The issue I want to discuss in this post is what, in particular, qualifies as a defensive portfolio posture. I have been advocating an increasingly cautious short/intermediate-term outlook on the market since late-March of this year in my videos and posts. While offense was the name of the game in the first quarter of this year, riding longs in the face of a daly barrage of erroneous calls for a market top, the correct strategy then became to retreat when we finally saw evidence of the long trade becoming too crowded.
Now, if you are a fund manager with a mandate to be heavily long at all times, then you will probably want to rotate away from some of the higher beta cyclical and commodity stocks over towards the healthcare and consumer staples, preferably with a dividend yield. For institutional money managers, that is a widely-accepted method of “staying defensive,” and you often hear them espouse as much on the financial news television networks.
For individual, retail traders, though, you should not bother deluding yourself. In the 2007-2009 bear market, the great consumer staple firm Proctor & Gamble fell from $75 to $43. In that same time, Coca-Cola sank from $65 down to $37. If that sounds like “staying defensive” to you, you might want to consider raising your standards. True, that was a rare and vicious bear market, and there are times when the defensive stocks will outperform not just in relative but absolute terms. However, in the current correction we are seeing the consumer staples begin to crack. The first chart below is the daily timeframe of XLP, the consumer staple ETF. Note the high volume sell-off on Friday, cracking below a head and shoulders topping pattern. I think the XLP is likely to dip below $32 in the coming weeks. I have also presented several other charts of individual stocks that are often considered hiding places for traders to avoid sharp market sell-offs. However, as you can see, they have not exactly been safe this time around. Indeed, steep corrections are notorious for getting to everything before they are over, as there are very few, if any, sacred cows.
As an individual trader, you simply must use your agility and flexibility to your advantage, which means moving to a heavy, if not full, cash position should became a weapon in your arsenal when appropriate. There is no mandate for you to stay in the market at all times. Do not feel compelled to try to find a hiding place in the consumer staples. You might be able to run and hide initially, but in addition to bear markets, sharp corrections will get to you…eventually.
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Great post Chess. Seems like when times get tough, the talking heads start espousing the virtues of dividend paying stocks. Well, I’ve seen quite a few 3-4% annual divvy’s wiped out in a matter of days recently…
Whack, whack, whack. Damn they look ugly.
Yeah, your charts and comments certainly show that in a sharp correction, the stocks that are seen as”holding up well” may not stay that way. In the end they may be labeled “the last stocks to fall.” And the bigger they come, the harder they fall.
Great post as always Chess. Thank you for not letting us succumb to commonly made mistakes.
best defense is a good offense. i’ll continue to short rallys until QE !
Very good post. Funny how all eyes were on $APPL now we watch $WMT
Thanks Chess. Voice of reason as per usual. The currency markets are showing a glimpse of reversal. Eur/jpy still reversing eur usd still well above Friday low. I would assume asian traders are reacting to Friday’s disaster so I guess we could see weak ES futures overnight and a backtest of DX high. Anyone think stocks and maybe oil might bottom tomorrow or Monday? Not positioned that way but I think its likely.
Tomorrow or Tuesday I mean. Hard to post via mobile
Chess, nice post.. thank you
Thanks, guys!
A humble question of mine: if you see a bearish environment in front of you, why you as an individual trader can move to 100% cash, but you as a fund manager will rotate your stocks (why “you are a fund manager with a mandate to be heavily long at all times”)?
Not a bear market. A correction in a bull market for now which makes shorting much riskier. And I have shorted in April and early May
Thanks for your answer and for sharing your views on the market; they are useful for someone like me trying to learn about the markets.
When I said “you”, I did not mean you personally. So let me rephrase: Your article says there’s a difference between an individual trader and a fund manager: assuming both of them agree there’s a correction to come, the first can move 100% cash, the second will rotate its stocks from beta to defensive stocks. My question was: why is that? What’s the reason behind this assumption? Why a fund manager has “mandate to be heavily long at all times”? Why he can’t/won’t move to (almost) 100% just like the individual trader?