As a trader I have an active approach to investments. My time horizon is at once both long-term and short-term, depending on the account I am trading and the risks I see in the asset or market I am looking at.
Naturally when it comes to my superannuation I have a long-term view as I’m just a month away from turning 45 and hopefully have at least another 40 years of life in front of me.
But sometimes that long-term view collides with a shorter-term reality or opportunity that I simply have to act on.
Today is such a day and I have switched my super to 100% cash.
This is a big move because at my age I believe that stocks will really be higher in 20 years time so my base equity holding I view as 20-30% of assets. That means that 100% cash is a super bearish position and one I only take when I think the market is at risk of a significant fall.
Many of the reasons I hold for why the market could be in line for a sell off were summarised in Henry Blodget’s brilliant article on why the market is at risk of a significant pullback he wrote overnight.
In the article Blodget crystallised a lot of different views on the current outlook for stock markets that I hold close. But there are two other charts that are worth looking at as well.
The first is the performance of stocks and the growth of the Fed’s balance sheet since 2008.
In Blodget’s piece he talks about Fed tightening and market moves but as this chart shows the market since the lows has needed the flow of Fed bond buying to keep it moving higher. When QE’s 1 and 2 halted and the balance sheet stopped expanding stocks fell.
So with the taper reducing the flow of Fed cash to the market each month to an eventual zero sometime in the relatively near future, this relationship suggests the market is at risk even before the Fed starts nudging rates higher.
Clearly the Fed board members understand this as their efforts to clarify when rates will be rising in this month’s minutes, released this week, show.
The other chart is my own technical chart of the S&P 500 which has been in nose bleed territory for some time now and has, just this week, had a big reversal. It’s likely to close back inside the big weekly channel it broke out of a few months ago.
The key level on the S&P 500 is 1800 and a break would signal the big fall is beginning.
Clearly the market hasn’t broken down yet so you might be asking why I’ve gone to cash.
The answer is I am simply exercising an option of capital preservation for the next few months.
It’s been a good run for the last few years and I’m happy to see how the market behaves before I dip my toe back into stocks – higher or lower won’t concern me because in the interim my option will let me sleep at night.