Monday , 2 October 2023

It’s Time To Adopt A Defensive Portfolio Posture – Here Are 13 Indicators Why

[Current investors in the stock market]…”seem to believe that their positions are diversified enough to protect them in a downturn, and…many appear to expect no major drawdown in spite of many months of extreme volatility. I would argue that the risk is far greater than perceived by many, and the protections most have in place are quite inadequate…[Here are 13 indicators] to support this interpretation…”

By Lorimer Wilson, editor of – Your KEY To Making Money! 

[This synopsis of edited excerpts* (730 words) from the original article (1269 words) by Kevin Wilson provides you with a 42% FASTER – and EASIER – read.  Wilson is receiving compensation from Seeking Alpha for pageviews of his original unedited article as posted there so please refer to it for more detail. Please note: This complete paragraph, and a link back to the original article, must be included in any article re-posting to avoid copyright infringement.]

“1. Sentiment is still decidedly bullish, with the latest Investors Intelligence survey indicating 45% of investors are bullish and only 20% are bearish… This is in spite of investors seeing three sessions this year in which the S&P 500 suffered 3% drawdowns against not one with a 3% gain; this condition last occurred in 1936, right before a 50% drop in 1937

2. …Households still have an extremely high exposure to equities, based on historical records going back to 1965. Data suggest that this level of exposure to equities serves as a prediction that future returns over the next decade will be below 4% annually

Chart 1: High Equity Allocations Predict Low Future Returns

3. …The liquid asset ratio at domestic equity funds is at an all-time low of only 2.6%, well below the level seen right before the panic selling in 2008.

Chart 2: Extremely Low Cash Positions in Equity Funds Represent High Risk for the Markets


4. Corporate debt issuance as a percentage of GDP is at a 32-year high and has diverged very startlingly from the high yield default rate. These kinds of things mean revert, and we have already seen spreads widen significantly since September, thus a major sell-off in illiquid high yield bonds is on the way.

Chart 3: Trouble Brewing in the High Yield Sector


5. Markets have only discounted junk bond funds…by 2.65% so far, but the downside is more in the range from -25% (2016 low) to -41% (2008 low).

Chart 4: Markets Have Only Discounted Junk About 2.65%

6. The VIX (fear) index has only jumped from a low of 11.5 to a recent high of 24, far below the typical highs of 40 seen in cyclical corrections and the extreme high of 80 seen in 2008.

Chart 5: VIX Generally Peaks Much Higher than What We’ve Seen So Far in 2018

7. Margin debt is…at the highest levels ever observed, and…this represents a huge additional risk to the markets in the event of a significant sell-off.

Chart 6: Margin Debt at Unprecedented Levels in Modern Era

8. …The NYSE measure of market breadth (New Highs minus New Lows Index, or NYHL) has only dropped to about -600 so far, a far cry from the -1,400 seen in 2016.

Chart 7: NYSE NYHL Index (Market Breadth) Could Drop Much Farther

9. Regional Banks (KRE) are off a whopping 24% in a rising rate environment that was supposed to support better profit margins for the financial sector.

Chart 8: Regional Banks Down 24% from the High in Spite of Rising Rates

10. …The ratio of the KRE index to the UST 3-month bill…[shows] an absolutely stupendous collapse since 2015 and this ratio is still falling. The observed degree of decline for this ratio is a bit counterintuitive, and I would suggest that something is clearly wrong. Markets are not really discounting the implications of this.

Chart 9: Regional Banks vs. UST-3 Month Down Much More Than Would Normally Be Expected

11. …The end of the credit cycle appears to be upon us, with the credit impulse (rate of change in credit) falling into negative territory.

Chart 10: US Credit Impulse Now Negative

12. Corporate debt/GDP at a peak level seen only in association with the end of the cycle.

Chart 11: Corporate Debt/GDP Suggests End of Credit Cycle


13. It would appear that recession cannot be very far behind, as JPMorgan Chase & Co. analysts have pointed out recently…and others have independently calculated.

Chart 12: Recession Odds Appear to Be Surging Higher



Given all of the indicators and risks mentioned above, it would seem prudent to adopt a defensive portfolio posture…Invest some money in:

  • SPDR Gold Shares Trust (GLD), but only as a short-term hedging trade, not a buy-and-hold position,
  • iShares Gold Trust (IAU) as an alternative ETF that may be safer for those who want to hold it for a somewhat longer period of time,
  • physical gold as it is the safest form of gold in the event of a true financial apocalypse…
  • and those in a more defensive frame of mind because of the expected eventual market slide should also hold some long Treasuries.

…In the end, those who own long-term Treasuries and gold will make a lot of money in the next 12-36 months, and those holding stocks will writhe in pain at their enormous paper losses…”

(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

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