It would be easy to blame the S&P 500’s 50 point intra-day pullback from a September peak on quarterly corporate numbers alone. After all, roughly one-quarter of companies have reported and a mere 60% surpassed earnings expectations — a “beat rate” that is lower than at any other point since the bull market began in early 2009. Even more disconcerting? Only 40%¬†of firms have exceeded revenue targets, demonstrating that the slowdown in sales is widespread.
At the same time, the likelihood of unimpressive quarterly results had been discussed by analysts and media pundits at great length. Are we now resorting to the easiest target to explain profit taking and risk avoidance?
There are equally compelling arguments to be made about the nature of risk-taking itself. Specifically, near-term market direction may be overwhelmed by a wider array of uncertainties than had previously existed.
For example, near-term markets had previously “priced in” little change in the White House with an Obama victory and little change in Congress with the House remaining in Republican hands. While some might argue that the race was always going to be close, it was Romney’s October surprise in the debates that has revived talk about “hanging chads,” “voter fraud,” and a “Year 2000 scenario” in November.
Why would an uncertain election outcome be particularly devastating in 2012? Without a clear winner, resolution on the fiscal cliff issues might not be attainable at all; Congress wouldn’t be able to fully negotiate with the executive branch.
Indeed, there are few uncertainties that have as much crash-provoking power as paralysis in the U.S. government. It happened in August of 2011 over the debt ceiling… it can happen again over a much longer laundry list of unresolved fiscal decisions.
Keep in mind, in the summertime, we witnessed markets occasionally pull back. Yet they consistently rebounded, logging a bullish pattern of “higher lows.”
Since the mid-September pinnacle, however, the pattern has changed. The S&P 500 is now hitting “lower intra-day lows,” while struggling to find enough support at the 50-day moving average.
In spite of an increasing amount of uncertainty, the intelligent course is to diversify in the middle of the risk spectrum. Here is where you will find an income stream in low volatility, high dividend producers. You’ll also find an array of genuine income alternatives to treasuries, from mortgage-backed bonds to emerging market corporates to non-financial preferreds to higher income yielding partnerships.
Stop-limit loss orders and “stop-gains” should be used for protecting current values on your more aggressive holdings. Meanwhile, use the sell-offs to incrementally acquire several middle-of-the-risk-spectrum ETFs. They have held up far better than the broader S&P 500 since the September 14 peak.
|Low Volatility, High Income, Middle-Of-The-Spectrum ETFs||¬†|
|PowerShares Emerging Market Sovereign (PCY)||¬†||2.6%|
|Vanguard Intermediate Corporate (VCIT)||¬†||¬†||1.8%|
|First Trust Dividend Leaders (FDL)||¬†||¬†||1.8%|
|JP Morgan Alerian MLP (AMJ)||¬†||¬†||¬†||0.9%|
|SPDR High Yield Corporate (JNK)||¬†||¬†||¬†||0.0%|
|Market Vectors Preferred Excl Financials (PFXF)||¬†||-0.1%|
|iShares Mortgage Backed Bond ETF (MBB)||¬†||¬†||-0.3%|
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