Taking Some Money Off the Table
a defensive and temporary move, not indicated by most of my signals. And yet...
Picture A.I.-generated by Gencraft. No, I don’t know what the weird horse’s leg is doing there.
Things have worked out pretty well for my strategies in the past quarter. Since November 1, my vehicles of choice have gained 47% (QLD), 22% (QQQ) and 18% (SPY). Right now however, I think it’s a good time to de-leverage. In other words, sell some frothy stuff; convert some QLD to QQQ and some SSO to SPY, and raise a healthy amount of cash.
Here are my thought processes:
Contra selling:
- Yes, the market is frothy, but by the same logic, I would have sold in March 1999, instead of March 2000, losing out on major profits. Unhappy are the folks who cash in, and then see their neighbor get rich because they have better nerves!
- None of my regular indicators and signals have identified a dangerous market. If you’re a momentum-based investor who watches the dozens of charts that e.g. Chris Ciovacco analyses every week, then there is no cause for worry.
- Yes, the current market is characterized by strong divergences: the Sexy Six (formerly: Magnificant Seven, but that was when Tesla was a stonker) are making new highs while the broad market is quite weak. That can be dangerous!
However, to quote Tom McClellan: "Divergence is a condition, not a signal." One does not simply sell stocks during episodes of bad breadth. If that was a strategy, it wouldn’t backtest well.
Pro selling:
+ Divergences are not immediately actionable, but need to be taken seriously. If my strategy tells me to be invested because the market is healthy, it raises concerns when I look under the hood and see… it’s not so healthy at all.
+ On average, February is a weak month.
+ Nobody sells at the top. The above March 1999 vs March 2000 choice is a false dichotomy. For the vast majority of people it was more like, March 1999 vs November 2001 (meaning: 40% Nasdaq gains versus 80% losses).
+ Andrew Thrasher has once again provided us with a hitherto unrecognized yet actionable signal, which he has examined starting in the year 2002. Two days ago, he wrote:
SPX is 11.7% above the 200-day MA as of last Friday’s close. When we’ve gotten to 12% in the past, the Index has begun to faulter (sic) soon after, as shown by the blue circles. The instances we didn’t see a pullback was when the market was just coming out of a major bear market (2003, 2008 and Covid Crash), which isn’t the case today. The last time we breached 12% was last summer which ultimately led to a 10% pullback. Before that was in early 2018 which was also a quick 10% decline as well.
In other words, the S&P 500 has gotten ahead of itself, and the rule of reversal to the mean says something is possibly going to give.
Now, whether 2022 was “a major bear market” is up for debate, as well as the question of whether we only recently exited it.
Also, note that Thrasher didn’t include the Dotcom case in his analysis. By the above metric, one can assume he would have sold everything in January 1999, because at the time the SPX was 13% above its 200-day moving average. And yet, from January 1999 to the top in March 2000, it gained an additional 22%.
Beware the reluctant-bear FOMO trap
I happen to be in the bull camp and think that a short-to-mid-term 5% to 10% correction will probably be followed by a new strong stock market. We’ll see. I hope for a short interlude of weak stock prices which I will utilize to leverage up again, by around May.
The market however will do whatever it wants to do, and so I’d like to point out a major danger: that of selling because things look iffy, then buying again because everybody else is making money, and then losing tons when the market corrects, only later than expected.
It happened to plenty of folks in the late Dotcom era — they sold in early 1999, re-bought in early 2000, and then gave up in frustration, after major losses, in 2001. It also happened to me in 2020: I sold the Covid rumor on late 2019, and when the market advanced well through January 2020, I re-entered the market. Ouch!
Hence, I’d like to advise you to do the following: If you do take some money off the table today or in the near future, write down your reasons for doing so. And write down under which circumstances you’d re-invest. And then stick to it!
A valid reason: “the market has corrected by 5%; bull thesis still intact”.
A non-valid reason: “the correction hasn’t happened (yet) and I have FOMO”.
This is only about raising cash, not about exiting the market
In sum, I think my strategies are still valid and I will generally be sticking to them until further notice. But after such an excellent run, there is only so much that a momentum-based signal can do for you. You’d lose a lot before the SPY even got close to its 200-day moving average.
As always, your vigorous comments will be much appreciated!
Excellent article, as always. I especially like that you’re moving out of leveraged to single positions. That’s a nice way to scale back given your concerns about February.
Thanks. After selling, how much % of equities and cash suggested?