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The Bears Are Deep in Their Caves

Stocks in this article: IWM DIA SPY

Other recent market observations worth mentioning include the shift in momentum from the iShares Russell 2000 ETF (SPDR) to the SPDR Dow Jones Industrial Average ETF (DIA). Small-cap stocks have been leading the majority of the year, but have surrendered momentum to larger blue-chip names -- which may be a sign that we are seeing profit taking in high beta areas, and a rotation into more stalwart defensive names. Another chink in the bull's armor, maybe?

At the end of the day, we're still seeing record inflows to equity-related ETF and mutual funds as performance chasing investors throw in the towel and opt for risk over safety. These moves may ultimately prove to be ill-timed, but are a symptom of the typical psychological action that we see through every peak in the market cycle. Greed and fear are powerful motivators.

My recommendation for your portfolio is to stay balanced and continue to ride the trend as long as it is intact. I am not seeing a pressing need to get more aggressive or defensive, at this time, until either a breakout or breakdown in recent consolidation comes into view. A step back below the 50-day moving average would be a warning sign for stocks and give us an indication that we are seeing a confirmation of downside risk.

Another key indicator to watch will be interest rates as we make our way through the transition of the Fed chairman role. Both stocks and bonds are likely to get volatile in the wake of monetary policy changes. That is why it is key to have a solid risk management plan in place to lock in gains when the tide turns and prepare for new opportunities.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

David Fabian is a managing partner at FMD Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing actively managed growth and income portfolios using ETFs. David regularly contributes his views on wealth management in his company blog, podcasts and special reports. Visit www.fmdcapital.com to learn more.
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