Market Review & Update

This week we will discuss why I doubled my bond position in my personal account. That may seem odd, given that rates have continued to tick up this past week. Much of the recent increase was related to a knee-jerk reaction to the July FOMC minutes, which failed to show signs of an aggressive timeline to cut rates. Notably, the rate uptick only improved the fundamental backdrop of bonds versus stocks.

However, a review of the recent market correction is needed before this week's main topic.

During July, we repeatedly suggested a correction was needed to work off the short-term overbought condition of the broad market. To wit:

"We must remember that market advances can only go so far before an eventual correction occurs. My best guess is that if the markets are to reach all-time highs this year, we will likely have a correction to reset some of the more extreme overbought conditions, as shown below. Any pullback to the 50-DMA is likely a good entry point to increase exposure on a better risk/reward basis.” - Trading An Unstoppable Bull Market

The correction began the following week. Since then, the market took out initial support at the 50-DMA, our initial target, and is approaching the 100-DMA. In Friday morning's pre-market commentary, I noted:

"While the market is oversold enough to bounce, the break of the 50-DMA has been decisive enough to suggest that the 100-DMA is the next logical support level. The MACD, as noted previously, is firmly entrenched in its 'sell signal' but is reaching levels that normally mark bottoms during bullish corrections. While I would expect a rally as soon as today, that rally will likely remain contained below the 50-DMA for now."

As shown, while the market did end flat on Friday, it rallied pretty strongly from the opening lows. A further "relief rally" next week will be unsurprising, with the market still very oversold. Any failed test of the 50-DMA will be a reasonable point to reduce equity risk and rebalance portfolio allocations as needed.

The overall market momentum and sentiment remain bullish, and the correction, so far, remains orderly and normal. As discussed, a 3-10% correction is normal in any given year.

As long as nothing "breaks," when this corrective cycle completes, we expect a rally into year-end. Such will be a function of performance chasing as portfolio managers play catch up into year-end.

We will continue to monitor things closely, but with stocks sporting high valuations, there are several reasons why I am excited about bonds.

More By This Author:

A Recession Is Coming, Or Is It?
Downside Risk Ahead Of Jackson Hole
Government Bonds Or Stocks? Which Is A Better Choice Now?