Trader against black bear market on red arrow down trend line with sky cityscape background. The struggle … [+] Back to the bearish market concept.

Getty Summary

There is no doubt that it is much harder to make money in a stock market downtrend like the one we are in, but it can be done. There is certainly more you can do than buy, hold and pray. Converting at least some of your assets to cash at the right time is one way to accomplish this. For those of you who don't like cash, another way is to move your portfolio to the right place at the right time. To that end, I focus solely on money in the various sectors of the S&P 500, most of which has gone – and will continue to go – into the energy sector since the beginning of January.

Introduction

In our most recent article for Forbes on February 23, we indicated that the benchmark S&P 500 (SPX) was in an emerging major downtrend and vulnerable to further declines as our tactical model was still in a negative/risk-averse state from mid-January. This major downtrend remains intact and the market appears more vulnerable to further weakness next week as even perennial market leaders like Apple (AAPL) begin to underperform the S&P 500. Further weakness in large-cap stocks like AAPL would be bad news for the market as a whole. Meanwhile, key market internals remain weak.

The Asbury 6: Negative from January 14

Asbury 6 is our firm Asbury Research's tactical risk management model. It is designed to help determine what the true day-to-day conditions of the market are becoming in an environment where computer-driven trading (which dominates daily stock market volume) has made equity investing more chaotic and stressful than ever before. Rather than chasing the S&P 500, which is up 50 points one day and down 70 points the next, the Asbury 6 Index tracks what we call "secondary indicators" – such as asset flows and relative performance – that are less susceptible to this now-defunct market. These indicators are less susceptible to the kind of choppy day-to-day influences that are now common, which are largely just noise.

Table 1 shows that as of Friday, March 11, all Asbury 6 component indicators remain negative (red). The "A6" model itself has been in negative territory since January 14, and the S&P 500 has fallen 12% since then.

Asbury 6 Risk Management Model

Copyright 2022 Asbury Research LLC

Asbury 6 says it's time to get "on the defensive. And, depending on the investor, being defensive can mean anything from cashing out to simply focusing on relative pledges rather than outright pledges. The latter allows you to stay invested, but if done correctly, lose less money than the market as a whole. Professional money managers rely on relative performance investing because most of them can't cash out.

During these periods of overall market weakness, like the one we are in now, we pay particular attention to investor asset flows because they typically show you where the money is going before the relative performance trend becomes evident. Our SEAF model is built to track money in this way.

Follow the Money: Energy and Healthcare

SEAF represents sector ETF asset flows and tracks where funds go in the sector space over three different time horizons. Basically, it shows where the money is going and where it is coming from. The SEAF currently shows that as of the end of last week, the most significant investor inflows are moving into the energy and healthcare sectors, while the most significant outflows are coming from the technology and financials sectors.

Asbury Research's SEAF Industry Selection Model

Copyright 2022 Asbury Research LLC

As of this week, health care is actually a new entry in our model, but energy first appeared in the SEAF on Jan. 10, long before it made headlines. Since then, the Energy Select Sector SPDR Fund (XLE) has risen 25.7% while outperforming the SPDR S&P 500 ETF Trust (SPY) by 39.3%. This approach is simply to track the money wherever it goes and then wait for the explanation behind it to appear in the financial press – after the move becomes apparent.

Wait until the money moves

There has been a lot of discussion in the financial press lately about energy prices rising too fast, too quickly and potential selling opportunities. But as long as money continues to flow there, we will continue to add to our energy holdings. As the money flows elsewhere, we will follow where it goes next.