A Reversion to the Mean

Several weeks ago we saw our primary market risk indicator (among others) reverse down bringing the ‘defensive team’ onto the field; this meant that the risk in the market was elevated, and as I wrote earlier, we should be proceeding with caution. This did not mean that we needed to come to a screeching halt. It meant that we unload the dead weight in portfolios and trim positions which had appreciated nicely.
The past few weeks can best be described (thus far) as a reversion to the mean or put simply, an exhale for the equities market. In mid-October many investments were statistically overbought. So far this pullback, or correction, in the market has been very similar to that of June in a number of ways: it has coincided with a bounce in the US Dollar and it has (thus far) caused more (needed) pullbacks than it has outright collapses. Sure, there have been several earnings misses to the downside, but by and large many areas of the market are yet to show long-term weakness.
The international equity market continues to show positive signs from a long term relative strength perspective, so international equities, as an asset class, continue to be an emphasized asset class. The same holds true for the US, particularly small caps.

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