Emphasis during 2010 will still be to manage market risk
This time of year many advisors and market gurus like to write about what they expect the markets will do in the upcoming year. I won’t make that mistake because I admit that I have no idea what the financial markets will do in 2010.
If we knew what would happen, our job as financial advisors would certainly be much easier. We could take a bunch of positions now, based on what is going to occur, and then just sit back and relax for the rest of the year.
The reality is that as money managers our main objective in 2010 will be the same as it was going into 2009 or any other year. Our primary goal is to make certain that we protect our clients from market risk and avoid major downturns. If favorable market conditions develop, then we also hope that we can generate some respectable returns.
After the major market downturn experienced in 2008, I certainly never expected to see stocks rebound like they did in 2009. We did anticipate a bear market rally and when it faltered in June, it appeared that the three-month rise in prices might give way to another significant downturn. Instead, stocks turned up in July and have been drifting upward for most of the rest of 2009.
Below is a chart showing a comparison between the NYSE composite and the Nasdaq. As you can see, over the past year the Nasdaq has been much stronger. I added the green lines to illustrate that since October, the NYSE has generally stayed within a very tight trading range. Over the past two weeks, the Nasdaq appears to have broken out of that range and reached a new high for the year.
This could be an indication that stocks in general are ready to begin a new upward move. Or it could be just end-of-the-year window dressing as Wall Street managers try to end the year with the biggest possible gains. We’ll know for sure in a couple of weeks.
The bottom portion of the chart is a relative strength index (RSI) of the NYSE. Normally when an index or an investment can trend above RSI 50 it means that it has the momentum to continue an advance. I added the red line to show that that the NYSE RSI (and its accompanying momentum) has been declining since the beginning of August. That is usually a negative indicator when the RSI is falling while the price is rising.
As with any year, 2010 will undoubtedly bring both challenges and opportunities in the financial markets. Our objective is to keep the ride as smooth as possible given the individual investment objectives and risk tolerances of our clients.
F.S.