Maximum Flexibility


It is too early to read too much into the last two days, but we can acknowledge some observable signs of what could be the early stages of an attempt to form a lasting bottom.

Wednesday’s massive, rare, and impressive candle was followed by a 91 point intraday reversal in the S&P 500 today. We have been saying in order to consider migrating from a defensive/principal-protection posture to a more balanced stance, we need the market to show us something. The last two sessions provide evidence of some improvement on the risk-taking relative to risk-aversion front.



Given the S&P 500 remained in an oversold position, we purposely added a relatively small percentage stake to defensive bonds, knowing a rally in stocks could be coming soon. In a short-term narrative that aligns well with the S&P 500’s improvement in the last two days, bonds (TLT) could possibly be in the process of experiencing a failed bullish breakout. If the breakout indeed fails, which is still to be determined, TLT could see increased selling pressure in the days ahead. Therefore, we reduced our exposure to TLT before Thursday’s close.


TLT was up over 1.00% intraday Thursday (doing well when stocks were getting hammered) and looking like it was going to print a convincing breakout. When stocks staged the impressive intraday rally, TLT moved to more of a “this breakout could be failing” look and closed with a tiny gain of 0.02%.


If the S&P 500 can stay out of free-fall mode and can continue to show signs of what looks like a possible bottoming process, the model will have us move to a more balanced approach in the short run. If we can add a nominal amount of equity exposure, it will allow us to have modest exposure to both sides of the equation (growth and defensive). The market’s profile has sustained so much damage that cash will remain a fairly substantial part of the equation until the data improves.

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Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit ...

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