These things always seems to happen when I am traveling.
I have yet to fully tear apart the internals of yesterday’s whackage, but we may be looking at more than the run of the mill 5-9% correction that has been the downside limit of the rally dating back to March 2009.
This correction could very well be the first since the bear market bounce began to break the 10% mark.
Coming into 2010, we had been running about 30% cash in our managed accounts. That feels like too much during the spikes up, and not enough during swoons.
During Q1,we made tactical tilts in a few names. We reduced some positions, added others, and liquidated still others. That raised our cash to 40%. This led us to be somewhat defensive during some of the 2010 rally.
A number of long positions were stopped out in Q1 for small losses. That is the nature of our trade discipline. That raised more cash.
Over the past few weeks, several of the names (mentioned here and else where) hit our upside targets: Eastman Kodak (a short squeeze buy), Citigroup (Buy what you hate), the airlines (technical buy), and some of the media positions (Gannet, NYT) were either sold or reduced to take profits. That has taken our cash to over near 50% in April.
We got stopped out of a few names yesterday, and made partial sells in others. As of this morning (with the futures looking up) we are at ~69% cash.
The portfolio changes have been tactical, and not strategic. In other words, the conditions for a major reversal are not conclusive. That doesn’t mean it cannot happen, it just means that at this moment, making decisions with imperfect information, we put the odds of a hefty drop of 20+% at about 25%.
Given that liquidity is still so abundant, we expect the pullback to be somewhat contained, but deeper than the prior 3 wobbles (June, September, January) since the rally began. We could see a deeper than 10% pullback. Depending upon conditions and internals, our expectations are that we will be buyers into a 10-20% correction. From current levels, we do not expect to revisit the lows.
If the correction fails to materialize, and the market rallies aggressively, with firming internals, we will reconsider our posture. We are always willing to redeploy cash higher into a possible melt up.
I still expect a 25% correction at the end of this rally. I am unable to say with any degree of conviction that the current market turmoil is that major move down.
Regardless, tight stop losses are in order.