As I mentioned in last Friday’s update, we eliminated some of the more volatile sector and country funds from our portfolios. Yesterday’s morning rally gave me the opportunity to continue that effort by liquidating some of our other major holdings in those sectors and countries which had performed well over the past couple of months and were in shouting distance of their pre-set sell stop points (to me, the definition of a major holding is one in excess of $1 million).
For the time being, we eliminated our positions in VWO (emerging markets), XBI (healthcare) and ITA (U.S. aero/defense) thereby reducing our portfolio volatility sharply and locking in profits. It turned out to be a good decision for the time being as the markets collapsed in afternoon trading.
Last week’s Subprime debacle seems to continue and may very well accelerate with the latest casualty being E-Trade. Some news reports are talking about the possibility of bankruptcy filing, which E-Trade has denied.
I have repeatedly written about and poked fun at the Subprime pig and its relentless appetite for the same food but served in a different trough. This ordeal is far from being over but it has the potential to derail the current bull market; the beginning stage which we may be seeing right now although we won’t know for sure until the benefit of hindsight sets in.
It therefore is wise to reduce exposure to volatile sectors and follow our sell stop discipline. If sectors/countries resume their up trend, we’ll find a new entry point. We may miss a little on the upside, but that’s better than losing too much on the downside.