4 Reasons I'm Selling Rallies in Equities
When people say they would buy something if it drops 5%, they usually don’t.
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Friday’s price action was a perfect opportunity to reset positioning and rethink views.
I’ll start with the simplest, fixed income. I am now mildly bullish on Treasuries. While I think we could gap higher, and ultimately think higher yields are in the cards, I like owning some Treasuries (or yield products) with the 10-year above 4.6%.
I’ve been buying back some muni closed-end funds in an effort to get to full positioning. My strategy there, of the 10 or so I own, is to look for underperformers, or where discount to NAV is at the higher end. This is a market, where one or two holders buying or selling can create dislocations, and since I’m somewhat indifferent to manager (I focus on four or five of the top ones), I find that strategy generates additional total return over time.
Next, to the most boring, credit. I think credit, investment-grade bonds, high-yield bonds, leveraged loans and collateralized loan obligations (CLOs) will remain boring, and will be dragged around by equities. I’m still bearish equities, as you will read in the next section, so I don’t love credit (like Treasuries and even munis better), but I’m not looking for any big hiccups.
Sell rallies in equities. I cut so much in terms of short positions in equities into the close Friday, I spent most of the weekend worrying that I wasn’t “short enough." Fortunately, we are getting a little bit of a relief rally. Nothing bad happened geopolitically. Some people will want to buy risk now that it is cheap.
There are a few reasons that I am fading rallies:
In my experience, when people say they would buy something if it drops 5%, they usually don’t.
-- Too often they bought it down 2% so no longer have cash to allocate and lost on that buy.
-- What people really mean when they say that is something like “I would buy if it drops 5% if nothing had changed to cause the 5% drop." Well things have changed – less helpful Fed, higher yields, positioning, etc.
The “Reaction Function” for earnings has changed. It is early in earnings, but rather than giving the benefit of doubt and looking for reasons to respond positively to earnings, the opposite seems to be occurring.
The AI Valuation Question. I’m a believer in AI but also think valuations got way ahead of themselves. The cost/benefit analysis is tricky as many are finding AI doesn’t live up to the current hype, while being expensive to implement. I view some of the moves we saw in AI stocks Friday as a harbinger, rather than a buying opportunity (though I did reduce shorts, at least for the moment).
I reduced exposure to my longs. I’ve started selling some China positions to take profits. I feel it is a great time to point out that in the past three months, QQQ, the “big tech” everyone was told to own, was down 1.4% and China, which everyone seemed to hate, had FXI up 11.8%, a big outperformance. I’m also reducing some exposure to energy and commodity stocks here. Just a touch as I think we could see them fade too and I don’t have the shorts in other sectors to support them. I will be buying these areas on dips for now.
ETFs mentioned directly or useful for this report that I trade (rates - TLT, TBT, TUA. China – FXI, KWEB. Commodities: XLE, OIH, XME. Equities – ARKK, SARK, QQQ, SQQQ, SPY, SDS).
On a final note, buying Bitcoin ETFs because of the “halving” seems like a bad and overhyped idea to me.
If something changes to my view this week, I will let you know, but for now I’m comfortable reloading shorts into earnings.
At the time of publication, Tchir had positions in muni closed-end funds, TLT, TBT, TUA, FXI, KWEB, XLE, OIH, XME, ARKK, SARK, QQQ, SQQQ, SPY and SDS.
