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Is It Time to Reduce Equity Exposure?

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We have seen the market rally significantly after the selling in Q4 2018. Although this is one of the strongest rallies in history, we believe that this is a bear market rally that is about to end. We are taking advantage of this rally and reducing our equity exposure till we get a confirmation of a bull market.

Currently the market is trading on technicals. Fundamentally there has not been any improvements this year compared to 2018. In fact, we saw several large companies guide their revenues and earnings lower in Q1 2019. It is important to remember that it is the fundamentals and earnings that drive stock prices and not the technicals.

Before we look at the factors that are pointing towards the end of this rally, let’s look at the 2 popular bullish cases that are out there.

1) Rally in high-yield fund: We have heard this several times before. Due to the rally in high-yield ETF primarily JNK that S&P 500 is going to new highs. It is true that for any sustained bull-market in S&P 500 we do need high-yield funds to show strength but recently we got 2 false signals. JNK made a new high in January 2018 and September 2018 but the market sold-off hard both times. Moreover, when we look at high-yield mutual funds, they have not participated in this rally. (Black line is JNK and blue line is S&P 500)

Devkota JNK ETF Chart


2) Market is above 200 day moving average: This does not make sense whatsoever as there is nothing magical about the 200 dma. It is just the average price of the last 200 days and does not have anything to do with the fundamental value. If we were to go back to 2008, we will notice that S&P 500 closed above its 200 dma several times but resumed its down trend as fundamentals started worsening.

Devkota SPY ETF Chart

We have seen the same thing happen in 2001-2002 tech crash too as you can see in the chart below. The daily price closed above the 200 dma few times but it eventually failed.


Indicators That Matter

We believe that there are few indicators that are better at predicting the market returns over the next 3-12 months. The conference board LEI, Initial Claims and our internal macro model have given us timely warning signals with regards to the long-term trend. These indicators by itself has better odds than random but when we get warning signals from all 3 at the same time, the historical results have been very good.

1) Conference Board LEI: The Conference Board’s Leading Economic Index has gone 4 months without making a new high.




Devkota Insights Time to reduce your equity exposure



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