Scaling Back Market Exposure
Investors approach the market differently. Some rely upon complex technical patterns and others simple patterns. Some turn to fundamental values and others use big picture ideas. Regardless of the approach taken, we all look to apply our ideas to the markets and search for opportunities.
Much has been written over recent months how the current rally is not supported by either an improving economy or stocks offering compelling values. The result is a market based on momentum. Being able to focus on one factor of market strength increases our chance of spotting reversals.
Momentum can be viewed by studying charts. At times investors use complex charting patterns. However, on other occasions simplicity works best. Having seen the market drop for two consecutive weeks, I believe we have reached the point where a simple story best illustrates the investment climate.
Read any investment article and you will see comments about how the market has rallied too far from the March lows and must head lower. However, these same writers never discuss the drop from the peak. I am one of the few who have stressed that the rally looks so large because the drop was so severe. In fact, taking a view of the entire bear market, the Dow's recent gains are nothing more than a bounce in an ongoing slide.
Within this bounce, I have been fixated on the 38% retracement level of 9,465. When the market was rallying from the July low, it took weeks for this resistance level to be broken (black arrow). Once resistance was broken, it became support and was needed to stop any market decline. That support now looks destined to fall (red arrow).
Were the Dow to close below 9,465 it would be ominous for equity markets worldwide. An immediate downside target would become 8,600 (red box). Given the strong correlation of markets during the rally, a falling Dow would take many international indices with it.
Looking at the portfolio created in my weekly newsletter EPIC Insights, we hold positions in a number of ETFs that benefit from rising equity markets. We have worked hard for those gains and I see no need to risk losses. Instead, we will be proactive and lessen our exposure before the markets fall further.
Having seen some of our ETF positions grow to in excess of 4% of the total portfolio, I will institute a maximum position size of 2% in any given index ETF. The ones affected by this are the iShares Australia Index (EFA), the iShares UK Index (EWU), the iShares Brazil Index (EWZ), and the iShares S&P Global 100 (IOO).
We have benefited by trading ahead of the market in the past, and will do so again. I recommend selling half the positions in EWA, EWU, EWZ, and IOO as this week's technical trade.
Note: At the time of this article, I am long EWA, EWU, EWZ, and IOO.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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