Tactical Update: Rally? Take It To The Bank (PREMIUM-UNLOCKED)

The following post was issued to TLS members on December 16, 2020.

The stock rally continues apace — how much further will it go?

Back on October 28 and October 30, we went “all in” on stocks in our client portfolios. The market subsequently put in its best month in 33 years (or, ever, depending on the index) and the best post-election rally of all-time. After this historic rally, however, it’s time to bank some of those gains, i.e., take some profits.

I will emphasize that the underpinnings of the market (breadth, internals, technicals, etc.) are still solid. However, we do have some serious shorter-term concerns at this point, specifically pertaining to sky-high investor sentiment, seasonality and some key charting “extension”, or potential resistance, levels currently being tested, or nearly tested. Specifically, here’s what we are seeing, and what we are doing about it:

  • The Russell 2000 has been on a tear. However, it is testing the 127.2 Fibonacci Extension of the 2018-2020 decline near ~1960. Odds are it does not continue higher unabated so we did add a small short, or inverse, position on the Russell 2000 on today’s open as a hedge. With the foundation of the rally still as solid as it is, we normally would not put on a short or hedge. However, we are reluctant to sell too much exposure in our long positions because we have already trimmed some and we still like the positions considerably.
  • The small and mid-cap growth positions, IWO and RFG, respectively, that we added just prior to the election (see above links as well as the charts in this interview from October 29) are now closing in on the 161.8 Fibonacci Extensions of their respective post-2018 or March crash declines. Again, while the internals remain strong, these indices should at least pause in this general vicinity. Thus, we are looking to take profits nearby, ideally IWO ~286 and RFG ~203.
  • We will continue to trim other positions as they reach key Fibonacci Extension levels. One other position we took profits in today was the internet ETF, FDN, near the ~214.50 level.
  • Lastly, on a separate subject, we added a small position in the Bitcoin exchange-traded vehicle, ticker symbol GBTC. As we have reiterated in our posts in recent months, the chart does suggest an eventual sustainable breakout and run higher in bitcoin. However, we believe it needs an extended consolidation prior to the “real” move. With that being said, today’s breakout will likely lead to further near-term upside before a likely failure and the aforementioned extended consolidation. Thus, while we despise buying breakouts, we bought a small position in GBTC for the near-term upside.

While several of these tickers are testing near key potential resistance, the popular large-cap indices do have some further upside prior to hitting the next Extension levels of consequence. Therefore, it would not surprise us to see, for example, the S&P 500 eventually tag ~3725, the Dow tag ~31,000 and the NDX tag ~12,900 prior to a more pronounced pause or pullback. We will take further defensive action (relatively speaking) at that point.

Today’s moves take us down to an approximately 65% net-long equity position (~85% including our precious metals, bitcoin and bond positions) — down from ~100% about 7 weeks ago. 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.