managing a stock portfolio in a flattish market

In many ways it’s easier to manage a portfolio in a market that has a clear trend, no matter whether it’s up or down.  That’s because there are standard rules for general portfolio structure for each.

an up market

The industry cliché is that it’s hard to keep ahead of a rising market.  I’ve never felt that way, even though the early stages of a bull market favor value investors, not growth investors like me.

The key is to keep a pro-cyclical orientation.  That means overweighting the most economically sensitive sectors, like Materials, Industrials, or IT and keeping away from less cyclical, or defensive, sectors like Utilities, Staples or Healthcare.

Smaller-cap stocks are typically better than their large-cap brethren.

A generous helping of foreign markets–emerging markets, in particular, also usually helps.

a down market

A downtrending market is certainly a lot less fun than an uptrending one.  (Almost) no one likes to lose money.  The rules for a bearish phase are just about the opposite for a bullish one.  But they’re just as clear-cut.

In a down market, stock investors try to make their portfolios look as much like local government bonds as possible.

That means large-cap holdings instead of small-cap; no foreign stocks, plus industries and sectors with as little sensitivity to the economic cycle as possible.

Overweight Utilites, Staples and Healthcare, and underweight Materials, Industrials, IT–and maybe even Consumer Discretionary.

Although it sounds a little silly once you have the benefit of hindsight, but I find the biggest difficulty in handling a down market is recognizing that you’re in one in the first place, and not in a particularly nasty upmarket correction.

Oddly enough, even bear markets have more up days than down ones.  But during the up days stocks barely move.  And the down days are brutal.


Normally the stock market either wants to go up or to go down.  It’s seldom content to idle.

If short-term traders (include brokerage trading desks, some hedge funds and individual day traders in this camp) decide it’s unlikely that stocks will decline, they begin to buy.  When they determine there’s little possible upside, they begin to sell.  They only make money if stock prices are moving, so they try to make it so.  They have a lot of clout.

As a result, flattish markets–like the one I think we’re in now–are fragile things.

As far as I can see, traders think there’s little near-term upside for US stocks.  They judge that the price earnings multiple expansion that has been driving prices upward over the past year is just about spent.  On the other hand, the Fed is continuing to keep the money spigot wide open.  Yes, the spigot might be turned back a notch next month, but there’s absolutely no discussion of the possibility that any of the extra money that’s been pumped into the economy over the past several years will be withdrawn.  We’re just slowing the  rate at which new emergency money will flow in.  The result is stalemate.

Markets like this are all about two things:

–individual stock selection, and

–at least some conviction about which way stocks will eventually break, once they decide to move either up or down again.

As far as stock selection is concerned, I think the two major areas to look at now are secular growth names in technology and consumer firms that serve average Americans.  It may also finally be a time to take a more serious look at the EU.

I think that the next major move in stocks is up.  Of course, I always think that.  But that hunch tells me what areas to look in.  It also makes me look extra hard for evidence to the contrary, because–other than having terrible stocks–it’s my greatest vulnerability.




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