One of the cardinal rules of trading and Investing is when your reason for buying something disappears, so should the holding.

Last month, we added Technology and Small Cap Growth (see Reducing Cash). There were numerous factors why, but one of the factors was the breakout of the SPX over the 1225 level. Yesterday’s close below that level is troublesome.

With that level now been decisively breached, we look at our reasons for owning more volatile higher risk names. Thus, with one of the major reasons for getting longer now gone, I want to throttle back our exposure to higher beta equities.

There were other factors that leaned towards adding equity exposure last month — seasonality and improving economic data to name just two. They seem to be offset by the escalating problems in Europe. And even thought he Euro is actually positive YTD, the potential for a cascading series of serious European bank issues continues to rise.

Hence, I am reducing some exposure. Note that this is a course correction, and not a full blown “Man the lifeboats” drill. I suspect a good part of the European concerns may already be at least partially discounted in the markets. We still have substantial exposure to lower Beta names, including value and dividend holdings, Berkshire Hathaway (BRK ‘b), and a few select equities. And the (smaller) tactical portfolio, which flipped positive on Oct 1 [Correction: Nov 1], remains fully invested in Equities.

Futures look strong today. There seems to be a traders’ expectation each weekend that a magic bullet will come in the form of some ECB or IMF bailout. I am less sanguine about a rescue for the EU, and the risk of contagion of bad sovereign debt to European, as well as US banks.

Hence, I want to make sure we had some dry powder — just in case Mr. Market decides to give us a Christmas present — a buying opportunity at lower levels.

Chart of the Breakout and Failure after the jump…

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BARRY RITHOLTZ IS AN REGISTERED INVESTMENT ADVISOR AT FUSION ANALYTICS INVESTMENT PARTNERS LLC, AN SEC REGISTERED INVESTMENT ADVISOR. THE OPINIONS EXPRESSED IN THIS BLOG ARE THE OPINIONS OF THE AUTHOR AND READERS SHOULD NOT ASSUME THEY REFLECT THE OPINIONS OR RECOMMENDATIONS OF FUSION ANALYTICS INVESTMENT PARTNERS LLC OR ITS AFFILIATES. ANY INFORMATION PRESENTED HEREIN IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SOLICITATION TO BUY OR SELL SECURITIES. PLEASE CONSULT YOUR FINANCIAL ADVISOR AS IT PERTAINS TO INVESTMENT ADVICE.

Category: Markets, Trading

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13 Responses to “Jettisoning QQQs and Small Cap Growth”

  1. PDS says:

    BR…prudent move…..as I said when you became more bullish back around Oct 21, the probability of you (your clients) getting whipsawed was and still is high….as it is mkt is down a bit since then…so best to hit the stops and as you say wait for a better day…

    say….I see the OWS banner is down again….are you still a collaborator?…or chgd your mind do to violence?….I’m still part of “Occupy a Desk” movement…the 53%

  2. baillebeag says:

    Thanks for the update. What do you think of bonds (treasurys or other) to smooth the ride? With the 10yr at 2%, the upside is so small.

  3. dead hobo says:

    Good luck with your plan. I’m holding firm until I either make money or until the market jumps into the grand canyon, at which point I double down. Personally, I think all dips will be far less severe than 2008 since a lot of that was caused by the novelty of the situation and the significant lack of working capital available to business. This working capital shortage caused the bulk of the downturn we are still recovering from today. Basically, people got laid off because business couldn’t get normal working capital loans for normal business operation. Much of the downturn cascaded from that problem … which does not exist today. (Falling real estate values were only 1/2 of the great recession.)

    Regarding Europe, I also think that problem is eminently solvable, but not until the PIGS all agree to get their fiscal houses in order. Italy appears to be going strong in that regard. Greece looks hopeful. Spain appears to have a real estate problem that will require outside assistance to overcome, plus who knows what else. A journey of 1000 miles begins with one step, and this problem will take years to solve. The ECB can help, but should not even try until the essentially heroin addicted nephews and nieces in the EU (except substitute debt for drugs) undergo rehab and display a track record.

    Specifically, with respect to sovereign debt, the ECB could perform a long term repo, as opposed to an overnight repo. Debt that is currently junk could be purchased at buyer cost or at a slight discount. The issuing country would buy it back in installments over time (a long time) at par. The ECB and IFRS would take on new rules for this type of fair value accounting in this particular instance so that the purchase didn’t destroy ECB capital. As long as the sovereigns involved don’t go nuts with debt again, this should work well. An absolutely necessary condition beforehand, though, is that all junk sovereigns must show a clear and convincing will to not repeat the mistakes of the past and show the wherewithal to buy back the debt over time.

  4. dougc says:

    It appears that the investment community believes that Merkel will Obama (cave after faking strength) if the bond market vigilanties persist but their actions are not hurting German bonds instead they are the European choice for safety.
    Lately the daily rumor of the day “the debt problem will be solved by ________________” has failed to rally the markets.

  5. Ted Kavadas says:

    RE: “I suspect a good part of the European concerns may already be at least partially discounted in the markets.”

    I believe that even aside from the European problems, significant other problems also exist. As such, this appears to be a tenuous time on many fronts.

    For those interested, here is a blog post I wrote outlining some of the major risk areas :

    http://economicgreenfield.blogspot.com/2011/10/danger-signs-in-stock-market-financial.html

  6. rktbrkr says:

    It looks like the the Greek debt holders have curbed their enthusiasm to take 50% haircuts so will this fandango to avoid calling a default a default finally end? Whats next?

    I thought I should flag this since it is a cornerstone of the present European sovereign debt crisis strategy. Last month the EU worked out a deal whereby Greece’s private sector creditors “voluntarily” exchange the debt they are due for new debt that constitutes a write down of 50%. But now it seems that the EU is only going to get 70-80% of private creditors onboard. This deal was structured so as to prevent both credit default swap triggers and the ECB’s taking losses. And with only 70-80% participation, the deal is not going to pass.(from FT Alphaville)

  7. Conan says:

    The model I use for the US (S&P 500) flashed a warning, tighten up stops and think about going short on May 29th for my long positions. It flashed a definite GO Short signal on August the 12th. This week it got close to a warning signal for the shorts, but it is turning south again.

    We are in a seasonally very positive season, so the bad news is being tempered by the strong seasonal factors. We are about 6 weeks from January and seasonality will be changing. So I am still in short mode until my signal changes and most likely the calendar is going in this direction.

    Something big would have to happen to make for a sustaining breakout to the long side. To me now is risky to be long.

  8. dead hobo says:

    Besides, can’t you just smell the sweet sweet fragrance of a massive short squeeze approaching? This shit happens every time and the shorts never learn.

  9. DrungoHazewood says:

    hobo

    There’s a lot of people waiting for a squeeze.

  10. CANDollar says:

    TED spread continues to widen.
    Ratio of US long bond to FXC spiking up.
    Don’t like this picture.

  11. drewsgo77 says:

    that chart looks like Sept ’08 – July ’09

    although it also bears striking resemblance to Sept ’08 – Dec ’09 (which is scary but still means we’ve done most of the losing).

  12. [...] to in the storm?  I am unable to determine this and so I watch and I wait before acting.  The sales we made last week of the riskier parts of our portfolio "felt" right at the time and this morning they look right.  [...]