Technically Speaking: Why We Reduced Risk Last Week
Why we reduced risk last week.
During the last few weeks, I have discussed the rising levels of exuberance in the markets.
On Friday, I tweeted the following:
Money flows very close to flipping negative. I might be a few days early but we are dropping #equity exposure by selling our long-index trading positions for now.
— Lance Roberts (@LanceRoberts) January 22, 2021
Rotation back to #FANG also suggests concerns about the #reflation trade. pic.twitter.com/g8rM6Wx9Qn
Not surprisingly, I received more than a few emails chastising me for “bailing on the bull market, which is going higher.”
Such is hardly the case. We reduced our weighting in our “indexed” positions, which we use for overweighting equity allocations during short-term bullish advances. Even though we took gains in our index positions, we remain primarily long-biased in our equity and ETF portfolios. However, given the extreme technical overbought and deviated conditions, it was prudent to raise some cash and protect our gains.
When Everyone Agrees
However, it wasn’t just the conditions we discussed which have us concerned about the markets in the short term. Investor positioning has also reached rather extreme levels. As Bob Farrell once wrote:
“When all experts agree, something else is bound to happen.”
Currently, with investor’s extremely long equity exposure, the risk of a correction has become more elevated.
(Click on image to enlarge)
If these extremes don’t ring some alarm bells, I am not sure exactly what will.
Importantly, while we are reducing risk now, such doesn’t mean the exuberance in the market can’t continue over the next few days to several weeks. Many will suggest our actions were wrong if the markets continue to rise, and we missed out.
Such could undoubtedly be the case. However, I will remind you that we wrote much the same in January 2020. Over the next few weeks, it appeared we were very wrong until we weren’t.
That is just the way markets work.
Investors Are All In
As we discussed previously, following an actual “bear market,” investors are very slow to return to the market. Following the “Dot.com” crash, it took several years before investors returned their allocation levels to “fully allocated” levels. The same occurred following the “Financial Crisis.”
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