Defensive Positioning

We just wanted to take the time for a brief portfolio update. We took long positions on the Brexit sell-off (around SPX 2000). We moved money into biotech, commercial & regional banks, capital markets and transports. The sectors had done well and we spent the last week taking profits. The markets seem to be consolidating and stalling and could be prone to weakness over the next several weeks.

We are entering a traditionally weak part of the year and the upcoming election season could exacerbate volatility in the near future. The chart below via Business Insider shows the seasonality of returns on a monthly basis.

With the VIX sitting at such benign levels, it makes sense that the market will at least stall and consolidate if it doesn’t correct at some point. With the upside potential of the markets currently stymied by complacency and considering our gains in the portfolio from the Brexit bounce, we believe the best course of action is to raise cash and wait for a more enticing entry.

On the SPX daily, the bull run appears tired as most oscillators and the MACD have all turned lower and volume is thinning. There is also a bearish divergence between the percent of stocks in the S&P 500 trading above their 50D moving average and the overall index (%SPXA50R on the chart below). A pullback to 2120-2130 would be a welcome event and allow us to reposition ourselves.

The daily Nasdaq has the same chart risks as the SPX. Make note of the bearish MACD cross that occurred last week.

Outside of raising cash and writing options against our core positions we are contemplating adding smaller positions of silver and the U.S. dollar to the portfolio. As far as silver is concerned, the precious metal is oversold on both the RSI (5) and fast stochastics oscillators although we will wait to see if the RSI (14) trend can retake the 50 level that it has held from the start of the year. We would also like to see MACD turn higher off this support level. Should some renewed signs of strength emerge, we will take our position. The weekly silver chart shows the uptrend of 2016 remains intact with the oscillators holding above their midpoints and the MACD remains in a rising pattern. Silver is sitting on its 200W moving average.

The US dollar has weakened recently as can be seen in all the oscillators. The MACD histogram and all the oscillators have started to turn higher last week as the dollar approached what appears to be near-term support. On the weekly US dollar chart we can see a flagging pattern off its parabolic run from last year. The more sensitive oscillators are oversold at this point but the MACD remains in a bullish pattern. We will most likely take smaller positions in both silver and the US dollar but will certainly wait until the outcome from Jackson Hole this week before moving in a more aggressive fashion.

Bottom Line: In our core equity portfolio we are taking a defensive stance over the next several weeks. Given the historically soft seasonal and election year equity patterns we are waiting for at least a brief pullback before we increase our exposure to more cyclical sectors and higher beta instruments.

Happy Trading

Joseph S. Kalinowski, CFA