Getting Centered

Includes: IVV, SH, SPY, USO
by: Mike Steinhardt

If you are running forward, the best posture is a forward lean. I’ve been leaning heavily in the bullish direction since mid-July and that has worked out quite well. However, if you expect to change direction in the near future or if you just fear that you are being too aggressive and might fall over on your face, it helps to do two things. The first is to slow down and the second is to get centered.

For the last 3 weeks, I have been working on those two strategies as I have gone from 80% UP signals to 67% (now). This week was more aggressive than last and I gave 429 new DOWNs vs. only 27 new UPs in the stocks I cover and 112 new DOWNs vs. only 1 (NYSEARCA:USO) in the ETFs. That may not sound like I am going slowly, but just consider this….I evaluated over 900 candidates for new DOWN signals this week and decided to avoid such an extreme move and did less than half that amount. To me, that is slowing things down.

As for “getting centered”…. I am not quite at the 50/50 level and I may not get there exactly, but I am much more comfortable at 67% than I would be at 80%. Note that 80% felt like the right “lean” a few weeks ago. But that was when I was confident in the direction and pushing to optimize the ground I could cover.

Am I expecting a bearish reversal in the market? Yes.

I am just not convinced that the reversal is exactly right now. I am willing to forgo some bullish profits as I neutralize the portfolio a bit during this period. My analytical work on direction relies heavily on the ability to be as balanced as I can at the moments that are pivot points. So as I start to feel the shift, even if I am not convinced a change is imminent, I work really hard to find what I call the “portfolio center of gravity.” If you are a runner, sprinter or athlete of any type, you’ll know what I mean. If you are a physics geek, you’ll know what I mean.

Evaluate your portfolio. How far are you leaning in either direction? How fast are you moving? If you are uncomfortable with either or both of those factors, consider going slower and getting yourself centered. If the market reaccelerates in the bullish direction, you will be sufficiently balanced to rapidly position your portfolio to profit. If, on the other hand, the market heads lower, you will have a better chance to avoid losing your balance, and losing your gains.