The first cracks in the market's armor appeared yesterday as
investors shunned stocks and sent the indices plummeting.
By the end of the day the S&P 500 was down 1 percent to
close at 1281 and the Russell Small Cap index was down 2.2 percent
to close at 787.
On the surface a 2 plus percent drop in the small caps seems
like a lot - but it's really not. To put things in perspective, the
Russell advanced from 600 in September to 800 in mid-January, a 30
plus percent increase, without much resistance.
The 5-year chart below shows that the index would need to fall
closer to 750 before a major support level would be in danger of
breaking. That level is 4.7 percent below yesterday's close.
At the open today, it looked as though we might be headed
straight down to 750 - the Russell immediately dropped to 776, but
has since bounced back.
The relevant questions now are: where will stocks go next,
should you take this opportunity to buy, or should you sell out of
The first is impossible to answer without multiple caveats. My
outlook is that individual stocks will decouple from the major
indices and will start to move on more stock and industry specific
news. I believe that the broad market will become increasingly
volatile as this decoupling happens, and that index investors will
not see much difference in the value of their holdings.
In short, I believe it's time to rebalance your portfolio. Doing
so should help protect you from the downside, lock in some gains,
and better position you for future gains.
My outlook necessarily means that it's increasingly important to
monitor individual positions. On this front my advice this morning
is to just sit on your hands, but watch your positions carefully
and be prepared to act soon. Maybe even this afternoon.
The time to act will be soon, but not before having a plan. We
need to see the bears overpower the bulls before heading for the
hills. If the bears win in the short-term, then it is likely that
nearly all stocks will shed some of their recent gains, and it will
be good to lighten up on the positions that you have less
conviction in owning.
How much you are up, or down, on any particular position - and
your conviction in the position - should determine whether you sell
some, or all, of your shares on what you don't consider 'core'
My advice would be to sell those positions that are becoming
increasingly volatile, and that you don't have much confidence in.
These are the positions that you wouldn't want to buy even if they
were 10 or 20 percent lower.
Conversely, I would recommend holding onto shares in companies
that you really like, and have conviction in holding through some
volatility. Perhaps you'll want to sell some shares to lock in
recent gains, and try to pick them back up at a lower price. Or you
can use the cash you've raised through selling your non-conviction
positions and average down as those stocks you want appear 'on
Occasionally re-balancing your portfolio is a necessary evil -
and is something you need to do when the market is telling you it's
Right now, the market's increasing volatility is suggesting that
you do so. I wouldn't advise you ignore it.