Friday update

20 minutes to spare and time to update our blog.

On February 3rd when the Dow was down 300 points we sold our short positions in the Emerging Markets (EDZ) and Russell 2000 (TZA) as well as closing out our position in the 20+ leveraged Treasury Bond ETF (TMF) for some nice short term gains.   Those gains covered losses in what remaining equities we had and actually resulted in a net positive day for us.

And to defy a client who in jest wondered if I was practicing “voodoo” in their accounts by having their net worth rise on a big down day (Being Irish automatically excludes any Voodoo ability) I went back to the TZA hoping for continued downside in US Markets, it didn’t happen and we incurred a 7% loss, so there.

What have we done lately?   We continue to hold on to our municipal and taxable bond funds which account for approximately 40% of our assets.   I still believe, lurking out there in the future is a market sell off in the 10% to 20% range.   Eventually the S&P 500 has to touch the 200 day moving average which it hasn’t done since 2012.  2013 is the exception to the rule when it comes to revisiting the 200 day moving average.

However, new Fed chair Janet Yellen provided positive testimony to Congress about the state of the US economy and that stopped the selling last week.

We will be entering a short but strong seasonal period that should last into April.   Hence we took some cash off the sideline and added to our minimal stock positions.  But at most we’re only 50% invested in equities and 40% in bond funds, the remaining 10% is in cash.

Emerging markets have stabilized and that is providing strength to US large/multinational stocks which do quite a bit of business overseas.   This large stock strength is coming at some expense to the type of small stocks we prefer causing a bit of lag in our accounts versus the indices.   This is likely a short term phenomena.

While a market sell off can occur at most any time, seasonality still points to a peak in US stock prices in March/April 2014 where we can expect an approximate 6 months of net weakness.   So caution is still advised.

There will a very good fat pitch coming to us in the September/October time frame and that’s the pitch we want to be ready for.


No positions

Stocks for hell or high water? No way

Advisers who tell their clients to remain fully invested in stocks, hell or high water is offering systemically dangerous advice. @Jesse_Livermore

We couldn’t agree more!

But we live and work in Lyons Colorado, so “high water” is a poorly timed phrase.

QE’s impact on markets and model portfolio performance

Not since 1995 has the S&P 500 not had at least a 10% pullback.   Normally, you can count on a 10% pullback within an ongoing bull market to a great time to add funds or bring new accounts online.  But 2013 is the year of the relentless rally where 2% pullbacks are new 5% pullback.    Extreme bullish investor sentiment which is normally a good barometer of when to ease up on portfolio exposure has been pointless, as previous blog posts have demonstrated.

So, whats going on you ask?   Why is this year different from the others and what does it mean going forward?

Markets are clearly being driven higher by the Federal Reserve current policy of Quantitative Easement and its by product of 0% short term interest rates.

Its no coincidence that when the Fed ended QE1 and QE2 markets fell apart with declines of -16% and -19% respectively in 2010 and 2011.

Its fashionable right now to analyze each economic tick (especially the recent positive employment data) to determine when the Fed will end QE3.   But the truth is we really don’t have an accurate guess for when that will happen.

Three things we know for sure at the moment:

1.  We are in the midst of the strong season for equities and that will last until March 2014.

2.  The economy as measured by employment is improving.  Contrary to politically biased media outlets job growth is not coming from part time employment.   GDP growth in the 3rd quarter was stronger than expected.   This is market friendly.

3. Bob Dieli’s Aggregate Spread and are both at benign/miniscule odds of recession.  Market friendly again.

My best guess of what will happen?  Eventually the Fed must end QE3 and the markets may anticipate this ahead of time by churning nowhere or showing internal deterioration in strength.    My thinking is that the Fed will do nothing till at least after congressional budget talks in January but by the time March comes around and temps here begin to melt some snow we should be decreasing our equity exposure in a meaningful way.

QE effects0001


Taking profits in SGOC

We are taking the profit in shares of SGOC after the stock erupted for another 35%+ gain this morning.   Stocks that go parabolic usually become very unstable when profit taking eventually takes over and we’d like to be out of the stock before that begins to happen.   As you can see by the chart it has made similar leaps before but it usually gives up about half the gain in short order.


No positions

Brad Pappas

Continued Caution

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