Fortunate To Book European Profits Last Week
We felt the risk-reward ratio in Europe had reached an unfavorable level late last week (9/20/12). We took some significant profits off the table on Thursday, September 20. The vertical charts caught up with Europe this week; FEZ was down 5.08% in the last five sessions, EWP was down 6.80%, and EWI dropped 5.65%. It was nice to have them off the books and the profits tucked away in cash this week.
We entered this week with a significant cash position from our profit taking over the past few weeks. From a risk-reward perspective, we like emerging markets relative to the U.S. and Europe. Thus, we did some buying in that region of the globe this week.
Good News…Bad News
The good news this week was risk-on vs. risk-off charts held at logical and important levels, similar to the S&P 500 chart below. The bad news is the short-term strength has been in risk-off (bonds, shorts, currencies, etc.). The charts will give us the info we need one way or another (bullish or bearish). Trendlines are underrated; on September 26 we hypothesized the market was ready to bounce near support. You can see the original version of the chart below here; support has held thus far.
The S&P 500 was up 13.83 points on Thursday, which means Friday’s session “gave back” less than half of the gain. The NYSE Composite finished the week with support in close proximity (see below).
While there is no question risk markets are fragile, it was good to see bonds remain tame Friday; TLT was up a meager 0.06% and IEF was flat. The S&P 500 also closed near support this week as shown below.
Still Booking Gains Until Signs of Life Reemerge
On Friday, we continued to incrementally take profits in the SCHF/EFA positions we established over the summer. If support in the charts shown fails to hold, booking more profits Friday (9/28/12) allowed us to reduce risk a little until the current battle between risk-on and risk-off becomes clearer. Even if support holds, we believe there are better risk-reward opportunities relative to EFA/SCHF. Small caps have four trendlines below price that may act as support (see below).
Markets are either going to hold the support levels shown in this post or another leg down is on the way. There is no need to guess. We just need to pay attention and manage risk accordingly. Any continuation of the corrective process would have us consider some intermediate-term defensive positions, such as bonds or currencies. If the markets continue to fall, the manner in which they come down matters (divergences? strong volume? breadth? etc.).