We’re shorting the S&P 500 and holding cash

Last month, the Multi-Strategy Sector Rotation Portfolio took a defensive position, so much so that we had net negative exposure to the stock market.  

So far this has paid off as we have profited from the market’s drop.  

The decision to do this was based on broad macroeconomic risks picked up by our models, and these risks are still the dominating force that is driving our positions going into October.  


Shorts and Cash

These macro conditions have not improved, so for the second month in a row we will continue to be defensive in our positions.  

Our largest position is and will continue to be the ProShares Short S&P 500 ETF (SH) and cash.

These two positions combined will represent less than 15% of our portfolio.

The result will be that our net exposure to equities will be breakeven (evenly hedged) to slightly negative.

New Positions

However, we do intend to build up our equity exposure with two possible additions to the portfolio.

The first of these new positions is going to be an Alerian MLP fund (AMJ).  

MLP stocks are typically high dividend payers with ties to energy, infrastructure, or other basic materials.  

This ETF has fallen nearly 50% since its peak just over one year ago (See below).  

Dividend Potential

Because of this substantial fall, the dividend potential is all the more magnified.  

This particular ETF has a current dividend yield of over 7%, and there are plenty of individual MLPs that are in the 10-15% range on dividend yield.  

In addition to the dividend, we believe there is plenty of potential for capital gains over the next 6 months because the price is already so depressed.


The second new position will be the First Trust Consumer Discretionary AlphaDEX (FXD).  

I admit, because macroeconomic risk is the primary story in the market right now, this sector could be completely overrun by these broad risks and perform very poorly.

The typical story, though, with this sector is that a large percentage of income occurs in the 4th quarter leading very often to strong performance surrounding the holiday months.  

For instance, from early October 2014 through the end of February 2015, this sector gained over 17% verses only 8.8% for the S&P over the same time period.

Early Xmas

Similar trends have occurred in prior years as well.

Also, it seems that the Christmas shopping season has been starting earlier and earlier every year.  

Most people aren’t quite thinking about shopping and the holidays yet, but they will be very soon, and as an investor, this timing is key because it is simply about thinking ahead and making moves ahead of the crowd.

Photo Credit: 401(k) 2012 via Flickr Creative Commons

The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.
There is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments are not a reliable indicator of the performance or investment profile of any composite or client account. Further, the reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.