market folly

Market strategist Jeff Saut believes that asset allocation is the key to alpha generation. But to be more specific, he is not dogmatic about the approach and instead prefers dynamic asset allocation. This is an extension of normal asset allocation in that it incorporates the use of various indicators to complement the normal analysis, intuition, and common sense that applies to creating portfolios. He uses this diversification as a tool to mitigate risk. Those of you increasingly concerned about the presence of risk in your portfolios can heed Jeff Saut's risk management principles.

The reason he brings this whole notion up in his weekly investment strategy is because he feels we are approaching a point in the markets where rebalancing portfolios might be in order. His proprietary intermediate-term indicator, stochastic indicators, and the 12-month moving average are all warranting caution. However, the Raymond James Chief Investment Strategist has been bullish on equities in the near-term in part due to their massively oversold condition. He recently proclaimed that risk adjusted stock selection is the key to portfolio success.

In particular, Saut has been fond of technology stocks as their weekly forward earnings per share are at a record high. He has mentioned Microsoft (MSFT) numerous times as an attractive play. This morning we posted up a bullish presentation on MSFT from hedge fund T2 Partners as well. Saut's other technology stock favorites include Iridium (IRDM), NII Holdings (NIHD), Nuance (NUAN) and PAREXEL (PRXL).

In the end, Saut feels the signal to rebalance is coming soon. Ultimately, the type of portfolio to rebalance stands to be determined. The type of portfolio to rebalance to is largely reliant upon whether or not the market can re-capture its 200-day moving average. The market is currently trading right around that level, testing resistance to the upside. Saut feels that many technical indicators will soon resolve themselves and will determine just how defensive (or not) a portfolio should be. In a separate post, we'll outline Saut's "Businessman's risk" portfolio and how it is allocated. In the mean time, embedded below is Saut's full market commentary for this week examining the potential upcoming rebalance period:



You can download a .pdf copy here.

More analysis from the market strategist can be found at Jeff Saut's risk management principles as well as his previous commentary outlining keys to portfolio success in 2010.