I'm going to experiment with a new series (and tag). I've recently been including positioning thoughts in Total market view, but this being the meat of the matter deserves its own post.
Keep in mind that I am trying to make this work applicable to a variety of market participants: hedge funds with ability to use leverage, have longs, shorts, and hedges; institutional portfolio or wealth managers for whom adjustment means overweight or underweight various asset classes or sectors; and individuals playing the market on both a longer term and medium term basis. The only thing I am not really addressing here is short term swing trading and/or day trading; weekly and daily pivots work, just action is too fast for any blog comments.
I tend to have mostly long emphasis because it is usually easier to buy what is going up, than trying to catch what is going down. Even if I think TLT is dropping, then it will usually be easier to buy more financials than try to short bonds.
From 10/27 caution alert, I suggested to raise cash or hedges, ie, have less exposure in the market.
When alert was lifted 11/7, current leaders were: QQQ among USA mains; SMH among sectors from much earlier buys, and recently XLF; globally, EWZ from much earlier buys, and more recently EEM, and DXY (which as a currency can be played in a variety of ways).
After 11/9, however, QQQ, EWZ and EEM quickly dropped off the strongest / winner list, replaced by IWM and DIA. XLF and DXY worked out great. SMH maintained.
The other key point is that from the start of Q4 I have been recommending minimal exposure to safe havens TLT and GLD; this view has been justified with the once mighty TLT below all pivots as of 11/10. Also, you will need to factor in this analysis for your own position list. If you have a lot of dividend stocks, then they also might have benefited from adjustment to underweight in a rising interest rate environment.
One aspect that will be entirely up to you is what "long", "somewhat long", or "very long" means, and how quickly you can adjust. A hedge fund running 100MM could be 300% long on leverage and change back to 0% long with futures hedges in a few minutes during the session, and even take significant action after hours. An institution might take a week to change allocation to an asset class in the new quarter. An individual in a non margin account might be constrained to use settled cash, but if you are nifty and use some of the leveraged ETFs out there there are ways of replicating some hedge fund strategies.
Personally I would rather have 2-5 best positions, take them in size that matters and execute well than having 50 things that all move together anyway.
Regarding flexibility: If Stanley Druckenmiller can sell all his gold in one day, then it is really only the largest players or those confined by certain benchmark adhering rules who cannot change positioning with relative ease.
11/9-11 playbook
Out EEM & EWZ
Hold or add XLF
Reduce QQQ, add IWM, some DIA
Hold SMH
Hold DXY long or related FXE short
11/15-17+
SPY cleared YR1, VIX Q4P rejection, QQQ held Q4P, then back above all pivots, VTI cleared YR1, all with safe havens crumbling = max long.
11/21+
Alert for trading turn to potentially take some gains but markets making it easy and kept on going up with no signs of euphoria.
11/28+
The decision here is to take any gains, hedge, or simply hold. If you are decently long you might want to consider previous editions of TPP top checklist. If we see several of these check off it is time for action. If not maybe better to do nothing. In this environment and momentum, a one day drop could immediately come back the next day.
A hedge is something correlated to the underlying asset that allows us to minimize downside while holding longs. A short is an uncorrelated short trade. Either of these can be used to reduce long exposure. Some hedges involve time decay like options or VIX related strategies.
If we start seeing ISEE spikes (125+) that maintain all day into the close (they can fade, ie start 175 then drop down to 100 by the close) then I'll be more willing to reduce late longs or hedge. Given slope of 10MAs on daily charts though, at this point looks best to let trends play out, ie, do nothing. If you are not max long by 11/17 with QQQ recovering above all pivots and VTI above YR1, joining SPY, DIA and IWM that had all cleared from 11/11 on, then it is too late to be chasing up here.
Sum
allocation: max long risk assets
USA mains: IWM, DIA
sectors: XLF, SMH
global: already reduced (funny but true, RSX best among EEM, FXI, INDA and EWZ from 11/15 on); EFA & EEM short candidates, INDA weakest but too late
currency & commodity: DXY long, oil neutral