CAPITAL IDEAS: Make up your mind already!

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Hey, the stock market. Are you going up or are you going down? Pick one side of the 200-day moving average and stick to it, okay?

What is the 200 day moving average? The 200-day moving average (DMA) is a key indicator that investors (traders?) use to gauge whether an investment is in a bullish or bearish trend. The 200-DMA is usually represented by a line chart and represents the average price of the last 200 days. When the price of an investment is above the 200-DMA, it is considered to be in an uptrend. And, when it is below the 200-DMA, it is considered to be in a downtrend.

The 200-DMA for the S&P 500 is around 4,500 points. As I write this column, the index is below the 200-DMA but flirts with it. As you read this, I wouldn’t be surprised if the S&P 500 rose above. Then fell below. Rinse. Repeat.

Year-to-date through April 21, 2022, the S&P 500 has exceeded its 200-DMA five times. Super bullish, right? Well, it also fell six times below its 200-DMA.

The stock market is, in some ways, a representation of investor sentiment. Hope this sounds weird to you – investing by feel. For many investors (non-traders), stocks are held for the long term, with perhaps some rebalancing or maintenance around the edges of a portfolio. But the wild daily wavers are often the result of emotional decisions made by investors based on the news of the day. And there was plenty of information to make us worried one day and optimistic the next.

Interest rates are rising. Hundreds of thousands of jobs are created. Inflation peaks. Corporate profit margins are widening. Supply chains are breaking. Consumer demand is skyrocketing. Down. At the top. At the top. Down.

I remain invested as if the stock market was going to resolve on the rise. I believe so for all the reasons I’ve cited in previous columns: a lot of pessimism in the market is attractive to a maverick like me; plenty of historical data shows upside potential; my avoidance of obligations. However, being the cautious man that I am, I have taken steps to flatten my investments by making fewer big sector bets.

I had direct exposure to the financial sector through the Financial Select Sector SPDR ETF (ticker: XLF). I sold it and placed the proceeds in the SPDR Dow Jones Industrial Average ETF (ticker: DIA). Twenty percent of the DIA is allocated to financial stocks, with the remainder also allocated to stocks.

So it really wasn’t like I was looking for shelter in this business. I took a few chips off the table, but I’m still playing. Like the bullish/bearish nature of the market in general, I can argue for or against the financial sector. Since I’m downplaying the risks slightly, I’m currently paying more attention to the downsides for financial companies than the upsides – closing deals will slow, growth in assets under management for wealth advisors will be difficult, and interest rates will be tough. bank borrowing increase.

A benefit of the broader equity allocation is that approximately 17% of DIA invests in technology stocks. The technology has been underperforming for a while. Readers will recall that I moved from growth stocks to value stocks in April 2021 and January 2022 (which included the technology sector). Part of this change was due to the expectation of higher long-term interest rates. However, as measured by the 10-year Treasury note, long-term interest rates may temporarily plateau. The 10-year yield recently reached 2.9%. Over the past half-decade, it has been difficult for this yield to challenge and then stay above 3%. It reached around 3.25% in 2018. A cap in long-term returns could support tech stock prices.

Allen Harris is the owner of Berkshire Money Management in Dalton, Massachusetts, managing investments of over $500 million. Unless specifically identified as original research or data collection, some or all of the data cited is attributable to third-party sources. Unless otherwise stated, any mention of specific securities or investments is for illustrative purposes only. The adviser’s clients may or may not hold the securities in question in their portfolios. The Advisor makes no representation that any of the securities discussed have been or will be profitable. Full Disclosures. Direct inquiries: [email protected]

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