It was another rollercoaster week in the global equity markets but that has really been the trend so far in 2014, even though many of the US averages have made new all-time highs. The volatility is thought to be a friend of the trader, but I heard one commentator on national TV say that "he had been wrong for the last 60 points in the S&P."
Of course, no active trader would ever risk that large an amount on their view of the market's direction. It does illustrate that it hasn't been an easy year for many traders as those who have been shorting the market since early in the year had to be very nimble in order to profit. But what is the investor to do?
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This 30-minute percentage change chart tracks the S&P 500 futures and the 10-year T-note from Monday through Friday morning. The two-day uptrend in the S&P futures, line a, was broken on Wednesday at 2:00 pm Eastern time (see arrow). The futures were up around 1.8% and then quickly dropped to up just 0.75% early Thursday.
At the same time, yields were just as wild as they started to rise before the S&P futures broke support. The 10-year yield went from up 0.75% for the week to up over 4% in less than 24 hours. The actual yield jumped from 2.67% to 2.78%.
As I mentioned in Thursday's column, I thought that the decline, Wednesday, was a mis-interpretation of Yellen's comments and nothing had really changed for the stock market. Hopefully, investors ignored the market's reaction but it's events like this, as well as the sharp selloff in early February, that makes it imperative for investors to have a plan.
Depending on your age and your financial status, I think everyone should have a commitment to the stock market as long as the NYSE Advance/Decline stays positive and economic indicators like the LEI show no signs of a recession. For those who do not want to study the market, a passive approach that invests in low-cost index-tracking ETFs that follow US, as well as overseas stocks, would be the best bet. But what should the more active investor do?
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The % change in the various asset classes show quite a few wide swings already this year. Gold as represented by the SPDR Gold Trust (GLD) has been the clear winner, up about 9.3%, but down from the mid-March high of 12.7%. Bonds are next as the iShares 20+ Year Treasury Bond ETF (TLT) is up just over 5%.
As of early Friday, the Spyder Trust (SPY) is up 2.6% while the Vanguard European Stock Index (VGK) is trailing a bit, up 1.9%. The emerging markets, as represented by the Vanguard Emerging Markets Index (VWO) were unchanged for the year in late January, but by early February, were down 7.6% for the year. VWO has improved from its worst levels as it is currently down just 2% for 2014.
I still think the emerging markets may be the surprise in 2014 as the technical outlook has improved but a bottom has not yet been confirmed. The more active investor should consider investing in several index-tracking ETFs, but in volatile areas, like the emerging markets, the percentage commitment should be kept low. One should consider not only the large-cap S&P 500 but also the small-cap sectors like iShares S&P 600 Small-Cap (IJR), which I recommended last Wednesday.
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If you are willing to spend the time and do the work, I think you can become your own investment analyst. These more active investors should consider a core position in an S&P-500-tracking ETF and then allocate to other industry-specific ETFs. So far in 2014, the Select Sector SPDR Utilities (XLU) is up 8.8% for the year. Not too far behind is the Select Sector SPDR Health Care (XLV), which is up 7.8%.
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