by Lance Roberts, Clarity Financial
Nonetheless, as discussed below, the current levels of “bullish sentiment” and “momentum” keeps our portfolios allocated toward “risk.” However, we are moving closer toward the “exit,” so we are not the last one trying to get out of the theater when someone yells “fire.”
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With the markets closing just at all-time highs, we can only guess where the next market peak will be. Therefore, to gauge risk and reward ranges, we have set targets at 3500, 3750, and 4000 or 4.4%, 12.2%, and 19.5%, respectively.
Here are the current risk/reward ranges:
- +4.4% to 3500 vs. -4.3% to June high breakout support.
- +4.4% to 3500 vs. -5.7% to the 50-dma.
- +12.2% to 3750 vs. -9.6% to the 200-dma
- +12.2% to 3750 vs. -11.5% to the June consolidation lows.
- +19.5% to 4000 vs. -22.17% to the March closing low. (Not shown)
Given there is no good measure to justify upside potential from a breakout to new highs, you can personally go through a lot of mental exercises. While there is certainly a potential the market could rally 19.9% to 4000, it is also just as reasonable the market could decline 22.2% test the March closing lows. Completion of the “megaphone pattern” discussed above would be a 37.43% decline.
Just in case you think that can’t happen, just remember no one was expecting a 35% decline in March either.
As we said last week, “risk happens fast.”
Portfolio Positioning
Let me restate our position for the last several weeks.
“With our portfolios almost entirely allocated towards equity risk in the short-term, we remain incredibly uncomfortable.”
Such remains the case this week. While we certainly enjoy the markets lifting our client’s portfolio values higher, we are keenly aware of the risk.
As Chuck Prince, CEO of Citigroup, once stated:
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” – July 2007
Note the date.
Just as it was then, stocks kept running well into 2008. But eventually, the music stopped, and poor Chuck was left without a chair.
Given we are now getting more extreme short-term overbought conditions, the risk of a short-term reversion has risen.
As noted last week, we have continued to maintain our equity exposure to the markets. Still , we have continued to “hedge around the edges,” by adjusting our bond duration, adding a long-dollar position to hedge our gold exposures, and adding more “defensive” names to our equity allocation.
Our job remains the same, protect our client’s capital, reduce risk, and try to come out on the other side in one piece.
While we are certainly more bullish on markets currently, as momentum is still in play, it doesn’t mean we aren’t keenly aware of the risk.
Pay attention to what you own, and how much risk you are taking to generate returns. Going forward, this market will likely have a nasty habit of biting you when you least expect it.
