The hardship in the energy arena has been equally challenging. Broad-based energy corporations in SPDR Select Energy (XLE) may be well off their March lows, but the influential sector fund is still down a bearish -21% from a 2014 pinnacle. Similarly, JP Morgan Alerian MLP (AMJ) – hit by the double whammy of rising yields and price depreciation in crude/natural gas – currently resides in a bear cave with a -21.5% decline. Even the transporters in the iShares DJ Transportation ETF (IYT) has witnessed intra-day depreciation of -11.5%; the current price of IYT is also below a long-term 200-day moving average.
For the record, I believe the bond rout is closer to running its course than marching forward. There is not much technical support for my belief, other than oversold Relative Strength Index (RSI) indications. Support for the 10-year Treasury in and around 2.5% may even be a decent entry point for government bond investors. Consider iShares 7-10 Year Treasury (IEF).
The U.S. 10-year is trading 10 basis points lower at 2.4% on Thursday. If you had a choice between owning Spain’s 10-year sovereign debt at 2.1%, Germany’s 10-year bund at 0.9%, or the U.S. 10-year at 2.4%, which would you choose?
(Note: I recognize that many would choose “None of the Above.” Nevertheless, foreign investors, pension funds and central banks all require government debt; the supply is limited. The dramatic taper tantrum in bonds that occurred in 2013 reversed itself in 2014. Similarly, the bond rout to this point in 2015 is likely to see a sharp reversal in the 2nd half of 2015 or in early 2016.)
On the whole, depending on the client, cash levels have been raised to 10%-25%. I have lowered stock and fixed income exposure due to the execution of stop-limit loss orders as well as the elevated correlations across asset classes; the elevated correlations make it particularly difficult to protect portfolios with traditional diversification. In contrast, a tactical asset allocation decision to raise cash makes it possible to acquire shares of stock or bond ETFs at lower prices in the future.