First, my system calls for being no less than 50% (exposed) to equities for as long as the macro picture is positive -- that's my current stance. Here are my priorities if and when the outlook changes:
- Look for confirmation of a reversal (if the market rallies) that would be evident by a weekly RSI divergence and/or a violation of a trailing ATR3 stop. In regard to the latter, I generally use a loose ATR4 stop when the macro is positive. However, I would transition to a tighter ATR3 stop as a signal to take action on my holdings (see below). Currently, the ATR3 stop on the S&P is 1918.
- When I obtain a confirmation, I would sell my "alpha" or any momentum or core holdings that correlate highly with the market.
- I would further trim my holdings by taking profits on any dividend growth stock that have appreciated more than 10%. Specifically, I would sell shares amounting to the profits in a stock.
The actions above will undoubtedly results in an equity exposure of less than 50% in my case. The next step which I will detail in another post this week would be to hedge my portfolio -- the holdings that I intend to keep for the long term. This step will entail going short the market using an inverse ETF (e.g., SH, SDS, etc.) to further minimize downside risks.
It's times like now that I wish my macro indicator was based on daily data. Unfortunately, the data is provided by the Chicago Mercantile Exchange only on a weekly basis.
That's it for now.
