A quick update on our current status:
The major market indices are at or near major market highs which will likely be a difficult hurdle to surpass in the near term.
In addition, investor sentiment is extremely positive which has negative implications going forward in stock prices.
To our way of thinking the combination of negative investor sentiment with markets at historical highs implies either a sawtooth churning market with little or no gain or a moderate decline in prices in the near term. We don’t believe at this time that a major market top is playing itself out, we believe based on Ned Davis’s market cycle analysis that a major top is due in the Spring of 2014.
All recession indicators remain in positive territory.
So, we are essentially playing defense for our clients by selling off stocks falling in our ranking systems and raising cash rather than reinvesting on the long side. We have added a significant amount of inverse exchange traded funds that should aid in buffering downside volatility in client portfolios.
Should a decline emerge to the degree that overwhelming positive sentiment is reversed we will reverse our course and liquidate the inverse ETF’s and add new long stock positions for a potential new leg up in the indices that could last to March/April 2014.
Brad Pappas
Investors not satisfied enough with a +23% gain on the S&P 500 they want Ludicrous Speed!
All is not quite copacetic on my stock trading screens, there are two factors that are giving me some angst:
1. The small cap dominated Russell 2000 index is losing relative strength compared to the 100 largest stocks as comprised in the OEX index. For the past couple of weeks my trading screen is green for the Dow and the S&P 500 but negative for the Russell 2000, this is not a good sign. The Russell has been leading for a solid year and while our returns remain strong I’m seeing underlying erosion in the breadth of the market’s never ending advance.
As the chart below reveals the market for small cap stocks is rolling over and could likely be a precursor of a larger market pullback sometime soon. On a positive note: all of the economic timing systems we follow show continued economic growth with miniscule odds of a recession within the next 9 months. Its likely that any pullback, if it occurs will be modest and not the Bear Market variety.
2. Investor Sentiment: There have been very few times in recent memory where my ensemble of sentiment indicators are in the uniform opinion as they are at present. Too much euphoria and not enough fear.
Citi’s Tobias Levkovich in an 11/3 briefing: “The Panic/Euphoria Model is sending a clear warning sign of substantial complacency.”
Jason Goepfert at Sentimentrader.com has in my opinion the most reliable ensemble of investor sentiment measurements and the ones that matter the most are at an extreme.
“Smart Money is clearly becoming more defensive while the infamous “Dumb Money” continues to close their eyes and press the buy button.
On a shorter time scale Sentimentrader.com’s Intermediate term oscillator has shifted to ludicrous speed as well.
What to do now? Time to raise some cash and in certain instances modestly hedge our portfolios. We’re taking a hard look at our existing holdings and curtailing long purchases. We’re very fortunate to have few tax losses to take but we do have several holdings that have been lackluster and are candidates to sell.
We seldom use inverse exchanged traded funds, but in my judgement now is a good time for their consideration. While I may think this market is running on fumes, we only intend to use them in modest amounts since the underlying trend for stocks remains higher and no recession is imminent. Or, just enough to soften the pullback should it emerge.
If you’d like more detailed information please contact me directly.
Be careful out there
Brad Pappas
No positions mentioned
We are very pleased to announce our client portfolio performance returns as of July 31, 2013.
We classify client accounts into two categories: Under 20 Holding and Above 20 Holdings. Above 20 Holdings is our default portfolio system new accounts. “Above 20” implies that there is a minimum of 20 stocks in the portfolio but many portfolios in this category have 30, 40 or more.
RMHI Under 20 Holdings: 27.42%
RMHI Above 20 Holdings: 30.9%
S&P 500: 18.2%
RMHI returns include all fees and expenses.
RMHI is not a mutual fund. We manage private portfolios held at Charles Schwab and Co. on behalf of our clients. Our specialty is managing quantitatively driven portfolios with a socially responsible investing screening process.
We believe the combination of scientifically based, back-tested quantitative style provides a superior alternative to socially responsible mutual funds. You can see for yourself at SocialFunds.com
CNN Money has a Fear and Greed Index which now reads 18%, this is a positive development. I imagine this is due to impending action in Syria. But this is just part of the investing process and to understand how to make the Fear and Greed Index work for you understand that you should be alert and looking for buying opportunities when Fear is prevalent and be cautious when Greed is commonplace.
Our intermediate time frame (under six months) and longer term time frames remain positive.
Background music: Ennophonic by Redlounge Orchestra
The most popular question I frequently hear is: “Your back test results look great, almost too good to be true but do your portfolio designs really working going forward?” Very fair question and if you don’t mind this is a great time to add some legalese “Past results don’t guarantee future results or even that a model devised by man and laptops will actually turn a profit in the future”. You know the drill, a back test can look great but will it work in the future or will it be a flop?
Late last year we took (what we thought) was a brave and potentially embarrassing step by placing three distinct trading models on the quantitative trading platform Collective2.com By doing this we could demonstrate the effectiveness of our systems in real time going forward, rather than relying on hypothetical back-testing. While there is no actual cash behind these C2 portfolios we trade them on the C2 platform as if there were like any other client portfolio.
In addition, if you’re intrigued and curious about our holdings, volatility or turnover C2 is a great place to check us out. You’ll see our winners and alas, our losers. In addition to our holdings, Cs provides a month by month return graph. You’ll also notice in the link below that C2 has given our portfolios a rank which is based on their proprietary ranking system and our rank as of August 24 is 9.95 and the highest possible rank is 10. According to C2 “In general a ranking above 5.0 is good. A rating above 7.0 is excellent.”
(Click on this image to be directed to our C2 accounts)
RMHI/OP III has approximately 30 holdings when fully invested and is designed for investors with over $100,000. It is by default the portfolio management system we employ for new accounts. Its also very scalable where at present we have accounts approaching $2 million in size using RMHI/OP III.
In terms of socially responsible investing, it would be very easy to alter one or two holdings so that the portfolio would meet a Vegan investing criteria.
Year to date 8/23 our C2 account III has returned 34% versus 18% for the S&P 500. Returns include commissions and accounting for slippage. Returns do no include management expenses.
You’ll also see that its possible to subscribe to our models on C2. We don’t encourage C2 subscription hence we keep the monthly cost prohibitive.
If you have any questions you can always call us. Meanwhile Dodgers / Red Sox are starting and it is a Sunday night after all.
Brad
Background music: Just chillin by Polished Chrome
Earlier this week we went on a road trip to check off a Bucket List item that after living in Colorado for 20 years and a deep interest in 19th century western history: The Little Bighorn. While Custer’s defeat in Southern Montana is not the black hole conspiracy mystery such as the JFK assassination, it remains so full of unanswered questions. One of the many things remarkable about the Little Bighorn is the placement of markers on the spots where U.S. cavalrymen fell. The various Indian nations are still in the process of placing their own markers where their warriors fell as well. These markers give you a really good idea of happenings of those fateful hours.
![IMG_0670[1]](http://dev.www.greeninvestment.com/wp-content/uploads/2013/08/IMG_06701.jpg)
Happenings from last week and looking to the week ahead:
Our client portfolios exceeded the return of the S&P 500 by a hefty 2.7% last week due largely to the sale of National Technical Systems which surged 38% on the news of its sale for $23 a share.
While its possible we may currently be in for a mild market pullback the underlying economic fundamentals still support our full equity exposure.
Bob Diehl of nospinforecast.com who developed the Aggregate Spread is giving us an all-clear signal in the search for an impending recession. His method looks 9 months into the future and is giving a green light up to at least April 2014.
In other macro economic news recessionalert.com is giving an all-clear signal as well. Dwaine Van Vuuren of recessionalert (RA) has developed a very intriguing stock market health model that incorporates economic data and stock market technical statistics. I expect I’ll be tinkering with his models shortly and investigating how well the synergy exists between his work and our own.
Green Investing Alert: Our proprietary quantitative ranking systems have identified a stock long enamored by the socially responsible / green investing community: Gaiam
Gaiam is a retailer that caters to the yoga/wellness market. What may be the catalyst going forward is the sale of their stake in Real Goods Solar which is allowing Gaiam to add a significant amount of cash to their balance sheet.
We have no positions in Gaiam at the time of this post.
Brad Pappas
