It's Time to Stop the Music

 | Mar 25, 2014 | 10:30 AM EDT
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Well folks, it's been fun, but I'm outta here. I have a friend who is pretty good at exiting trades. This sixth sense also helped him stay out of trouble at college parties. He said he was out the door when the first beer bottle hit the wall. He usually passed the cops going the other way.

I'm far from the only one, but I've been writing about bull market excesses in this forum for many months now. Chuck Prince took a lot of heat for his quote about continuing to dance as long as the music is playing, but never has there been a truer statement in the history of markets. If biotechs and Elon Musk stocks and social networking stocks are going parabolic, you play along, or you underperform. But you have to leave the party before the brawl breaks out.

About the only thing that can stop a bull market in its tracks is the Federal Reserve. Without going into a bunch of navel-gazing-Fed watching here (because I can, if you really want me to), it has become evident that Fed Chairwoman Janet Yellen, dove or not, is following the plan that Bernanke put into action. And the rest of the FOMC signed off on. Quantitative easing will end, and if the Fed gets their way, rates will rise. In time.

It has been a full 20 years since we've gone through a vicious rate-hiking cycle. Even though this rate hike might only be 25 basis points, or the mere threat of it, that's vicious by today's standards. The 1994 rate ripping by Greenspan altered the course of an election and inspired James Carville's bond market quote. It also blew up a few things along the way. We might expect similar results here (including the things blowing up).

The timing on this will be tricky. First, there will be any number of Fed speakers (such as Wrong Way Bullard) to undo the damage that Yellen did in her press conference, which should send the market up smartly. There are heavy inflows into stocks that will continue for some time. And stocks are still not really expensive

But I'm not looking to top tick the market here. That is senseless. Frankly, I think the price action stinks, I think that biotech is absolutely unholy here, and I think Mr. Market is dropping a not-so-subtle hint that things had gotten out of hand and a correction is underway.

This week, I will be liquidating all of my speculative trades. In particular, I am referring to Tesla (TSLA), SolarCity (SCTY), Zillow (Z), and KraneShares (KWEB). I am not particularly concerned about the timing. I want out. I still love these positions. I still love the ideas. It doesn't matter. Bear markets/corrections don't discriminate.

I also want exposure to downside. The price of protection is plenty cheap in the SPX but in credit it is even cheaper. I will buy downside puts or put spreads in HYG. I have written before about the lack of liquidity in the corporate bond market owing to the Volcker Rule.

I've panicked out of winning trades in the past, but I think this time is different. Right now, cash sounds pretty appealing.

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