Wednesday, March 16, 2011

Attempting to Harness the Negative Energy

These are scary days out here in investing land. Between geopolitical concerns in the Middle East and the nuclear scare coming out of Japan, there has been a rapid re-pricing of risk occurring in financial markets. Now I don’t want to downplay the human disaster that is occurring in Japan, and my heart goes out to the people there who are dealing with the aftermath of the earthquake/tsunami/nuclear catastrophes. But as scary as the current news is, we believe that the current selloff in stocks is a very healthy development as it is creating some fear and beginning to shake some of the weak hands out of the market.

Our current plan is to use the recent risk aversion to our advantage by scaling out of some hedges and defensive holdings during this decline and replacing them with areas of the market we think contain the most value. It may take some time for this correction to play out given the duration and magnitude of the strong rally that preceded it, and our view is always subject to change if the fundamentals and technical weight of the evidence dictate we do so. But given our current view that this is a correction rather than the start of the next major market downturn, we are attempting to harness the negative headline energy and turn it into future portfolio outperformance.

Chart: Japan ETF (EWJ)