Special Report: Bulletproof? (PREMIUM-UNLOCKED)

The following post was originally issued to TLS members in the afternoon of June 5, 2020.


Can anything stop this historic rebound?

About 2 and a half weeks ago (May 19: Game-Changer?), we noted a change in the near-term outlook for stocks. As stated at the time, “technical strides in laggards (e.g., small-cap and broader market as well as Europe and energy shares) now suggests that the recent consolidation is a continuation pattern or bull-flag. Therefore, it opens further upside in the near-term prior to an ultimate top in the post-March “B-wave” bounce.” Fortunately, we pivoted out of our shorts and simultaneously adopted our largest long position in several weeks. That’s because, fast forward 17 days, and check out the moves from these laggards:

  • Value Line Geometric Composite + 19% in 17 days
  • Russell 2000 + 15% in 17 days
  • Financial SPDR (XLF) +22% in 17 days
  • Vanguard European ETF (VGK) +16% in 17 days
  • Oil Services ETF (OIH) +41% in 17 days!!!!

The rally has been phenomenal, more so because we anticipated it and participated in it. However, today’s terrific jobs news and subsequent market pop has now pushed these laggards into their subsequent upside targets that we foresaw following their key technical progress just 17 days ago. Thus, while our intermediate-term Risk Model continues to be constructive, we shifted our Short-Term Outlook to Bearish. In our view, these developments suggest that some near-term de-risking is in order — particularly among those longer-term laggards. Specifically, here are the moves we are making:

  • Selling half of our Oil Services ETF (OIH) position ~152
  • Selling our Utilities ETF (XLU) position ~61.90
  • Shorting 10% of Russell 2000 ~1520
  • Shorting 10% of Europe via buying inverse Europe ETF (EPV) ~23.76 (equivalent of VGK ~53)
  • Buying Gold Miners GDX ~31.40

These moves will result in a drop in our allocation from near 35% long to about ~10% net-long, including our GLD and GDX positions. Aiding our conviction to lighten up here is the fact that sentiment is already reaching bullish extremes, at least based on the options market. Specifically, the CBOE Equity Put/Call Ratio is hitting its lowest levels in 6 years (chart to follow) — amazing when you consider the bull market that has existed during most of that time.

So is this market bulletproof? It may appear so at the moment. However, we still believe the broad domestic and global equity market is in a longer-term bear market. Therefore, while there may be winners that are doing well (and we want to hold on to!), it also means that the best tactic is still to sell market laggards into strength to resistance. That is what we are doing today.


Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.