In Austin this morning, the visibility is limited, it’s drizzly and the streets are wet. As I was driving to work I noticed that everyone was driving a little bit slower, and for good reason. Many things can happen when the streets are wet – and they’re not all good. Oil that has leaked from cars and has been on the street will rise to the surface once it begins to rain – making it more slippery than just being wet. A combination of wet streets and slippery surfaces means that you can lose control of your car quickly. You may not be able to stop in time or you could slide out of control in a turn. That’s why it was good to see everyone slowing down and being more cautious. Wet streets and other conditions can work to heighten our state of awareness and exercise caution.
The same is true with the stock market. Just like we know that risk has increased when the streets are wet, we know that risk increases in the market when it has been steadily moving upwards, and then a significant number of stocks change to a sell signal. A week ago Wednesday, on April 17, 6% of the stocks on the New York Stock Exchange had shifted from being on a buy signal to a sell signal. This measurement is known as the Bullish Percent, and there has now been enough of a change to tell us that the risk has increased in the market.
That signal doesn’t tell us to turn out the lights and leave; it simply tells us that the risk in the market has increased and therefore we should exercise more caution. Exercising caution can mean a number of things – there are a number of strategies to use when these conditions occur that can help us to limit losses should the market continue to go down from here. Unfortunately, I nor anyone else has a copy of next week’s Wall Street Journal. In other words no one can say the market is going to continue to move in either direction. All we can do is to know “what is” and act accordingly. If you are invested in the stock market through your IRA, 401(k), or after-tax account it would be worth your while to take a look at your holdings and evaluate how they are performing.