Weathering a Volatile Market Cycle

It’s just two months until we hit 2015 and as we watch what’s happening in markets we can definitely see that the first week of November proved to be mild compared to the wild ride we had in October.

We’re now entering a season that’s historically favorable to stocks. And the wave of buying activity we saw two weeks ago shows there’s still buying pressures in the market. These two factors may well work together to support prices through year-end.

That said, a number of observations tell me that investors are still putting the “caution” in “cautiously optimistic.”

A preference for high-quality assets shone through last week, suggesting investors want to stay invested… but are leaning toward a defensive stance.

For instance, U.S. stocks made gains last week while foreign stocks — which are perceived to be riskier — lost a bit of ground.

Bond markets were also split. While Treasury’s (high-quality) gained, there were several bond niches that drifted lower… emerging market bonds (higher risk), included there.

And classic “defensive” sectors — like Consumer Staples and Utilities — have been outperforming in the aftermath of the October shakedown.

But the recovery from mid-October’s selling climax is still feeble, as a handful of technical indicators are not yet confirming stocks’ newfound strength.

One of these is the cumulative advance-decline line. It measures the total number of individual stocks that are trading higher relative to the number of individual stocks that are trading lower. And it acts as a useful gauge of a market rally’s health. Specifically, when a broad stock market index, like the S&P 500, is trending higher — making higher highs and higher lows — you want to see the advance-decline line tracing out a similar patternrn.

But currently… it’s not.

While the S&P 500 has recently broken to new highs… the advance-decline line is still working to push above its early-September peak. Take a look…

AOD graph 1114

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I’ll continue monitoring this technical indicator because if it fails to break to new highs in the near future, it could be a sign that the market’s newfound strength is short-lived.

Either way, the Boom & Bust portfolio has weathered market volatility quite well. If you’d like to see which positions are featured as the best and worst performers of this week, click here.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.