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January 2012 Portfolio Recap

So far, 2012 is off to a strong start. Through February 2, 2012 the S&P 500 (NYSEARCA:SPY) is up over 5.3%, handily beating 2011's full-year performance. Impressively, the Nasdaq is up over 9.7% year-to-date. So, with January's impressive performance, the question remains: Where to from here?

Turning to 2011, we saw a similar 4% rise in the S&P 500 through Feb 3rd. An impressive 28% run-up between late August 2010 and mid February 2011 was halted on February 18, 2011. Five months of sideways action was followed by a stock market collapse in the Summer of 2011. Despite a 20.6% run in the S&P since October 1, 2011, we have yet to reclaim the highs of February 2011.

Fortunately, extremely low valuations in many blue-chips combined with necessary December 2011 tax-loss reallocations within the portfolio have yielded superb results. Through February 2, 2011 our portfolio has produced a 10.5% return, doubling the performance of the S&P. That performance is made even more impressive considering nearly 20% of the fund is invested in bond ETFs.

Thus far, the strategic shift discussed in my December 2011 Instablog post has paid off handily:

"As we have approached year-end, I have been aggressively selling losers to offset trading gains recorded earlier in the year. In addition, to achieve greater tax efficiency going forward, I have repositioned the portfolio for lower yield and greater dividend growth. I will be less active in capturing dividends in 2012 and more active adding to core positions on weakness. Currently the portfolio yields 6.84%, down from 8%+ through most of the year."

To help protect January's impressive portfolio gains, I have been actively selling long-dated out-of-the-money covered calls. Currently 39% of the portfolio has been hedged with covered calls, and the overall portfolio is hedged against a 3.6% market decline. I will continue hedging activities as the market rises and individual stocks in the portfolio demonstrate significant outperformance.

While seasonal bullishness is likely to continue in the short-term, I see significant headwinds as we approach the 1,350 level on the S&P. I expect a prolonged period of consolidation, and a possible 5% pull-back once the 1,350 area is reached. Longer-term, I maintain my 1,440 target price in the S&P.

Overall Sentiment: Neutral.
Portfolio Yield: 4.93%
Projection: Seasonal bullishness. S&P resistance at 1,350.

Top 5 Positions:

  1. iShares High Yield Corporate Bond (NYSEARCA:HYG)- 15.6%
  2. Apple (NASDAQ:AAPL)- 4.7%
  3. Microsoft (NASDAQ:MSFT)- 4.7%
  4. Teekay LNG Partners (NYSE:TGP)- 3.9%
  5. Omega Healthcare Investors (NYSE:OHI)- 3.3%

Disclosure: I am long HYG, AAPL, MSFT, TGP, OHI.