This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

January Recap: Risk Off

Stocks in this article: TLT SPY AMZN XLY XLU PFF IYR

We are also seeing a widespread accumulation in utilities stocks and distribution in the consumer discretionary sector. The miss in Amazon.com (AMZN) earnings this week highlights a crack in the bias towards consumer spending and high-beta stocks as we start the New Year. If you look at the correlation between the Utilities Select Sector SPDR (XLU) and the Consumer Discretionary Select Sector SPDR (XLY), you can see a similar trend developing as we are seeing in Treasuries.

Utility stocks are often driven higher as interest rates fall and investors grow cautious about economic growth prospects. They are often seen as an additional safety trade because of their low volatility and strong yields which make them attractive in a sell off.

Other areas of strength in January include REITs and preferred stocks which were heavily beaten down in 2013. The iShares U.S. Preferred Stock ETF (PFF) and iShares U.S. Real Estate ETF (IYR) have both outperformed this month on the back of falling interest rates and investor demand for value income opportunities. I highlighted these areas at the beginning of the year as ETF income alternatives for a portion of your portfolio. I believe that these sectors offer a unique strategy for diversification and will continue to perform well if interest rates remain accommodative.

My initial reaction to this change in tenor for equities is to keep things in perspective. The majority of stocks are still well above their 200-day moving averages and the selling pressure has been orderly. We are not seeing any significant signs of distress in the markets other than the normal ebb and flow of equity prices. That should be viewed as a positive sign that the market is digesting earnings and other macro-economic data in a typical fashion.

I have been seeing widespread use of the term "stock correction" of late, which I think is a little premature. Remember that a true correction is defined as a drop of 10% or greater. A bear market is widely viewed as a drop of 20% or greater. Therefore it is still early to call this pullback a correction when we are approximately 5% from the highs.

How you react to this data is largely a function of where you sit. If you have a large cash position and want to get more exposure to stocks, this represents an excellent opportunity to start adding to core holdings or select areas that you feel will outperform. Conversely, if you are overexposed to high beta areas of the market, you may want to look at rebalancing your portfolio to cash or fixed-income.

I am using this pullback to add to select tactical opportunities for clients in low volatility ETFs and making sure that I am balancing risk with reward. My outlook for stocks will likely change to cautious if we get closer to the 200-day moving average. That is a key risk management metric for our portfolios as we manage our way through a new wave of price data. Remember to stay balanced and nimble this year as new opportunities and risks develop.

At the time of publication the author had a position in PFF and IYR.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,672.60 -141.38 -0.79%
S&P 500 2,051.82 -11.33 -0.55%
NASDAQ 4,757.8790 +7.4820 0.16%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs