Stay Cautious, Investors

April 14, 2022  |  Michael Reilly

Sometimes it’s good to be long, sometimes it’s the time to be short…

And other times, it’s time to go fishing.

Let’s take a look at some key takeaways from today’s markets:

  • Lack of follow-through evident beneath the surface
  • Risk-off environment persists
  • Defensive sectors gaining strength

Last month’s equity market bounce was impressive at the moment, but it’s failed to produce the sort of strength that argues in favor of a broadly-based “risk-on” environment. 

And despite a handful of days in which new highs outnumbered new lows, there is a lack of consistency. We’re now at 20 consecutive weeks of more new lows than new highs in both the NYSE and NASDAQ.

It’s hard to have a bull market when more stocks are making new lows than making new highs.

The weight of the evidence suggests a cautious approach remains warranted.

From a  “risk-on vs. risk-off” perspective, market breadth needs to pick up before we can conclude that we have moved beyond a market for managing risk.

Currently, the average NASDAQ stock is 15% above its lows but is still nearly 40% below its high. 

Seeing the average stock (on the NYSE or NASDAQ) get closer to its highs than it is to its lows would go a long way to feeling as though markets offer anything other than risk.

Defensive areas are moving to the forefront as we are seeing absolute and Relative Strength from Utilities, Staples, and Health Care. There is nothing growthy about this.

On a relative basis, Transports and Semiconductors are at new lows relative to the S&P 500, while both Utilities and Staples test recent highs. Again, nothing pointing to a rising market.

Looking to the Industry groups for guidance, when Home Construction and Builders ETFs like ITB are coming off 52 new lows, it historically has not pointed to a strong economy or stock market.

The point is that we continue to see further deterioration, warning investors that now is not the time to be a hero. 

Protect your capital and pick your spots.

Until next week, invest wisely…

P.S. For more information on Risk Management or Rowe Wealth’s new Volatility-Resistant Investment Model you can schedule a free 1-hour consultation here.

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