The equity market as represented by the S&P 500 is stuck in a trading range between an upper limit at 2090 and a lower limit of 1960 in my opinion.
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Despite being near all time highs, the underlying behavior of the index is acting bearish in response to the crash in oil and the weakness of foreign markets, especially Europe.
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That trends is occurring even as interest rates of the 10 year notes fall due to deflation fears and a flight to safety by foreign investors.
We know a few things from January’s action.
1) The strong U.S. Dollar is affecting large U.S. companies who earn income abroad. For the most part, the risk of holding these stocks outweighs the reward.
Until we get passed this earnings season and the market adjusts for the strength of the dollar, the market will be choppy in my opinion.
2) The market is volatile because the Fed isn’t aggressively stimulating the economy and financial markets through its bond purchasing. Yet the risk of true deflation, being led by oil, is on every investor’s mind.
As a result of the two fundamental reasons above we should expect more choppy action while we are at best stuck in the range bound environment.
The Everyday Portfolio is designed to avoid volatility. When equity markets gyrate, I tend to shift the portfolio holdings toward less volatile assets.
As such, in the Feb, 2015 rebalance, the Everyday Portfolio will hold a larger share of 7-10 years US Treasuries (IEF) then it has ever held and will be 100% out of equity positions.
In addition, the portfolio is reducing the exposure to long term treasuries (TLT) as the volatility of the moves in the Treasury is also increasing.
Finally, gold has finally started to build from a intermediate term bottom.
So the portfolio is taking a small starter position in the SPDR Gold Shares (GLD) ETF.
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