Hedging or Reducing Market Risk is Building


Things can move in one direction far exceeding our expectations of reversion timing. Lord Keynes, though the attribution is sketchy, apparently said something about this back in the day: The market can remain irrational longer than you can remain solvent.  Whether it was acutally said or not the point is still relevant.

This is exactly why most of our portfolio decisions rely on dynamic mean reversion and not static or standard mean reversion.  We don’t like getting monkey-hammered by Mr. Market. But that said, the evidence is mounting that the market is getting tired right now and will correct. How much will come in price, how will come in time is yet to be determined.

After having a nice sushi lunch Thursday with a mentor and pal Don Vialoux, I am reminded that the optimal sell date in a second term presidential election cycle is July 17.  In addition to this date I like to get a little more exponential by also looking at the rolling 5 year seasonality numbers. It keep us closer to the action. Over the past 5 yrs the average July return had been +1.8%.  To date in July we’re around +3.10%, well above average.

So with the odds of seasonality on side there are a few more things building up to make shorting or hedging risk, get more convex, appropriate right now.

The NYSE New high-low is high…


Breadth is not strong with a few markets lagging, like the NYSE.  The NASDAQ hasn’t made a new high either


Post Brexit Europe is better, but this chart is longer than a week.


The next two charts speak more to timing than just being in the ballpark.  The % of S&P stocks above the 50 DMA is peaking and overbought


The % above the 200 DMA (longer data than above) on the TSX which has a large pro-cyclical component (energy, metals and mining, industrials) is also peaking and overbought.


The S&P has made a new high breaking above last year’s spring/summer levels underpinning the current strength.  On a fundamental basis this implies earnings will grow 25% YoY. 


Technically-speaking only, “breaks” are not always reliable and why putting in place some risk management is prudent right now.

S&P Lows

Chief Portfolio Manager