Finally. For the first time in a year, the stock market has made money for a full quarter. And my model portfolio of exchange-traded funds did exceptionally well, spurting 13.5% in the second quarter.
Most of my positions racked up double-digit gains as they rebounded from the bear market bottom reached in the first quarter of 2009. The model trounced the performance of the stock market itself, as the Standard & Poor's 500 Index ($INX), represented by SPDR 500 Index Trust (SPY, news, msgs), advanced just 11.3%.
Despite this achievement, I'm going to substantially reorganize my portfolio for the months to come. I'm going to stay in stocks because, although we may see a brief pullback, the rebound has begun. I'll also cut back on bonds and dump gold until the inflation so many anticipate actually materializes.
If you agree with my outlook, you might plot a similar strategy.
The moves
Notably, I'm eliminating leverage from the domestic equity positions. The two-times ETFs I have owned, designed to rise twice as much as their benchmarks, performed decently in the quarter. But over the longer term, their results have been lousy.Eliminating leverage decreases the effective weighting of equities within the portfolio, and I don't want to do that as the market finally moves up. So I'm also slashing my holdings of bonds. They have served me well in the bear market, but their outlook is not so promising. As the economy recovers from recession, interest rates will tend to rise, which takes the prices of bonds lower.
Finally, I'm selling gold. I added it three months ago as a hedge against inflation. No such prospect has arisen, and SPDR Gold Shares (GLD, news, msgs) has declined 0.6% in the past three months. Until the inflation threat becomes more concrete, I think gold is likely to wallow.
The leveraged letdown
The model finished the quarter with 9.6% of assets in ProShares Ultra S&P500 (SSO, news, msgs), 6.6% in ProShares Ultra MidCap400 (MVV, news, msgs) and 5.5% in ProShares Ultra SmallCap600 (SAA, news, msgs).In each case, the fund is designed to deliver two times the performance of its benchmark, effectively doubling the weight of these allocations.
In the second quarter, these leveraged funds delivered on their promise pretty well, but it turns out that was happenstance. I had owned all three funds for six months, and in the first quarter they did much worse than promised. That was largely due to the extreme turbulence and downward trend in the first period, but the more favorable conditions in the second quarter did not erase the blot.