Divestor

Today continues the trend of the decoupling of correlation between the main equity indicies and the bond market – both are down today, heavily. Along with Gold and other commodities, my guess at the moment is that this is going to be the start of some significant downturn.

I have continued to sell shares and am anxiously awaiting a proper time to pounce. These sorts of mini-developments take time to work their way through the technical trading side of the marketplace, so it is far too early. I still had the belief that there would be an intermediate rally up to the S&P 1700-ish level but obviously this is mistaken. That said, I am decently positioned and 2/3rds of the portfolio are in things that are trading under tangible book value, so I am quite defensively positioned.

Pay attention to the S&P 500.

My underlying impression at this point is that asset values are generally being propped up by the fact that there is really nothing else to fuel speculation into. The actual value within the index is not tremendously overvalued at the moment, but it is frothy.

I believe we’re setting up for a moment where both equity and fixed income are going to get hammered simultaneously, which is not a very common market event – normally the two assets are anti-correlated.

The only safety will be cash. Equally acceptable will be short-term treasuries although considering the yield (nearly zero) of anything less than 1 year of term, is more or less a proxy for cash.

That said, when analyzing the data and also analyzing sentiment, my guess at this point is that we’re going to get one more intermediate market rally. However, this will continue to be a good opportunity to liquidate holdings and raise cash.

The S&P 500 is finally trending down after going through a monstrous rally:

This is getting very close to the prevailing trendline. If it breaks then most of the technical traders will take the index down further. What is most fascinating is that the longer term interest rates haven’t gone down over the past 10 trading sessions, which suggests that there has been a decoupling of the “risk-on”, “risk-off” mentality.

Thus, we could be entering into an environment where everything will drop, equities and bonds alike. The only safety will be in cash.

However, my gut instinct suggests that we’re going to get one more good market rally in the summer before a strong concentration in cash is warranted. Currently I am sitting in a 10-15% cash position after raising some money.

There hasn’t been a heck of a lot to report in the markets lately other than the S&P 500 continuing its rise up as the perception of the recovery continues.

That said, I believe it is unstable and historical norms would suggest that if one applies a bit of regression to the mean that we’re probably closer to the inevitable local high than the local low.

This is exactly why I have been slowly unloading some positions as they have gone higher. I’m no longer in a net negative cash position, and the cash percentage will continue to increase as the market continues to increase.

A few other observations.

One is that the Canadian dollar is testing lows. They have traded very narrowly since the 2008-2009 economic crisis and they are at the low end of the range. With the perception of Canada being a commodity market and the perception that our interest rates are not going to be rising anytime soon, this may signal a continued decline of Canadian currency relative to the USA.

The other observation are about long-term bond yields creeping up:

I am not sure what to make of this. Certainly bond traders are adding supply to the market and dumping it into equities, but this is the classic “risk-on” type formula where you have anticorrelation between bond prices and equity prices. Right now equity and any non-fixed income assets are winning.

I look at the year-to-date performance which is still significantly positive and my gut is telling me to cash out and call it a day until rainier days hit the markets. This will continue to happen as markets continue to rise.