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The End Of QE And The Summer Correction

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    January 9, 2014

    I took some time to visit with David Asmun and Larry Shover on Fox Business News yesterday to discuss the markets, Janet Yellen and some strategies and opportunities to hedge against a potential correction later this summer.  With the new year upon us, there are always a plethora of forecasts, predictions and estimates, which are always inherently bullish, to consider.  However, what seems to be lacking is any consideration of the risks of a correction.  As I state in the interview, our job as investors is to “buy low and sell high.”   Unfortunately, that advice tends to fall on “deaf ears” when markets rally strongly during a given year.

    However, as I discussed recently in “30% Up Years,”

    “…each 30% return year was also the beginning of a period of both declining rates of annualized returns and typically sideways markets.  It is also important to notice that some of the biggest negative annual returns eventually followed 30% up years.

    Furthermore, as shown in the chart below, since the 1950’s, mid-term election years have been more less flat with declines coming in the second and third quarters of the year.


    The rationale that supports this behavior is that the markets dislike uncertainty.  As we head into the mid-term elections in November, it is likely that the markets could stagnate while wating to see if the current gridlock will remain or if the conservatives can gain control of both the House and Senate.

    This is why, from a contrarian investment view, I recommended taking a bit more defensive posture heading into the summer months ahead by:

    • Raising some cash by trimming winners and selling laggards.
    • Adding fixed income as a hedge against a market sell off.
    • Gold miners are “hated” and are likely to have a countertrend rally sometime this year.
    • Ditto for gold.
    • Exchange high beta stocks for boring old dividend stocks.

    I am certainly not recommending going to cash, which as I state in the interview, is a mistake that investors too often make.  However, being prudent with managing portfolio risk by “selling high” provides the cash to “buy low” when the opportunity presents itself.

    When we consider that the Fed has begun to “taper” their bond buying programs, the ebullience of individual investors and extreme extensions in the financial markets – the assumption of a 10% or greater correction sometime this year is not far fetched.  The only question is whether you will be in a position to capitalize on it, or just recover from it?

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.


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