Again, the S&P 500 came within a few points of a brand new record on Monday (7/20/2015). Meanwhile, previous highs in 2014 came when RSP’s higher highs formed a steeper slope and bullish participation of index components tended to hit 85%. In 2015, RSP’s higher highs began leveling off and the bullish percentage on new S&P 500 records dipped to 75%. At the present moment, RSP appears to be charting lower lows, while the Bullish Percentage Index is down to 56%. All at a time when the S&P 500 is near all-time records?
Fewer and fewer big name companies are carrying popular benchmarks on their shoulders. Fewer and fewer stock sectors remain in definitive uptrends. In essence, the market internals are not particularly healthy for the longer-term sustainability of the bull.
History demonstrates that when market internals weaken, benchmarks eventually follow. Even more troubling is the reality that weak market internals coupled with tighter monetary policy as well as extraordinary overvaluation do not bode well for future price direction. It follows that the do-it-yourself investor should now concentrate on tactical asset allocation shifts that would enhance his/her probability of minimizing loss in either a sharp correction or an uglier bear.
My advice a few weeks ago still stands; that is, a larger allocation to cash is warranted when market breadth is deplorable. The average cash level/cash equivalent level across my client base of 225 families is 15%. Money market funds work fine. One might also consider SPDR Short Term Muni (SHM) and/or iShares Short Maturity Bond (NEAR).
The do-it-yourself investor should also look at recent weakness in small-caps as an opportunity to shift to the largest of the large caps via iShares S&P 100 (OEF). Large-cap growth via iShares Russell 1000 (IWF) is also preferable to small-cap complacency, though one should employ stop-limit loss orders and/or reduce one’s allocation alongside a significant trendline breach.
