Sectors of the Month – December

Going into December, we recognize that the current state of the market is one of the more difficult ones we’ve seen in a while for managing risk.  Some areas of the economy continue to perform well, but enough macroeconomic data has been soft and the potential for changes in fed policy have the potential to cause a lot of downside risk during a time of year when the stock market tends to perform well.  So, we are in the market but with a cautious eye to exit quickly if price deteriorates.

The three key sectors we’re focusing on this month are Technology, Industrials, and Insurance.

Technology (XLK)

This is the area that looks the strongest to us right now.  Whether it’s Internet, Semiconductors, Software, or Hardware – every area of the Technology space has been among the best performers over the last 3 months.  We’re investing in XLK, which is a broad representation of the Technology sector.  Technology has become so integral to our everyday lives and each year contributes to so much of the growth of our economy, we believe these are the companies people will more likely want to own regardless of the state of the economy.

Industrials (XLI)

Many of the larger holdings in the Industrials sector are in Manufacturing, Defense/Areospace, and Transportation.  In particular, we think that conditions could favor the Defense and Transportation elements of this sector.  The strong dollar and weak oil prices tend to bolster airlines because the strong dollar makes it more affordable for American to travel internationally and the low fuel costs helps improve the profit margins of the airlines.  The increasing conflict in the Middle East and other parts of the world makes it likely […]

Last month our strategies took defensive position, so much so that we had net negative exposure to the stock market.  So far this has paid off as we have profited from the market’s drop.  The decision to do this was based on broad macroeconomic risks picked up by our models, and these risks are still the dominating force that is driving our positions going into October.  These macro conditions have not improved, so for the second month in a row we will continue to be defensive in our positions.  Our largest position is and will continue to be an S&P Inverse ETF (SH), Bonds, and Cash.

However, we plan to add two new holdings next week to begin dipping our toes back into equity exposure.  These new positions are part of our Calendar system, which is just one piece of our overall strategy for wealth management.  Combined, the new positions will represent less than 15% of our portfolio.  The result will be that our net exposure to equities will be breakeven (evenly hedged) to slightly negative.

The first of these new positions is going to be an Alerian MLP fund (AMJ).  MLP stocks are typically high dividend payers with ties to Energy, Infrastructure, or other Basic Materials.  This ETF has fallen nearly 50% since its peak just over one year ago (See below).  Because of this substantial fall, the dividend potential is all the more magnified.  This particular ETF has a current dividend yield of over 7%, and there are plenty of individual MLPs that are in the 10-15% range on dividend yield.   In addition to the dividend, we believe there is plenty of potential for capital gains over the next 6 months because the price is […]

In the Auxan Capital style of wealth management, we have many strategies, one of which is a Sector Rotation system. Our approach is to purchase three sectors or countries each month out of a basket of 40. The sectors we purchase are determined by a series of four technical analysis indicators.  As I get the signal, though, I can’t help but consider what fundamental or economic scenario might be setting them up for success.  For the month of September, our Sector Rotation system is moving into defensive mode. It is invested 50% in the ProShares Short S&P 500 inverse fund (SH) and 50% in cash.  If you prefer not to use inverse funds, consider buying treasury bonds as a hedge instead.

There are times when a 10% pullback looks like a buying opportunity, and there are times when it looks like the beginning of a new bear market.  We think this pullback in recent weeks looks more like the latter.  Here are a few reasons:

1. In July the S&P quietly broth through a long term trendline established since the 2009 bottom.

2. The S&P broke through its trending channel and has pulled back to test the resistance.  It has been met with heavy selling every time it peeks into the 1980-2000 range.

3. On Aug 21st the S&P broke through its 350 day moving average, which has been an excellent litmus-test as to whether the market is in a bull market or bear market.  Now that it is below this line, odds are much higher that we are in the early stages of a bear market.

4. On Aug 20th, the S&P completed a Head and Shoulders pattern that had been developing over a 6 month period.  This pattern commonly occurs at key […]