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Prep for Another Round of Equity Weakness

Here's why I suggest steering your portfolio to value, to dividends, to low-multiple and easily understood companies.
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While I sent out a columnist comment early Friday looking for a bounce, it is time to fade that move.

My rationale is quite simple:

Exuberance

Despite chatter about capitulation, I see signs of exuberance. ProShares UltraPro QQQ (TQQQ) , the triple leveraged ETF that references the Nasdaq 100 (around 50% of that index is concentrated in 10 companies), had big inflows and has the most shares outstanding in this cycle. That strikes me as aggressive buying, rather than capitulation.

Fed

Look for Fed speakers to hammer home the hawkish tone. I expect them to explain the balance-sheet reduction, which won't be pleasant for the market to absorb.

I think a big part of this is just "jawboning" to cajole (or bludgeon) markets in the direction they want, especially in regards to inflation expectations. But that doesn't mean it won't weigh on the market.

Selling Spreads

Selling is spreading, and the next leg down is likely to impact the S&P 500 as much or more than the Nasdaq (versus recent outperformance). SPDR S&P 500 ETF Trust (SPY) , for example, has seen outflows accelerate as investors seem to be trying to catch the falling knife in the most beaten-down stocks.

Credit

Credit has been weak persistently enough that some macro pundits will point out credit markets as another reason to sell off. I don't agree, but sometimes you have to go with the flow. So the next round of stock weakness will have more people pushing the credit weakness theory.

CDX IG, a credit default swap index, has widened to 62 from 49. The Bloomberg IG corporate bond index has widened to 106 from 92 in a little over a week. All that is with relatively little new issue, hinting at how nervous the market is.

High-yield and fallen-angel bond ETFs (VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) ,  iShares Fallen Angels USD Bond ETF (FALN) ) have seen large outflows and are trading at or near recent low prices.

Finally, I continue to see selling pressure at the front end of the corporate bond market as fears of rate hikes spur selling. While that is "boring" in terms of investing opportunities, it is worth paying attention to because if selling persists there, it tends to rapidly shift out the curve, turning into bigger problems.

Bottom Line

So I'm looking for new lows on equities. I suggest taking profits from last week's late-week buying, or take advantage of the recent bounce to reduce exposure to the "highest valuation" stocks.

Continue to steer your portfolio to value, to dividends, to low-multiple, and easily understood companies.

I continue to like energy. I'm looking at oil exploration ETFs such as SPDR S&P Oil & Gas Exploration & Production (XOP) and oil servicers ETFs like VanEck Vectors Oil Services (OIH)  as all my sources say that, even ignoring what is going on with Russia and the Ukraine, supplies are tight and there will have to be some serious efforts made to expand supply (after years of relative neglect).

If, somehow, the Fed backtracks and sends out a dovish message, I would be back to more bullish stocks across the board, but I think that is highly unlikely.