Defensive Action Started

True to our pre-planned strategy we started taking defensive action yesterday late in the trading day. Our initial step was for "large" accounts where having 30-35 holdings makes economic sense. We have not yet implemented defense for mid sized accounts (these use mostly sector ETFs) or small accounts (mostly broad based asset class funds). The idea here is that because mid and small accounts have few holdings there are fewer potential defensive trades to make so we move a little slower but will be taking action this week if the SPX is still below its 200 DMA.

For anyone new we take defensive action when the S&P 500 goes below its 200 DMA. Specifically if it looks like the SPX will close below for a second day, we trade late in that second day. We start small because true bear markets give plenty of time to get out; look at how 2000 and 2008 both started slowly with more of a rolling over. 

In our large accounts, the majority of our clientele, we sold ABB (ABB). From the top down we wanted to remove volatility and reduce sector exposure to a sector that would be especially hard hit if we are headed into a recession or bear market or both. The industrial sector is a good place to take this type of action for an account built at the sector level.  We covered this before but in the face of downturn this sector tends to get crushed. You can look at a long term chart of Caterpillar (CAT) to see this in action, CAT epitomizes the point.

From the bottom up ABB was a tough hold that went down a lot. In the time we owned the company has grown its business but the stock has endured a pretty meaningful multiple compression. I don't think the company is by any means broken but it is a good source of funds for trying to reduce the portfolios' volatility.

Not every single account had ABB so for those we reduced industrial sector exposure in other names. 

As I usually say on these posts the market is either going to go down a lot or it won't If it does then this will have been the correct trade and if not then it will have been incorrect. Right here right now in the middle of it we can't know what comes next we can only have an opinion. But it is easier to be wrong by sticking to the strategy laid out ahead of time than being wrong by making it up as you go.