For the past few weeks we’ve become increasingly more cautious as investor enthusiasm has reached euphoric levels. The irony of this is that Jason at Sentimentrader.com has published a study that euphoric investor enthusiasm doesn’t always lead to weakness, it frequently can create a short term top followed by churning market action before resumption of the rally. Churning action is not bad at all and in the past week we’ve seen two of our holdings make extraordinary leaps: FONR catapulted from $11 to $19 and today SGOCO Group rose 47% in a single day.
Combined with this is the fact that we are in the strongest season of the year for stocks. This evening I ran a study dating from 1999 to 2013 where I measured the rate of return for our models from November 19 to March 31 of the following year.
There were 12 time periods measured and I excluded 2008 and 2009 from consideration due to recession. Note there was a recession in 2001-2002 period as well but small cap value defied the recession and posted strong gains. The results are a combination of both real time and hypothetical data.
Average gain November 19 thru March 31 was 18.91% including all fees and expenses.
Low return was 5%. The high return was 30%. Median 17%.
There were no negative returns.
The markets reluctance to sell-off despite high sentiment readings but with strong seasonal strength gives me the sense that holding inverse exchange traded funds may not work this time and they were sold for a small loss.
Brad Pappas
Long FONR and SGOC
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
With all due apologies to Joe Strummer and the Clash “Should I stay or should I go?” What to do about Washington? We now have another go around with Washington but we’ve seen this act before haven’t we? Politicians seem to prefer to be giving interviews on TV rather than working for a bipartisan solution.
Gaming how the issues of healthcare and the debt ceiling will be resolved are pointless IMO and the markets seem to be taking the Washington dysfunction in stride. Last night Bank of America lowered their 4th quarter GDP estimate from 2.5% to 2.0%, still a very long way away from a recession especially when you consider that the Washington michegoss may prolong the Fed’s easy monetary policy.
What we do know is that the underlying economy is improving and will likely continue to do so for a quite a while. We’re not in the business of forecasting as that’s another fools errand, the early warning macro data at present shows no sign of recession within the next 9 months.
Others have asked “Should we take some profits now?” Again I would still say “No”. To do so would likely mean the investor would create an additional capital gains tax obligation with the hope that you’re selling high and have the dexterity to buy near the bottom. In my experience I’ve never seen an individual investor pull it off due to the psychological release of selling a position and yet truly have the emotional strength to buy back in a again. Once again a very low probability event.
Be cool out there
Brad Pappas
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.
Music in the background: The Black Keys “Have Love Will Travel”. I’ll pull no punches I love listening to the Black Keys especially at the gym. But, for all their appeal has there been a band that has borrowed from more artists? Bo Diddley should be collecting some of their royalties.
Frequently, we have to tell clients to ignore the noise of the media which will bombard the investor with combinations of fear or euphoria bordering on the manic. Frequently those opinions are jaded with political or investment biases which make their statements virtually worthless. Even more frustrating are the multi-handed economists who never appear to make a decisive stance “On one hand, then on the other hand etc.)
Its essential to tune out the noise and find sources of information that are purely data driven without biases and one very good source is Recessionalert.com (RA)
This morning RA released their Long Leading Index (USLLGI) and I’ll use their own words to describe the USLLGI:
“The USLLGI takes a far-reaching forward view of U.S economic growth by tracking 8 reliable indicators which have consistently peaked 12-18 months before the onset of NBER defined recessions since the early 1950?s. The growths of these indicators, together with their diffusion index, are combined into a 9-factor composite to give a generalized view of future overall U.S economic growth. When the USLLGI falls below 0 for 2 consecutive months you have a signal that recession will occur in 12-18 months.”
This is an economic timing method not a stock market timing system. The lead times are long, for example in the 2007-2008 “Great Recession” the LLI tipped its hand in early 2006 by crossing over the 0 level. In 2011 it made a near miss by approaching 0 but it never broke through. At present its at a healthy reading of .1 which largely eliminates the chances of recession in 2014. Its too early to say for 2015 but we’ll have an idea by the end of this year.
In the meantime, ignore the fear and noise. The potential for a new secular bull market has some real potential.
Be careful out there
Brad Pappas
