Dear Mr. Market:

If you’re new to this monthly series…remember what we’re doing. This exercise, as we like to call it, is not an attempt to pick the best stock or “time the market”. We leave that futile task to those who own time machines and If you’re new to this monthly series…remember what we’re doing. This exercise, as we like to call it, is not an attempt to pick the best stock or “time the market”. We leave that futile task to those who own time machines and accurate crystal balls. For a refresher, see our first article on the MPG Core Tactical 60/40 portfolio.

Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (June 5, 2015).

Click here to compare the portfolio against the benchmark

What adjustments did we make?

We didn’t make any portfolio moves in May. Aside from collecting nice dividends through BND, LQD, and Conoco Philips (COP), the market environment did not warrant making any adjustments.

Why?

All too often investors (professionals and amateurs) tend to get fidgety and assume that one always has to be making moves. If you’re a financial advisor making moves for the illusion that it’s creating value…shame on you. Not only are you doing a disservice to your client but you’re adding zilch in long-term performance. If you’re a self-directed investor making moves for the sake of it…stop. It’s not like going to the gym; the more you move/trade is not akin to exercising more. (i.e. there is no implied benefit). Matter of fact, it does the opposite. If you haven’t heard us say it before, “your portfolio can be like a bar of soap…the more you handle it the smaller it gets”.

The MPG Core Tactical 60/40 portfolio closed the gap over the past few months relative to a 60/40 benchmark but it’s not from miracle stock picks. Again, save that excitement for the racetrack or Vegas. In the last section of this article we’ll expand on the reason we’re seeing this portfolio mix narrow the lead of a benchmark geared more towards bullish equity activity and with a weighting towards domestic exposure.

With our standard and passively managed 60/40 Benchmark we made the monthly and automated adjustment to the allocation. On the last trading day of the month we sold equities and bought bonds:

5/29/15: Sold 24 shares of IVV (S&P 500 Index) @ $212.58 ~$5k

5/29/15: Bought 71 shares of BND (Vanguard Total Bond Index) @ $82.34 ~$6k

Note that this marks one of the few times when we almost repeated the same move as the month prior. This market appears to be waiting to make a move of some sort; the million-dollar question is will it be up or down? Markets like this present a textbook backdrop for what will be a sharp move in either direction. We have not seen the stock market trading in such a tight range at this point of the year since 1992. Traders are clearly nervous and some warn that this type of action is typical of what happens before a huge market top. That premise is not far fetched after a six-year bull market run. Perhaps equally convincing is that this “consolidation” phase is perfectly healthy and a precursor to a final strong move up. Since nobody has a crystal ball it’s simply a matter of being ready for both possible outcomes.

Where are we going from here?

Are you ready for some June gloom? As much as we despise cute market sayings and euphemisms, the set up for a more volatile and perhaps cloudy month is here. Historically, the summer season is the weakest of all of them and with a market that is perhaps getting more tired, we shouldn’t be surprised to see it struggle. Not only is the economic data telling the Fed that rates may not need to be raised as soon as anticipated but the huge run from a strong U.S. dollar might be running out of steam. Economists and forecasters love connecting dots and try to find correlations to make predictions. Most of the ones we see are worthless and often times appear as data mining efforts to make investors think a correlation exists when it doesn’t.

Some correlations, however, are worth paying attention to. In our recent post on Facebook (“like” us if you haven’t already!) you’ll note that we show you one connection that is inversely connected to the other. When the US dollar strengthens against other currencies the prices of commodities typically drop and vice versa. If you believe (as we do) that we might see one last lunge upwards from the dollar followed by a natural retreat, position your portfolio accordingly.

Back to what we alluded to earlier in this article, US stocks are primed for weakness relative to other asset classes. Specifically we believe Europe offers better valuations right now. We’ve said it before but the changing of the guard has taken place in 2015. Our opinion is that developed International equities will continue to outperform domestic equities this year and possibly into 2016. Thus far the ETF (exchange traded fund) we use for developed international (VEU) has out performed the S&P 500 (IVV) by over 400 basis points year-to-date (+6.16% vs +2.14%).

The dollar will eventually weaken and once that happens it will make your favorite imports more expensive. Don’t fret too much however, as those with healthy allocations towards international stocks will do well.

See you next month!