Jeff Diercks'  Instablog

April proved a tricky month for the markets. In the beginning of the month it looked like we could see a long overdue, substantial correction. Instead, we side stepped lower that then rallied higher as if someone pressed a massive "Buy" button.

I had told our subscribers to expect such a possible retest of the highs and that is just what we got. What I did not expect is that we would find a way to put in new incremental highs.

Here is how the averages performed in April:

All three major indexes moved higher and surprisingly the NASDAQ led the way for the month outperforming the other indexes over the last few days of the month while playing catch up.

Where we go from here is really anybody's guess. I would normally say that we are entering a soft season of the year for equities (May - October). However, let's face facts, markets are no longer being driven by fundamentals but by Central Banks.

This was no more evident than in Europe in April as member nations continued to produce weak GDP numbers and forecast slowing growth, but European markets instead of correcting (as the charts and our trend models seemed to indicate) rallied to new highs on the ECB's perceived change of heart on austerity and the possibility of further easing in Euro land. It was this technical weakness followed by strong anticipatory price moves against our inverse/short position that was the primary reason our sample model portfolios and our EAFE Index signals underperformed.

Stock-Signal.com performance was generally strong for the month. The two exceptions being our EAFE models which, as explained earlier, hurt us in April. The other exception was our Long signal in the U.S. dollar, which took a break in April as equity markets rallied and the dollar resumed its negative correlation to such markets.

Our strongest Stock-Signal performances were in the DB Commodities Index and the London Gold Index. Our models had subscribers inverse (short) both indexes and we cleaned up as a result. On a technical basis both markets appear to have further downside after the current counter trend bounce in each is completed.

(click to enlarge)

(click to enlarge)

Our sample Equal Weighted portfolio returned a solid +.59% before commissions, fees or other trading costs.

Our sample Global Opportunities portfolio returned 1.88% before the same costs. Both portfolios were negatively impacted by our EAFE signals for the month, however, the Global Opportunities portfolio was able to overcome this loss with large gains in gold and commodities as mentioned previously.

Overall, we made money, which is always the goal! The S&P 500, however, has clearly been the winner and has left our sample portfolios in the dust for the year-to-date period. This kind of disparity between index performances rarely lasts forever and I would expect that our other index signals will pick up in the coming months. However, I would also like to state this is no normal market. In all my years of investing, I have never seen a market so tied to Central Bank intervention as now. It is like a bunch of junkies looking for a fix and the Central Bank is the glad supplier!

We broke to new multi-year highs on all the major indexes in April. I would have bet you "dollars to donuts" we would have seen a top at the end of April, but we did not. So now the million dollar question is where will stocks go from here. My guess is we continue to grind higher.

I watched Carter Worth on CNBC explain how he thought the divergence in sector investing between low volatility sectors and higher beta/volatility sectors would eventually lead to a nasty shakeout. He made the point (that we have seen in our managed accounts and are exploiting) that money has flowed to lower growth, low volatility sectors in excess. While at the same time higher growth sectors continue to struggle in terms of growth expectations and money flows.

Now Carter may be right, but it seems to me we are in a bubble environment and bubbles tend to go much farther than anyone would expect. Low volatility just seems to be the bubble de jour!

Speaking of bubbles…is gold the most recent bubble to pop? I have a good friend who keeps warning me about an impending short squeeze in gold and a new move to highs based on buying by the hard metal suppliers. However, when I look at the charts all I see is a counter trend bounce and the possibility for more weakness over the balance of the year. We will have to see who is right!

So bottom line: this is a very exciting market, but it is fraught with danger! Make sure you know where the exit signs are and that someone is paying attention because these upward bubbles could burst at any time. May I suggest to you a Free Trial to Stock-Signal.com. We will help you stay on track and out of trouble, especially if this raging bull turns to bear.

Disclosure: I am long EFA, SPY, QQQ, HYG, CMD, UUP, DGZ.

Recently we provided a post with a lesson about ABCs of portfolio exposure (see How Exposed Are You? A Brief Lesson In Exposure!).

In this post, we are going to take exposure to a whole new level. This week we will explain Beta Exposure.

Yes, that is right! Beta exposure.

I am sure you may have heard a smart sounding portfolio manager talk about his beta exposure on CNBC and wondered what the heck he was talking about? Well now you too can amaze your friends families and sound smarter than anyone should be by using this term too!

So let's start with the basics. What is Beta?

According to www.investopedia.com, beta is "a measure of volatility, or systematic risk, of a security of portfolio in comparison to the market as a whole." In English, it is how much a security moves in relation to its benchmark.

As an example, an ETF like the iShares Dow Jones Select Dividend Index (DVY) has a beta of .70 as compared to its benchmark, the S&P 500. This means when the S&P 500 moves up 1%, it is likely DVY has only moved up .70%. If the S&P 500 likewise falls 1%, it is probable that DVY will only fall .70%. So it is less volatile than the underlying index and has a lower beta.

Here is another example, the Materials Select Sector SPDR (XLB) has a beta of 1.2 as compared to its benchmark, the S&P 500. This means when the S&P 500 moves up 1%, it is likely XLB has moved up 1.2%. If the S&P 500 likewise falls 1%, it is probable that XLB will more than 1.2%. So it is more volatile than the underlying index and has a higher beta.

So what does this have to do with portfolio exposure?

Easy! Smart managers also look at their overall portfolio on a beta basis. In English this means they determine the weighted average beta for all their holdings relative to each holdings percentage of the total portfolio. The total of these betas is the portfolio beta.

When managers feel markets may turn choppy or decline, they attempt to reduce the beta of their holdings by selling high beta positions and buying lower beta positions. When managers feel markets want to head up, they tend to increase the beta of their holdings by purchasing higher beta positions.

In layman's terms, it is a way of keeping the same number of positions but either supercharging the ability of those positions to outperform or, in the case of lowered beta, reducing portfolio risk while still keeping the present exposure.

So just recently you heard me say that our equal weighted portfolio was now 50% exposed to the market (75% net long and 25% net short). I also told you that same exposure was just .06 on a beta basis.

So if the beta for the S&P 500 is 1.0? Am I leaning towards more aggressive beta exposure or less beta exposure?

If you said, less aggressive beta exposure, give yourself a pat on the back.

Disclosure: I am long SPY, EFZ, QQQ, HYG.

Exposure in investing is not the type of exposure that Lindsey Lohan, Paris Hilton or Kim Kardashian might seek out. Although to us in the investment field it is just as exciting or maybe more so than the everyday over-the-top antics of this group and others like them!

(click to enlarge)

My definition of market exposure in financial terms is the proportion of money invested and subject to market risk.

In general there are two basics types of exposure: Gross and Net.

Now here is where the confusion starts for many and it is what I hope to clear up today!

Gross exposure is defined as the total investment dollars invested as a percentage of your total portfolio in dollars. Yes, this could be total investment Yen invested as a percentage of total portfolio dollars in Yen? It can apply to any currency.

So let's do a few basic examples"

You have a portfolio valued at $100,000 (U.S.) and you invest $80,000 in 4 ETFs.

So $80,000 divided $100,000 equals 80%. So your market exposure is 80% gross long.

You again have a portfolio valued at $100,000 (U.S.) and you invest using margin in equities with value of $120,000 (U.S.).

So $120,000 divided $100,000 equals 120%. So your market exposure is 120% gross long in this case.

Now that is gross exposure. There is also net exposure.

My definition of net exposure is that it is gross long exposure minus gross short exposure.

So again here are few examples:

You have a portfolio that is valued at $100,000 (U.S.) and you invest 75% in a long portfolio of ETFs and you invest 25% in an inverse ETF.

So you have $75,000 gross long and $25,000 gross short, your net exposure is $50,000 or 50% ($50,000 / $100,000).

Your gross exposure is $100,000 or 100%.

Confused…let's try another one.

You have a portfolio that is valued at $100,000 (U.S.) and you invest 120% in a long portfolio of ETFs and you invest 30% in short portfolio of stocks.

So you have $120,000 gross long and $30,000 gross short, your net exposure is $90,000 or 90% ($90,000 / $100,000).

Your gross exposure is $150,000 or 150%.

So there you have it. The next time we tell you that our equal weight sample portfolio is 100% invested on a gross basis all the time, but is currently on 50% invested on a net basis. You will know exactly what we mean.

By the way, example 3 is our current exposure in the equal weight portfolio. As I write this markets are off big and I am thankful to only have net exposure of 50%, 37% on a beta basis (more on that later).