Harris Private Bank Chief Investment Officer Jack Ablin recommends that investors immediately reduce some of their stock market exposure.
Ablin said he made the call after a key momentum indicator he follows reached its "breakdown" level, when the S&P 500 fell 5 percent below its 200-day moving average to 1051.
"The last time we broke it was January 2008, and we certainly broke down then," he said.
Ablin says for some investors, a reduction of 30 percent of their stock holdings is appropriate, though the amount would vary. He recommends they shift the funds to short-term investment grade bonds or cash.
But unlike 2008, Ablin said sentiment and the other indicators he watches are not as weak. So instead of spinning into the grips of a bear market, he believes the stock market is still moving sideways. The last "breakdown" signal was triggered on Jan. 18, 2008, when the S&P was at 1392, before ultimately hitting a low of 676 in March 2009.
"I would say you could call it a meaningful reduction," in equities positions, he said.
"I think this is a time for caution. This isn't a fool-proof system, but in this environment if we're going to be wrong, I'd rather have too many low-risk assets in a market that's going up, than the other side of having too many risky assets in a market that's dropping," said Ablin.
"The other assumption is we're still in a secular sideways market. I'm assuming that we're just cycling sideways," he said.
Ablin's momentum indicator was triggered on the upside in July 2009, when the S&P 500 rose above its 200-day moving average. At the time, the S&P was at 932 and he said there were signs it was setting up for a big move higher. Here's more of what he said at the time.
Over the last 10 years, the momentum indicator signaled important turning points for the market, Ablin says. Prior to the January 2008 move, the S&P also broke down in November 2000, nearly 40 percent above its 2002 trough and 30 percent above its May 2003 "breakout" level.
Ablin also watches the economy, valuations, sentiment and liquidity.
"If we strip away momentum, and look at my four other factors, it isn't like I have a compelling reason to own stocks anyway. Valuations are reasonable. It may be at fair value. The economic backdrop seems to be disappointing," he said. In terms of liquidity, "the cash stockpile is pretty good."
He said that money supply isn't keeping pace because the banking system is not lending.
"We still have a very steep yield curve...I would be much more optimistic on the economy if I knew we weren't spending $1.6 trillion more than we're taking in," he said.
Ablin also watches investor sentiment. "If you're in a market where investors are somewhere between skeptical and nervous, then this isn't capitulation. Investors are not panicking," he said.
"For anyone looking for an extreme in investor behavior, an extreme in investor sentiment, we're not there yet," he said.
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