Stock Market Oversold 5/21/12

With the stock market's drop from around 1400 at the beginning of May to the current levels around 1308, our oversold models are now bullish.  That decline represents a drop of some -7%.   What do our trading models say now?

• Our intermediate-term oversold models are now strongly bullish.  Traders may want to trade a potential bounce upwards.
• Our long-term models remain bullish -- but are slightly cautious, wary of potential downdrafts.

Our last stock market signal update was on May 2, 2012, when the S&P stood at 1406.  The S&P is at 1308 at the time of writing this.  

On Rebalancing

Some recent research on rebalancing:  There's a tradeoff between staying true to the desired asset allocation -- versus: execution costs (commission and slippage), and normal market action (fluctuations, trends).

Rebalancing too frequently can create extra costs. On the other hand, rebalancing infrequently allows the asset mix to drift -- and can increase risk (nominal risk and risk relative to the desired mix). Based on other publications -- as well as Monte Carlo simulations I performed -- the data DOES show that rebalancing too frequently can give up some gains in exchange for potential expected asset mix drift. This is evidence of how markets can trend -- and yield excess performance for holding assets that are trending... (But some of these topics might be the topic of other research/articles)... The "sweet spot" for rebalancing seems to be 6-14 months, depending on the assets/investment vehicles -- and investment goals.

Interestingly, some products (like commodity indices) are designed to rebalance annually rather than monthly (or even daily)...

http://seekingalpha.com/article/277851-a-well-balanced-portfolio-including-alternative-investment-etf-allocation

Stock Signal Update 5/2/12 (8am)

We had a stock signal update just over a week ago, and rode the recent stock market surge higher.  After the rapid rise, our overbought models are signalling a moderately bearish stance.  Our long-term models remain bullish.

• Long-term investors should maintain long positions.
• Traders should monitor positions and either be flat -- or have very close stops to exit long positions...  
• Traders and investors looking to go long or add to long positions -- should wait for a pullback -- or an oversold signal.  

Our last update was on April 24, 2012, when the S&P stood at 1371. The S&P now stands at 1406.