All this week, I have been discussing why I thought we may be coming to an end of the cyclical bull market that began in March 2009: Listen to Ritholtz Sees “Major Cyclical Correction” from Tuesday morning, and watch this and this from Thursday.

I have cut back on some major holdings, and raised our cash levels to 25% in the asset allocation model I manage. I removed half of our energy positions, eliminated our emerging markets exposure. The biggest move was cutting S&P500 exposure by 50%. A handful of clients who had outsized Apple exposure saw those positions reduced by a third. We maintain a heavy bias in long portfolios in health care and in consumer staples. I have no desire to reduce treasuries or munis, which will become a safe harbor if and when things get choppy. (I have NOT added inverse ETFs, but that is something I may consider in the future).

Note that these portfolio moves have nothing to do with the upcoming elections or the fiscal cliff. I agree with what Michael Belkin said at the Big Picture conference: “People should forget the Fiscal Cliff, this market is all about the Earnings cliff.”

In terms of future recession probabilities, I now place us at 60% over the next 18 months. In other words, we are more likely to see a normal cyclical recession before Spring 2014 than not.

I don’t imagine we go straight down from here; There will be sell offs and rallies, pre and post elections. There will be some data points that suggest things aren’t so bad, and then some that are awful. It is not a black and white situation. I do believe the low volatility we have seen may very well become a thing of the past, and the VIX is becoming a definitive Buy.

One last point: This is NOT a batten down the hatches, go-to-100%-cash, looking for a 50-60% crash type of expectation. (We, um, already had that one). Instead, this is looking like a regular earnings and revenue shortfall driven recession, with equity markets at risk for a 20-30% correction.

~~~

Investing is an art form that requires probabalistic decision-making using imperfect information about an inherently unknowable future. We work with less than a century of price action, when ideally we should have 1,000 years of market data to analyze. We never know the ideal time to enter and exit positions, but we can at least strive for an objective process using known metrics (earnings growth, valuation, price trends, etc.).

Hence, why we make gradual and infrequent moves, highly cognizant of the possibility we will be wrong.

 

 

Category: Earnings, Economy, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

40 Responses to “Time to Reduce Equity Exposure . . .”

  1. Russ says:

    BR, I greatly appreciate these concise, reality-oriented, here’s-where-things-seem-to-be, and “here’s what I’m doing” summaries that you provide from time to time. They’re one of the reasons I think little guys like me keep reading. They provide a helpful reference point amidst all the noise.
    Russ

  2. BennyProfane says:

    Thank you.

  3. postman says:

    Thanks very much, BR. The combination of your careful analysis and modesty is all too rare.

  4. Frilton Miedman says:

    I second Russ.

  5. [...] Barry Ritholtz, who has made some excellent timing calls in the past, says he’s paring back on stock holdings. [...]

  6. slmasker says:

    Russ expressed my reasons for appreciating this overview of your current market moves, as well.

  7. [...] Source: Time to Reduce Equity Exposure . . . (Rithotlz) [...]

  8. pintelho says:

    Yeah no doubt. I was thinking the same thing yesterday…after one of my holdings did a magnocandlestick after posting a great quarter…i said..this kinda volatility on good news is a bad thing. i think its time to take some off the table.

    thanks BR for confirming my own intuition.

    i have fears though that this will f’up the election for Obama…whom i think is the more reality based person to lead us in the next 4 years….sad.

  9. AHodge says:

    im not short the US yet just europe
    im just motly out of the US except specialty on risk
    i am not betting on a US recession “soon” its a risk

    you are getting publically cagy— guy
    18 months is forever in this business to call a recession

    the 3Q flash GDP may be a little stronger than it looks at 2.0
    there is a 0.5% drop on farm inventory (drought)
    and a 14.5% dro0p in motor vehical net production
    in the slightly wierd world of NIPA accounting an increase in imports is a negative
    there is deflator the dollar GDP is over 5%

  10. steveplace says:

    ” and the VIX is becoming a definitive Buy.”

    NOOO BR NOT YOU TOO!

    You can’t buy the VIX. You can roll positions into options, buy puts, buy VIX options or futures and so on.

    But there is no way to get long the spot VIX

    ~~~

    BR: Don’t be pedantic

  11. First, “…I second Russ…”, x2

    Second, these ‘guys ‘n gals’, here.. http://www.gfmag.com/archives/159-september-2012.html#axzz2APR7jIrA .. were, not only, “bang on” (and Timely..), but, also, Show Why ‘Print’ (when One has something Worthwhile to Note) will, always, be Valuable.

    “Newsweek”, on the other hand, will never be missed..(good going, Tina..)

  12. svarada says:

    Thank you Barry
    – Sri

  13. rick-aust says:

    Think you are generally intuitively tuned into the zeitgast.
    My thinking leads me to a think a major ruction in the bond market rather than the equity mkt may be at hand
    Cause / effect will be fed credibility question mark. Given market exposures I wonder
    where this money would go if it exited the bond market? Would it stay in US$? The gold market
    would likely benefit but the surprise may be the equity market wins by being least ugly.
    Simplistically my thought process is if growth does take a turn for the worse,given the Feds committment,
    investors will understand that QE3 could be in place for a loooooong time. How do you really justify buying
    30yr debt from someone paying so little with such a poor credit outlook.
    At economics classes I dont recall the outcome for P and Q when the supply and demand curves are both seemingly positively sloped. People demand for the stuff is gratefully matched by the supplier
    Not gonna speculate about a catalyst, but just sensing the Nervosity Index and market allocations i reckon the
    market always zeroes in on the weak point of the herd…… eventually. Timing is everything

  14. gloeschi says:

    BR – is your reasoning for taking money of the table the fact we are “due” for another recession (macro) or is it your technical models? Tx.

    PS: While VIX might be low, 1-year VIX futures are currently higher than the day LEH went belly up. Steep contango guarantees high roll-losses for most long-volatility ETF’s, leaving investors with little tools to bet on increasing volatility.

    16% implied vola means basically you’d expect >1% daily moves on about 1/3 of trading days. So with approx 20 trading days in a month, 6 or 7 should have moves of 1%+. Dow went without a -1% day for 3 months. So unless swings pick up, a VIX of 16 is too rich. Implied vola, however, has NO predictive value. It’s just the current market expectation, and those expectations can, and will, change.

  15. AHodge says:

    re VIX here i am not totally against going long VIXon expected bad nows
    but the only way i ever made money in it was shorting the top or near top
    the peak of the panic

  16. sureseam says:

    “This is NOT a batten down the hatches, go-to-100%-cash, looking for a 50-60% crash type of expectation. (We, um, already had that one).”

    Why should this time be smaller than last time? Just askin’ ’tis all!

    ~~~

    BR: Because THAT alleviates the built up pressures in the system.

  17. ComradeAnon says:

    “Regular” now means 20-30% correction. More paradigm shifting.

  18. b_thunder says:

    Barry,
    with AAPL up $2 and AMZN up $10 (with P/E somewhere between 280 and infinity due to losses) – do you want to reconsider your less than 100% bullish allocation? Fiscal Cliff, Earning Cliff – do they even matter?? Does anything matter anymore? The old “playbooks” were rendered obsolete in 2008/09 bailout mania, when the gov’t policies and the rules of the game were radically changed. The newer 2009-2011 playbooks may have to be abandoned as well. Personally I’m 10% “long”, 90% cash/equivalents

    ~~~

    BR: No, the old playbooks were not rendered obsolete — they served people well who understood how to contexualize them — many failed to.

    Day to day action is mostly noise, and pre-market stuff even worse.

  19. catman says:

    I get by with a little help from my friends…

  20. Concerned Neighbour says:

    With central bankers priming the pumps indefinitely, AMZN and its 3,000+ P/E may prove to be the bargain of the century in a year or two. Up 4% on a big miss. It makes you wonder how much higher it would have gone if had lost even more.

  21. Concerned Neighbour says:

    And Barry, thank you indeed for your candor. In an era where fundamentals no longer appear to matter, your job is much more difficult that it otherwise would be.

  22. acme says:

    Just another voice chiming in to say thank you, Barry.

    And these are definitely my favorite types of posts. They are extremely helpful!

    When I opened my first retirement account years ago, I went to Merrill Lynch. My thinking was, “I am not a finance person and I don’t want to have to think about this stuff, so I will pay a professional to advise me.” What a sucker, right? After being muppeted into some bad investments, I finally switched to Fidelity and now manage my own investments.

    Thanks again for this blog.

  23. nofoulsontheplayground says:

    At the very least, three consecutive weekly red candles will almost always guarantee a lower low within the next couple of weeks on individual issues as well as indexes. This week is the 3rd weekly red close.

    As for the VIX buy, the VIX and tons of other indexes and issues have weekly MACD divergences that point to multi-week moves up in the VIX and corresponding multi-week moves down in indexes and individual issues.

    It’s been a while since we’ve seen technical signals that are this strong. The divergences are quite big.

  24. GeorgeBurnsWasRight says:

    What bothers me most is that it seems too obvious that the stock market is going to go down.

  25. Thanks BR. I’m seeing the same things you are. Something fundamentally changed in the market last week after IBM and GOOG posted earnings. People are starting to protect their portfolios and raising cash. That can’t be good for the markets going forward. There’s just too much potential for selling.

    As for buying VIX, we’ve had good success using mid term volatility as a hedge.

  26. 4whatitsworth says:

    Yeah, it definitely looks like a profit recession, and if everyone gets as cautious as we all appear to be then a recession. Not sure about emerging markets if they are flat and then begin to move that could be a decent place to be. Also the end of the year thing is a bigger deal then I think you make it out to be next year cap gains tax will go up at least 3.5% to cover Obama care, also there is a high likely hood that the base goes up 5% so that’s 8 1/2% if you are holding gains now why the heck wouldn’t you sell?

    Thanks for your insight, your awesome. I am not sure if I hope you are right or not this time around there is no really good place to put your cash.

  27. Mark Down says:

    20%-30% correction …… WHEN….

    2YRS 5 RS…….

    Will you be standing out in front of 535 Fifth when the day comes?

    ~~~

    BR: If you are asking that question, it suggests you have not been paying much attention to the philosophy we preach around here. It’s disappointing that after all this time, someone can still maintain such silly perspectives.

    For your sins against Human Intelligence, and the general obnoxious tone of your comments, you are hereby banished into Comment hell. For anyone else interested in the subject of why I don’t really like specific predictions, see The Folly of Forecasts

  28. [...] Time to take some equity off the table.  (Big Picture) [...]

  29. tw_fogarty says:

    BR – good ideas expressed with clarity.

    w/r/t all the VIX hubbub, I’d also note that copper has rolled over hard and that’s not usually a good sign for industrial fundamentals. The trend in high yield spreads to treasuries, a proxy for equity risk premium, has stopped narrowing and is starting to widen bearishly. I have raised my cash position to about 30% over the past 1.5 weeks by exiting lower conviction ideas.

  30. Bridget says:

    Sincerest thanks. Please keep us informed if you take any trips.

  31. [...] Barry Ritholtz officially moves into the bear camp – or at least the less-bullish camp. [...]

  32. JasonPappas says:

    Barry, I respect your reasoning but wonder what you say to the “don’t fight the Fed” camp. Isn’t Ben trying to create an asset bubble?

    ~~~

    BR: They already did — but at a certain point, the Fed’s effectiveness runs out.

  33. investorinpa says:

    Barry,

    One thing I learned from you is that whenever a down point in the stock market comes, its time to have your shopping list ready to go. So in the interest of a future blog post for you, how about you ask the following:

    If the entire market (every stock) were to go down 10-15% for a short time (say 2 to 5 months), what stocks would be on your shopping list?

  34. [...] for the worse. Barry's done a pretty good job at communicating our growing cautiousness in his post Time to Reduce Equity Exposure from Friday. Because this is short-term [...]

  35. znmeb says:

    Munis a “safe haven”? How do you diversify munis?

  36. [...] we get defensive and allow things to develop. We get a bit more liquid with the expectations of better [...]

  37. [...] took some Apple (AAPL) off the table in late October — it was due to the combination of macro concerns, a wildly over-owned stock, and the [...]

  38. [...] I’m working on it, but its complicated. Meanwhile, watch the site for posts like this (Time to Reduce Equity Exposure) and [...]