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Optimism about the stock market and the economy has changed to doom and gloom very quickly over the past couple of weeks. Monday’s decline did some serious technical damage to the markets as the S&P 500 broke through its 100-day moving average and is in shouting distance of its 200-day moving average (currently 1755, with the 200-day moving average being 1708).
If you remember the European crisis a couple of years ago, we were very worried about the global economy and the markets. At that point there was real danger of some European countries going under. Of course, if big banks are too big to fail then certainly Spain and Italy are too big to fail. However, you always need to plan for the worst and hope for the best. Fast forward to today: at least for now this “crisis” doesn’t seem nearly as bad in comparison. The economy is still growing (although the numbers haven’t looked as strong lately), we still have an accommodative Fed, and the problems in some emerging market countries are not nearly as bad as what we saw in developing countries a few years ago. At least not yet.
On the other hand, we have been worried for quite some time about how the markets would react to the Fed taper. The rally on the announcement in December quelled our fears but markets often overreact and then change their mind later.
All of this makes a great case for a lot of volatility and risk, at least for a few weeks. We see the first level of support on the S&P 500 at 1728. If that doesn’t hold then the next level is the 200-day moving average of 1708.
While we still believe we have not seen the high in this cycle, and do expect the S&P 500 to break 2000 within a year or two, we feel it is important to move to defensive positions for now. Our overriding philosophy is always to protect from the large long-term loss. To accomplish this it is important to move to safety before bad turns into really bad. If the market drops more we will get more defensive and if it turns around we will get back in.
Positioning and Recent Moves
Our current overall positioning has changed. We are positioned for a flight to safety: Treasuries and higher quality bonds.
We have sold most of our stock positions, our high-yield bond positions, and our inverse Treasuries. We have replaced them with Treasuries, Corporate Bonds, and GNMAs.