When it’s time to sit down and figure out exactly how we want our portfolio to be positioned, we start from the top/down. Diversification is not, buy everything and hope for the best. I think it’s important to take each asset class for what it is and decide how (and if) you want that to compliment your other assets. So we take stocks, for example, and ask ourselves, “ok do we want to lean long or short? smaller caps or larger caps? staples or discretionaries? emerging or developed?” Then we look at bonds, “do we want to be in Treasuries? Junk? Corporates? nothing at all? Long, short?” We also need to figure out how big we want our position to be in each asset class. Or do we even want to be them at all? This is all part of our diversified, non-correlated (target) portfolio.
So let’s look back and see how each of the major asset classes performed versus one another throughout 2012 (Click Chart to Embiggen):
Stocks led the way this year, as represented by the S&P500. Gold should finish the year positive while the rest of the CRB Index was dragged down by the struggling Crude Oil market. Treasury Bonds prices, while off the highs are still closing the year in the green. And with the Euro coming back hard off those summer lows, the US Dollar Index is going out slightly down for the year.
Correlations aren’t what they were a year ago and especially not what they were three & four years ago. So keep in mind that these relationships are constantly changing, and staying on top of these developments in the intermarket world really give you a leg up versus other market participants.
Intermarket Analysis is a very important part of our Technical work. Sometimes it gets forgotten as part of the study that we like to call Technical Analysis. But at the end of the day, we study price behavior regardless of the asset class. This is one of the many advantages that I feel technicians have over other forms of analysis. We don’t care what were looking at. Price is price whether the chart shows shares of $AAPL or the Crude Oil vs Natural Gas ratio. I can’t imagine not being able to do that.
Let’s use this time of the year to give this some thought. How do you think the intermarket landscape will be different in 2013?
Tags: $USDX $UUP $GLD $GC_F $SPY $TLT $CL_F $USO $CRB $NG_F $UNG