Well, I thought I would be the first to quote from the eye-rolling Gwyneth Paltrow press release in the financial media as this is our way of graciously leaving the bull market rally that began in late 2012 but without the need for a starvation cleanse or $500 yoga pants.
Since December I’ve been harping on the potential for a serious market top in the second quarter of this year. At the time I only had market seasonality, the longest period without a pullback to the 200 day moving average since 1995 and the absurd level of investor bullishness to lean on for my rationale.
This chart alone is quite damning evidence based on past precedents that we could be in for a rough time for the next six months if we don’t take action.
At present we’re seeing action in the Treasury bond market that belies current equity market strength and is leading me to believe that last week’s feeble rally in stocks was perhaps the last gasp of the rally.
If we were in a strong equity market as we saw last year there should be no rally in Treasury bonds, in fact Treasuries should be quite weak. But as the chart below reveals the Treasury market is in the midst of a serious rally.
Our thinking is that we’re in the early stages of a market sell off, which at minimum corrects down to the rising bottom pattern in the chart below (red line). Ideally, we’d like to see the sell off move down to the trailing 200 day moving average (blue line). This would represent a sell off of 7.5% and bring some much needed negativity back to the markets. Market rallies are born from significant market negativity and fear not the “trees grow to the sky”state of mind.
We’re able to be Goop-ishly serene about the potential for market weakness since by mid March we had approximately 40% of client assets in cash and almost 100% in cash for new accounts. This past Tuesday we hedged our equity holdings by initiating positions in two inverse exchanged traded funds (TZA and SQQQ) and recognizing the new rally in Treasuries added to our position in the TMF. In addition we cut back our positions in small regional banks since the rally in Treasuries has a hint of “inverted yield curve” which is quite negative for the banking industry. Lastly we cut our position in Arotech in half since it has spiked as high as $6 in recent trading.
There are times when we should be as aggressive as possible to make gains for our customers and clients and then there are time to to step back and have some chamomile tea, I’ll have mine with Stevia.
Be careful out there
Brad Pappas
Long TZA, TMF, SQQQ and ARTX