Getting ready for a sell-off, Crouch plays defense

As market watchers debate over whether it is too late to catch a piece of the current rally, Stanley Crouch is already playing defense in anticipation of a correction. “I think we have the potential for a pretty significant drop after a very long and meandering rise from the most recent bottom in June,” said Mr. Crouch, chief investment officer at Aegis Capital Corp., a $2 billion asset management firm. Citing what he described as “artificial support and synthetic intervention from central bankers,” he is forecasting an equity market correction of between “15% and 25% in coming weeks.” Mr. Crouch believes a sentiment shift is unfolding in which the markets realize that “there is no central bank put,” and macro deterioration cannot easily be stemmed. As the correction unfolds, the euro could fall by about 30%, and commodities will also decline, including gold and silver, he said. The forecast is based both on recent market patterns and technical fundamentals showing divergence between some major sectors, he said. “I liken it to a freckled swan, which is a swan with the marks of all the various things out there that everyone knows about,” he said in a reference to rare “black swan” market events. “Take your pick, there are lots of reasons to be concerned right now,” Mr. Crouch added. As precedents, he noted the sudden double-digit stock market declines that occurred during the summer months of 2010 and 2011. “Those were both interim tops followed by declines,” Mr. Crouch said. “They were both meandering rises that met with sharp declines, and this market looks a heck of a lot like those markets did.” With that in mind, Mr. Crouch is allocating to cash and dividend-paying stocks, and he is adding some short positions. “Right now, the model for this environment is very defensive,” he said. Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.