Risk Management: A Process Not An Event

The stock market has taken us on a big roller coaster ride so far in 2014.  After hitting all time highs on January 15th, the market nose-dived through the end of the month.  This turbulence caused some of our indicators, like Bullish Percent charts, to move to a defensive posture so we sold stocks in some of our portfolios to reduce exposure.  
However, the prevailing trend in the market is still positive as is its relative strength versus other asset classes.  So the big question is, "Will the recent pullback lead to deeper correction requiring a more aggressive defensive posture?"
 

We don't know the answer to that question.  But we do have a defensive preparedness plan to evaluate the risk of a more severe equity market decline, whether it comes three weeks, three months or three years from now.  
 
As you can see from the pictorial image of our game plan, it is an evaluation process that involves five key Trend and Leadership indicators and measurements.  No single event controls our investment strategy.

 
 Chart courtesy of Dorsey Wright & Associates
 
Of these five key indicators, the Lower Tops in the Bullish Percents is the only indicator that has turned defensive.  The other four indicators remain decidedly on offense.
We understand that we are in a riskier stage of this bull market. To avoid incurring large losses if this correction turns into a more severe decline, like the Boy Scouts, our motto is, "Be Prepared."
To learn more about our investment process, click here.