Sitka Update: Reducing Market Exposure
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On March 24 I reported that the firm I represent, Sitka Pacific Capital Management, moved its allocation model from market neutral to long. Prior to that we had been fully hedged in our “Hedged Growth” strategy from August of last year until late March.
This rally, in spite of what many think, has been weak and corrective looking. Volume has not been impressive. Over the last two days we have reduced exposure and are now back to a fully hedged state. We do not like the risk reward setup here.
However, there are individual plays that seem attractive and we are still seeking those out. For example, we did not like the risk reward setup in gold at the time and sold our position at 980 on the way up, not down. Gold is much more attractive to us at these prices, so we have added partial exposure.
Like always we are striving to remain flexible. If gold or some of the energy plays we are in reverse back down, we will be out, and without notice.
Over the past few days, many have asked me about the strength of this rally and why it was occurring. The answer is that nothing moves in a straight line. The S&P dropped 20% over a 5-6 month period and the Nasdaq and other indexes even more. Some foreign markets, notably Shanghai, fell 50%. Simply put, bearish sentiment simply was too extreme. The reverse is happening now. The bottom is in calls keep getting louder and louder while the economic data is anemic.
April appeared to us to be not much more than a series of choppy, overlapping short covering rallies with air pockets below. If breadth, volume, and other indicators we are watching pick up, we are willing to change our minds. However, as of right now, we are comfortable being fully hedged in one strategy and high in cash in another.
This is not a recommendation to go short, or to take any specific action at all. Rather, I am merely stating our beliefs that risk and optimism are both too high for our tastes. Whatever is left of this rally, someone else can have it.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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