This Time Last Year

This time last year the S&P 500 hit its lowest level since October 1996. It even went lower than the low of the burst of the technology bubble in October 2002. It was down 58% from its high in October 2007.

Since March of last year there has been a dramatic move up of 72% off those lows with only a few bumps along the road. The latest being a sharp drop of 10% in 13 trading days ending on February 5th. This was followed by a move back up to just below where we were on January 19th of this year.

The net result of all this up and down movement is that the S&P 500 is still 27% below its high point in October 2007.

Is the market going to continue to move up to reach and surpass the previous highs or will it rollover and test previous lows? It is impossible to know the answer. What we can do is assess and manage risk while entering trades for the equities showing the greatest relative strength.

One key tool in assessing and managing risk is understanding whether the market is overbought or oversold. Think of yourself trying to walk on a balance beam used in women's gymnastics. If the balance beam was only 6 inches off the ground your risk is low because you know that if you fall off, you don't have far to fall and probably won't get badly hurt. On the other hand if the balance beam was 6 feet off the floor your risk is high because you have a long way to fall and the probability of getting hurt would be much greater. Although the market is moving up, it is high in the overbought territory. This means trades have to be entered cautiously and monitored closely to prevent the major losses that can occur if the market falters and retreats from current levels.

This makes choosing equities with the greatest relative strength more important. Relative strength is based on past performance and is an indicator used to select the equities with the greatest possibility of reaching desired targets. Various markets, sectors, funds and individual equities are compared to each other and given numerical ratings. Although past performance does not guarantee future performance, it is a useful indicator when comparing and selecting investment options.

In my previous blog I indicated that holders of mutual funds in 401(k) plans were best served by keeping the money from recent sales in a Money Market Fund. Although indicators are now pointing higher, it is still prudent to hold those funds out of the market until there is more confirmation of a sustained move upward.

Small Cap and Mid Cap equities continue to outperform Large Cap. and equities with good dividends are providing a hedge if prices start to fall.