On Monday, I sent out the weekly market commentary and talked about the issue of taking the escalator up and the windows down. I included charts of the S&P 500 ETF (SPY – Quote) from Monday’s action that illustrated that market volume was 3 times greater when the market fell than when it was going up.
The markets opened down 1% yesterday on market volume that was SEVEN TIMES GREATER than during the up moves yesterday. Here’s the picture:
There are two things that we can learn from this. First, that market volume (liquidity) matters. It’s easy to buy in to a stock but sometimes it is hard to get out. The price that is quoted at any given time can give the impression that you have a gain in the position, but if you go to sell it at a time when others are trying to get out the price you get can be considerably less than what was quoted.
Secondly, there is risk in holding positions when the market is closed. The market closes at 4 pm. But like we saw yesterday, when it resumed it opened down 1%. There’s no simple way to protect against that loss unless we plan and position ahead of time.
Many people think that it is easy to get in and out of the market. What I learned the hard way, though, in 2008 is that the ONLY way to prevent this overnight risk is by reducing market exposure before it happens. Depending on the news flow and events, the market can open several percentage points lower than where it closed and there is nothing we can do about it.
That’s why I follow a process that seeks to place a probability on the potential for gain in the overall market compared to the potential loss and adjust portfolios accordingly. Over the last several weeks the markets have continued to go up, but risk has been rising with my indicators As such, my equity exposure has gone to nearly zero and I have been invested in US Treasury bonds and cash. Those positions are continuing to bear fruit. We aren’t going to get rich off their gains, but the value of the accounts should be preserved plus a little more. And for those that are retired, I especially believe that preventing significant loss must be the first priority.
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Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
