Q&A {Part I}

Back on March 6 in order to reflect what we had been doing for client accounts we lowered our market ratings to NET MARKET SELL on a short term basis and the intermediate rating to NET MARKET NEUTRAL.  You can go here  for a definition of what this terminology means. I had a lot of questions about this change, particularly in an environment where stocks have done so well.  I promised to do a Q & A regarding these changes.  Unfortunately life in the way of work, client meetings  and a root canal conspired to keep me from getting this done.  Better late than never I say so today through early next week I'm going to try to answer some of the questions that have been raised in an Q & A forum. 

What do these rating changes mean?

Our changes in ratings reflect what we have been doing in client accounts on a net basis. These are not market timing calls. These moves largely reflect the very overbought nature of the markets and the fact that we have had such a strong move since last fall.  I still believe that stocks have the potential to move higher between now and the end of the year but it seems that some sort of pause is in order.  We are guided by what the game plan and the playbook tell us.  Both of these are telling us that a more defensive posture is warranted at this time.

How have markets done since you changed your rating?

Since we have made these changes on March 6 the S&P 500 is up more than 5% and the Nasdaq composite has advanced close to 7%.  Although as of this writing futures indicate a much lower opening for stocks.  {Please note that we are long ETFs related to the S&P 500 in client and personal accounts and ETFs related to the Nasdaq in client accounts.}

So in essence you have been wrong in a market call? 

That would be correct if these rating changes reflected some sort of market timing mechanism.  Remember these reflect what we have been doing in client accounts.  Equities represent risk in the sense that they can decline in value.  Now we can remove much of the issue of single stock risk by focusing primarily on Exchange Traded Funds {ETFs} but ETFs do not shelter accounts from market risk.   You can mitigate that risk by hedging accounts or by raising cash.  Raising cash for most of our clients is the most prudent risk management tool we have.  We began the year pretty fully invested and held that position for most of the winter.  At the beginning of March we began to see some signs that the market was reaching levels on our money flow basis and by valuation that probability indicated a more cautious position.  As such on a net basis we have been sellers in order to bring down the risk levels on accounts.

Can you give an example of what you mean by bringing down risk levels?

In our more aggressive strategies we went into the beginning of the year on average on a net basis with cash positions between 5-10%.  We have raised cash on a net basis in these accounts on  average to between 8-12%.  We have therefore participated in the move in March but have chosen to do so with less risk exposure. 

Tomorrow we will continue this series by taking a look at what our indicators have been saying.