Sector Weightings, Market Timing and Moving To Cash

 |  Includes: DIA, QQQ, SPY
by: Roger Nusbaum

I had a post on RealMoney Tuesday in which I said that the panic is over but that the event is not. The market then got whacked. I tend to think that the panic is in fact over, and what is happening now is the discounting of how serious this will or will not be.

I mentioned over the weekend that a prediction of 'no more selling' made no sense to me. That such a big threat could resolve itself in a couple of weeks just seemed wrong, and it still does.

Based on a couple of the comments Tuesday, the panic may not be over. This is subjective of course, but I think the panic of early August was the discovery of the problem. Now that it has been discovered, it needs to resolve over time.

Generally speaking, I have thought the worst case scenario from this would be a normal bear market and while I have been less vocal about a normal recession, this wouldn't be shocking either.

Regarding the Bespoke table from yesterday a reader asked "How do you time your over-weighting or under-weighting of a sector? Why do you think it is reasonable to time sectors, but not time the market?"

It depends how you use the word 'time'. As a means of short term trading, I don't think it is ideal for managing other people's money (this is my perception only and I am not saying what other people should do), and I am not that good at it. In terms of following the economic and stock market cycle, recognizing when sector weights seem to be out of balance - these are very long term things. I have had roughly the same underweight in financials for several years. When the yield curve normalizes I will be closer to equal weight. Is that timing? In a way yes, and in a way no.

My focus in this regard involves infrequent need for big change, trying to add value if possible and smooth out the ride a little. This is right for me - it is ok if it is not right for you.

Another reader asks "Why am I in this market when a risk free internet bank pays 5.5%????"

When do you need to use the money? In that time frame what do you expect will be the better hold; a diversified portfolio or a money market. Whatever you answer is what you should own. If you want stocks, you need to realize that at this point the market is well within 'down a little'.

Yet another question asks "do you get more bearish as we cross below the 200 dma for a second time?"

I don't think of it that way, but maybe I should. Right now my portfolio is behaving as I hoped. Generally, accounts are going down a little less than the market, so as we grind around in this same area I don't see a need to add more double short (this can change at any time).

The real thing here, and I think most clients get it, is trying to use the tools to try to protect against down a lot. It is helping out for now, but time will tell what I do next; I will share whatever that is.