Manage Your Portfolio Risk

The broad market action last week defined the worries in more ways than a two percent loss in the broad indexes. The uncertainty is turning to fear, which in turn is pushing money to the sidelines or safer havens. Treasury bonds rose 2.8 percent on the concerns over the “fiscal cliff”. Scanning the headlines over the weekend it was the topic of choice in the financial markets. Investors are fixated on the topic and the ramifications to the markets overall if the political powers don’t find some resolution or compromise politically. The one thing for certain is it can’t be business as usual in Washington. There has to be compromise and a workable solution if the markets are to hold or find support short term.

The first step for you and I in dealing with the uncertainty is to define the risk exposure we have in our portfolio. Risk/reward is not something you do only at the time of purchase, but it is necessary to maintain clarity daily relative to our money. The markets are down just over 6 percent from the highs in September. That is not officially a correction, but the indexes are in position to move into correction territory. The sellers are definitely in control of the trend short term and sentiment is in their favor as well. Thus, risk is elevated and we should have already taken the necessary precautions to protect short term positions from uncertain risk. For our models stops have been hit, weaker positions sold and cash at elevated levels are the end results of last weeks move.

The current market environment for stocks is sell first ask questions later. The S&P 500 Index next keysupport level is the 1358 level despite closing at the 200 day moving average on Friday. Thus, our downside risk is 21 points or 1.5 percent and we will watch to see how this week plays against those levels.

There is plenty of conversation about the index being ‘oversold’ technically. While the data does point in that direction the surrounding events will matter more than the technical data at this point. The markets are in need of some emotional relief if we are going to rally off support. Progress in Washington is first and most important, but we also have to watch Europe as the Greece issues move to the front page again. Bottom line, markets can remain oversold for extended periods of time if the events or emotions causing the push lower are not resolved or dealt with. Protect the downside risk, don’t assume anything.

As we stated above the short term trend is negative and the leadership on the downside remains the technology sector. Missed earnings have been the driving factor of late in the sector along with a lack of clarity going forward for growth. I was reviewing the earnings data overall for the broad market and they have actually been surprisingly good. 61.3 percent of companies have beaten estimates. That is well ahead of year-over-year comparisons. The fact that the earnings reports have been better than originally expected is a plus if we can remove the current fiscal budgeting issues from the picture. However, that is an mighty big IF!

Bottom line is this is a new week, the president has invited leaders from the Congress and Senate to discuss a resolution to the current budget dilemma. That meeting isn’t scheduled to take place until Friday however, and that leaves the whole week for more speculation and fear mongering. We have posted the updated Watch List for the week on the website models and updated the research page. The bias remains to the downside, but we have to manage what the market gives not our opinions. Stay focused and disciplined as we move forward.