When markets are weak I always remind myself of the black and white movie The Enemy Below with Robert Mitchum and Curt Jurgens.   When Jurgens’s U-boat was attacked by Mitchum’s depth charges “Take me to zee bottom, I vant to go to zee bottom!”

Jurgens was fascinating in another respect in that he was born in 1915 in Bavaria and in 1944 sent to a concentration camp in Hungary as he was deemed “politically unreliable”.   If Jurgens was considered unreliable, imagine what they’d think of Mitt?

The media is transfixed as always with labels and since the S&P 500 has fallen 10% it has officially become a “correction”.  But thats in the past and what do we anticipate in the future.   There has certainly been a change in trend that hasn’t show any sign of interruption, but could this be the midpoint on the way to a 20% Bear Market?

The break below 1300 along with a series of declining peaks is not a market investors should step in front of to anticipate a bottom.   Realistically, we should bounce sometime soon, but this will be an opportunity to lighten up again in preparation for a move to 1250 or 1200.    My guess is that the worst possible outcome would be 1150.   However flipping the coin over, this may be the best potential outcome for our clients do to our very defensive posture holding in a range of 50% to 100% cash at present.

According to Jason Goepfert since 1928 there have been 24 instances where the market has declined 10% while within 3 months of reaching a 52 week high.  In those 24 instances, 1/2 went on to protracted bear markets with losses of 10% or more (in addition initial 10% loss).  On a brighter note, half of the 24 declines ended soon enough that new highs were registered within approximately 3 months.   In my opinion this is a likely scenario for us this year, but we must still go through a bottoming process and that will take weeks.

This too shall pass.

Brad

No positions

So, until proven otherwise this is not the time to press our bets but remain very defensive.   We will be able to be very aggressive again once the markets have finished the bottoming process.

Today’s market weakness compels me to make a few comments here.  A couple of weeks ago we went to a neutral stance on the US stock market despite the fact that it had already declined 4% in the preceding weeks.   Some may say “Whats the point of selling now after a 4% decline?”  My answer is simply that you have to draw a line somewhere because a 4% or 5% decline may be the start of a 10% or even a 20% decline.   We’re in a great position with almost all accounts still in double digit returns YTD and with a very large percentage of cash on the sidelines.   We can use this decline to our advantage by deploying our high cash % when the inevitable intermediate term rally emerges.  I’m not in the business of trying to figure out where the exact bottom is, I’ll be looking for extremes in negative investor sentiment combined with emerging market strength.  After a decline of today’s magnitude we’re much closer to significant second half of the year rally.

Always keep in mind that big rallies are born from big negative sentiment and today’s decline will make a significant contribution to negativity.

If you’re a new investor who’s looking to gain an edge or considering becoming a client of RMHI please understand that this is the chance for you to get in cheap without having to chase holdings in a mature bull market.    This is why during periods like this I begin to develop my shopping list of future holdings and wait for the  chance to buy which will occur when our intermediate term indicators turn positive.

All the best,

Brad

No positions mentioned.