Wealth Watch: Geopolitical Strain – Will it get worse before it gets better?

From the desk of Vance Howard:

The HCM-BuyLine® is still negative and has gotten even more negative, which could result in an additional reduction in equites. We are currently about 30% cash/ T-bills. We have been getting a lot of questions about the cash balances within our models. As a reminder, the cash balance observed when looking at the model summary does not consider the cash balance within the underlying HCM mutual funds and ETFs, but the exposure to cash/short-term bonds is still there inside of the funds. The markets are very oversold, so we will pick rallies to sell into over the coming days or weeks. Our target will be about 35-40% cash or T-bills depending on the system, and we are currently a little bit above 30% in cash or cash equivalents at this time. Markets like this are very uncomfortable, but this is the reality of the stock market. The goods news is that this will work itself out and we have built up a large cash holding which puts us in a very strong position to take advantage of a lot of great companies whose stocks have been beaten up. The likes of Facebook (FB), Salesforce (CRM), AMD, Nvidia (NVDA), and the list goes on. Some of these stocks are down over 40% plus YTD.

One recurring question about yesterday’s selloff has been “was it a day of capitulation?” But as always, time will tell. I’m often asked in times like these why I’m not in 100% cash and let me explain; playing the all-or-none game is foolish. Yes, I was 100% in cash in the crash of 2008, but we reduced exposure in three tranches with our target to not exceed 60% cash. With the last tranche being based on our banking system, if it is stable, you can have garden variety nasty selloffs or a bear market, but when your banks start to implode like in 2008 you have a whole set of different problems. Currently, our banking system is healthy and very strong. Playing it too safe may make you feel better for a few weeks, but when it finally turns up, which it will, you will be way behind. Remember, even in the height of the pandemic in 2020, the most I was in cash was 50-60%, and that was a nasty period when we were all wondering if we would live or not. And of course, we ended with a record year.

The tech-heavy NASDAQ has sold off more than the S&P 500, with the S&P 500 holding up better due to help from energy stocks. Oil and energy stocks have reached a point of being parabolic, meaning any good news out of Ukraine could send them selling off 30-50% in a matter of days. In fact, Carl Icahn was liquidating his whole position in Chevron this week.  Parabolic moves do not last.

Expect volatility for the near-term. Intra-year selloffs like this one have a high probability of recouping losses and moving back up before year-end.

I’m on CNBC, FOX business news, TDA TV, etc., and I can’t say it while I’m on their networks but turning off the news will make you a lot healthier and much happier.