Strategy Update: Investors Spooked (PREMIUM-UNLOCKED)

*The following Premium Post was issued to TLS members on October 28, 2020.*

Stocks following pre-election road-map…here’s what we’re doing about it.

As reiterated in all of our recent posts, including today’s DSS, our outlook in the short and intermediate-term remains the same. Specifically, our intermediate-term Risk Model is still positive and, in fact, has firmed in recent weeks with the improvement in market breadth and chart posture among broader stock indices. In the shorter-term, however, we have continued to warn of elevated risk due to concerns related to the volatility market as well as investor sentiment. For that reason, while we have been nibbling on some longs and covered 1/4 of our hedges, we have refrained from getting too aggressive in adding net-long exposure. Today’s selloff is resulting in a number of high relative strength areas testing compelling entry levels as well as a healthy increase in investor fear. For those reasons, we have kicked up the aggression.

Here’s what we’ve done so far today:

  • Shifted our short-term Outlook to “Bullish” for the first time since mid-September

Covered the following hedges at listed levels:

  • Covered another 1/4 of original Russell 2000 short near ~1555 on the RUT or ~154.50 on the IWM (i.e., sold RWM ~32.70)
  • Covered another 1/4 of original Europe short near VGK ~49.95 (i.e., sold EPV ~24.54)

We also increased our allocation to the following:

  • Small-Cap Growth IWO ~226.84
  • Taiwan EWT ~45.40
  • Copper CPER ~18.84
  • Software IGV ~314.90
  • Inverse Long Bond TBT ~15.98

We also looking to add to Mid-Cap Pure Growth RFG among others. The next compelling levels we are looking at as potential bounce areas — and, thus, a good spot to cover shorts and add to longs further — is near ~3260 in the S&P 500, ~26,250-26,500 in the DJIA and ~462 in the Value Line Geometric.

Of course, near-term risk remains, especially out to election day. Then again, it seems as if the consensus is coming around to our outlook for near-term risk into the election, followed by an eventual solid intermediate-term rally, as we saw around the 2016 election. We don’t like being in the consensus so that is one thing that gives us pause. However, it is possible that where the consensus will be wrong is if the market bottoms before the election. Our moves now certainly would welcome that development.

As always, stay tuned to our DSS posts for further developments — they provide the most current updates to our investment portfolio and outlook.


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.