Preparing for Both Bull and Bear Markets
Luckily for U.S. investors, stocks historically spend relatively little time languishing in bear markets, which are defined as a drop of more than 20% in major stock indexes.
But when bear markets strike, they can pull the rug out from under a stock portfolio that isn’t prepared to deal with them. From October of 2007 to March of 2009, the Standard and Poor’s 500 fell by 57% because of a meltdown in the financial system triggered by a mortgage crisis. And the latest bear market, triggered by a spreading global pandemic, pushed stocks down by 30% in just a month.
One can only hope that the latest market downturn will end soon. But portfolios designed with triggers that respond to downtrends by accordingly lightening up on stocks can be one way to potentially sidestep a portion of any downturn. That’s exactly how Howard Capital Management’s two new ETFs – the HCM Defender 500 Index ETF (LGH), which tracks the HCM 500 Index (seeking to outperform the Solactive US Large Cap Index) and S&P 500 stocks, and the HCM Defender 100 Index ETF (QQH), which tracks the HCM 100 Index (seeking to outperform the Solactive US Technology 100 Index) and Nasdaq 100 stocks – are intended to work.
For example, the HCM Defender 500 Index ETF uses the HCM-BuyLine®, a proprietary quantitative investment model developed by Howard Capital, to determine when the ETF should be heavily invested in the stock market. When the Solactive US Large Cap Index’s closing price is 3.5% below the HCM-BuyLine®, the index will assume a 50/50 allocation between stocks and one- to three-month Treasuries. But if the Solactive US Large Cap Index drops to 6.5% below the HCM-BuyLine®, a sign of a coming bear market, the ETF will become fully invested into one- to three-month Treasuries. Once the Solactive US large Cap Index closes above the HCM-BuyLine® for five consecutive trading days after having dropped below one or both of the previous two levels, the HCM Defender 500 Index will be reinvested in equities. The HCM Defender 100 ETF works similarly, alternating in and out of tech stocks.
According to Vance Howard, the CEO of Howard Capital Management, these ETFs can “take the emotion out of investing by not reacting at the first signs of trouble.” Many investors, he contends, react too quickly to troubling news and tend to sell off shares in the midst of a small correction. “Just because you get a bit of volatility in a market doesn’t mean the market is going to roll over and turn into a bear market – it just may be normal consolidation.”
Sometimes, of course, conditions are ripe for a serious downdraft that might last a year or longer, and that is when these ETFs can possibly provide risk management against extended market downturns.
It’s too soon to tell whether this latest market downturn will be as bad as the one fueled by the mortgage meltdown 12 years ago. But Howard is certain about one thing: a bear market is just as inevitable as a bull market. And investors should consider purchasing quantitative investments that are designed to automatically handle either scenario.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the HCM Funds. This and other important information about the Funds are contained in the prospectus, which can be obtained at www.howardcmetfs.com or by calling 770‐642‐4902. The prospectus should be read carefully before investing. HCM Funds are distributed by Northern Lights Distributors, LLC, member FINRA/SIPC. Northern Lights Distributors, LLC, and Howard Capital Management, Inc., are not affiliated.
Important Risk Information:
Exchange-Traded Funds involve risk, including possible loss of principal. Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress. ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. There is no guarantee that the Fund will achieve its objective. Securities in the Index or in the Fund’s portfolio may underperform in comparison to the general securities markets or other asset classes.
The HCM-BuyLine® (the “Indicator”) is a proprietary indicator used to assist in determining when to buy and sell securities. Not every signal generated by the Indicator will result in a profitable trade. There will be times when following the Indicator will results in a loss. An important goal of the Indicator is to outperform the market on a long-term basis. The Indicator is reactive in nature, not proactive. It is not designed to catch the first 5 to 10% of a bull or bear market. Ideally, they will avoid most of the downtrends and catch the bulk of the uptrends. Naturally, there can be no guarantee that the Indicator will perform as anticipated. Use of the Indicator will not necessarily limit your losses to the desired amounts due to the limitations of the Indicator, market conditions, and delays in executing orders.