Bonds Can Help Stock Investors Monitor Correction Risk - Seeking Alpha

8/11/2019 Bonds Can Help Stock Investors Monitor Correction Risk - Seeking Alpha

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Disclosure: I am long SPY, VTI, QQQ, XLF, IJR, FEZ, VT. (More...)

Outlook For Earnings Sparking Concern

Earnings season always causes some hesitation in the bull's camp. As more and more

releases hit the wire, the question is will the concerns be justified? From USA Today:

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Bonds Can Help Stock Investors Monitor

Correction Risk

Jan. 14, 2014 9:02 AM ET | by: Chris Ciovacco 5 comments | Includes: AGG, FEZ, IJR , QQQ, SPY, VT,

VTI, XLE, XLF

s Can Help Stock Investors Monitor Correction Risk - Seeking Alpha http://seekingalpha.com/article/1944101-bonds-can-help-stock-in

1/15/2014



Exercise apparel retailer Lululemon Athletica and fashion chain Express were

the latest retailers to cut fourth-quarter earnings outlooks Monday after slow

January sales. Lululemon was on track with its sales and earnings guidance

through December, chief financial officer John Currie said. But the retailer

has seen sales trends so far this month "decelerate meaningfully," Currie said.

Economic Fear Tends To Be Deflationary

Stock market corrections tend to be induced by concerns about the economy and corporate earnings. If theeconomy were to hit a soft patch, bonds become more attractive as a safe haven alternative to stocks. If you

follow the stock market closely, you remember the ugly waterfall decline that took place in August 2011. The

ratio of bonds (AGG) relative to stocks (SPY) rises when investor demand for defensive bonds is increasing

relative to stocks. The ratio was rising well before the real problems hit the stock market in August 2011.

Bonds Were A Tell In 2007

As we all know, 2008 was an ugly year for the global economy and stock market. The bond-to-stock ratio was

rising in 2007 telling stock investors to pay closer attention.


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Bonds Can Help In 2014

The demand for bonds has picked up in early 2014. The odds of a more meaningful pullback in stocks will

increase if the bond-to-stock ratio can clear the blue trendline and hold the breakout into Friday's close.

Equities Still Experiencing A Taper Drag

The stock market will be much more apt to take tapering in stride if earnings can continue to improve.

However, tapering and disappointing earnings reports could spell trouble for stocks. From Bloomberg:

Stocks extended declines Monday after Federal Reserve Bank of Atlanta President Dennis

Lockhart said the U.S. economy is on "solid footing" and he would support continued cuts to stimulus. "It sounds as if the Fed is staying on its course of tapering," John Carey, a fund

manager at Boston-based Pioneer Investment Management Inc., said in a telephone interview.

His firm manages about $220 billion worldwide. "Whatever mixed signals could have come

from the jobs numbers, they're looking at the overall picture."

Investment Implications - Incremental Risk Reduction

Our market model makes allocation changes based on observable evidence and hard data; the concepts are

described in this "preparing for the next inevitable correction" video. Monday's 1.26% drop in the S&P 500

was accompanied by some concerning deterioration in the market's risk-reward profile. Consequently, we

took an incremental step to reduce equity exposure by selling our stake in energy stocks (XLE). The modelalways steps out of the weakest position in the portfolio first. Incremental risk reduction admits "we could be

wrong here", meaning if buyers step in at the trendline below, we still have exposure to stocks, just not as

much as we had last Friday.


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As outlined in detail in this week's video, the bigger picture from a risk-reward perspective remained positive

prior to Monday's sharp selloff in equities. Risk reduction does not mean bearish; it means less bullish.

Consequently, we continue to maintain positions in U.S. stocks (VTI), financials (XLF), technology (QQQ),

small caps (IJR ), Europe (FEZ), and global stocks (VT).

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Will 2014 Bring Calmer Economic Waters For Markets? Mon, Jan 13

Is It Time To Sell Stocks And Buy Bonds? Fri, Jan 10

2014: Leverage The Power Of Now In Investing Thu, Jan 9What Is Relative Demand Telling Us About Stocks And The Economy? Wed, Jan 8

Comments (5)

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Mr. Bear Comments (288)

Good to know, thanks.

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14 Jan, 09:11 AMReplyLike0

alan ljl Comments (137)

The equity market price increase of approx. 25 to 30% in 2013 while the earnings aggregate increase of

5 to 6% signals that the market rise was due to "multiple expansions" fueled by the 85 billion a monthFed injection.

I like the author's well rounded ETF selections (maybe add a couple) and feel for the equity side of

your portfolio it doesn't get much better than that.

My only thought is the market run is now in overbought territory and a correction will bring even more

investors in, in due time.


AE_Savant Comments (9)

I appreciate your study of the market Chris and am a devoted reader of your articles.

Thanks for making technical data more understandable to the small investor.


Danny64 Comments (10)

So, Ciovacco Capital Management invests solely in selected ETFs? No individual stocks or mutualfunds? I take it bond ETFs (and commodity related) when better technical pictures present themselves?

I invest heavily in ETFs also with a smaller basket of stocks and some mutual funds. I often wonder if I

hold too many securities and should scale back on the quantity and concentrate on mainly ETFs? My

core holdings include VTI, IJR, VEA, and VEU. Have some sector ETFs. Invest no more than 5% in

any one stock (a rule of mine). Have, I feel, a bit too many mutual funds - all of which I only have

smaller investment amounts in.

I learn a lot reading Chris Ciovacco articles! Thank you for taking the time for this!


Jeffry Chmielewski Comments (485)

Stocks were super-cheap on a historical basis last December/January based on the spread between

earnings yield and the ten-year. Now they're not.

As a result those who did the bond to stock reallocation trade (the great rotation) at the end of last year

are now over exposed to stocks that aren't nearly as cheap as they were. Expect some weakness as the

un-rotation starts.


1/15/2014





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