2013 ended with enormous gains in the market with the Dow ending in it's largest advance since the '95 market and the S&P Closing at Record highs. The market stayed in confirmed uptrend the vast majority of the year, but it is very evidently hitting turbulence in 2014. Small cap US equity led the 2013 market, and continues to be the leading asset class, while precious metals retained it's unfavored status for the entirety of 2013. China and Brazil were the major market losers with loses ranging from seven to ten percent. As the new year starts, many investors are questioning where the market should head next. Many speculate that the extended market is due for regression to the mean, anywhere from a 7 to a 40 percent pullback. The question is what should investors do with their portfolios now in order to hedge against this potential market downturn?
In reality, no one can accurately predict the market; instead, wealth managers utilize key indices, indicators, and common sense to take their best portfolio strategy associated with their prediction. There are several clues that indicate 2014 may end for the worse.
Prior to January 29th the market was in uptrend under pressure; however it reversed into a correction later that day. Market performance in January tends to be incredibly indicative and correlated with the following year's performance. With the market down 6% already from year start, this downturn should immediately spark weariness of 2014's performance.
Another major warning sign is the OBOS or the percentage of the market that is extended into overbought or oversold territory. 2013 retained a high overbought status the majority of the year. When the OB% extends to a high, it is a warning sign; almost everyone who wants to invest has invested. The OB percentage reverse into OS territory mid January. This reversal on top of high market volume proves that institutional selling is occurring and investors are taking profit. This is yet another clear warning sign of market reversal.
What should investors do? If your portfolio contains high beta, growth, or high risk stocks, reduce positions in those equities immediately, because their volatility will result in greater losses than the market average. If you haven't already liquidated these stocks yet, I would suggest doing so until the market regains its strength. If you chose to not liquidate your stock portfolio completely, maintain ETF positions to hedge your risk. ETFs should be concentrated in favored sectors such as technology, internet, and leisure. Be careful to stay out of ETFS with high bullish percentages, especially if the sector has reversed into Os; the same remains true for general industries.
Bonds are an alternate option to the stock market; unlike stocks, they have gained momentum during this year. Municipal bonds, which provide a safer investment are an alternative as well - a main advantage being that they are tax free for your state of residence.
Defense is just as important as offense, if not more important.
Posted By: Cara Brokaw
Saturday, February 8th 2014 at 10:29PM
You can also
click
here to view all posts by this author...
