Breakout

Year-End Investing: Risk On vs. Risk Off

Jeff Macke
Breakout

Pop Quiz: What do the Biotech (XBI), Consumer Discretionary (XLY) and Financial (XLF) sectors have in common?

Answer: 1) They are all high-beta, and 2) Paul Schatz, president of Heritage Capital thinks you should own all three groups.

First a definition then we'll get to Mr. Schatz's explanation. Beta is a measure of stock or sector's price movement relative to the stock market as a whole. High-beta stocks typically move in the same direction as the market only more so. In a falling market investors want to sell beta, in a rising market the opposite is true. Being long beta is tantamount to being in a "risk-on" posture.

By inference Schatz thinks the market is poised to go higher, but there's a catch.

"To me we're in a rental period," he explains in the attached video. "I'm not into owning any of these names or sectors or the market."

Related: Don't Bet Against a Santa Claus Rally: Detrick

The key words are "rent" and "own." Like so many grinding their way through the last few years, Schatz has found that the best opportunities involve playing the emotions on the Street rather than a pure fundamental approach. It's not that Schatz is a gun-slinging trader. He's just pragmatic.

Schatz's outlook over the near term is higher but the magnitude of the rally depends on the nature of the move. He has two scenarios. His most bullish take is that the current rally is on its last legs leaving us poised to revisit November lows. If so, investor skepticism will lead to a 2 - 4 month rally that could see the S&P 500 top out somewhere over 1,500, if not more.

Related: Seller's Remorse Will Drive Stocks Higher Through Year End: Kilburg

Should the market not see any pullbacks and the current rally extends 2 - 4% higher from current levels, Schatz sees nothing less than a collapse to below the lows of last June sometime in the first quarter of 2013. Such a scenario means stocks would drop 10% before it's worth nibbling on the long side for the long or short term.

As for things Schatz would hang onto for longer than 4 - 6 weeks, he says one of his biggest positions remains long-term U.S. Treasuries (TLT). As screwed up as the country may seem, owning our debt remains as "risk-off" as you can get.

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