The State of the Markets:
Before we dive in to any sort of subjective analysis about the current state of the markets or what may or may not come next, I think it is important to note that our Indicator Boards did a pretty darn good job of waving yellow flags well before the current correction began.
While I learned a long time ago that is a VERY bad idea to brag in this business, I would like to point out that the boards had been warning us for weeks that all was not right with the indicator world and/or that risk factors were elevated. For example, take a peek at the August 20 report titled, All Is Not Right With The World. As such, anyone paying attention to our weekly review of the state of the indicators should not have been surprised by some corrective action.
On a personal note, having some sort of a "heads up" that the indicators were not in their happy places in advance of the negative action gave us time to prepare and make some adjustments. For example, in portfolios that focus on market leadership, we have positions allocated to both the leading factors and the leading major market indices. For much of the year, selecting these positions had been easy-peasy. The leading factor had clearly been momentum and the leading major index had been the NASDAQ 100.
However, as the indicators faltered, and technical divergences developed, there was a distinct shift in our leadership work. So, at the beginning of the month, factor leadership shifted from momentum to minimum volatility and the NDX was replaced by the Dow. Whether or not this type of leadership holds beyond the next week or so is anybody's guess. But I wanted to provide an ...