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RiskSIGNAL Flashes Red

“There is always a disposition in people’s minds to think the existing conditions will be permanent,” Dow wrote, and went on to say: “When the market is down and dull, it is hard to make people believe that this is the prelude to a period of activity and advance. When the prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one, which make it unlike its predecessors and give assurance of permanency. The one fact pertaining to all conditions is that they will change.” – Charles Dow, 1900


The RiskSIGNAL™ has been breached and turned red yesterday. This is the first time since January of 2022, at the beginning of the 2022 sell-off, that the RiskSIGNAL™ has flipped red. We have been be reducing exposure to equities in client accounts across the board. I do expect a trader’s rally as soon as the market determines stocks are oversold, but any rally with the RiskSIGNAL™ being red should be sold into.



We have significantly increased our cash holdings to a range of 40-50%. Typically, we phase out of positions over a few weeks, but the bears haven't fully seized control of this market (yet). Given the market's rally since the onset of October, it's prudent to mitigate some risk at this juncture. We plan to allocate our cash into very short-term bonds, which are currently yielding an attractive rate of around 5%.


Should the signal turn out to be a false alarm, it's preferable to reduce risk while the market is somewhat elevated, rather than amidst a downturn (buy low, sell high). I highlight this as market seasonality is in favor of the bulls. This rationale also underpins our rules to not go all-in and transition to a 100% cash position.


This systematic, emotion-free approach streamlines our investment decisions, helping keep client portfolios aligned with market trends. Although not every RiskSIGNAL™ adjustment leads to profit, its ability to preserve capital during major market crashes, coupled with growth pursuit, positions us for potential long-term outperformance.


For instance, a portfolio needs a 67% gain to recover from a 40% loss. By lessening the impact of major drawdowns, investors fare better compared to a buy-and-hold strategy. But avoiding downturns is just the beginning; knowing when to get back in is also key.


As a refresher for those who were with us in 2022, you might recall that soon after the red signal, the market rallied for several weeks (passing the point where we started selling), yet we successfully avoided roughly 80% of the subsequent decline. Patience is key.

In the next few weeks, I'll write a series to explain how our signaling process works. For some clients, this might be the first time seeing so much movement in your accounts, and a refresher could be helpful for your expectations.


Inflation picked up pace for the second consecutive month amidst climbing Treasury yields, while the Fed faces a tough choice: either proceed with another rate hike, potentially sealing the deal that a major sell-off has commenced, or deviate from their established narrative.


For now, it is important to be patient and let the markets chop around. I don’t know what the future will bring, but remember The one fact pertaining to all conditions is that they will change.


Feel free to reach out to me and use me as a sounding board.


Best regards,


-Kurt


Kurt S. Altrichter, CRPS®

Fiduciary Advisor | President

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