In a new report, UBS Securities Canada Inc. is cutting its equity allocation and raising its portfolio weighting for cash, citing concerns about the valuation of the S&P/TSX composite index.

In the report, the firm says, “We are reversing our early November call to raise equities and lower cash, and reducing our equity weight back to 50% (-5%), raising cash to 15% (+5%) with bonds unchanged (at 35%).”

“The roughly 1,000-point rally since then is the main factor, as our assessment of the market’s potential has not changed much,” it says. It notes that the S&P/TSX composite is 8% above its fair value estimate at the 11,500 level, “leaving precious little upside to our marginally revised target of 11,750 (vs. 11,500).”

“Moreover, this assumes a solid 20% rise in earnings, which is not likely to be exceeded,” it adds. “Accordingly, we are taking a more defensive sector posture by reducing materials and tech to neutral, while raising staples to over and financials to neutral.”

“Overall, we think investors should move from riding the trend to a counterpunching mode. This reflects both current valuations, and also that the view that we are coming due for a meaningful pullback (10% or more),” it says. “While we would view this as transitory, and so potentially a buying opportunity, time is no longer on the side of this rally as it is now the second longest and one of the strongest of the last 50 years.”