Back in December, I discussed in a Seeking Alpha article how money flow was negatively impacting the stock market. In short, outflows from liquidating hedge funds, tax-loss selling, a Fed that had ramped up QT to $50 billion a month, virtually no foreign investment (see China's 90% plus fall off) and the permanent dribble out of pensions due to Boomer retirements while traders piled onto the trend, caused the perfect storm of selling to cause the worst December since 1931.
Everybody wants another answer for the sell-off. But it is right there in plain site. Massive selling pressure from big players. Retail hardly mattered. There was no "news" that caused the sell-off. Not a potentially slowing economy, not politics, not fiat currency screamers or bubble yellers. It was money flow.
It is always money flow at the moment it occurs. Yes, there will be a series of events that coincide, cause or correlate with the eventual money flow, but forecasting those relationships is incredibly hard. Only a few of us get it right more than half the time. If you want to be more successful trading, keep an eye on money flow. When it turns, pay attention.
Another Turn In Money Flow Coming
We are about to see another turn in money flow. In the first quarter every year, we see massive inflows into retirement plans from elective additions and more from employer contributions. Tax loss selling is over and hedge funds are in formation as well. So, Q1 is usually quite good.
By mid-April those retirement plan inflows end. Take a look at historical returns for the weeks following mid-April going back 20 years. You'll see a very regular pattern of downturns and flat periods. Very few up periods to speak of. Virtually all the positive returns come in the first two weeks of April which is on whole an up month. What does that say about the second half of the month?
May through September are typically negative to flat as well. Hence, "sell in May and go away" as a well-known saying goes. All of these patterns have to do with calendar based money flows and the occasional stacking up of year-end selling due to having an overall down year, i.e. in down years there's tax loss selling and funds that liquidate in Q4.
Fading The Rally
For the next two weeks, I'll be fading this rally. I expect to get to 50% cash, more in conservative accounts. I'll hold onto my favorite tech and ride out some of the energy which has a Middle Eastern tailwind through at least early June. High beta healthcare, old capital intensive industry, financials, most utilities, I don't want any of them.
Here's a lesson I've learned over the years: there's no such thing as defensive equities. If you think the market is going down, get to cash, treasuries and a few hedges. As has been covered here by others, TLT, on a pullback the next week or two, might present attractive entry. I like puts on SPY and IWM, as well as, a few sector ETFs.
Bottom line, as I said in my webinar Friday (posted to YouTube), mind your asset allocation. Stop trying to divine the next market event. Consider you real risk tolerance and make necessary adjustments to what you own. I think for most people, that means gradually trimming across the board the next two weeks.