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Brexit Investment Update

Common stocks are under pressure today due to the Brexit vote to leave the European Union.

spx 2016-06-24Double click on any image for a full sized view

You saw this chart a couple of days ago when I was showing you the 4% sized trading range of the S&P 500 Index over the past 18 months.  Today, I am showing it to you again with the impact of today’s post-Brexit sell-off.

You can see that the index has move down toward the lower boundary of the range (the red bar on the far right of the chart), but that it is still well inside the two blue bars.

There is no reason to get overly aggressive based upon today’s move, but I have made a couple of trades in client accounts that would be classified as opportunistic:

1.  A couple of months ago, I told you that I was adding the Vanguard Long Bond ETF to client accounts as insurance against some unplanned for event.  When the market is near a top, any sort of negative surprise will send the market down and long bonds up.  Today, I sold it for a total return of just under 4% over the past 10 weeks.  This investment performed exactly as expected and gave us a premium performance over the stock market which is up 0.3% year-to-date.  Since this was added as insurance, today was the perfect day to cash it in.  We still have an allocation to intermediate term bonds, including treasury, corporate and mortgage, so there is still insurance in place – but those are more dividend plays until the market corrects more and we have additional need for cash to pick up targeted purchases at better prices.

2.  With the proceeds of the sale above, I added starter positions in two adated beta ETF’s (index ETF’s that mimic a portion of the S&P 500 that I view as being in the sweet spot investment-wise at the moment) just to take advantage of today’s sell-off.  I added the S&P 500 High Quality ETF and the Deep Value ETF to get some additional exposure to the stock market but with holdings that should outperform the broader market during the likely turbulent period ahead.  Both funds feature companies with solid balance sheets, strong dividends, and cash flow.

3.  And with the balance of the sale proceeds I added a short-term position in the ETF that mirrors the London stock market.  It was down more than 10% and we will either hold it for a short-term gain or hold it for an intermediate period depending upon the post-Brexit prospects for the British economy and its corporations.  The British Pound is at its lowest level in 30 years, so the companies headquartered in England should get a significant upward revision in earnings since they will be able to sell their exports significantly cheaper to buyers who have an immediately stronger currency (making the British goods cheaper by comparison).  Plus our buying the ETF at a 10% discount should make for a decent investment.

I have some other trades to make, but will probably sit tight and see what the market tells us before adding additional equity exposure. Over the weekend there could be scare stories hitting the news that will send the wolves to the gate and give us a lower purchase level next week.