I spent a few minutes with my friends Melissa Wilson and Tom Zizka at Fox 26 Houston earlier this week discussing the issues surrounding the crash in the Dow on Monday and what investors should be doing now.
As I wrote earlier this week:
"Of course, what much of the mainstream analysis dismissed the potential impact from the China "market bubble" collapse, the potential "Asian contagion" was quite evident. To wit:
'The recent plunge in the Chinese market may, or may not be, the sound of the latest bubble popping as I write this missive. However, there are two very important warnings be given here:
- The current bubble will eventually end, just as the last two have, in a rather disastrous plunge for those chasing returns.
- The plunge will also likely be coincident with an unwinding of excesses in the S&P 500.'
"The current belief is that the economic environment is stable, and growing enough, to support and foster continued expansion in domestic markets for the foreseeable future. Of course, that was also the belief at the peak of the previous two bubbles as well."
As I discuss in the interview, while China was deemed to be a problem previously, it always was THE problem. Take a very close look at the chart of the China Shanghai Index bubbles and busts overlaid with the S&P 500 Index. Do you think you should you be concerned?
As I addressed in this past weekend's newsletter:
"The time has now come to start moving more heavily to cash. As I will discuss throughout this weekend's missive, including the 401k-Plan Manager, it is now time to 'OPPORTUNISTICALLY' REDUCE PORTFOLIO ALLOCATIONS.
As noted in the chart below, the markets are now once again extremely oversold."
"As I have often stated in the past, by the time a market signal is given in the market, the markets are very likely at a point of extreme oversold or bought conditions. Therefore, it is always better to use the subsequent relaxation of those extreme conditions to add or reduce portfolio exposure.
This is why it is never a good idea to 'panic' when something initially goes wrong. With the markets now deeply oversold, it is VERY likely that the markets will bounce next week. The problem, for those with 'buy and hold' bullishly biased strategies, is the 'bull market' has ended... at least for now."
As shown in the chart above, the bounce from these oversold levels will run into a substantial amount of overhead resistance where the rally will very likely fail. THIS WILL BE THE POINT to take some actions to rebalance/reduce portfolio equity risk as needed.