Market Trends that worry me

by Wayne Ferbert on September 9th, 2013

At Buy & Hedge, we remain lomg-term bullish on the US Equity markets. We continue to get confident that a long-term posture – with rolling short term hedges is the appropriate US equity exposure.
 
But as experienced market followers, we always ask ourselves – what could go wrong? Or put differently: does the bear case for markets have any legs? And right now, at least for the short term, we think the bear case has its strongest case in some time.
 
A few of the points that give us pause:
  • The US Equity earnings for the S&P500 had its lowest percentage beat on expected EPS this past quarter since 2008. You could argue that this just means the analysts are getting better at forecasting. I have met many analysts – and I don’t think they are any better now than they were 10 years ago. I think this could point to slowing revenue and earnings power among the world’s largest companies. And these are the companies that ‘stir the proverbial drink’.
  • US Equity markets are still very close to the all-time highs. As an investor, I would always rather be buying a market on a discount – and not buying it near its highs. So, when it comes to putting new money to work, this is a gut-wrenching market level to work with.
  • The improving economy, while slow, is still likely to drive a Fed taper in 2013. Key economic indicators still are mixed – but when was the last time we saw an economic indicator really just ‘blow up’ or as I like to say: “throw up all over itself”. Those days appear to be behind us. The Fed taper should drive rates up – which HAS to drive yield hungry investors back to the fixed income markets. The timing of this switch is debatable – but the eventual rotation of money back to a ‘normal’ yielding fixed income market is INEVITABLE.
 
Of all of these trends, this last one is the most worrisome. It will prove to be the hardest to time – and the fixed income market will almost always be moving ahead of the Fed moves. After all, a ‘normal’ fixed income yield is probably still years away – so how long do the yield hungry investors wait? This will be hardest to predict. So, how does the Buy & Hedge investor adjust?
 
You don't. You stay long and stay hedged. But if you REALLY want to change things up a little bit - then sell ITM or ATM calls for about 1/3rd of your ETF positions that are collared. You will improve your time premiums and get rewarded when they expire worthless - assuming your short-term view of the market is bearish and the market obliges.

Just remember - this is a decision to be tactical in the short-term with part of your portfolio. These kind of tactical moves can be just like 'timing' the market. So, only do it if you are ready to love with the outcome if the market rallies higher in the next several months.


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