Wednesday, March 08, 2006

Switching to a more defensive stance

A $10k order of BEARX, a bear fund, was placed yesterday and came through today. As this action indicates, I’m taking a more defensive stance regarding the general stock market. The slowing housing market weighs on my mind more than anything, as are the following charts. If $BKX breaks, watch out below! It seems that everyone is expecting a boost to the market after the Fed halts rising rates. This may very well be the contrarian play of this year. I earnestly recommend reading this piece from MarketThoughts.

The down turn in the precious metals sector is crystal clear now, and my “selling into strength along the way” approach has proved prescient despite wrongly calling for one more leg up. Leaving something on the table for the next guy has had its own rewards. If past cycles offer any guidance, the next wave up will start in 6-7 months, with good buying opportunities in a couple of months’ time. Since all commodity sectors are likewise embroiled in their own corrective phases I see few transactions for a while until a bottom has been reached.

My purchase of EEM for the asset allocation accounts has proved untimely. However, the essence of asset allocation precludes timing entry points. Such is the discipline. On the other hand, I’m free to make hedging bets in my active managed accounts.

The only position requiring closer attention right now is FXI (purchased here and here). It contains many energy sector names which is part of the reason for its decline. I’m more concerned with the Shanghai composite ($SSEC) that has met resistance at the 1300 level. The gap created by the Chinese New Year holidays has been filled and I will seriously consider selling if it drops below the 50 dma of 1230. A break there would have grave implications for the global market.

Portfolio reshuffle

As mentioned earlier, I like to keep my actively managed and asset allocated accounts roughly equal. Since the end of last month, some funds were deposited to the AA accounts with which the purchase of EEM was made. One of my IRAs that contained PCRDX was reclassified to the AA section. My wife’s 2005 IRA will also go there. In general, I prefer realigning my allocation by directing new contributions to reduce expenses. I’ll do a more comprehensive portfolio review at the end of this month.