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