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…