I always keep an open mind when it comes to the stock market. I look at the positive and negative signs and adjust my client’s investment levels accordingly. I was fairly constructive on the market coming into last week, mainly because the price action was very strong. Unfortunately, the Brexit vote caught many people off guard (including myself) and I was forced to reduce exposure for my clients. Let’s review the current signs:

NEGATIVES:

1) Nobody knows what this Brexit vote means for the market. The biggest fear is that other countries in the European Union will follow England and this could lead to more uncertainty, especially for the global banking system.
2) From a technical perspective, all the major indexes closed below their 10-week moving averages. This is important because it’s usually an area of institutional support.
3) We are heading into the summer, a time when many big fund managers take time off. As a result, the market tends to experience more volatility during the July and August months.

POSITIVES:

1) We’re still in a liquidity driven market fueled by a globally coordinated effort to keep interest rates low. The US Fed will not be raising rates anytime soon due to the global uncertainty.
2) The economy is not in a recession, but certain sectors are seeing an earnings recession. Although Energy and Financials are struggling, many areas of technology are still showing strong growth.
3) It hasn’t paid to get too negative on this market. The last three declines (Oct 2014, August 2015 and February 2016) have recovered strongly, especially because sentiment quickly moves to extreme negative levels.

CONCLUSION:

Keep an open mind! It’s important to be flexible and adapt to market conditions. For example, I reduced exposure for my clients on Friday as a defensive measure. My strategy isn’t for everyone, especially if you are a longer-term investor. I am still bullish over the long-term, but I prefer being defensive over the near-term until market conditions stabilize. As always, know your timeframe and invest accordingly! Good luck!

I can be reached at: jfahmy@zorcapital.com