Profiting In A Market Downtrend

The Bottom Line

Without a doubt, it’s a lot harder to make money in a stock market downtrend like the one we’re in now, but it can be done. And there’s certainly a lot more that you can do besides buy, hold, and pray. Shifting at least some of your assets to cash at the right time is one way to so it. For those that aren’t comfortable being in cash, another way is by shifting your portfolio to the right place at the right time. To do that, I simply follow the money in the various sectors of the S&P 500 and, since early January, most of that money has been going into — and continues to go into — the Energy Sector.

Introduction

In our most recent February 23rd article for Forbes, we said the benchmark S&P 500 (SPX) was in the midst of an emerging major downtrend and was vulnerable to a deeper decline as our Tactical models remained on a mid-January Negative/Risk Off status. That major downtrend still remains intact and the market appears vulnerable to even more weakness next week, as even perennial market-leaders like Apple, Inc. (AAPL) are starting to underperform the S&P 500. More weakness in mega-cap stocks like AAPL would be bad news for the overall market. Meanwhile, key market internals remain weak.

The Asbury 6: Negative Since January 14th

The Asbury 6 is my firm Asbury Research’s tactical risk management model. It was designed to help determine what the real day-to-day condition of the market is in an environment where computer driven trading (which dominates daily stock market volume) has made investing in equities a lot more confusing and nerve-racking than it used to be. Instead of chasing the S&P 500, which is up 50 points today and down 70 points tomorrow, the Asbury 6 tracks what we call “secondary indicators” — things like asset flows and relative performance — which aren’t as easily influenced by this now common day-to-day choppiness which is largely just noise.

Table 1 shows that, through Friday March 11th, all Asbury 6 constituent metrics are still negative (red). The “A6” model itself has been on a Negative status since January 14th and the S&P 500 has declined by 12% since then.

The Asbury 6 indicated it was time to start “playing defense”. And, depending on the investor, playing defense that can mean anything from going to cash to simply focusing on relative bets rather than outright ones. The latter keeps you invested but, if done correctly, losing less money than the overall market is. Professional money managers rely on relative performance investing because most of them cannot go to cash.

During these periods of overall market weakness, just like the one we’re in now, we pay special attention to investor asset flows because they show you where the money is going, often before the relative performance trends become readily apparent. Our SEAF Model was built to follow the money in this way.

Following The Money: Energy & Health Care

SEAF stands for Sector ETF Asset Flows and tracks where the money is going in the sector space, in three different time frames. Basically, it shows where the money is going and where it’s coming from. SEAF is currently showing that, through the end of last week, the most significant investor inflows are going into the Energy and Health Care Sectors and the most significant outflows are coming from Technology and Financials.

Health Care is actually a new entry in our model as of this week but Energy first appeared in SEAF on January 10th, long before it became a headline. The Energy Select Sector SPDR Fund (XLE) has risen by 25.7% since then while outperforming the SPDR S&P 500 ETF Trust (SPY) by 39.3%. This approach is simply following the money, wherever it goes, and then waiting for the explanation behind it to show up in the financial press — after the move becomes obvious.

Wait Until The Money Moves Before You Do

There has been a lot of talk in the financial press lately about energy prices going too far, too fast, and being a potential selling opportunity. But as long as the money keeps going there, we will remain overweight Energy. And when the money goes elsewhere, we will follow wherever it goes next.