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Dow Bumps Higher; S&P 500, Nasdaq Lag

Hong Kong's Hang Seng index closed down 0.27% and the Nikkei in Japan finished lower by 0.39% as anti-Japan protests escalated in China, leading more Japanese firms to halt their manufacturing operations in the country.

As for U.S. economic data, the Commerce Department reported that the U.S. current account deficit narrowed to $117.4 billion in the second quarter from a downwardly revised $133.6 billion in the first quarter. Economists expected the deficit to shrink to $126.8 billion.

The benchmark 10-year Treasury rose 9/32, diluting the yield to 1.816%. The greenback was up 0.30%, according to the dollar index.

Leo Kelly, managing director and partner at HighTower, said that he and his team are beginning to reduce equities modestly, after increasing equity holdings and reducing an overweight cash position during the recent volatility, with the markets now having moved so quickly on the anticipation of and execution of QE3.

"We have also shifted some of our equity allocation to a hedged position on the S&P 500 with significant downside protection," said Kelly. "We still favor equity for the long term and see opportunity in sectors such as energy, technology and healthcare. That said, we are concerned with the potential for volatility over the next several months when the euphoria of Bernanke 3 wears off. After all, the Fed would not engage in such an action if it were not very concerned about the economic landscape."

Kelly expects to use volatility to increase equity holdings in areas HighTower sees performing well over the next several years, including select European stocks.

"The dichotomy of attractive valuations of companies with solid fundamentals, sound business models that are geographically diversified and strong balance sheets makes the area attractive," he said. "Timing of entry in such a potentially volatile market is always a concern. Again, we will look for volatility to add to the market directly and are actively pursuing a hedged European equity holding."

Bonds, however, are another story with Kelly saying HighTower is "significantly underweight" in Treasuries.

"Over the last several months we have reduced the average duration of our portfolios," he said. "We are very concerned with interest rate risk. QE3 is yet another injection of liquidity into a market awash in liquidity. Eventually, rates must move higher, we want to be prepared. High quality municipal bonds, high quality corporates, floating rate bank loans and emerging market bonds are areas we are currently investing in."

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