Portfolio Evaluation After Labor Day

September 08, 2015, 12:05 pm ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

After Labor Day, Investors re-evaluate their approach to the stock market.  This is historically the time of year when investors make decisions about how they will proceed.

Typically, investors look at market levels to make this determination, but it is important to look at all of the options when making decisions about how to proceed, and sometimes the market's themselves do not reveal where opportunities exist.

The best way to find a path it is to not only evaluate market conditions, the Dow Jones industrial average was down about 9.65% YTD when I wrote this, but also to evaluate what has been working in a market that has many investors concerned.

The concerns stemming from the stock market today are all about liquidity.  I'm not going to get into detail in this article, but recognize that excess liquidity is what caused the market to get into bubble like territory and liquidity concerns are what are causing the market to experience problems today.

Risk is more evident today than it has been for years.

With that said, risk controlled strategies are also standing out for the first time in years.  Strategies that are not correlated to the market tend to look much better when markets don't go straight up like they did during the FOMC stimulus phase.  Normally, markets don't act like that, they experience significant undulations from time to time, and risks are normal even though they haven't seemed normal for years.

The suggestion that I have made to evaluate risk controlled strategies in conjunction with market conditions is often frowned upon by buy and hold investors, but the Dow Jones industrial average has only returned 14% since 2007 and only 40% since 2000, which basically equates to about 3% a year.  Before 2013, when the FOMC stimulus phase began, the returns were actually negative, but the past couple of years has made investors forget about that, ignore the risks, and many now expect more of the same.

I am here to tell you that if you expect the market to increase like it has over the past couple of years you're sadly mistaken.

In my opinion you must control risk, you must engage in strategies that are capable of making money if the market increases or if it declines, and you must accept the fact that risks are extremely high even though you don't want them to be.  You can point the finger at China, OPEC, or at Europe if you want to, but again it all boils down to a material shift in liquidity.

Are their strategies that can work even in an environment where liquidity diminishes? 

You bet!  In fact, our strategies have been doing quite well this year.  They are not meant for everybody, they require more work than buy and hold investment strategies, and they do not correlate to the market like traditional portfolios.  That can be eye popping sometimes, but do not let that distract you.  Proactive strategies have drawdowns just like the market has drawdowns, the difference is that proactive strategies often can work when the markets are declining as well, which makes them an exceptional option to include in the evaluation process most investors are making after Labor Day.

The performance table below demonstrates just how effective proactive strategies can be and although the relative performance YTD is not necessarily considered exceptional when the market itself increases aggressively, they certainly stand out when markets are under pressure like they have been.

Performance Summary

Disclaimer:  Past performance is no guarantee of future results and substantial losses can result from investing in the stock market.  Investors MUST consult with their personal financial advisors and assess their personal willingness to assume risk before making any decisions to invest in the stock market.  Trading strategies also demand more from investors than traditional investing practices usually do, and as a result those may be difficult for some investors to handle on their own.  This adds risk to investing and should also be assessed.

Support and Resistance Plot Chart for

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