The best thing that can be said about yesterday’s market activity is that the solid gains from Tuesday held as you can see from the above chart (courtesy of MarketWatch.com).
There were no additional catalysts to speak of so volume was fairly light, but the important event was that the S&P; 500 closed the day above its 200-day moving average for the second day in a row confirming investor confidence.
Since a selloff did not happen, I committed about 1/3 of portfolio value (depending on client risk tolerance) to broad domestic indexes as mentioned yesterday. I consider the downside risk fairly small at a level of about 4%.
Here’s how I arrived at that number.
Our domestic Trend Tracking Index (TTI) is currently positioned +2.27% above its long term trend line. If the major indexes head south from here, it would take a drop of only about 4% of the broad market to pierce the trend line to the downside generating an all-out sell signal.
Because of our proximity to the trend line, this would happen prior to our conventional 7% trailing sell stop being triggered—hence the reduced risk.