My constant theme for about a month has been to lower risk in the face of high investor expectations and the S&P 500 index up against overhead resistance. Markets have done well since the turn last November but the odds of the rally continuing appear to be dimming. I’ve been consistently selling our laggard holdings to raise cash but now we have to take the next step in increasing our defensive posture.
The cap ETF symbol IWM is beginning to roll over. Frequently this is an early warning indicator and can move in advance of the larger cap S&P 500.
Possible reasons for this include:
Lowered GDP expectations for the 1q 2012 by Bank of America to 1.8%.
The ISI survey shows a dip in retail activity.
Rise in oil prices which continue combined with the increasing tensions with Iran.
The rise in oil can potentially put a lid on equity prices.
Markets have had a nice run but the lack of momentum has me concerned that even if the S&P 500 breaks to the upside, the breakout could be temporary and not the start of a major move. No matter, the IWM which is a surrogate for small cap stocks is clearly in retreat. For these reasons we’ve added the TWM at just over $32 as a hedge against our remaining stocks.
If you look closely you can see the price of TWM is starting to curl higher which would correspond inversely to a move lower in small cap stocks.