Stocks slip 6 percent in 6 days - should we sell?

In our July market commentary Stock Market Indicators Flashing Yellow, we wrote, "We often talk about stock market indicators in terms of green light, yellow light and red light. Are earnings forecasts green, yellow or red?  Are bond yield trends green, yellow or red?  Are government policies green, yellow or red?

After eight years of mostly green indicators, we're seeing a lot more yellow right now. This does not mean that we are yanking money out of stocks. However it does mean that if you have a significant expense in the next year (i.e. a big trip, a home purchase or a renovation) it might be a good idea to raise the cash now."

This year, we brought on board quite a number of new families, but we've only invested 1/3 to 1/2 of their cash.  Why?  Because this sharp sell-off, 6% in the major stock market averages over the past 6 days, is exactly what we anticipate when stocks have had a good, long run and valuations are stretched to the high side.  Furthermore, we don't expect that the sell off is done, and that a peak to trough decline of 10% is quite likely.  However, just like the 10% decline we saw in just February-April of this year, we expect the downturn to be of short duration.  The critical element that converts a pullback in to a meltdown - excess leverage - simply is not present.

For families that were already fully invested, we simply left them invested after setting aside any cash needed for the rest of this year.

We will explain our reasoning and investment strategy in our regularly scheduled commentary, which will be distributed Saturday morning.  However, we are sure that our clients are concerned and want to know our bottom line.  At present, we are not selling stocks at all and indeed are planning to buy stocks as early as next week.