Breakout

How to Play the Relief Rally

Jeff Macke
Breakout

"Defensive at the bottoms, bullish at the top" or "flat-out defensive" have been the dominant investment themes during the explosively range-bound market of the last two months. This is a fairly common trap of go-nowhere markets and one which needs to be addressed, particularly as we get through October and into the seasonally bullish end of the year.

Into the bearish, or at least defensive, camp we can add David Hefty, CEO of Hefty Wealth Partners. Hefty is looking askance at the nearly 10% rally in stocks, despite thinking a "relief rally could be coming." Hefty has been defensive since late Spring and is keeping his bat on his shoulder now.

"Investors today are paralyzed by what's going on," he offers. Of course there are good reasons to be concerned in the bigger picture. At least in the near term, the market seems increasingly given to shaking off the bad and giving ambiguous news the benefit of the bullish doubt. The question for both the bullish and the bearish is what would make them change their minds. For Hefty, that means better news on GDP and an improvement in his proprietary measure of 300 different technical measures. The Indiana-based money runner doesn't like what he's seeing, as evidenced by his out-sized cash position.

I've written of both my concerns on the long side as well as my 20% long positioning; occasionally covering both ideas in the same segment in order to maximize your bang-for-the-viewing-buck! This positioning leaves me almost perfectly ambivalent on both the rallies and the sell-offs. Being long but cash heavy also means I'm in roughly in the same boat as Hefty, not to mention many, if not most, of the guests we have on Breakout.

It's one thing to babble on talking-head style about various scenarios. Since that's too easy and, frankly, not particularly value-adding, I'd rather share what I'm actually doing with my own money and what I'd be thinking if I still ran a hedge fund. Since most of our fund manager guests are understandably reluctant to be specific on how they're playing this, I'll take a shot at it:

I'd be more bullish for a trade if we a) closed decisively over the S&P 500's 200-day Moving Average at around 1177 (looking good so far today), b) Europe managed to effectively delay the day of reckoning on a Greek default (seems more likely today than yesterday), c) the reaction to the earnings reports this week was muted and/or bullish d) some combination of all three.

I officially went into "Sell Rallies" mode with a Purple Crayon segment on May 17. Call it 1,320ish on the S&P. Including potential taxes and brokerage fees, let's say the market can rally between six and eight percent before my call goes from being good (if I do say so myself... and I do) to bad. That cushion is key as it means I've got a good spread in terms of performance relative to the market. If I were strictly running other people's money I could stay underweight stocks up until and slightly through 1,320 before I'd squandered the lead, investors pull their money and I start looking for other work. I don't have to chase but I can't coast either.

If we get a, b and c above I'm going to want to own beaten down favorites. Apple (AAPL), Ralph Lauren (RL) and the like. Depending on where it is at the time I'd even take a look at something like the hideously broken NetFlix (NFLX), for a trade. Rallies off the lows take everything higher, save defensive names that everyone is long already. Since I have a lead on the tape I can, and will, give the market some latitude in terms of pulling the trigger. Call it a close above 1220 and I'm a buyer. Below that and I'm holding my fire, though, as always, telling you what I'm thinking in real time.

There you have it, a couple of market takes and my personal action plan to do with what you will. As always, I'm open and indeed hungry, for other ideas. Please share your strategies in the space below.

View Comments (72)