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Robert Duval
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Full time Investor / Trader, 17 years. Specialist in risk management, with intermediate trade focus, US stocks, international ETFs and commodities. Believe in correlation of markets, must understand all markets to trade one well. Self taught through continuous study of myself and other... More
  • 12 Reasons To Raise Cash And Become Defensive 0 comments
    Aug 26, 2014 11:40 AM


    They don't ring bells at tops, and one rarely hears the bullet they say.

    Here is a short list of why I am highly defensive, right now, and recommend others do so and raise cash before the fall arrives.

    It's all about the internal indicators, the weak foundation of the current rally.

    1. Divergences. Although the Nasdaq continues to power higher and the SPX celebrates breaking the 2000 barrier, small cap stocks (NYSEARCA:IWM) continue to substantially lag. The rally -- continues to narrow in breadth and in new 52 week highs.

    IWM Chart

    IWM data by YCharts

    2. Treasury bonds continue to substantially outperform junk bonds, which are also lagging the SPX, a divergence. The Yield curve continues to flatten, with long bonds greatly outperforming 5 year instruments.

    TLT Chart

    TLT data by YCharts

    JNK Chart

    JNK data by YCharts

    3. Commodities are starting to sell off, hard, particularly Oil, very interesting during a time of substantial Mideast Uncertainty. Both this and the bond trends put into question economic strength going forward.

    USO Chart

    USO data by YCharts

    4. Poor retail, and housing stock sector performance. These sectors are tied to the consumer, who accounts for 70% of the economy. There are numerous articles detailing the continued struggles of the middle class consumer.

    XHB Chart

    XHB data by YCharts

    5. Overwhelming belief -- market cannot be timed. Common near cyclical tops. Market timing becomes most popular -- prior to cyclical lows.

    6. Complete faith in Central bank's ability to sustain asset prices regardless of underlying economic trends. This faith in the all knowing, all powerful central banks to generate robust growth -- I sense this faith will be tested in the weeks and months ahead.

    7. Record corporate profit margins, far above the mean, sustained by junk bond issuance, corporate Buybacks, special dividends. Lack of organic growth. Buybacks are slowing:

    8. Lack of consensus bearishness on SA and elsewhere, especially compared to pre 2013 levels. Bears have been converted to bulls, or simply have their hides laid out in the sun...if one read the commentary and feedback from 2009 - was regularly forecasting the return of another 2008 crash. We don't see that much, anymore.

    See this --

    As a well known Wall Street analyst throws in the towel on his cautious stance, and projects a parabolic 300 point SPX run into year end. Capitulation of the bears? We will see.

    9....The Billionaire getting much more cautious, holding and raising substantial cash reserves. Warren Buffett (currently holding his largest cash allocation, ever), Seth Klarman, (50% cash) Wilbur Ross (selling 6x his buying ) and others....all legends very cautious, and largely dismissed.

    10. QE those who would call irrelevant -- would ignore historical precedent in 2011 and 2012 at the conclusion of QE programs, then. The Fed is determined, IMO, to get out of the QE business, at least for now. A valuation adjustment, is entirely rational. And like 2011.....

    11. Europe is having issues, once again, and threatening to return to recession. Stock markets in Germany, Spain, Portugal, France are correcting hard. To say the US will sail through without being affected..Ignores history. See German ETF chart:

    EWG Chart

    EWG data by YCharts

    EWI Chart

    EWI data by YCharts

    12. Continued US contractionary fiscal, taxation and regulatory policy.

    Bonus Chart: New Margin Debt figures from SA's Doug Short. Notice both the absolute total seems to have peaked, and prior peaks from 2000 and 2007- note 7 years apart and now it is another 7 years later -- line up perfectly.

    Conclusion. I am highly defensive on US markets here. I recommend investors raise substantial -- 30-50% cash and / or buy long dated option protection. I also believe investors would be well served examining out of favor emerging markets with secular growth stories, when the time comes.

    These are my thoughts alone from 16 years in this business, and I make my trading plan accordingly.

    This article is tagged with: Market Outlook
    A Next Great Investment Opportunity -- Brazil - EWZ 11/9/13          

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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