One conclusion we can draw from the news and market reaction to it is that stocks are showing some interest rate sensitivity at this level.  It is more than I thought, but the market is king.  What can we learn from it?

If we review previous market activity, we saw clear negative bond reaction to the specter of higher rates but we did not see much of a negative response from stocks.  One explanation is because the market expected the Fed knew something about prospective growth that was on the way.

Now that we have a move lower in yields, stocks have reacted positively.  So, maybe stocks do have more room to go up if rates go down further (which I expect), but what about the converse- will the market be as sure that if the Fed stops accommodating it will be because they see growth?  Or has the Fed lost some credibility?  

Is there some asymmetry that we as investors can take advantage of?  For my own part, I have been too ready to worry about top line growth.  The market is not there yet.  It is not a focus.  I have written in the past about the change in focus from time to time.  Right now it's all about the Fed decision.  As such I should have seen that if I was right about the non tapering, stocks would see lower rates and move positively.  If I was wrong, bonds would continue to slide down in price and stocks would not care.  The "caring"/focus may come after once the Fed path decision is out of the way.  So for me, it should have been stay long stocks and keep/add to my bonds.  Instead, I started worrying about the top line growth a bit too soon and cut my equity exposure which has cost me about 1% so far.  Not fun.

So where from here?  It's still about the Fed.  The focus will shift to data and whether the Fed will read that positively.  So maybe now the top line discussion will start again.  

For my money, we are still in a very slow growth economy and the risk is for a further slow down if rates stay up.  So, I believe it is logical for me to stay low in stock exposure and maintain my bonds (if not increase).  But herein lies a management issue.  I usually try to set up my portfolio in a hedged manner.  I want to have bets that payoff when I am right, but also some that pay off if I am wrong.

If I am wrong and there is a spark somewhere, stocks will go up and bonds will go down.  My portfolio will get hurt both ways.

Spread products can help here.  Things like loans (VTA, VVR), muni (MHN, MUB), preferreds (PFF, JPS, JTP) I believe will do well in both scenarios.  My bet in those is sizeable around 50-60% of my portfolio.

If I were to properly construct my portfolio (make it more efficient as in lowest risk for a given return expectation), then I should not have same-way bets on in both my bonds and stocks.

In order to achieve that, I will shorten my duration while maintaining the credit position.  I can do this by selling my TLT.  The downside to this strategy is that if there is a global risk off event, I won't have a position that makes money.  I won't lose too much though as my stock exposure is minimal.