I’m 100% Long for the 1st Time in Years

The 5-15% multi-month correction that I was waiting for since May has finally arrived. Last Friday I tweeted that I increased my net long exposure to stocks from 25% to 75%. And I tweeted again on Monday morning that I was using my remaining cash balance to buy stocks during the early morning flash crash.

Increased my equity exposure from 25% to 60% on this 5% pullback in the S&P 500
8/21/15, 10:15 AM
Further increased equity exposure to 75% on S&P 500 dip below 2000
8/21/15, 1:43 PM
Just went 90% net long as S&P 500 futures broke below 1900. Sell offs based merely on EM problems has always been a good buying opportunity.
8/24/15, 8:13 AM
Just went 100% long on test of Oct ’14 low. Could not get filled on individual stocks so bought $SPY
8/24/15, 9:44 AM

I almost always keep at least a 10% cash balance, but the indiscriminate panic selling seemed to be devoid of any fundamental reason making me convinced that markets will experience at least a short term rebound. The most popular reason ascribed to the August selloff, the crash in the Shanghai Composite and the slowing Chinese economy, do not warrant a 12% correction in my view.

Rather, the best explanation for the correction is that the market was simply due for it after not having experienced a 10% pullback for one of the longest stretches in history.

Months Without a 10% Correction
Source: Ryan Detrick

Moreover, with the Fed having supported financial markets with extraordinary monetary stimulus during the past 7 years, it would seem likely that markets would stumble as the Fed backs away.

Fed QE Impact on Market-2

Although, the Fed wisely decided to taper its QE3 program to avoid the market dislocations that ensued after QE1 and QE2 were halted, the fear of a rising Fed funds rate has spooked markets once again. If the current panic does not subside before the Fed’s September meeting, a rate hike is likely to be postponed.

During market turbulence it is important to not get caught up in the media noise and lose sight of the economic fundamentals which ultimately determine equity prices. As shown below, after the winter induced Q1 slowdown. the US economy is back on track for 2-3% growth. And looking ahead, the economy is on the verge of accelerating to 3%+ growth as I wrote about here.

2015 Q1 GNP-2

By almost every sentiment and technical measure, the market is due for a rebound at which time I will get back to a 10% cash cushion. I do not know if we have seen a bottom, but after a 12% correction I believe we are closer to the bottom than to the top and new highs are only a matter of time. Therefore, I want to be heavily long US stocks.


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