Possible Intermediate-Term Approach
We have long exposure, which caters to bullish outcomes. We have a ton of cash, which aligns with our fundamental concerns. The significant bull/bear demarcation line sits between 1,268 and 1,240. Even if 1,240 holds and stocks rally, a drop to 1,240 represents a 5.5% decline from present levels. Based on the head-and-shoulders pattern, a close below 1,319 gives the bears a short-term edge. It is too early to give up on the possibility of a strong rally occurring between current levels and 1,240. It is not too early to prepare for a possible bearish break of 1,240.
Should 1,319 fail to hold, we can reduce our short-term exposure to risk by adding a hedge to offset our long positions. The hedge can be removed quickly should Europe or the Fed announce some form of market intervention. The hedge can be increased to offset more risk incrementally in the coming weeks should the situation continue to deteriorate.
Regardless of the technicals, we are concerned about slowing economic growth and Europe’s inability to make difficult decisions. Not much has changed since last fall. The fundamentals (too much debt) are bearish, but the markets can turn on a dime after numerous forms of possible intervention. Flexibility is more important than ever.
Our goal is to migrate to the proper long-term allocation. If the S&P 500 gets to 1,440, we want to participate. If the S&P 500 drops to 970, we need to have a migration plan for such an extreme, but not impossible, outcome. If we take incremental steps and remain flexible, the odds of success will increase dramatically. We are monitoring the situation and reviewing all options constantly.
