Macro Tsimmis

intelligently hedged investment

SELL iShares Dow Jones US Technology ETF (IYW)

Posted by intelledgement on Mon, 19 Jul 10

OK, last September we got into this position—US high tech—holding our noses. At that point, the NASDAQ was up 38% in the previous six months. We felt that the rise was unjustified and unsustainable, but that [a] there was some risk we were wrong and [b] given the forward inertia the market had built up, we felt it was prudent to protect against “upside” risk even presuming our analysis was correct.

Well, by April of this year, the NASDAQ was up another 19%…but since then it has been falling back and is now just +5% from were we bought in last September. So, what’s the story here? Last September, we listed five ways we could tell if we were wrong, and the rally—and economic recovery that underlay it—were actually legitimate:

1. The economy ceased to contract and started expanding
2. The consumer continued spending money at a gradually expanding rate
3. Emerging markets continued growing faster; demand for commodities rose
4. Most countries continued to gain more from free trade than they lose
5. Inflation resurfaced

We have had modest economic growth but the jury is still out as to whether there is any substantial “organic” component to it or whether it mostly—if not completely—reflects government stimulus. Consumer spending has not appreciably improved. Emerging markets have continued to grow faster, but if Europe slides into recession and the USA is barely north of neutral, this is not much of an achievement; commodity demand growth is a mixed bag at best. There has not been a surge of protectionism, so condition four has clearly been fulfilled (and this criterion was relevant to the IYW ETF because US high tech sells so much to the emerging market countries). Inflation, on the other hand, remains dormant outside of China.

So, generously, we have two-and-a-half out of five. Not very persuasive. Thus, as we never believed in this rally in the first place, we are cashing in our chips here, booking our modest profit, and reducing our exposure to downside risk.

Previous IYW-related post:

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