How To Take Advantage Of The Current Stock Market Pullback

How To Take Advantage Of The Current Stock Market Pullback: Global Investment Strategy Update

Last week, the US stock market quickly sold off its July gains. Some are starting to wonder if this stock market pullback is a buying opportunity in the markets, or the start of a major decline.

Taking a look at my global asset allocation strategy can give us some clues into what global investors are thinking.

ETF Portfolio Selections For August 2014

To start, this month’s changes in the portfolio still reflect strong relative strength in the US and global markets.

Typically, at the start of a major bear market decline, we will begin to see early warning signs:

    • Relative strength in our global portfolio decline and equity ETFs are replaced with US Treasuries (“TLT”).
    • Additionally, the model will move into “TLT” when an ETF in the portfolio trades below its 10 month moving average.

So far, neither has happened. Indicating to me, that global investors are still bullish.

Here is the allocation for August:
august portfolio

Changes From Last Month

Last month, the global model showed outflows:

july performance

However, this looks to be more of a “knee jerk” reaction to global news than a major move into cash – as safe haven assets, like US Treasuries, failed to replace any of the equity ETFs.

Historical Performance Data

year to date returns

history 1 history 2

A look at a historical backtest (provided by ETFreplay) of the global model shows it has outperformed the S&P 500 since 2003, while being exposed to less volatility.

Due to the model being reallocated on a monthly basis, many of these “knee jerk” reactions to global news are therefore ignored.

As a result, historically “knee jerk” reactions have been a good buying opportunity within the model.

Thoughts On The Stock Market Pullback: Buying Opportunity Or Start Of A Major Decline?

Taking a look at the weekly charts of the ETFs in the August allocation, we can see that the upward trends are still in place.

Some foreign markets are reacting to overbought conditions and some of the recent news headlines have given investors an excuse to sell, while other markets are showing potential breakouts of these trends.

Australia iShares “EWA” 

“EWA” looks to be in the process of a potential break out:

ewa

Canada iShares “EWC”

“EWC” has pulled back to its upward trend line. While its 50 period moving average continues to rise:
ewc Hong Kong iShares “EWH”

“EWH” is another breakout candidate: ewh Japan iShares “EWJ”

“EWJ” is in a consolidation phase after breaking through resistance levels:ewj Malaysia iShares “EWM”

“EWM” is yet another breakout candidate:

ewm Singapore iShares “EWS”

“EWS” still remains in an upward trend after trading above resistance levels:

ewsUnited Kingdom iShares “EWU”

“EWU” pulled back from the upper end of its trading channel. May be a buying opportunity – as long as it remains in its current channel:
ewu Mexico iShares “EWW”

“EWW” looks to be in the process of a longer term reversal after trending downwards in 2013 and the first half of 2014:eww

Powershares QQQ “QQQ”

“QQQ” still continues to rise within its longer term channel. The tech heavy index did not react in the same manner as the Dow did last week. This may be an indication that US investors are not ready to sell their high beta positions yet:

qqq

S&P 500 SPDRs “SPY”

“SPY” has pulled back to its longer term upward trend line from overbought levels, but the trend is still intact:

spy

A Closer Look At The Pull Back in US Stock Market:

A few weeks ago I posted this chart:

sp-pnfI mentioned how the US stock market was starting to look a bit overbought, but that the long term trends were still in place.

Fast forward to today, the S&P 500 has pulled back from its overbought levels. Even after last week’s drop, the longer term trend is still in place:

spx pnf

As long as these trends stay in place, I believe the current pull back can be looked at as a buying opportunity rather than the start of a major pullback in the market.

Thanks and I hope you are having a fantastic summer!

-John

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