Some folks might prefer to dismiss the evidence as technical folly. They assume that once Greece and Puerto Rico get their bankruptcy bailouts – that once the People’s Bank of China (PBOC) throws enough stimulus at extremely volatile Chinese equities – the U.S. stock market will power forward. Indeed, if those things happen, I’d expect a brief round of euphoric buying. On the other hand, the smart money might be wise to raise additional cash by selling into strength, since corporate profits per share as well as revenue-per-share are heading into negative year-over-year territory.
Let’s keep in mind that the valuation of the median NYSE stock is the highest in history. And historically, when valuations have been this “questionable,” the overall stock market has tended toward dramatic correction or bearish disaster.
In spite of the probability that “something wicked this way comes,” I do not advocate a mad rush for the exits. My tactical asset allocation approach to the current risks has been to keep cash/cash equivalents at a 15%-20% level for the majority of my client base. Over the course of the last two months, we have downshifted from roughly 65%-70% growth to approximately 55%-60% growth; we have downshifted from roughly 30% income to approximately 20% income. The rest is in a basket with cash/cash equivalents.
The type of ETFs that we still hold in our growth portfolio are those that have not hit stop-limit loss orders and not crossed below and stayed below respective long-term moving averages. They include assets like iShares S&P 100 (OEF), SPDR Select Health Care (XLV) and PureFunds CyberSecurity (HACK). We do hold some treasuries on the income side of the ledger with iShares 3-7 Year (IEI). Nevertheless, at this moment, the best protection against terrible market breadth is a bountiful swig of cash.
