The S&P 500 traded far below its 200 day moving average (DMA) on Monday, rallied back to get close to the 200 DMA by the end of Monday trading, then flirted with it for much of Tuesday before moving quite a bit higher perhaps helped by news that the White House was not going after Amazon (AMZN).
It has now tested the 200 DMA three times in the last few weeks and all three times the index recovered to go back above the moving average. Are all these successful tests a good thing in that it is "passing" the tests by recovering or is it a negative that it keeps falling back to the 200 DMA, doomed to eventually fail? I don't know which is exactly why I believe in a simple process for defensive action. I talk about taking defensive action when the index breaches its 200 DMA.
Specifically, if it looks like the S&P 500 is going to close below the DMA for a second day I make one trade. I had the spreadsheet work done and ready to implement but then a couple of hours before the close the market moved much higher taking a close below the 200 DMA for a second day off the table.
No one knows what comes next. We can opine or guess and maybe we will be right but if you stick to a specific strategy, there is no consequence for not knowing. My hunch is the market is starting to rollover and I will hope that it doesn't.
Bear markets have the historical tendency to start slowly, six months after the last two markets had started the S&P 500 was only down 10%, giving plenty of time to reduce exposure. I don't think there is a way to reliably miss an entire bear market but my objective here is to avoid the full brunt of one.
My first defensive trade this cycle whether that is this week or soon thereafter will like be to buy an inverse fund. Most clients own a little gold and a tactical product that will help reduce the correlation a little bit. The inverse fund would likely grow to hedge more of the portfolio as the market drops and I would add one or two more inverse products to further reduce the portfolio's correlation if the market shows to be heading lower. And of course I could sell something to further reduce net long exposure but for now my thinking is that I would prefer to not have to sell much but we'll see how that unfolds.