The calm before the storm?

I've spent the last few days lightening up positions across my portfolio. While I do still have a few longs, these are mainly held via options and are relatively small bets which are centered around earnings both in the US and Australia. I've been quick to take any profits on the short side, as markets has proved so resilient, and because I'm loath to short the high flyers here after they have been smashed so hard, so quickly. Moreover, due to the massive sector rotation we have seen, the S&P 500 is within a percent or so of its all time high - hardly the environment to place big short bets. 

However the truth is, the action in US markets has me a little worried. While the high flying tech and biotech names were certainly overbought and richly valued back in late Feb, watching these names get pummeled day in, day out without more than a measly bounce is disconcerting to say the least. This really does remind me of the beginning of my trading career in early 2000. 

The thing is that the sector rotation we are witnessing is both perfectly natural and totally understandable. Why would any rational investor want to chase ridiculously priced tech names like Twitter, Splunk or Fireye when they could instead be long Pfizer, McDonald's or Microsoft and get paid a nice dividend in the meantime? Furthermore, why would any self respecting momo trader or technical guru want to try and catch these godforsaken falling knives of the Nasdaq? 

What's makes things tricky here is that the value sectors (utilities, energy, staples) are very overbought in the short term, but they haven't shown any signs of rolling over. This situation could continue for some time yet. Back in 2000, while the Nasdaq peaked in March, the S&P 500 traded sideways until late August. But make no mistake, the type of sector rotation we are seeing has always indicated that we are in the final stretches of a bull market. Other indicators that confirm this complacency include an extremely low VIX, and the fact that basically every strategist is positive on the market.

Whilst the market might manage to hold up for a while yet, I'm increasingly of the view that it's time to be cautious. Nevertheless, I will be waiting for more cracks to appear before I take off my remaining longs and establish decent short positions. I feel that this is no time to try and be a hero.