Jefferies' Zervos Prefers Summer in Tuscany to U.S. Stocks

(Bloomberg) -- Watch the monitors, or relax in a Tuscan villa?

It’s an easy decision for Jefferies chief market strategist David Zervos, who after making a killing in the first half of the year is choosing to chase Italian sunsets rather than whatever upside may remain in U.S. assets.

Zervos suggests taking profits after his strategy of going long “spoos and blues” -- U.S. stock futures and Eurodollars -- generated a return of almost 30% this year. The change comes after he suggested selling calls on the S&P 500 Index in March to buy downside protection. This so-called “seagull” trade capped his upside at the 3,000 level that U.S. equity futures recently breached. Rather than hold or tweak the trade, he’s exiting completely.

“I’m happy to let the the Johnny-come-lately types chase spoos at all-time highs and cash 10s below 2% for a bit,” he wrote to clients from his perch outside Florence, referring to S&P 500 futures and 10-year Treasury yields. “There may very well be more upside to go in the near term, but the time feels right to pass the baton.”

Zervos added his long-term positive stance on risk parity remains. The strategy, which aims to diversify volatility across different asset classes to smooth returns, has had a banner year amid the “everything rally.”

“If the FOMO starts to kick in later this summer, I will have no problem jumping right back into the risk-parity pool,” he concludes. “But for the moment, I just feel like commenting on market action from a distance, preferably by a Mediterranean seaside, without a position in hand.”

To contact the reporter on this story: Luke Kawa in New York at lkawa@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Brendan Walsh, Rita Nazareth

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