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How to Play Likely Q2 Market Weakness—Searching for Alpha for May 2012
Last month's Searching for Alpha commentary detailed our view that stocks would likely come under pressure in the next quarter. While equities didn't exactly fall out of bed in April, there was an update in volatility. There are several reasons why I think we'll continue to see pressure in the markets.
First off, stocks appear priced for perfection. Among the positive earnings, there are still significant issues in the world economy, with Europe on the top of that list. Last Friday's weaker than expected GDP, and continued uncertainty about the direction of interest rates—as illustrated by the considerable volatility in 30-year bond prices—underscores an environment that will be difficult to map, at least in the short term.
It would not be wise to underestimate market seasonality. With elections in the U.S., Greece and France looming, rising energy prices and the domestic housing market trying to decide whether to bottom or keep falling, there should be enough uncertainty to keep a lid on stock prices.
How should advisors play this weakness? As I mentioned last month, rebalancing into the weakened market is a smart strategy. Those who are sitting on outsized gains from individual security plays may want to raise cash in anticipation of better times later in the late summer.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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