Over the weekend at the Geico 500 at the Talladega Superspeedway, the underside of the Number 3 car driven by Austin Dillon caught fire in spectacular fashion. Someone on Dillon’s pit crew advised him to keep driving to the point where one of the racetrack fire crews was positioned which resulted in an instantaneous response and faster suppression of the flames.
This is an example of situational awareness which has applications to many (all?) aspects of life including firefighting and investing. Here is where the work from John Hussman becomes relevant. He talks in terms of risks at a given moment being relatively high or relatively low. Yes the funds have done poorly but I would argue that his conclusions about risks, elevated or reduced, are not the problem. I believe his preference to hedge so aggressively in the face of elevated risks led to the fund’s results.
He could be exactly right about elevated risks (over bought and overvalued), but that does not have to mean the market must go down anytime soon. Arguably, risks are worries and you know the cliché about markets climbing walls of worry.
In terms of situational awareness the bull market is old, economic activity in this recovery has lagged most recoveries before it, there are serious distortions in the global bond market, there are serious distortions in the currency market, while earnings have gone up in the first quarter revenue has decreased by 4% thus far and for one more, Barron’s over the weekend said that whenever the Fed does start to raise rates it will have to figure a new way to do it due to the size of its balance sheet and the diminished role of the Fed Funds Rate in the banking system these days.
As long as that list is (and of course there is a bullish case now too), the market could keep going up. All of the things on that list could get worse and the list itself could get longer and the market could still keep going up.
But elevated risks are still important and so paying attention to whatever you see as being risks is important. Being situationally aware means not just following the data but having a game plan for how to address those risks, elevated or otherwise, if and when their consequences hit the market.
After 74 months of bull market, simply selling out based on some defensive trigger point may not be ideal in a taxable account. Whatever your equity exposure you’ve likely had some degree of up capture (hopefully a lot) and so too much selling would trigger too much in the way of capital gains (this sort of thing is very subjective, too much for you is a different number for others).
I’ve been very consistent over the life of this blog in believing that funds offering alternative strategies are a part of the solution along with some selling. When I first starting writing about these ten years or so ago the field was quite narrow but now has expanded to include many more strategies and fund providers.
The big idea is that a little bit of selling, which could simply be more along the lines of rebalancing down to target weights combined with an exposure to alternatives will reduce net long exposure which at times makes sense to do like when the S&P 500 breaches its 200 DMA and especially when the slope of the 200 DMA is negative.
One strategy to avoid might be funds that invest in loans to medical students. Barron’s had an article over the weekend about just such a fund that has gotten into some sort of trouble over pricing the loans and the fund has been suspended. I’ve never heard of such a thing which is why I bring it up. I’m not linking to the article or naming in the fund in case some part of this bizarre story isn’t quite right.
