Take profits and batten down the hatches. That’s the advice of former head of ETF trading Jared Dillian. He believes equity markets are likely to see a rough ride in the next few months.

In a recent interview with Mauldin Economics, Dillian elaborates on three red flags that make a case for a near-term pullback in stocks. Dillian first notes that “the price action is really not that good” in various financial markets.

He mentions that the stock market is weakening, the bond market is whipsawing, and the medium-term low-volatility/high-dividend trend is “starting to show some cracks.”

 

Activist Short Sellers
Image source: Wikimedia Commons

Low-Volatility/High-Dividend Stocks Are Slumping

The most important thing, according to Dillian, is that the prices of the popular low-vol/high-div-paying stocks, including utilities, are starting to drop. These are what are called the “value” stocks. This market is huge, and if it turns further south, it will be bad.

Dillian’s key concern is that if people no longer want to own these low-vol/high-div stocks, there could be “lots of downside to the markets.”

Dollar Strength

Dollar strength is also dragging down the markets. In the interview video, Dillian says, “If the dollar is breaking out higher, say the DXY to 105 or 110, we could have a period of underperformance in stocks.”

Interest Rates

The author of The 10th Man financial newsletter (subscribe here) said that US bond interest rates may be up a bit lately, but interest rate fears are built in at this point. Dillian says fears of an interest rate hike may be adding to the current stock market weakness, but other factors weigh more heavily on the market prices.

Net Short Right Now

Dillian has been repositioning his own portfolio to match his expectations of a pullback in stock markets. Over the last couple of months, the veteran trader has been gradually peeling out of his long positions and starting to add short positions.

He concludes the interview by saying: “I’m pretty much net short… Not aggressively short, but pretty short.”

Watch the full interview with Jared Dillian below:

Get Thought-Provoking Contrarian Insights from Jared Dillian

Meet Jared Dillian, former Wall Street trader, fearless contrarian, and maybe the most original investment analyst and writer today. His weekly newsletter, The 10th Man, will not just make you a better investor—it’s also truly addictive. Get it free in your inbox every Thursday.