In our previous blog we noted the Relative Strength Index (RSI) was signaling that the market was overbought and we were proceeding with caution. We felt an orderly pullback in the range of 3% would be healthy. Consequently, we increased our cash position near the market highs. Since then we have seen an approximate 6% decline. Unfortunately this pullback has not been the healthy, orderly type we hoped for in July and instead has been caused by trade war developments, currency manipulation, and interest rate fears.
Today the S&P 500 was off more than 3% at one point before the fear and panic subsided and its counterpart, the DOW, was off nearly 900 points. Watching the market action throughout the day, the aimless selling could be seen as stocks fell quickly on heavy volume. Last week Fed Chairman Jerome Powell hinted that we are not entering into a prolonged monetary stimulus period and unexpectedly President Trump slapped another 10% tariff on the remaining $300B worth of Chinese imports. These two headlines, coupled with the retaliation tactic of currency manipulation out of China, abruptly pulled the rug from underneath the US equity markets intensifying the decline.
While cheaper prices are generally a welcomed buying opportunity, doing so during a steep decline takes a bit of courage. Immediately the RSI moved below 30 signaling oversold conditions. The last time the indicator fell to this level, the market firmed quickly and moved higher by 7.5% in less than 2 weeks.
If we remove emotions, these circumstances present an opportunity to slowly increase equity exposure by selecting small bites of companies that are extremely oversold and/or now look fundamentally cheap. Thankfully we are in a position to introduce a measured increase in market exposure.