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Stocks Signal Important Shift Is Underway


Overexposure to stocks and underexposure to bonds was what worked best in 2013, however there are signs that trend might be shifting.

Anxiety is the friction between where you are and where you should be.
Todd Harrison

One of the most poignant markers of the change in social behavior this year is that investor anxiety has gone through the roof. It seems that the appetite for risk has been quickly dulled by a 3% drop in the S&P 500 Index (INDEXSP:.INX) this month despite its meteoric rise last year. That shift in equities has put a bid under safe haven asset classes and caused many investors to rethink their current asset allocation in the face of rising uncertainty.

Overexposure to stocks and underexposure to bonds was what worked best in 2013, however there are signs that trend might be shifting. The ratio between the iShares 20+ Treasury Bond ETF (NYSEARCA:TLT) and the SPDR S&P 500 ETF (NYSEARCA:SPY) shows renewed strength in Treasuries over equities is at its strongest pace in the last nine months.

Another interesting correlation to note is that the Utilities Select Sector SPDR (NYSEARCA:XLU) is continuing to strengthen in 2014, while the Consumer Discretionary Select Sector SPDR (NYSEARCA:XLY) is weakening significantly. Discretionary stocks led the market higher in 2013 on the back of strong demand and positive economic data, while utilities were bogged down by rising rates. That trend appears to be reversing and may be a sign of a shift from high beta stocks to low volatility names.

While volatility has ramped up, the bigger picture remains largely unchanged. SPY has modestly breached its 50-day moving average but has yet to show any convincing sign of slipping below its long-term trend lines. Clearly there is no need to panic quite yet.

As long as SPY can maintain its price above the 200-day moving average (smooth red line), I believe that the bias will continue to trade higher. Right now, I am continuing to view this pullback as an opportunity to add to existing core or strategic equity positions with any cash on the sidelines. In addition, it may make sense for those who are overexposed to a single asset class to consider rebalancing their exposure to a more balanced mix of equities, fixed-income, and cash or alternatives.

One ETF that I think is an excellent low-volatility way to pick up additional exposure to the market is the iShares MSCI US Minimum Volatility ETF (NYSEARCA:USMV). This fund selects 140 stocks that have the smallest price fluctuations of their peers and charges a rock-bottom 0.15% expense ratio. I like this position because it has diversified exposure to numerous sectors and is a conservative way to add equities to your portfolio.

Some additional observations that jump out at me and may end up being meaningful in the bigger picture:
  • Picking tops is an exercise in futility. Let price be your ultimate guide as we navigate our way through this choppy environment.
  • Setting stops losses removes emotion and allows for protecting capital in the event that the market does ultimately decide to head lower.
  • Putting together a watch list of positions that you want to enter on a pullback is always a prudent use of time. Make sure that you continually update that list with new opportunities that offer compelling reasons to purchase at attractive levels.
  • Don't get too bullish or bearish in the bigger picture. Make sure that you stay balanced with your asset allocation and look to capitalize on trends that develop in the New Year.
Read more from David Fabian, Managing Partner at FMD Capital Management:

Managing Risk With Less Prediction and More Discipline

ETFs To Watch For Global Deflationary Signals

VIDEO: 2014 Investment Roadmap

Twitter: @fabiancapital
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Position in USMV.
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