Did Friday's Rally in Stocks Finally Turn Things Around?

If you invest your money and watch the markets, you know that stocks have been in "correction mode" since February. Maybe you're wondering whether that correction is over yet. If so, did Friday's rally turn things from the negative to the positive? It did feel that way, didn't it? Indeed, most items were up on Friday, including gold and bonds. Happy days here again?

Being subject to feelings, just like any other red-blooded person, I've learned to do my best to ignore, or at least set aside any feelings I have resulting from market movements. Typically such feelings reflect, at best, nothing more than the daily movements of prices. And those daily movements are the least relevant to understanding the general trend - aka the "primary trend" - of the market.

So instead of focusing on those feeling engendered by those daily movements, I shake off what are essentially daily distractions, and force my attention elsewhere. One way to do this is a weekly review. Now, weekly is still a pretty short stretch of time, so I'm not simply looking at the last week's price action. Part of that weekly review entails reviewing trusted sources that help provide some longer perspective. Here's one such perspective I found helpful during this week's review. Since it's May, it concerns the whole "Sell in May, go away" thing. Some people believe that if you sell out all your stocks in May and return in the fall, you'll get better results. The historical data supports this - but not all the time. In any case, some current indications might make it seem the wise thing to do this time around.

For example, looking at some major averages (S&P, SP 400, SP 600, NASDAQ), all show 40%+ of the stocks that make up the average are showing negative momentum. (This source has a proprietary measurement of momentum that has proved pretty helpful in calling future movements.) Indeed, the DJIA has - get this - 60%+ of its stocks with slowing momentum. This sort of action indicates that these averages are breaking down "internally" even as they may be rising overall. The best example of how this is possible would be the NASDAQ, which has remained relatively even over the last 6 weeks, despite more than 15% of its stocks not only falling in price, but turning negative in trend. However, in the NASDAQ 3 stocks dominate – AAPL, AMZN, MSFT - and their action has pulled up the average overall.

Any firm conclusions here? Do we observe the venerable practice of "sell in May and go away"? Not saying it's a bad idea, but it's not something we'll likely pursue at this point. Rather we'll focus on risk management, kicking that up a notch. That means enhanced vigilance. What sort of vigilance? Well, keeping close watch on our portfolio positions the way a mother duck watches her ducklings. (If you've ever seen a mother leading her ducklings you'll know what I'm talking about here. If not, check out this short video:




So, yea, something like that. Having or even raising cash helps too. Or maybe you check more frequently those indicators you follow - you know, the ones that gauge the internal strength of weakness of important indices (like we saw above), or others like the Advance-Decline line. Maybe you pay closer attention to data related to credit and liquidity - the lack of which precipitated our last crisis in 2007-2009.

As for whether the correction is over, it may be. On the other hand, I wouldn't be shocked if there was one more "flush" to the downside before things turn around. Turn around? Well, yes, probably. Turn around so much that it will bring a smile to the proponents of a stock market "Melt-Up"? Not sure about that, but wouldn't be shocked.

In any case, it's yet another reminder of the general wisdom, even if you keep your little ducklings close by, don't keep all your eggs in one basket.

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