February 16, 2021
** Equity and Sector Portfolio – Trade Update ***
Portfolio Managers – Michael Lebowitz/Lance Roberts
We reduced our fixed income exposure by selling our entire position in MBB (mortgage ETF) and buying, in its place, 10% of SHY (1-3yr Tsy). We are concerned that further selling in the fixed income markets would raise the duration of mortgages and create forced selling by leveraged institutional holders of mortgages. Given the low yield of mortgages, the risk-reward is not worth the risk.
Equity/Sector Portfolio
- Sell all MBB 13%
- Buy 10% SHY
Market Commentary
This past week was mostly non-eventful, with markets absorbing some of the previous week’s runup. In the short-term, the markets are indeed overbought, with almost every market pushing 2-standard deviations of the 50-dma. Such would suggest that upside is limited in the short-term, but money flows are currently favorable, supporting stock prices in the short-term.
We will review the money-flow analysis for each of the major markets.
In all graphs below, the primary indicator to observe is the middle panel. This is our money flow indicator, which combines both price and volume to determine the strength or weakness of advance or decline.
S&P 500
As noted, we had previously reduced our exposure to markets in mid-January as the money flow indicator was getting extremely extended. That worked out well given the sharp decline at the end of January. Following that decline, we began adding positions back to portfolios and are once again nearly fully allocated to equity risk.
At the moment, money flows are positive, and the market has been consolidating the recent gains. However, money flows are weaker than they were previously, and when the market turns down, we are likely going to see a bit bigger correction than we saw in January.
The money flow index is currently not back to its warning zone just yet, so we are still one to two weeks away from the next correction phase.
Mid-Cap 400
As with the S&P 500, Mid-caps are significantly extended and deviated above long-term means. When it comes, the correction will likely be reasonably substantial, given the current deviation. Profit-taking would be advisable currently.
The money-flow index is positive, but flows are weakening, so when a correction begins, it will be worth paying attention to. At the moment, there is no need for real concern, we are likely a couple of weeks away from a correction, but as stated, a little profit-taking is advised.
Small-Cap 600
As with the Mid-Cap 400 index, the same goes for the small-cap index. Small-caps are grossly extended, overbought, and deviated from long-term means. It is highly advisable to take profits and reduce exposure to this sector after the recent run.
Again, we are most likely a week or two away from a correction. While you can continue to hold positions for now, just be aware of the risk. When the market turns, it will be swift, and you likely will not have much opportunity to sell. Such is why some advance profit-taking is probably advisable.
Emerging Markets
Emerging Markets, like small caps, are grossly extended. As with the recent correction, the next will likely be just as “fast and furious.”
Again, we are likely a week or two away from a correction as money flows are positive. However, they are weakening, which suggests profit-taking is advisable.
International Markets
So goes Emerging Markets, so goes International.
Take profits and reduce risk. The coming correction, when money flows peak and turn lower, will be relatively swift.
Gold
I have had a lot of questions about Gold lately. The belief is that with the Fed, and the Administration, pumping money into the financial markets, we are about to get a strong surge of inflation. While I will not get into the dynamics of what causes real inflation here, the simple fact is that Gold is more of a “fear” trade than an “inflation” trade.
Clearly, given the mass speculation that is going on in the market from Gamestop to Marijuana stocks, there is no fear. Such is apparent in the chart below. Technically there is no reason to own gold currently. When we begin to see the technical backdrop improve, we will undoubtedly add positions back to our portfolios.
