In SMI's October cover article, The Role of SMI’s Dynamic Asset Allocation Strategy in Light of Current Market Dynamics, we revisited the concern that led to the research/creation of DAA:

If you've been tuned into the market's ugly recent slide, it's probably hard to believe that just three weeks ago the market was setting new all-time highs. This downturn has been sudden and painful, but isn't particularly noteworthy — yet. The unfortunate reality of investing in stocks is that these types of market spasms are fairly common. If you want the stock market's long-term returns, you have to deal with its volatility.

SMI has increasingly emphasized caution as this year has progressed, with the latest examples being our October cover article on Dynamic Asset Allocation and Matt's Voices of Reason, Reasons for Caution post Monday. Seems as though we must think a bear market is imminent, right?

Not exactly. Truth is, we have very little insight into when the next bear market will arrive. We don't really think anyone else knows the answer to the When? question either.

But there are still three solid reasons why we feel that it's important we emphasize the bearish case, despite the stock market sitting near its all-time highs.

There are no changes to the DAA lineup for October. Read on for the full details.

DAA is a core portfolio strategy that is designed to help SMI readers share in some of a bull market’s gains, while minimizing (or even preventing) losses during bear markets. The strategy involves using exchange-traded funds to rotate among six asset classes, holding three at any one time. DAA is a defensive, low-volatility strategy that nonetheless has generated impressive back-tested results when evaluated over full market cycles, demonstrating the power of "winning by not losing."

The recommended categories/ETFs for October are (in order of current momentum):

There is no change being made to the official SR recommendation for October. Read on for the details.

Sector Rotation is a high-risk/high-volatility strategy. While its peaks and valleys have been more extreme than SMI's other strategies, it has generated especially impressive long-term returns, as discussed in Sector Rotation is Risky, But Highly Rewarding.

When SMI’s Dynamic Asset Allocation strategy (DAA) debuted in January 2013, it may not have seemed particularly revolutionary. But it approached two core investing issues from a totally different perspective than SMI had used up to that point. First, it was the first major departure from our long-held stance that risk could be effectively managed by adjusting a person’s stock/bond portfolio allocations. Second, it upended the idea that investors are best served by setting a fixed portfolio allocation and holding it through bull and bear markets alike. In fact, DAA had the potential to shift investors completely out of stocks at times.

Why Upgrade?

SMI offers two primary investing strategies for “basic” members. They are different in philosophy, the amount of attention they require, and the rate of return expected from each. Our preferred investing strategy is called Fund Upgrading, and is based on the idea that if you are willing to regularly monitor your mutual-fund holdings and replace laggards periodically, you can improve your returns. While Upgrading is relatively low-maintenance, it does require you to check your fund holdings each month and replace funds occasionally. If you don’t wish to do this yourself, a professionally-managed version of Upgrading is available.

SMI also offers an investing strategy based on index funds called Just-the-Basics (JtB). JtB requires attention only once per year. The returns expected from JtB are lower over time than what we expect (and have received) from Upgrading. JtB makes the most sense for those in 401(k) plans that lack a sufficient number of quality fund options to make successful Upgrading within the plan possible. Here are the funds and percentage allocations we recommend for our Just-the-Basics indexing strategy.

Today I'm going to discuss a fundamental investing distinction between trend-following and predictive strategies. Occasionally I'm reminded that some of these foundational investing building blocks need to be revisited from time to time. So while this is is basic information, it's also really important.

Most investing approaches fall into one of these two camps, though there are countless variations of each. On the one hand, you have investors that are following the market's lead and trying to move in the same direction as the market: these are trend-followers. On the other hand are investors who try to anticipate what the market will do next, independent of what it's doing currently: these are predictors (that's my term, not an official investing label).

Hurricane Florence appears poised to blast the Carolinas in the coming days, with 1.7 million people currently under evacuation warnings and some 5.4 million covered by various hurricane watches and warnings. It's a dangerous storm and we can be grateful for the technology that has been developed to allow for these forecasts and warnings.

It may still be brutal, but at least people aren't going to be caught unaware. The warnings are out and people have a chance to make preparations and move to safety.

Almost exactly 10 years ago, the collapse of the Lehman Brothers investment bank delivered the "Oh no" moment that unofficially kicked off the Financial Crisis. That's when it became clear things were dramatically worse than most people had expected, as well as when it dawned on everyone simultaneously that obligations were about to not be paid, starting with Lehman Brothers but extending to points no one could predict given the vast intertwining of the global financial system. It was this unknown element of how far the damage would extend that was largely responsible for the paralysis of the financial system that sent ripple effects in every direction.