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2012 Year-To-Date


We have had a pretty good year so far in the stock market overall when you look at the YTD return of the S&P 500: up 11.83%. If you look at the bar chart above, you can see that financials, technology and consumer discretionary stocks are the big winners.


In looking at the major markets, you can see that the NASDAQ is the big winner with Emerging Markets following in a distant second place.

What’s changed from 2011? Investors have been underweight stocks compared to bonds and cash since the stock market crash of 2008. They have begun to feel its time to make a shift back to stocks from bonds and cash, given the following things: (1) corporate earnings have been strong the past couple of years; (2) the Federal Reserve has stated that it is going to keep interest rates low until 2014 at least; (3) US Unemployment has dropped to 8.2%; (4) the European Debt Crisis is out of the news (not necessarily solved but we aren’t seeing rioting in Greece everyday on the TV); and (5) its an election year and stocks tend to move higher in election years.

But is it time increase overall equity levels as many are doing today?


If you look at the graph above, you can see that we have been in a trading range since 2000, and that we are up significantly from the lows of 2009. We have ridden the market up and capitalized upon those gains, but if I were someone that has been underweight stocks during this time period, I would not be moving money into the market now.

We are currently positioned with about 5% cash and 5% in our contra mutual fund position in the stock portion of client portfolios. A couple weeks ago, we so half of our 10% allocation to the equity index to raise cash and added to our contra position to bring it up to 5%. These two actions were designed to protect against a market pullback that we were long-overdue to experience. Since the October 2011 lows, the market has virtually moved straight up – that cannot happen forever – so we made these moves as part of an overall risk management strategy.

But the real question is whether we will experience the same type of market pullback we saw last year from May to October. Anything is possible, so we want to have some cash and contra positions in portfolios to use to reinvest in favored stock positions if they pull back.


I often write on the blog to invest what you see, not what you believe. In looking at the year-to-date chart above, you can see that the market has dipped below the 20 day moving average and is converging on the 50 day moving average. If we dip below the 50 day line, my plan is to book some profits in some of our higher beta holdings (more volatile) and wait for the market to stabilize. When it does, we will add that cash to holdings that have underperformed (assuming the fundamentals are still sound) and manage the pull back accordingly.

In the meantime, the uptrend is still positive, and in spite of it losing steam, there is no reason to over-react.