Stuffed Turkey?

A brief note why I have exited my equity long exposure

The following commentary is for professional investors only. It reflects my own views in a strictly personal capacity and is shared with other likeminded investors for the exchange of views and informational purposes only. Please see the disclaimer at the bottom for more details and always note, I may be entirely wrong and/or may change my mind at any time. This is not investment advice, please do your own due diligence

Since the Treasury’s pivotal decision to prioritise bills over bonds in their issuance in the beginning of November, equities went very far, very quickly. Out of risk-rewards considerations, I have now exited most equity long positions and will likely sell or hedge the remainder today. A brief summary of the reasoning:

• The S&P 500 has now approached the declining trendline (red) from the Covid-19 bull market highs. This is a psychologically important level for many market participants, and may fail there, trap some in a fake breakout or take more effort to push through (see white line as prior exemplary resistance)

Source: Bloomberg

• Sentiment is not outright frothy yet, but being bullish is definitely not contrarian anymore. BofA’s strategist Savita Subramanian came out with a “S&P 500 at 5000” note, which certainly unnerved me…

• … as her timing has been remarkably procyclical in the past and indicative of general consensus (which means the view is usually already in the price)

Source: Arun Chopra

As I laid out in previous posts, and will write about more in the coming weeks, risks to the economy remain. It is possible, but far from certain whether a soft landing can be achieved

• I continue to see the rationale for both a soft landing and a recession, and given we are in unprecedented territory in terms of economic context I don’t think anyone knows. But with the benign case mostly in the price now, I prefer to observe data and market internals over the coming weeks from the sidelines, rather than take the risk of an uncomfortable surprise

• More so, the state of the European economy appears increasingly concerning, with employer survey data in France and Germany now indicating layoffs ahead

Source: Frederik Ducrozet

• For that reason, I find the German 10-year bond interesting, which has broken its year long trend. I perceive the possible removal of the debt break as a red herring in terms of relevance for this security and lean towards buying it in the coming days (I may be wrong, please do your own due diligence)

Summary: I am not bearish, but after a tremendous run the risk-reward in equities has changed, while early December has traditionally been a choppy period for markets, so I’ve decided to cut my long exposure. Some more upside seems possible, but I prefer to watch data and market internals while I wait for better entry points, as the economic outlook still remains very much uncertain

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