Investing in Everyone's Future

Reflections On A New Era

The next four years could be a bit awkward especially for new readers.   One might assume that I applaud the Trump Presidency but my political and social views are of secondary concern.  My role is to interpret the direction and behavior of policies and markets and hopefully be on target. Quick Summary of 2016: One year ago our base case scenario was the economy and markets were rolling over into recession and that downside risk of stocks was much greater than the potential upside.  This proved to be the correct assumption as many categories of stocks (especially Value stocks) were in full-fledged bear markets.  We avoided a sharp 15% decline in January-March and the Brexit decline in July.   During the April-May period forward looking economic data began to improve sharply and the recession was avoided (first time for such a turnaround since 1985).   While I deeply regret lagging the major indices in performance this year, the risk/reward last Spring was disproportionally negative and preservation of principal is always my #1 priority.   2016 will represent an economic mid-cycle bottom which supports the prospects of acceleration in 2017. Below is a basic trend model which uses the 12 month moving average (ma) of the S&P 500.  When the SPX is above the 12 month ma the trend is bullish/positive.  Moves below the 12 month ma indicate a potential change in trend and a time for caution.  It’s not perfect but when combined with an eroding economy the results can be devastating to the Buy and Hold investor not paying attention.       And then there was the election…… We’ve now...

The false virtue of simplicity

When markets rise inexperienced investors want to buy and hold and view simplicity within investing as a virtue. When markets fall investors wish their adviser had a risk strategy that raised cash which by default increases transactions and complexity. A few $8 trades can save tens of thousands of $ and allows you to buy in after the bottom. You can’t have it both ways. Brad...

Waiting for the fat pitch

Our mean reversion strategy has reached the point where a low risk entry point can be made but we continue to wait.   Rising poll numbers and increasing odds for the Republican candidate continue to put pressure on US markets.  Markets can continue to increase their oversold status by becoming more so but that may also mean a stronger resulting rally. Should the Republican candidate win next week I would expect a sharp woosh down in US stocks and the USD.   At some point there will be stability where new positions can be established. Since everyone seems to be concerned with the negatives, there are important positives to consider: The 50 day moving average of the SP500 remains above the 200 day moving average and GDP growth is accelerating (These are not bear market conditions). Since the newsletter being sent to clients two days ago our cash position has increased to 50%+. Should HRC win the presidency I’d expect markets to stabilize after the election.  In the meantime high cash levels will be maintaned. november-2016-client-letter Brad...

Stocks presenting a low risk entry point.

Ideally we could have used additional weakness to increase the oversold status of US stocks.  The lack of volatility and any follow through are likely with us till earnings season or the election are over.  ...

Present status

At present we have 35% of client assets in cash as the markets have receded from a high risk level.  The late September/early October time period is notorious for steep market weakness.   Should we witness a further pullback in the indices we’d have a low risk entry point to use our sidelined cash. In the meantime a Green energy related company Advanced Energy Industries is behaving extremely well.   We have only a small holding in The Vegan Growth Portfolio but would like to add more on any market pullback.  AEIS is completely ignoring any market weakness as demand for the shares is very strong. Long AEIS  ...

Optimizing Risk and Exposure in a low return market

Over the past several weekends I’ve been looking into developing strategies that could maximize return in a relatively flat market.  While its true that the major indices broke to new highs only a month ago, meaningful confirmation of what could be a new leg up has not materialized yet.  Plus, I’m a bit concerned about the upcoming election and the potential for chaos, not unlike 2000. The point of this blog entry is to show a technique that would identify low risk/great entry points for the equity investor to be 100% invested.   Other than these time periods the investor should be less than 100% invested.  I fully realize this goes against many traditional investment tenets but in our testing those tenets of being 100% invested at all times don’t hold to be worthwhile.   After all, if you’re already 100% invested how can you add to your holdings on a market pullback?  At worst, the gains you may have realized in a rally are going to be at least partially dissipated during an eventual sell-off. Technique: % of Nasdaq 100 stocks above the 50-day moving average This first chart shows the Nasdaq Composite over a 5 year period moving in a range between roughly 80% above the 50-day moving average to below 20% below the 50-day moving average.   Ideally a client should begin to move from underweight stocks to fully invested when the % drops below 20%.  Likewise begin to lighten up your investments on a rise above 80%. One of the great advantages to this technique is realizing that market sell-offs are inevitable whereby your state of...