Through Tuesday’s market the S&P 500 Index is down -5% for the year, an exhale that has not gone unnoticed by the investing public. Nerves are a bit rattled, tensions a bit high, and while we could debate the origin of these emotions for many hours, the reality is simply that clients are humans and humans have emotions.

A 3% pullback in the market feels bad when you haven’t experienced one in a few months, and a 5% exhale feels worse. Speaking purely objectively, a 5% pullback in the S&P 500 occurs roughly 3 1/2 times per year (based upon data going back to 1928), and is thus very much part of the ecosystem for equity investors.

About one-third of those exhales become corrections (down 10%), and less than 10% become “Bear Markets” (down 20%, or more). We can’t say with certainty that the 5% correction in recent weeks won’t eventually result in a Bear Market, but we can offer a useful reminder that 90% of such pullbacks haven’t led to a Bear Market historically. Doesn’t mean this one can’t, but it does offer some evidence that it certainly doesn’t have to.

During the market pullback we’ve seen a few significant shifts. Equity funds, which were rather “overbought” (based on a quite technical bell curve calculation like back in college…) just three weeks ago, have been replaced by Bond funds on the overbought side of the distribution curve. Meanwhile, Equity funds themselves have become statistically oversold through Monday’s market.

What does this mean? Well, if you believe in buy low and sell high, equities/stocks look more attractive than bonds.

While this next chart is indeed quite technical, it offers some insight…

Thanks to our friends at Dorsey Wright & Associates, they provide us useful graphics and charts such as the one below. It is the “% OBOS for All US Equity Funds.” Or, the Percentage of Overbought/Oversold for All US Equity Funds as addressed above and simply tracks how oversold the US Equity Fund (ETFs & Mutual Funds) database is today.

This data point has nearly reached -100% oversold, and sits at its lowest levels since May 2012. Levels of this magnitude have been reached 7 times in the past 5 years, and with the exception of June 2011 they have provided useful entry points within a long-term bullish trend is equities. THIS IS GOOD.

As I mentioned initially, Bonds have replaced Stocks as the “overbought” investment category as it relates to short-term indicators/trends. These trends may change in the future, but for now they deserve some respect and attention.

So, it seems we have our data—and that we should indeed, “Quiet the Noise” and press on with our overweight allocation in equities…and do so with educated confidence.

Again,be different–don’t let this “Exhale” affect you like it will most—know that your portfolio will honor it for what it is and take every opportunity it offers us!

If we, at Alphavest manage your 401k or other investments, know that we’ve got you managed. But as always, feel free to call or email us with your questions.

Liberate and Quiet the Noise,

Cokie

P.S. Want to know more? Click here to email Cokie!