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How Should You Position Your Portfolio for a Year-End Rally?


Remember: If you are constructing a portfolio by yourself, there is a process to follow.

If the U.S. domestic economic data can show evidence that the U.S. can avert a recession, then equities will prove to be a bargain at the current levels. Not to mention, we need more clarity on the EU, which of course can cause a major hamper on global growth.

Let's take a look at the broad market represented by the S&P 500.

At my firm we remain bullish as the market passed an important test last Friday by settling well above 1204.00 (1219.00 to be exact). 1204.00 represented the upper region of our congestion zone (1114.00 - 1204.00) which captured 90% of price action for the last 11 weeks. Regardless of the upside breakout, for the last eight trading days we have identified key resistance between 1235.00- 1255.00 (combination of the green moving average line and the blue horizontal resistance line which we have had in place for several months). This region is currently posing the next big challenge for a market which has had to consistently deal with poor fundamental news. Thus far, as it is playing out day to day, the Index hit a high of 1230.00 (just under initial resistance of 1235.00) on Tuesday, and has since come under pressure the last two trading days.

Long Term Investor: We would be looking for a push into 1,300 by year end. See below which sectors we want to be overweight and underweight. We would look to get long these sectors around the 50 Day Moving Average on the S&P 500 1,179. I would even look for 1% below that level at 1168 on the S&P 500 to get long.

Below are sectors that we would be under and overweight if we avert a recession and have a year-end rally. This is not a defensive portfolio and is positioned for growth. You will notice we have a 0% allocation in Utilities and overweight Consumer Discretionary. Year-to-date, Utilities have outperformed Consumer Discretionary by 8.9%. Health Care, another defensive low-growth environment investment allocation, has outperformed Technology and Material by 5.9% and 16.9% respectively.

As a reminder, this is a general model portfolio positioned for economic growth and will not provide as much protection if you were heavily weighted defensive sectors. Speak to your financial advisor before making any new allocations. Remember: If you are constructing a portfolio by yourself, there is a process to follow. First, figure out your risk profile. This will determine how much volatility you can handle in your portfolio. Volatility works both ways; increased volatility will increase the range for higher returns, but larger draw-down. The next step is your asset allocation, which can reduce portfolio volatility and will ultimately be responsible for your portfolio gains. Modern portfolio theory believes that over 90% of portfolio returns come from asset allocation, not security selection. There has been a lot of research done on this. A broad asset allocation plan, however, is not going to create alpha. Remember: If you are a passive investor, you don't need to rebalance your portfolio every week; you should, however, consider rebalancing your portfolio as economic data changes.

For ways to execute these sectors via sector ETF's, visit the

Twitter: @TheChartLab

No positions in stocks mentioned.
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