2013 has certainly been an interesting year so far. We have seen precious metals prices deflate, interest rates rise, stocks continue to march higher, and currencies gyrate like a yo-yo. For short-term traders this kind of volatility is exactly what they love because it allows them to jump in and out of the market to make very swift profits. However, for intermediate or long-term investors it can be a frustrating time. Especially when Wall Street darlings such as Apple Inc (NASDAQ:AAPL), SPDR Gold Shares (NYSEARCA:GLD), and the PIMCO Total Return ETF (NYSEARCA:BOND) have fallen out of favor. New market leaders have taken their place with regional banks, consumer discretionary, and small-cap stocks making new highs behind solid upward momentum.
The start of earnings season is now upon us and Alcoa Inc (NYSE:AA) kicked off the quarter with better than expected results. Whether or not that will set the tone for the rest of the market has yet to be seen. The areas that will likely be in stark focus are financial stocks, mortgage REITs and utilities, which have heavy ties to interest rates. Investors will be seeking additional guidance from these companies on how they will extend their gains with higher rates impacting their revenue and business models.
In my opinion this may be one of the more important earnings seasons in recent memory because it will be a key determining factor on whether or not stocks will again resume their climb. One thing is for certain, there will likely be a great deal of continued volatility among stocks, bonds and gold in the near future as money repositions for the second half of the year. The most widely publicized asset flows have been in the fixed-income spectrum as TrimTabs reported an estimated $80 billion was yanked from bond ETFs and mutual funds in the month of June alone.
I am still not convinced that all of the money flowing out of bonds will immediately be put to work in stocks as many experts have speculated. In fact I believe that this money will be put to cash or short-duration bond funds for the time being until such time as the dust settles and a clearer picture emerges. I think that many investors, especially conservative income seekers, are hesitant to put money to work in stocks at these levels because the risk of a correction is quite high.
I am sure that many people are considering throwing in the towel on bonds and selling everything in the hope that they can put that money to work in dividend-paying equities. However, you may be in for a double whammy if we end up sustaining a swift correction this summer that compounds the losses you have already experienced.
Instead I would focus on making subtle adjustments to your fixed-income portfolio by using rallies to your advantage to sell underperforming positions. Once that cash is freed up you can use it to make opportunistic purchases when dividend-paying equities and high-yield securities are presenting better value. The key is to be nimble and make impactful changes while still retaining a balanced portfolio. If you don't have a strong conviction on where the market is going then cash is always a good place to hide out for a short period of time.
Whenever I am entering new positions I usually start with small allocations that I average into over time. I tend to favor sectors of the market that are above their long-term trend lines and are showing favorable momentum patterns. In addition, I overlay a core risk management approach to guard against the potential for a correction.
Right now my watch list includes several holdings that I want to purchase on a pullback such as the First Trust NASDAQ Technology Dividend ETF (NASDAQ:TDIV), the SPDR S&P Regional Banking ETF (NYSEARCA:KRE), and the iShares High Dividend ETF (NYSEARCA:HDV). As we navigate our way through the next several months I will continue to refine and adjust this list to take advantage of new opportunities as they present themselves.
Additional disclosure: David Fabian, Fabian Capital Management, and/or its clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.