What a crazy start of the year!  Political and market mayhem are the leading stories through March of 2016.  Since I’m politically agnostic (ahem), let’s talk markets! 

Gainplan gets Defensive:  In early December our investment committee became increasingly concerned about the direction of the US Economy as the general economic data trended further towards recession.  This data increased the probability of a recession in the US economy significantly since last summer.  As such, we moved from a “neutral” stance to a “bear” market stance and we significantly increased our cash positions and limited exposure to risky asset classes, even as the market seemed to be shrugging off the downward trending financial data.  However, our move to become extremely conservative proved prudent as the markets entered January and February with a bang, with the S&P 500 and Russell 2000 drawing down over 14% and 20% from their respective highs.  We believe that the global markets entered BEAR territory with this recent move, and thus our investment philosophy has been to put capital preservation first, and growth second, during the last quarter of last year and now the first quarter of 2016.

Overall, the strength of the current rally appears little different than a typical bear market rally.  Bear market rallies are generally swift both in their upward momentum as well as downward reversion.  The market’s move off the February lows has been more of an inconsistent rotation of leadership/strength amongst beaten up asset classes, and that’s different from a bull thrust where everything advances powerfully. There was also none of the signs historically associated with a major bottom in January or February outside of extreme negative sentiment which has since returned to a more neutral reading. Thus, the probabilities still indicate that the current rally represents a countertrend move in an ongoing bear market, and we are anticipating another pullback.  We will learn quite a bit during that next pullback as we look to determine if this is a bear market (as we are treating it) or a bull market correction.  Consistent with our overall capital preservation strategy we will use this market rally to scale back our risk exposure as we continue to try to determine if this is the real bear market (and recession) or if we are still not quite there.

We will continue to be highly suspicious of this current market, and allow capital preservation and prudent risk management to dictate our investment strategies.  This means we will likely maintain high allocations to cash, use some bonds to offset risk, and keep a tight sell parameter on our investments most of the time.  You may see us lighten up your equity exposure as the market goes up in anticipation of a downward reversion and possible continuation of the bear market.  If the market drops, you may see us increase that exposure in an attempt to catch these volatile upward bear market rallies as well. 

Ultimately, the question comes down to “is this market fully capable of saving itself and continuing on in a bull market trajectory” on one of these uptrends.  It is possible, but we will need to see some improvements in earnings, or Price/Earnings multiple expansion, or some other catalyst (the Fed, European Central Bank, etc.) to drive that possibility.  If we see those positive catalysts unfold, and it could unfold quickly, we could once again be in a risk on environment and be comfortable with higher allocations of risky assets.   The other scenario is that this market may continue to go sideways for the entire 2016 year and we run flush into a recession in 2017.  Under that scenario we shall remain opportunistic while hedging the downside with cash.   Nobody knows for certain.  We will continue to be prudent while we believe the risk of the markets taking their next leg down outweighs the potential for upside returns.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Gainplan LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Gainplan LLC or performance returns of any Gainplan LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Gainplan LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.