Monday, March 7, 2011

Like Clockwork

When market volatility drops to a very low level it is often difficult to evaluate the efficacy of Pinnacle portfolio construction. We think we are well diversified and that “defensive” investments will act…well….defensively. Unfortunately, when cyclical stocks take the lead as they have over the past 9 months, and when the broad market is well above its historical average length of time without a five percent decline, it presents a problem in evaluating our risk management strategy in real time. The stock market has exhibited signs of making a short-term top of late, and intraday market volatility seems to be picking up. The S&P 500 has only declined by 1.53% from February 18th to last Friday’s close, but it does give us at least some opportunity to see what, if anything, is working in our defensive allocations.

The answer is that the defensives are “doing their thing.” They are performing “as advertised.” They are working “like clockwork.” In other words, so far so good in terms of this particularly short bout of market indigestion. First let’s look at the defensive equity positions we own for the same period. While the broad market is down 1.53%, utilities are up +0.31%, consumer staples are down 0.74%, and health care industries are doing fine on a relative basis as biotech is down 0.79%, medial devices are down 0.17%, and health care providers are actually up +1.79%. Our defensive international funds are also doing relatively well. First Eagle Overseas fund is +0.22%. Our alternative asset classes are performing heroically of late as gold positions (GLD and IAU) are up +2.91% and 2.8% respectively. Diversified commodities (UCI) are up 3.41%. As might be expected, our fixed income positions are doing quite well relative to stocks across the board. The 20-year Treasury Bond ETF (TLT) is +1.35% since February 18th.

Whenever market volatility picks up we take a deep breath and hope that our managed strategies deliver the low volatility we hope for as a diversification to our broad equity exposure. Once again, so far the news is good. The Merger Fund is up +0.06%, TFS Market Neutral is +0.65%, and the Hussman Strategic Growth Fund is +1.09%. We will continue to closely monitor the performance of the hedges in our portfolio as we dance with the possibility of (perish the thought) a market correction. So far it’s all working like clockwork.