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Dave & Donald Moenning

Mr. David Moenning is a full-time professional money manager and is the President and Chief Investment Officer for his Chicago-based Registered Investment Advisory firm, Heritage Capital Management (...

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How To Stop "Diworsifying" Your Portfolio

Thursday's missive exposed the fact that a diversified portfolio is dramatically underperforming the return of the U.S. stock market in 2013.

While some may argue that we will soon see this phenomenon dissipate due to the propensity of financial assets to ultimately revert back to the mean, this fact isn't helping investors who are currently staring at returns which are at best, in the low single digits this year.

As was stated yesterday, part of the problem is that the long-term bull market in bonds is likely in the process of morphing into a secular bear market. Another big part of the problem is the fact that the U.S. economy as well as the dollar are heading the wrong direction for trades in commodities and emerging markets. Now toss in the ongoing difficulties in Europe and it becomes clear that the problems being created by what is usually considered a "well diversified portfolio" may be with us for quite a while.

What's the Solution?

For those investors that like the comfort generally provided by a diversified portfolio, here's an idea that will allow you to (a) maintain a diversified allocation in your portfolio and (b) stay out of trouble when the big, bad bears come to call on an asset class or two.

The idea is to break your portfolio up into parts according to the desired asset allocation and then install a "risk management" strategy for each part of the portfolio. For this example, let's use the generic diversified portfolio laid out yesterday (only the math will add up correctly today) which is broken up as follows: 50 percent stocks (25 percent U.S., 15 percent Foreign, and 10 percent Emerging) 30 percent bonds (10 percent U.S. 7-10 Treasurys, 10 percent U.S. 20+ Treasury's and 10 percent Junk), and 20 percent "real assets" (10 percent Commodities, 10 percent Gold).

In simple terms, we then create a "sell strategy" for each asset class. This can be something as simple as a 150-day moving average or as complex as a market model dedicated to each asset class being managed. And here's the kicker; it almost doesn't matter what sell strategy you use. No, it's the fact that you have one that REALLY matters.

What's This Portfolio Look Like Now?

Instead of lazily sitting in all asset classes at all times and being exposed to the brutality that accompanies most major bear markets, the idea is to use both components of the traditional "buy low and sell high" approach. The key is that the approach I championing here has the ability to take the exposure of each asset class in your portfolio to zero when the bears are present.

In order to keep things simple, let's use a 15-month weighted moving average as our "bear market" signal for each asset class. In short, if the asset class is above the 15-month average you hold long and if it is below, you move that portion of the portfolio to cash.

Here is an example of using this approach for the S&P 500 since the mid-1990s:

As you can see, the S&P 500 is currently above its 15-month ma, so you would simply hold on to the U.S. stock positions in your portfolio.

Running through the entire diversified portfolio, the current positions and signals would look like this:

  • U.S. Stocks (25 percent) - SPY: Buy/Hold long

  • Foreign Stocks (15 percent) - EFA: Buy/Hold long

  • Emerging Market Stocks (10 percent) - EFA: Cash

  • U.S. Treasury 7-10 Yr (10 percent) - IEF: Cash

  • U.S. Treasury 20+ Yr (10 percent) - TLT: Cash

  • High Yield Bonds (10 percent) - JNK: Cash

  • Commodities (10 percent) - DBC: Cash

  • Gold (10 percent) - GLD: Cash

The Bottom Line

To be sure, this not a fool-proof strategy as using a single, very simplistic indicator on a monthly basis can produce a large amount of whipsaws over time. As such, it would be wise to utilize an approach incorporating at the very least, some technical analysis triggers such as trend lines and support/resistance zones as well. However, the bottom line is that your portfolio would currently hold a large amount of cash (60 percent) and would not be exposed to the damage occurring in bonds, junk, commodities and gold.

While such an approach makes infinite sense, you may be surprised to learn that the majority of financial advisors do not advocate such a strategy. Why not? In short, while the blind, "buy and hope" approach is easy, managing risk requires significantly more time, effort and expertise.

If you have any hope of avoiding the big, portfolio crippling losses that have occurred in bear markets over the past 15 years, managing risk - in whatever fashion you may choose - is the way to go.

Dave Moenning is speaking at the Traders Library event, on Friday morning and will not publish morning report. Regular "State" reports will return on Monday.

P.S. If you like the idea of utilizing long-term, risk management strategies in your portfolio, be sure to check out the IRA-401K Advisor Service offered at StateoftheMarkets.com.

Click Here For More of Dave M's "Daily State of the Markets" Commentary

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. Syria/Geopolitical Issues

      2. The State of Fed/Global Central Bank Policies

      3. The Outlook for the U.S./Global Economy

      4. The Level of Interest Rates

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Positive
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

  • Near-Term Support Zone(s) for S&P 500: 1660

  • Near-Term Resistance Zone(s): 1700-1710

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

  • Trend and Breadth Confirmation Indicator: Positive

  • Price Thrust Indicator: Moderately Positive

  • Volume Thrust Indicator: Moderately Positive

  • Breadth Thrust Indicator: Positive

  • Bull/Bear Volume Relationship: Moderately Positive

  • Technical Health of 100 Industry Groups: Moderately Positive

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

  • Overbought/Oversold Condition: The S&P 500 is overbought from a short-term perspective and is neutral from an intermediate-term point of view.


  • Market Sentiment: Our primary sentiment model is neutral .

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.

Weekly State of the Market Model Reading: Neutral - This tells us to be cautious at this time and stay focused on the price action.

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

Turning To This Morning...

With the market enjoying its best week in some time and Secretary of State John Kerry meeting with Russia today over Syria, traders can't be blamed for taking a step back at the present time. And based on the overseas action, this appears to be what is taking place as there is very little movement in the major markets. In the U.S. we'll get weekly jobless claims before the bell and futures are relatively flat at this point in time. However, it is worth noting that the fear trade appears to be taking a hit today as gold is diving $23 in the early going.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:

- Japan: -0.26%

- Hong Kong: +0.07%

- Shanghai: +0.66%

- London: -0.01%

- Germany: -0.04%

- France: -0.29%

- Italy: -0.34%

- Spain: +0.19%


Crude Oil Futures:
+$0.82 to $108.38

Gold: -$23.00 to $1340.30

Dollar: higher against the yen, euro, and pound.

10-Year Bond Yield: Currently trading at 2.890%

Stock Futures Ahead of Open in U.S. (relative to fair value):

- S&P 500: +0.13

- Dow Jones Industrial Average: +12

- NASDAQ Composite: +1.89

Thought For The Day...

"Greater than the tread of mighty armies is an idea whose time has come." -Victor Hugo

Looking for Guidance in the Markets?

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.

The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.

The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

Got Research?

Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:

  • State's Chart of the Day - Each day we highlight a top rated stock with a positive technical setup

  • The Risk Manager Report - Stay in tune with the market's risk/reward environment

  • The “10.0” Report - These are the REAL best-of-breed companies

  • The Insiders Report - See what the people who know their company's best are buying

  • ETF Leaders Report - Looking for the top performing ETF's? You've come to the right place.

  • The SOTM 100 Portfolio - The top rated stocks in each market sector

  • State's Market Models - Each week we quantify the "state of the market" with a series of models

  • The Focus List - Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day
  • Mission Statement

    At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

    Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

    Wishing you green screens and all the best for a great day,

    David D. Moenning

    Founder and Chief Investment Strategist

    StateoftheMarkets.com

    For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

    Positions in stocks mentioned: none


    The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    The information contained in our websites and publications is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

    Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

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