February 2019 – The rebound turns into a rally… what next? Keep or sell?

In February, the market rise that started late December became a rally after breaking all intermediate resistance levels that could have signaled to a bearish market. If the current market trend is not bearish, does this mean it is a bullish one? Long-term charts seem to say so, and global growth data confirm it for now.

The million dollar question is: what shall we do, buy or sell?

Market ceilings are only a step away: 4% for the S&P500 and 7% for the Nasdaq. The Eurostoxx 50 maximums are still far off (slightly above 60%), but Europe has not got back on its feet since the 1999-2000 rally. If we assume that the loss of competitiveness in the region is permanent now that Europe has irrevocably missed the technology train and hopes for a fiscal and labor common market have dispelled, and only take into consideration the highs of the last 5 years, the gap narrows significantly and places the European market ceiling only a 15% away. The 4Q 2018 crisis reminds us that neither higher corporate gains nor the truth (or untruth) of cycle-end rumors are responsible for triggering short-term market plunges. In the absence of sufficiently solid leading indicators allowing us to anticipate trend changes, there is only one strategy that can benefit from the increasing irrationality of market behavior: accumulating excess gains in the form of cash in bullish markets and then re-using it to increase spending power in the next correction phase.

Every portfolio/investor should be clear about the maximum and minimum risks they are willing to take in normal market conditions (i.e. over a complete economic cycle). For Sigma Fund Real Return the net exposure to equity markets should range from 20% to 40% of its assets. At the beginning of the crisis, we held a net exposure of around 28%; during the crisis it reached 39%, and after the last resistances were broken through, we have decreased it to 32%. Once the market ceiling is reached, we will gradually lower exposure to 20-25%. Ultimately, this strategy consists in finding an adequate level of risk that allows us to meet our return objectives, while leaving a security margin that is ample enough to permit us to increase risks in market correction phases.

In a nutshell: if you are invested, lower risk to a neutral level that will allow you to increase it in the next market correction. If you have missed the rally, don’t try to recover lost time now: start with an intermediate level of risk, giving you room to increase it in the future. There can be nothing worse than lagging behind markets and at some point you will need to outpace them. If there is one thing markets periodically offer is entry opportunities. Rather than suffering volatility, you have to take advantage of it to your own benefit. Since there are so many algorithms distorting prices –both on the up and the downside– let’s use the opportunities offered to investors that are looking at fundamentals.