Financial Professionals

Market Insights

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3 Speeds

02/24/2010

Back in December, I wrote about the correlation between a "sideways" market and the temptation to alter portfolio strategies. The 2004 and 1994 markets provide templates.

SPX 2004


Source: Bloomberg

SPX 1994


Source: Bloomberg

Clearly, the evidence of 2010-to-date suggests that I am spot on - this is a very difficult market with tremendous uncertainty and conflicting fundamentals. I find myself turning toward the temptation to change course, from time to time.

SPX 2010


Source: Bloomberg

So, I have come up with a strategy that is a pure risk management play. Rather than crashing the vehicle in this long twelve month race, I prefer to stay on the track and just adjust my speeds. Three speeds are all I need. On Fast Money I discuss them frequently - underweight, market weight, and overweight.

I remain convinced that the "deep dive" will not present itself in 2010. Therefore, I don't believe in the "bearish" portfolio strategy. I do acknowledge that this is a year for the active manager,not the passive indexer. That leaves me changing speeds from time to time in my core holdings of corporate bonds, information technology, natural resources, and energy. This week, I changed speeds from "overweight," as I advocated immediately after the Carry Trade unwind to "market weight" and, in some instances, "underweight." My lone remaining "overweight" is in corporate bonds where I believe more spread tightening will occur over the next few months.

Moody's Corporate Bond Indices BAA


Source: Bloomberg

Unfortunately, we are entering the "Baseball Season of Frustration." Earnings Exuberance Exhaustion was very evident in the most recent quarterly earnings. Top line sales beats could not translate into further stock price appreciation as the exuberance has exhausted. Policy makers continue to spend too much time focusing on the upcoming November election and continually thwart any upside momentum with boundless uncertainty. As always, I will continue to highlight the positive, for that is always an investor's most rewarding path. But the time is upon us to navigate through the uncertainty; adjust your speed accordingly.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.