Fasten Your Seat Belt!

It is official; the multi-month trading range on Wall Street has now ended with a breakout to the downside.  You will recall that the major US indices were in a quiet, consolidation phase since December and over the past several weeks, we wrote extensively about the deterioration in the stock market’s internals. 

In fact, about a month ago, our proprietary set of trend following indicators flashed ‘market under distribution’ which prompted us to reduce our equity exposure and partially hedge our book. Unfortunately, over the past few trading sessions, these set of indicators have deteriorated even more and there is now a high probability of an autumn plunge.  Accordingly, we have reduced our equity exposure even more and currently, only half of the capital under our management is invested in common stocks. 

Our remaining ‘long’ positions in equities are on a very tight leash (protected by trailing stops) and if the stock market slides further and our stops are hit, our losses will be no more than 3%. On the other side of the ledger, in order to hedge our equity exposure, we have allocated 20% of our managed capital to 20-30 Year US Treasuries, 10% to 25+Year Zero Coupon US Treasuries, 5% - ‘short’ industrials, 5% - ‘short’ biotechnology and 5% - ‘long’ US Dollar. So, if the stock market declines, our small losses on our remaining ‘long’ equity positions will probably be mitigated by profits from these holdings and if things get really ugly, we will do quite well.

Look. The stock market’s internals look very weak and after peaking in April, the NYSE Advance/Decline Line has now fallen to a multi-month low. Moreover, the number of 52-week NYSE lows is staying stubbornly above the number of 52-week NYSE highs and volume is rising on down days.  Last but not least, all the major US indices are now trading under the 200-day moving average and both the Dow Jones Industrial Average and the S&P500 Index have slipped to a multi-month low. Despite this awful price action, many analysts and commentators remain oblivious to the looming danger and they are urging their followers to ‘buy the dips’! 

Make no mistake, to our experienced eye, this does not feel like a normal pullback within the context of an ongoing primary uptrend. Instead, it seems to us as though the major US indices and global equities are rolling over and even our primary trend filter is getting close to flashing a full blown ‘market in correction’ signal. So, our readers should remain on guard and consider liquidating all weak stocks from their investment portfolios. Furthermore, we suggest that our readers cut back on risk and consider hedging their stock holdings.

On the economic front, the developed world is caught in a liquidity trap and the low-growth environment is likely to persist.  In fact, we have a nagging feeling that with the slowdown in China, the world may be sliding into an outright recession.  Last year, China was responsible for 40% of global growth and without a shadow of doubt; its economic woes will affect every nation.  Already, the currencies, economies and stock markets of the commodity exporting nations have been decimated and if China’s housing bubble implodes, then things will get very interesting indeed! Remember, the constituents of the S&P500 Index derive almost 40% of their revenues/earnings from overseas and a global slowdown will hurt American business. So, in this era of globalisation, it will be naïve to assume that certain nations or sectors will somehow be insulated from the carnage.

Turning back to the stock market, our remaining ‘long’ positions are in the strong sectors (banks, consumer staples, consumer discretionary and housing) and on Thursday, we got stopped out of our European equity position.  So, we now have no exposure to Europe and suggest that our readers also press the ‘sell’ button (despite the ongoing QE, European markets are falling and this is very bearish).    

In terms of our performance, we are pleased to report that all our strategies are outperforming our benchmark (MSCI AC World Index).

Below is the performance summary of the various strategies:

Net return since inception (1 January 2013)

Equity Portfolio                      Fund Portfolio                        Benchmark (MSCI AC World Index) 

(+) 24.50%                                (+) 24.65%                            (+) 20.29%     

Net return since inception (1 August 2014) 

Blue-Chip Portfolio                Benchmark (MSCI AC World Index)

(+) 1.24%                                (-) 3.31%

Turning to commodities, a world-class crash is now unfolding and the CRB Index is now trading at levels not seen since 2002! More importantly, the price of crude is sitting just above its 2009-crash low and we suspect it is going lower.  Look. The commodities markets are telling us that something is very wrong and more likely than not, they are forecasting problems in China’s housing market. Should China’s debt bubble pop, its housing market may deflate for years and in our opinion, it may also affect Hong Kong’s property market. In any event, our readers should either be ‘short’ or out of all commodities.

In terms of precious metals, both gold and silver have firmed due to the ongoing turmoil.  However, the deflationary forces are simply too intense and will probably overwhelm the precious metals market. So, we do not have any exposure to these inflation hedges.

In the forex market, the emerging markets counters are really feeling the heat and even some senior currencies are sliding against the greenback.  Asian currencies remain in relentless downtrends and this does not bode well for global economic growth.  At present, the US Dollar Index is still gyrating within its consolidation phase, but whether the Federal Reserve hikes or not, we suspect the next big move will be to the upside.  At the time of writing, the Euro is approaching its declining 200-day moving average and this should provide an area of resistance.  In any event, if the Euro slips through the 1.08 level on a closing basis, we will ‘short’ the single currency.      

Finally, over in the debt market, as per our expectation, long dated interest rates in the US are falling and if we get a deflationary event, we may see fresh secular lows. Over in Europe, 10-Year government bonds are yielding less than 1% and if we get a global recession, the 10-Year US Treasury Note may also join the sub-1% party! Accordingly, we have allocated 30% of our managed capital to 20-30 Year US Treasuries. Over in the corporate debt space, junk bonds have definitely topped out and the path of least resistance is down. 

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Puru Saxena is the CEO of Puru Saxena Wealth Management, his Hong Kong based SFC regulated firm which offers discretionary portfolio management and research services to individual and corporate clients. The firm manages two trend-following strategies – Discretionary Equity Portfolio and Discretionary Fund portfolio.  In addition, the firm also manages a Discretionary Blue-chip Portfolio which invests in high-dividend world leading companies. Performance data of these strategies is available from www.purusaxena.com

Puru Saxena also publishes Money Matters, a monthly economic report, which identifies trends and highlights investment opportunities in all major markets.  In addition to the monthly report, subscribers of Money Matters also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com

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