Keep your powder dry

Portfolio manager Keith Richards says opportunities are coming, but you must have cash to take advantage of them. This will not be the end of the world. It’s a much-needed correction.

Keith Richards says a much-needed market correction is coming, so keep some cash to take advantage of the opportunity.

I’ve been ranting on (and on…) about the overvalued tech stocks, and their disproportionate influence on the market for several months now. True, my ranting made me appear misled, as the market raged on over the summer. I even recently cautioned a friend that the timing (not the concept) of buying index ETFs at this time was not good.

He replied: “You felt the market/tech was overdone three months ago. Yet they keep going up. Perhaps this time is different.” Sir John Templeton’s famous quote of “this time it’s different is the most dangerous thing to say when investing” has rung in my ears during this entire rally. Many smart market strategists have been suggesting that this time really is different. Sir John was wrong. So was I, it appeared…or were we?

Caution be damned

Sure, our ValueTrend Equity Platform participated in the tech rally with about a 15-per-cent weighting up until June. But we reduced those holdings thereafter, noting the high valuations and overbought technical status of the group.

In early September, I once again shouted my message on my bi-weekly blog at ValueTrend. I’ve been the broken record since June, shouting the same message, and eating crow right after doing so. The market went up, despite those lofty valuations and technical factors. Why would anyone listen to cautious investors like Buffett, or me or other billion-dollar managers like Tepper, Druckenmiller, Ackman, Minerd? (Google these guys if you don’t know who they are.)

We’ve all been holding cash and focusing more on value this summer. It’s been the retail investor, Robin Hood speculators and index players who looked to be right. They bought the S&P 500 index, the NASDAQ index, and the FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks. Valuations, overbought sentiment, historic technical patterns be damned. They were making money.

We even sent out a special ValueTrend update in early September discussing the potential for continued correction, and how we are positioned for it. (Are you a subscriber to the newsletter? If not, there’s a subscription button on our website at www.valuetrend.ca.) In that newsletter we presented a case for markets to correct based on election patterns, the recent news on a vaccine pending in November, and the individual effects on the FAANG stocks considering a potential Biden election win. We discussed how we are positioned to deal with this situation.

I recently even called out Tesla as ready to correct on my blog. The technical indicators I looked at painted a similar setup to Bitcoin’s topping pattern of late 2017. I did call the Bitcoin correction in a blog written November 2017.

How low could the market go?

It’s been the small traders (stay-at-home people, new to the market via online services) who have been a major part of the current market madness. Most of these investors are younger people who feel comfortable in owning the fast-moving tech and social media stocks. They are focused on both the stocks and the options surrounding those stocks. Their biggest challenge will be in their lack of experience in bear-market corrections. How will they react when they face the inevitable fact that stocks can’t go up without periodic bear markets or strong corrections?

They, along with buyers of US index ETFs like the S&P 500 and NASDAQ (which disproportionately hold the FAANG stocks), have forced money into the FAANGs at an unrealistic clip. Now we are hearing about the potential for some of these positions to unwind as call options prices collapse. SoftBank (a Japanese multi-national conglomerate holding company) was recently in the news as a potential threat to these stocks if they are faced with further downside pressure on the stocks and forced to start unloading their positions.

How we are positioned

Our Equity Platform holds almost 25 per cent cash now, as does the Aggressive Growth Platform. We are very underweight in technology stocks, with only a 10 per cent exposure. Instead, we’ve focused on value and dividend stocks like Berkshire Hathaway, Walmart and others. This, along with diversification into Europe, emerging markets and even a bit of commodity exposure through a base metals stock and a gold ETF.

Opportunities are coming, but you must have cash to take advantage of them. This is not the end of the world. It’s a much-needed correction. I’ll keep writing my thoughts for The MoneyLetter—and I’d encourage readers to subscribe to our ValueTrend newsletter too. This is an abbreviated form of our client-only newsletter—and it contains the highlights (without specific stock picks) of our ongoing strategy. And by the way—if you feel you would like to reduce your portfolio’s forward risk potential through a portfolio management program like ours, we’re always available to talk to you about your individual situation.

Keith Richards is Chief Portfolio Manager & President of ValueTrend Wealth Mgmt. He can be contacted at info@valuetrend.ca. He may hold positions in the securities mentioned. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only. It may also contain projections or other “forward-looking statements”. There is significant risk that forward looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.

This is an edited version of an article that was originally published for subscribers in the September 2020/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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