As mentioned in my June 24, 2019 market update: Stock Market Walking a Tightrope, the stock market had many longer-term negative divergences that I felt increased market risk over the intermediate-term. I indicated that these divergences were only red flags until the major market indexes broke down.
Over the past four trading days, we have seen the broad stock market break decisively to the downside. This drop along with the longer-term negative divergences that I spoke about in that update suggest that market risk is now officially elevated and odds favor additional market weakness over the near-term.
For a detailed explanation of the market internals that we used to formulate our market thesis, click the video link below.
Past newsletters referenced in this month’s stock market update video
Client Account Update
I reduced our client equity exposure substantially in July. This was done by selling some of our weaker stock holdings and buying short positions. Short positions are securities that behave in an inverse manner to the security that you are shorting. For example, we own ProShares UltraShort S&P 500 fund which will perform inverse to the S&P 500 by 200%. So, if the S&P 500 is down 1%, this short fund should be up about 2% and Vice Versa.
Our client equity exposure sits at around 14% for our conservative model and our aggressive model is net short about 12%. These amounts are derived from taking our total long position percentage and subtracting our total short position percentage. For example, our conservative model has about 47% total long and 33% total short, for a net equity exposure of 14%. Our aggressive model has more short positions than long positions and thus is net short.
The reason that I have elected to add short positions instead of only selling stock holdings to lower equity exposure is that we own many stocks that have been performing well relative to the broader stock market. However, if those holdings hit their stops, they will be sold.
In addition, all models own bond funds as well which are benefiting from falling bond yields.
Now is the time to reevaluate your retirement account allocations, not later after you have incurred substantial losses. If you are worried about how your retirement accounts are allocated, shoot me an email and we can schedule a virtual meeting to review your holdings.
Craig Thompson, ChFC
Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.
We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.
Asset Solutions is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.