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:

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)

Why We Reduced Risk, Technically Speaking: Why We Reduced Risk Last Week

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 “” 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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