Last week we moved a significant portion of all our discretionary client portfolios to cash.

Under normal circumstances, we do not want to carry high cash balances. However, when our indicators show strong bearish signals, it’s time to do our best to protect our clients’ capital.

On Friday, January 15th, one of our key equity indicators turned red. As we have said for the last few years, a red signal means the risk involved in remaining exposed to equity markets is significantly higher, and greater caution is warranted. On Monday, January 18th, we sold $42 million of equities across all of our discretionary accounts.

What did we see that made us move to cash?

Our key technical indicator doesn’t move into the red very often: it happened most recently near the beginning of 2008 and again shortly before the US lost its AAA credit status in August 2011.

What caused the indicator to turn red this time? It is difficult to pinpoint the exact cause (US Fed? China? Oil?), but when it does move into the red, it is safer to move to the sidelines and protect assets. Note that in 2008, a red signal was first received in January, but the markets didn’t really get ugly until Lehman Bros. went under in September.

2015 was a rough year for markets and the first couple of weeks in 2016 were worse. Most equity markets dropped at least 15% over the past year – and markets have been significantly more volatile since August. Fortunately, we made some good calls over the last year and most clients who have been in our discretionary portfolios have had positive returns over that time.

The technical research we use says that we should be out of equities. What do the fundamental analysts say? Myles Zyblock, Dynamic’s Chief Investment Strategist, is someone we follow closely. Right now, he is about as bearish as we’ve ever heard him. His view is that markets may be a little oversold, but the current macro-environment does not support a sustainable rally.

Could the markets rebound 5%-10% in the coming weeks? That’s possible of course. Is it worth being fully invested with the indicators we are seeing? Not now. We believe that, at this time, it is more prudent to preserve capital and wait until it is safer to “go back into the water.”

Of course, we are watching the markets continuously. We want to be more fully invested, and are doing our best to determine when, from a risk/reward perspective, it appears best to re-enter the markets; But if these forecasts hold true and 2016 proves to be a difficult year for equity markets, we want to do our very best to protect our clients’ capital.

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