At the close of 2015, we got several bearish signals and positioned our portfolios to be almost neutral to the stock market by buying ETFs with inverse stock market exposure (SH, SDS). In other words, our net exposure to the stock market is now very near zero. If the market weakness continues through the first week of January, we expect to get additional sell signals.
These are the most bearish signals we’ve seen since April/May 2008. The All World Index, which reflects global economic conditions, looks very similar to early 2008. There’s rarely a perfect parallel in the stock market, but general patterns do tend to repeat themselves and the current conditions are shaping up to look a whole lot like the market top in 2007-2008. That doesn’t mean the decline will turn out the same, but it does warrant caution.
And there’s a lot more than just one chart. Many other things that tend to accompany market tops have occurred in the past year. Some of these include:
Declining earnings for several quarters
Peak margin debt
Declining transportation index
Flattening yield curve
Deteriorating market breadth
High priced IPOs
Elevated M&A activity
Falling commodity prices
Trendlines breaking down
Aging bull market
High yield debt dropping
Stretched PE valuations
Manufacturing index below 50
There are a lot of reasons to be defensive right now.
The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.