FINANCIAL ADVISOR INSIGHTS: Charles Schwab's Got A Nifty 'Pyramid' You Can Use When Building Your Portfolio

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Investors Sentiment Is Clocking In At Extremely Bullish Levels (Bank of America)

According to the BofA’s Bull & Bear Index, which tracks sentiment using indicators like hedge fund market exposure, fund flows, long-only investor positioning and so forth, investors are more bullish than they were in 99% of periods since 2002.

This is cause for worry, as recent economic data doesn’t seem to hold up to such high levels of bullishness.

disconnect in investor sentiment and economic indicators

Photo: Bank of America

The New Tax Deal Makes Muni Yields Look More Attractive (iShares Blog)

Just before the fiscal cliff deal was made, municipal bonds were in high demand, as investors saw them as a safe harbor against tax increases, according CFA Matt Tucker, and then they experienced a selloff amid speculation that they would no longer be tax-exempt.

Now that a tax deal has been made, and munis are still tax exempt—even though they pay a lower yield than corporate bonds—they appear to be more attractive than their yield would signal.

“Regardless of your strategy, when it comes to evaluating a municipal bond’s value, remember to use tax equivalent yield to put it on equal footing with taxable securities,” said Tucker in a note.

Tucker offers up this useful formula to make the calculation:

municipal bond yield after tax

Photo: iShares Blog

Investors Are Expressing Their Views On Stocks With Options (Goldman Sachs)

The S&P 500’s trading is volume is the lowest it’s been since 1998.  However, this appears to be so because investors are choosing to express their views by trading call and put options instead of trading actual shares.  This is according to a report by Goldman Sachs’ options strategists Krag Gregory and Jose Gonzalo Rangel.

And even in options trading, the put-call ratio, which in effect is the ratio of options traders betting against the index to those betting on it, is decreasing, which may reflect the incredibly bullish sentiment we’ve seen toward stocks so far in 2013.

S&P 500 Options Average Daily Volume by Calendar Year

Photo: OptionMetrics, Goldman Sachs Options Research

Budget Cuts Would Be A Major Downer For Markets (Wall St. Journal)

Even if the $85 million worth of budget cuts scheduled to kick in this March are delayed or scaled back, the whole partisan process could put a huge damper on investor optimism, which would force a major pullback in stocks.

“The combination of this [sequestration] potentially occurring, along with high asset prices–stock and bond–raises the risk for investors,” Daniel Roe, chief investment officer at Budros, Rubin & Roe Inc. told the WSJ, “We have been moving to a more-conservative posture in our portfolios.”

“You have to recognise what prices you’re paying for assets and what risks you’re taking,” he said. “We think it pays to take at least modest steps to take less risk.”

Use This Portfolio Pyramid To Diversify Your Investments (Charles Schwab)

Just like a food pyramid comes in handy when you’re trying to eat a balanced mean, Charles Schwab has come up with a portfolio pyramid. “The foundation of the portfolio pyramid is asset allocation, which determines the broad risk level of your portfolio to match your risk profile,” said the brokerage company in a note.

Here’s what the pyramid looks like:

portfolio pyramid

Photo: Charles Schwab

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