Written by Lance Roberts, Clarity Financial
Currently, we are trapped.
In the longer-term, markets are overbought, overvalued, and extended against a backdrop of weakening economics, a potential political upheaval, and poor earnings outlooks.
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On the other hand, we have an exceedingly bullish market, extreme momentum, and a shorter-term defined bullish uptrend.
So what do you do? The same as do you with a “porcupine.”
You deal with it very carefully.
On Friday, we used the early market lows to add to some of our technology positions that we had discussed reducing recently:
“Consequently, given the more extreme short-term overbought conditions and deviations, the risk of a short-term reversion has risen. Therefore, we spent this past week harvesting some of our gains (AAPL, MSFT, CRM, ADBE, AMZN) and planting a few seeds for our ‘Fall’ garden (VIAC & T)
Importantly, this does not mean we sold everything and went to cash. We continue to maintain our equity exposure to the markets. We are just reducing risk by ‘hedging around the edges,’ adjusting our bond duration, and adding more ‘defensive’ names to our equity allocation.”
The additions on Friday are only moving us back to target weights in some of our holdings from being underweight before the correction.
Importantly, we remain “bullish” on the markets currently as momentum is still in play. However, we also realize the tremendous amount of risk that remains due to overvaluations, extensions, and deviations.
If the short-term trend of the market changes from bullish to bearish, we too shall change our positioning accordingly.
The problem for most investors is either a lack of a discipline to manage capital or an unwillingness to acknowledge that what was working no longer is.
We prefer to acknowledge change and have the discipline to deal with it.
