If not a dime, how about a quarter? In fact, make it the quarter just ended. Year to date, the S&P 500, the Dow Jones Industrials, Transports, and Utilities all gave up multiple percentage points. Only the Nasdaq Composite closed relatively unscathed over the three-month period, but badly injured since the mid-point of March.
The skies were blue. The marketplace was humming, and seemed to sail through most of January.... until it sailed right off of a cliff. That was when volatility returned to financial markets, at first due to excessive selling of volatility itself through the use of levered and inverse exchange traded products.
That specific item faded over several weeks as less capital had been committed in such fashion, but a wound had been inflicted. The public had found out that they were indeed more vulnerable than they had previously thought. Trade war jitters, inconsistent macro, instability within the president's inner circle, short-term liquidity concerns, increased federal deficit spending, and a hawkish central bank would have been enough, but there was more. There would be a scandal involving how personal information was handled at social media giant Facebook (FB) . This would prompt larger interest in regulating internet firms in general. Then there would be tragically fatal auto accidents involving Uber, and Tesla (TSLA) . This would prompt high-end chip maker Nvidia (NVDA) to suspend testing autonomous vehicles on public roads.
What all of these news items did together was cause rotation out of the tech space that was in fact exacerbated by the increase seen in a passive style of investment over the years. Where did the money go? Besides cash? There was some safe haven buying. A bid showed up under the long end of the yield curve that made life uncomfortable for the banks as said curve further flattened. Traders did move some money into the Staples, but let's not get carried away, Staples, as a group are off 8% year to date. Defense stocks benefited to some degree. Lockheed Martin (LMT) , Raytheon (RTN) , General Dynamics (GD) , and Northrop Grumman (NOC) have all out-performed broader equity markets year to date as well as on shorter time lines.
How I Am Tacking This?
This is not just a blip in time to be laughed about down the road.
Earnings season is coming. That will help... as long as earnings are good. Even if they are good, a new normal is being created for volatility at the point of sale. It is important to, and I like to think that I have taken advantage of the peaks and valleys provided by these markets, trade around some core positions, and to re-organize my book as best as I could. I have increased, or initiated equity exposure in recent days to Salesforce (CRM) , Adobe (ADBE) , Exxon Mobil (XOM) , Lockheed Martin (LMT) , McDonald's (MCD) , Micron (MU) , Disney (DIS) , Twitter (TWTR) , Intel (INTC) , Kratos Defense (KTOS) , General Dynamics (GD) , and of course.... drum roll please...General Electric (GE) . In many cases, particularly for GE, MCD, INTC, and DIS, I have reduced the price of entry by raising revenue through the sale of both put and call options.
I have also raised cash where I thought appropriate. I have exited Alphabet (GOOGL) , and International Business Machines (IBM) completely while further reducing exposure to Apache (APA) , Amazon (AMZN) , Lam Research (LRCX) , and Oracle (ORCL) .
Bottom line here is that in volatile markets, you need to button up. You might ask how that could be if I spread the dough around so much. That's the point... I spread the dough around, and went to a higher cash level (currently 32.8%) while I was at it. Too high? I am comfortable. Are you? If I'm wrong about being so high in cash, I'll live, and I'll adjust. I am also in the process of increasing my exposure to physical gold. I think that is important now, and will become more so going forward. In a perfect world, I would like to get my allocation for the precious metal back up to 7.5%.
(This item has been updated to clarify that Nvidia has suspended testing autonomous vehicles on public roads, but not all work on self-driving cars.)
