It has been a phenomenal year for stocks, and the market
continues to churn higher nearly every day. It seems as though the
market has a propensity to overcome nearly every crisis that the
media can throw at it while reliably grasping at new highs on a
regular basis. As a money manager, I am enthusiastic about the
outperformance of US stocks and relishing the consistent steady
returns. However, as a risk manager I am careful to not get overly
exuberant and remember that the rug may be swiftly pulled out from
under us when we least expect it.
The recent report that the
Vanguard Total Stock Market Fund
) has surpassed the
PIMCO Total Return Fund
) as the largest mutual fund in the world is a testament to the
increasing appetite for risk among retail investors. Bonds are now
looked at as an increasingly dangerous asset in the face of a
growing anxiety that the Federal Reserve will soon begin tapering
its asset-purchasing agenda. The threat of rising interest rates
has capped gains in bond funds this year and sent investors fleeing
to the relative "safety" of equities.
Just as bond funds became overly loved in the first half of this
year and interest rates fell to unprecedented lows, I fear that the
same scenario will eventually unfold for US stocks. There is some
level of credibility for the "Great Rotation" out of bonds and into
stocks as the Fed eases itself away from the table. However, if you
think that money coming out of bonds is going to create a
consistent bid in stocks for the foreseeable future, then you might
be in for a rough ride.
We are eventually going to hit a bumpy patch that will see US
stocks reverse their trend higher and send investors fleeing for
the safety of cash or fixed-income securities. This is simply a
function of the regular ebb and flow of the market that has created
wealth for generations. The key to prospering is preserving your
wealth when the tides change.
Right now we are seeing small rotations in index leadership which
may be a sign of institutional investors starting to jockey for
position before the end of the year. What I think we will see
through the remaining two months of 2013 is a push/pull between the
latecomers who are chasing performance and the early adopters who
are looking to lock in gains on their positions. Every portfolio
manager dreams of years when they can lock in 20%+ returns.
Whether we end up higher or lower from here is anyone's guess, but
the following are some observations that are worth noting:
iShares Russell 2000 ETF
(NYSEARCA:IWM) has been the clear leader all year but faltered
last week as the rest of the market remained relatively strong.
This will give some life to the bears as momentum shifts of this
nature can often be a warning sign of risk aversion.
SPDR S&P 500 ETF
) have continued to push to new highs and remain in healthy
uptrends. These power indices continue to churn out positive
gains on an almost daily basis to push their total return to 26%
and 28% respectively this year. My advice is to trail your stop
losses higher so that you can lock in gains if we get an
- Commodities have been horrendous this year and continue their
long-term descent. The broad-based
PowerShares DB Commodity Index Tracking Fund
(NYSEARCA:DBC) is near its 2013 lows and does not appear to be
showing signs of a turnaround just yet. I am avoiding this space
until we see a return of demand for soft commodities and precious
metals. I would rather wait for a new trend to develop than try
to catch a falling knife.
- Bonds have risen from the dead and appear to be catching a
bid. The consensus seems to be that the Fed's taper decision has
been put off until 2014 which has opened the door for asset flows
back into fixed income. High yield has been strong all year and
we are now seeing a rebound in core intermediate-term holdings
such as the
PIMCO Total Return Fund
(NYSEARCA:BOND) and the
iShares MBS ETF
(NYSEARCA:MBB). This could be a sign that investors are looking
to hedge their highly appreciated stock positions or taking
advantage of higher yields on these ETFs.
My advice on trading the remainder of the year is to continue to
ride the trend while it lasts with the commitment of trailing stop
losses to lock in gains. I am not actively adding new equity
holdings to my portfolio at this level, but I am continuing to note
changes in sector leadership and adjust my watch list accordingly
for the next buying opportunity. I will be using any weakness to
add to core holdings and rotate into areas of the market that I
feel have the best potential for growth in 2014.
I am using that same strategy with respect to income-producing
assets as well. High yield is rich right now, but there are still
other areas of the market that are offering value in actively
managed closed-end funds, preferred stocks, and even select real
No matter how you trade the final months of the year, be careful of
becoming entrenched in a single bias toward one asset class.
Broaden your horizons and look for value and opportunity wherever
it may be.
Read more from David Fabian, Managing Partner at FMD Capital
Four Must Watch Trends In Fixed-Income ETFs
How to Play Consumer Discretionary Stocks
The Best ETFs To Navigate Choppy Interest Rate