January Recap: Risk Off
NEW YORK (FMD Capital Management) -- As a new component to my blog this year, I wanted to start a monthly series that recaps the recent market action for the preceding month and highlights interesting observations. My goal is to add a little insight into your investing endeavors by focusing on new correlations, trend changes, and technical setups that may lead to profitable trading opportunities.
As you probably already know, January has been characterized by widespread declines in most of the major indices. Depending on your index of choice, stocks are off anywhere between 3% to 5% on a total return basis. This will be the first negative start to the year since 2009 and highlights the first significant return of volatility we have seen since mid-2013.
It's interesting to note that we are seeing some very strong trend changes in areas of the market that signal a return of the "risk off" mindset. The correlation between the SPDR S&P 500 ETF
(SPY) and the iShares 20+ Treasury Bond ETF
(TLT) has been steadily inching higher, which indicates Treasuries are significantly outperforming stocks in the last 30 days.
After shaking off one of its worst years in the last decade, TLT has rebounded over 6% in January to reclaim its notoriety as a flight to quality instrument. That is why I have been a big advocate of hanging on to your core fixed-income holdings as a tool to balance out your portfolio and reduce overall volatility. In addition, you are able to take advantage of some of the best yields on bonds that we have seen in several years.
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