Manufacturing Data Spooks Markets

Last week, we noted that buying dips in 2014 was riskier than doing so in 2013. Markets often anticipate bad news. The news that came Monday made it hard on last week's dip buyers. From The Wall Street Journal:

Monday's selling was touched off by a weak report from the Institute for Supply Management that showed the nation's manufacturers cut orders and reduced production in January. The group's manufacturing purchasing managers index for January slumped to a reading of 51.3, its lowest reading since May, though still indicating an expansion of activity. The metric missed a projected 56 and marked a drop from December's 56.5.The moves in U.S. trading followed weakness in European stocks amid continuing anxiety over emerging markets.

Weekend Video Showed "Be Careful" Evidence

This week's stock market video was created over the weekend, meaning before Monday's 40 point drop in the S&P 500. As you might imagine, if the weekly charts looked concerning Friday, they still look concerning after Monday's close. Consequently, until cleared, the concepts in the video still apply from a risk-assessment perspective.

Growth Expectations Not Being Met

As described in detail on October 28, the Federal Reserve was hoping the economic coals would catch fire allowing them to cut back on the lighter fluid (QE). The Fed has cut back, but the economy is not stepping up in a convincing manner. From Bloomberg:

U.S. stocks fell, sending benchmark indexes to their biggest declines since June, as a gauge of manufacturing in the world's largest economy retreated more than estimated. Only eight stocks in the Standard & Poor's 500 Index advanced today and all 10 main groups fell at least 0.7 percent. "Everyone walked in this year expecting a continuation of at least growing economic activity and the latest data we've been seeing throw a bit of cold water on that theory," Bill Schultz, chief investment officer at McQueen Ball & Associates.

Investment Implications - Incremental Risk Reduction Continues

Since Twitter timestamps every tweet, it can serve as a de facto investment journal. Our market model began shifting our allocations on January 23 based on the observable changes in the market's risk-reward profile.

Charts used to monitor the battle between bullish economic conviction and bearish economic conviction called for a second chess move on January 24.

Signs of A Lasting Bottom?

We have not seen improvement in the ETF space or within our model that points to an imminent and sustainable turn in stocks. Could a dead cat bounce occur soon? Sure, anything can happen. Since our approach looks at the evidence in hand, rather than attempting to forecast, we will wait for meaningful improvement before shifting from our current incremental risk-reduction strategy to an incremental cash-redeployment strategy. We took another step away from stocks (SPY) and toward bonds (TLT) Monday. Our bonds performed well during Monday's sell-off in equities; TLT was up over 1.22%. Our cash performed well (relative to stocks).