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.
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.
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.