03-04-2021: The Matrix and Dodging Bullets

You may or may not be a fan of the movie series, entitled "The Matrix" and variants of that name. Several scenes show various participants (the bad guys and the hero) being able to dodge bullets.


This current market reminds me of those scenes. Picking a bull or bear strategy is like dodging bullets... not an easy thing to do, even for Keanu Reeves in the Matrix.



Here is the data situation:

  • The market, from an historic perspective, is about 4 EMs above the 200 DMA. That puts the market squarely in the OB condition and that means we should be in the process of going to cash... (meaning, we raise stops to 0.25 EMs)... but...

  • The market, from a current historic level of 12-month's of volatility is only about 1.5 EMs above the 200 DMA, which means the market is not OverBought (OB) at all.. IF you assume that the current level of volatility is "normal".

  • You would have to assume that we are in a "new normal" to believe the historic value of one standard deviation (less than 5%) is to be ignored and that the current value of one standard deviation (over 11%) is the new normal. Taking this new normal position seems to defy a certain level of common sense.

  • The higher the level of volatility, the higher the risk of market reversals which can be nothing more than whipsaws... or... the beginning of the next major bear market or bear market correction.

  • The historic analysis of data/trends/volatility/etc. support being long in well-defined bull-market trends, short (via inverse ETFs) in well-defined bear-market trends, and in cash if neither of those trends are clearly defined.

With the above in mind, and no clear trend one way or the other and even though the bias is more bearish than bullish, there are just not enough reasons to have capital exposed to this market... therefore, I've moved all but the DIS model to cash.


Why not move the DIS model to cash, you may very rightfully ask??


TG, LI and TQA are all growth-type models. DIS is not. DIS (Diversified Income Strategy) is designed to focus on income harvesting and not on capital appreciation. The model tends to hold Closed-End Funds (CEFs) for very short periods of time; typically just long enough to get the dividend and then exit the position once it trades back to the cost basis. Our goal is to get about 10%+ in income and, maybe, 1% or so in capital appreciation. That's the goal... mind you... NOT the promise.


Right now, we have a couple of positions that go ex-div in the next few days. We'll capture those divs (unless the holding moves up more than the div in the meantime, at which time, we'll simply sell and capture capital gains instead of the div) and then look for the earliest opportunity to sell at or above our cost basis.


The DIS model tends to hold more cash except for the very short time-periods around ex-div dates of our target list of CEFs. This has the added benefit of taking more risk off the table. While cash doesn't pay (hardly) anything, it also doesn't take on the risk of loss if/when these CEFs take a nosedive.


In closing... today we are sticking to the financial-Hippocratic Oath, which is to do no harm; and that means, except for DIS, we are now 100% in cash.

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