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
Below is a chart of our primary portfolio for accounts in excess of $100,000. This trading system has been verified by Collective2.com where it has been given a score of 9.96 out of a possible 10.
Year to date rate of return 42.7% versus 21.64% for the S&P 500 as of 9/21/2013. Returns do not include RMHI management fees (which are negotiable and vary from client to client) but do include all trading expenses including an allocation for slippage.
This portfolio uses our most effective quantitative systems for socially responsible investing and is ideal for long term investors. The portfolio automatically filters out industry groups such as Energy, Biotechnology, Pharmaceuticals and Tobacco. In addition it is screened on a personal level by myself for companies that are likely to be offensive to any of our clients. In addition, this portfolio also fulfills the requirement for a Vegan investor. Contents of the portfolio can be seen by clicking the Collective2 link above.
Please note that in many of our examples we use hypothetical backtesting for investment examples. While this account at C2 is in a sense hypothetical since we’re not actually buying or selling any shares directly through C2 it is meant to be used as a real time mirror of the changes and results being made in our client portfolios. The hypothetical buys and sells made in the C2 portfolio are also being made at the same time in live client portfolios.
Brad Pappas
Every once in a great while I’ll hear a song that will stop me in my tracks no matter what I’m doing, as time goes on that seems to becoming a rarer event but last night it was: Gnarls Barkley with “Who’s going to save my soul”. It could have been Motown back in the day but the slight hip-hop melody makes it a stunner.
One of the most common requests we receive from new investors is the Vegan investment portfolio. For more then two decades Socially Responsible Investing revolved around broad themes such as environmental and military issues. In the early 1990’s we introduced the concept of Humane Investing or avoiding companies with operations harmful to animals such as factory farming.
But now a new trend is emerging that we’re happy and capable of accommodating: The Vegan Investment Portfolio.
The Vegan Portfolio is built upon our standard humane investing concepts but with a closer and more discerning eye for details of a companies operations. While many investors employing socially responsible investing strategies may include owning Whole Foods Market or Chipotle Mexican Grill the Vegan criteria excludes such ownership. But in our experience its also not accurate to assume that the Vegan portfolio must exclude consumer staple or food stocks. In the past year we’ve owned stocks such as J. B. Sanfillippo and Sons symbol JBSS (nuts) or Calavo Growers symbol CVGW (avocados).
We like to think that owning individual securities with our proprietary quantitative investment strategies offers investors a very strong alternative to mutual funds. Investors must keep in mind some basics of mutual fund practices:
By our calculations mutual funds that classify themselves as “Large Cap” only have approximately 500 stocks to choose from.
Mid Cap mutual funds have approximately 840 stocks to choose from.
Once you consider that a Vegan screen combined with other social screens could eliminate at least 30% of the universe of stocks to choose from the remaining investment choices can be quite limited. If you’re a Large Cap fund that could mean less than 350 stocks to choose from which is a major reason why applying social screens to Large Cap mutual funds are quite difficult to implement and why you can be quite surprised when you see the contents of an SRI fund.
RMHI has the entire U.S. equity universe to choose from or approximately 6800 stocks which is quite an advantage. In addition, we can avoid the large multinationals that have hands in many businesses and focus on companies that are specific in their business operations which gives us confidence that their practices meet our social screening standards.
Since our universe of selection is relatively large compared to mid cap and large cap funds the implementation of a Vegan criteria is much easier to implement.
A Vegan criteria screen eliminates the following, but not limited to:
Factory Farming including all producers of non vegetarian foods.
Leather / Hunting retailers – including shoe retailers such as Brown Shoes or Cabellas.
Firearms manufacturers.
Animal Testing companies which includes biotechnology and pharmaceutical manufacturers.
Restaurants including fast food restaurants.
Specialty chemical companies that create compounds that could be used in support of other offending companies.
Extractive industries such as mining, gold, petroleum and needless to say fracking.
I’m sure there are other classes of companies to be excluded and we will usually address them as they come to the top of our rankings systems. But have no fear if you might think the list above is too restrictive, our 30 stock portfolio on Collective2.com is by most definitions a Vegan portfolio.
There are always companies that fall into gray areas where there is no right choice except the choice most comfortable to the investor. A recent example is Big 5 sporting goods which sell items like baseballs, baseball gloves and footballs all made with leather.
To summarize, while many non SRI investment planners and advisors may have little idea what a Vegan portfolio looks like they are always welcome at RMHI. In addition the realities of owning and managing large and mid sized mutual funds can make social screening impractical due to the limited size of the stock selection universe. This can be avoided by including smaller sized companies (under $500 million capitalization) .
RMHI owns 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.
