Total Returns %

1 Week

YTD

Dow Jones Industrial Average

+0.96%

+7.03%

NASDAQ Composite

+0.87%

+6.83%

S&P 500 Index

+1.04%

+6.79%

Russell 2000

+1.55%

+6.53%

U.S. Aggregate Bond Index

+0.37%

-1.00%

MSCI All Country World

+1.65%

+5.19%

Source: Yahoo! Finance.  Data through 2-18-11

Global markets put in another solid week of gains.  However, emerging markets are still struggling with rising food prices and inflation controls.  I am certainly not the only investor (layman or professional) that has the impression that the market is well overdue for a pullback.  But, markets are still grinding forward.

This has me re-thinking the current state of the markets.  Many analysts, investment professionals and myself, are looking at the market and wondering how far off we are from a significant pullback (5%+) in the market.  Typically, a market run like we have had since last fall will take a breather.  The resilience the market is showing has me wondering:  What if there is not a “big” pullback, but just a bunch of smaller pullbacks or resets?

For the last month or so, all of the technical signs have pointed to a pullback being not far off.  There are signs like the Volatility Index at lows, low market volume, cash holdings by mutual funds at lows, bullish percentage indexes at very high levels, and so on.  How could a market with very real risks (Europe, Middle East, inflation, oil, debt in the US, etc.) facing it be defying the odds?  The answer is herding, sideline cash deployment, bond investors reversing course, and a reversal of course by emerging market investors.  As long as the Fed and European Central Bank are printing money, the markets have support. 

Eventually, this market will see a significant drop, but it could certainly grind higher in the meantime.  Consider that we have not seen very many really large market movements up or down, but a consistent slow move up on lower-than-average volume. 

With the very real possibility that the above small pullbacks theory is in play, I plan to alter my approach to the current market.  Instead of holding some cash and waiting for a pullback, I will start deploying cash balances to new areas of investment such as US Industrials, Technology, and US Midcaps.  The idea is to start investing the cash over a period of time just in-case we do see the pullback.  At the same time, I have identified some investments to unwind should the markets pullback.  The result of this approach is:

  • More participation in the market rise should allow it to grind higher
  • Downside protection in the form of slow investment of new cash and strategic sales (of mostly profitable investments) to raise cash
  • The cash from the strategic sales to be used for purchasing new investments at lower levels

I am not alone in my thinking that we are due for a correction.  I have talked to many other advisors who are holding large (30-40%) in cash awaiting a drop.  As a steward of other people’s money, it is my responsibility to make prudent, well informed decisions.  At this point, I have been patient in waiting for an entry level, but it may be that for the short-term, we will see very small entry windows over a period of time.

Would you like an analysis of your current investment portfolio?  Call me to schedule your free consultation- 913.693.7918.

John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals.  For more information, visit https://www.chladekwealth.com.

All written content on this site is for information purposes only.  Opinions expressed herein are solely those of John P. Chladek, MBA, CFP®, President, Chladek Wealth Management, LLC.  Material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness.  All information and ideas should be discussed in detail with your individual advisor prior to implementation.  Investment Advisory services are offered by Chladek Wealth Management, LLC, a registered investment advisory firm in the State of Kansas.  The presence of this web site on the Internet shall in no direct or indirect way be construed or interpreted as a solicitation to sell or offer to sell investment advisory services to any residents of any state other than the State of Kansas or where otherwise legally permitted.