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 already so depressed.
AMJ Weekly Chart
The second new position will be the Consumer Discretionary sector (FXD). I admit, because macroeconomic risk is the primary story in the market right now, this sector could be completely overrun by these broad risks and perform very poorly.
The typical story, though, with this sector is that a large percentage of income occurs in the 4th Quarter leading very often to strong performance surrounding the holiday months. For instance, from early October 2014 through the end of February 2015, this sector gained over 17% verses only 8.8% for the S&P over the same time period (See below). Similar trends have occurred in prior years as well.
Also, it seems that the Christmas shopping season has been starting earlier and earlier every year. Most people aren’t quite thinking about shopping and the holidays yet, but they will be very soon, and as an investor, this timing is key because it is simply about thinking ahead and making moves ahead of the crowd.
Consumer Discretionary verses the S&P 500
I expect that we will maintain these two new positions for probably 5-6 months.
The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.