Risk on, risk off

xlp

xlu

The 2 charts above are those of the consumer staples sector and the utilities sector. These are just 2 of the sectors that are traditionally considered “defensive” on the stock market. Bonds are also considered a defensive asset class. Interestingly, as the S&P500 broad market index reaches new highs, we are witnessing rotation out of the more “risk on” investment sectors and asset classes and into these “risk off” defensive sectors. Disclosure: we have a position in the XLP consumer staples sector ETF illustrated above.

The charts below are those of the biotech sector, and the Nasdaq composite. Note how these “risk on”  sectors are falling pretty much in sync with the rapid rise in the defensive sectors. Very interesting, indeed.

BTK

nasdaq

This may suggest that my prognosis of a market correction in Q2 or Q3 is not too far off of being accurate. The markets are suggesting, through money flow into these lower risk sectors, that now is the time to become defensive.

In light of the growing potential for an interim correction within the bull market, we at ValueTrend have raised about 22% cash in our equity platform recently. We anticipate reducing this exposure further into May.

Investing in a rotational market

It is my strong belief that investors who have been enjoying the index-driven market returns over the past few years may not do so well as markets continue to rotate through sectors and asset classes. It is my opinion that the “easy money” has been made. You must be prepared to be much more proactive in rotating through stocks and sectors going forward. If you feel that you do not possess the expertise to follow such a strategy, perhaps you would like to explore having your portfolio managed through our services at ValueTrend. My associate Craig Aucoin and I would be happy to review your current portfolio. We’ll offer suggestions on improving your financial situation, and we’ll explain how we can manage your money as prudently as we do our existing ValueTrend clients. We manage family accounts that include RRSP’s, non-registered investments – as well as the usual assortment of TFSA’s and RESP’s. Our total family (husband/wife) asset minimum is $500,000. For more information, email us at [email protected] or [email protected], or call us toll free at 1-888-721-8736.

4 Comments

  • Hi Keith,
    I enjoy your appearances on BNN. I was wondering about Microsoft. There are about 30% of computers that are still on the Windows XP operating system. Can you surmise the possible impact of this on the stock might be? They are trying to make a successful transition to the device market. They are trying to acquire Nokia. As you know the stock had a nice breakout after a long consolidation. I bought the stock around $38. Would you continue to hold it and would you put in any downside protection? Thanks.

    Reply
    • Hi John
      You share a name with a Sprott Portfolio Manager. But who am I to talk about sharing names, eh?
      I will disclose that we hold a position in MSFT-
      Please understand that we buy some positions as “shorter termed” plays–usually ETF’s, and we buy some positions as “longer termed” plays. MSFT is such a play. For the reasons that you mention, we feel MSFT has a 3-5 year potential to double. My fundamental counterpart here at ValueTrend, Craig Aucoin, was in my office when I was reading your question–and he reiterated his confidence in the story. However, there will be counter-trend movements along the way. I feel there is little risk of a significant move below $36 breakout point (now support) no matter what the markets do. So, I’m prepared to stay with the story despite obvious potential (as with any stock) of volatility.
      BTW–I’m on BNN next Tuesday 6:00pm again. Feel free to email the show ahead of time or call in with questions!

      Reply
  • Hi Keith,

    From your BNN appearances, I know you like some infrastructure stocks, but from a seasonal rotation standpoint, is the infrastructure sector similar to the seasonality of utilities and consumer staples?

    Reply
    • Eric–Infrastructure is somewhat of a broad category. Its got rail, power, pipelines (some will call pipelines utilities), and even some resource type investments in it–depending on who you talk to! So a broader based infrastructure play like BIP, which I regularly endorse on BNN, is a little harder to peg from a seasonal perspective–BIP is power, rail, toll roads, lots of stuff!
      Bottom line–you cant argue with BIP’s trend and dividend if you buy at a good price (on the trendline)

      Reply

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