Posts Tagged 'investing'

Caution is Warranted Despite Winning Streak

The Fed-inspired rally continues, however caution is warranted.

 This might be a time to recall the Wall St. adage, “It’s not what you make, but what you keep”. For some time now the only real economic positive (to the stock market) has been the continued monetary policy (QE III) of the Federal Reserve. Low rates have forced many investors out of the safety of CD’s and bonds and into riskier stocks in search of return. Trouble is that policy has only ½ worked.

According to an article at, the smart money has been net sellers this year, while the retail (individual investor) has been the buyer. In other words, what Bank of America Merrill Lynch’s (BAML) big clients have been selling, their brokers have been finding buyers among their individual clients. Anyone a client of BAML and gotten a call this year about what a great deal stocks are? Next time you might want to ask why all the big guys are selling if stocks are such a great buy!

 Here’s a piece of the story. And a link to more:

So far in 2013, BAML’s retail clients have put $7.37 billion into equities, while big institutions have taken $10.69 billion out of the stock market, and hedge fund clients have reduced their holdings of the asset class by $423 million. 

Read more


My Take

I’ve felt for some time that we are just along for the ride. There just aren’t solid fundamentals to justify this year’s gains, let alone a continued rally. However, all year, the “story” has been that the economy and corporate earnings will accelerate into the end of the year and continue through 2014. We have just started 2nd Quarter earnings reports, and along with actual earnings we will hear about outlooks for 3rd Quarter and beyond. This “guidance” hasn’t been great, but we are still early.

The question will be, if the earnings outlook is gloomy, can the Fed’s reassurances that ZIRP (zero interest rate policy) and a continuation of QE III be enough to keep the market afloat and bring back some of the “big” money?

My advice is to have a plan, and stay nimble.


Why I’m Getting Ready to ‘Go Away in May”

The attached article was published at on 5/2/2013. While the market continues to show technical strength, key economic data is deteriorating. While we remain fully invested, we are rotating portfolios to lower risk holdings.

The data looked good until the last half of April. Now the five factors needed for a continued rally have taken a decided downturn, prompting one advisor to move into a low-beta strategy and collect dividends over the summer. His advice? Watch SPLV and JNK very closely.

Recently we’ve seen a turn in economic data that may be showing a soft patch ahead for our economy. But with a plethora of data to choose from, which data really matters?

In the past I’ve used a study by Citi equity strategist Robert Buckland that suggests that after a significant increase in the market, there are five factors that determine whether an existing rally can continue.

But before we look at that data, let’s first take a quick technical look at where we are according to three indicators: SPY (SPDR’s S&P 500 Index tracking ETF), SPLV (PowerShare’s S&P Low Volatility Index tracking ETF), and SPHB (PowerShare’s S&P 500 High Beta Index tracking ETF).

Below is a year-to-date candlestick chart of SPY, with the 200-day simple moving average (SMA) in yellow. SPY is clearly trading well within its uptrend—as indicated by the white lines—which started in November of 2012.

Despite the media’s Chicken Little reaction on every down day, the candle chart provides a quick visualization showing that volatility also appears to be well within a “normal” range. And, finally, SPY is trading well above its 200 SMA, a common indicator of the strength and future direction of the market, as long as the 200 SMA also continues to show an upward trend.

Figure 1:SPY 12 Months

Horsesmouth: Why I'm Getting Ready to 'Go Away in May'


In Figure 2, below, I’ve added SPLV (yellow line) and SPHB (blue line) to the graph of SPY (green and red line). I’ve also changed the time frame to a year-to-date view. The white trend line shows that SPHB has turned negative since about mid-March, while SPLV has continued to show gains.

The result has been a relatively flat SPY. This shows a definite rotation from riskier high-beta stocks to lower-risk, lower-volatility stocks. While this is a “risk-averse” move, it is significant that SPLV is still showing a positive trend. Investors to do not appear to be concerned about a broad market sell-off but are apparently (and logically) looking for the lowest-risk securities—probably as an alternative to near-zero-interest-rate bonds. More dividend-paying securities will be in the SPLV index than the SPHB index.

Figure 2: SPY vs. SPHB vs. SPLV Year-to-Date

Horsesmouth: Why I'm Getting Ready to 'Go Away in May'


This is a graph I look at on a weekly, if not daily, basis. We moved out of SPHB and into SPLV for our Seasonal ETF strategy at the beginning of April. I will get very defensive if SPLV starts showing a downtrend along with a continuation of SPHB’s down trend.

Back to the fundamentals
While a rotation from SPHB to SPLV could just be an indication of investors looking for yield, it could also be an early warning sign of bad things to come. Do the fundamentals warrant a continued rally or a sell-off?

Let’s use Citi strategist Robert Buckland’s five criteria for a continued rally to help us determine whether this upturn might continue. We rank each criterion as a positive, negative, or neutral development:

  1. Lower-than-average starting valuations: Neutral. Reuters dropped 2013 earnings projections to $114.01. This gives the market a 13.9 forward P/E—a decidedly average number. I lean to a neutral position because historic low interest rates would normally account for a higher P/E.
  2. Double-digit EPS growth: Fail. Year-over-year earnings growth is now projected at a paltry 3.75%. estimates that top-line revenue growth will be flat for Q1 2013.
  3. Rising PMIs: Fail. Markit Flash PMI came in at a 52 reading on April 23. While still a positive number showing economic expansion, it is lower than the previous reading of 54.6.
  4. Higher U.S. government bond yields: Fail. The yield on the 10-year Treasury has dropped from about 1.88% to 1.7% in the month of April.
  5. Sustained flows into equities: Negative. According to, the week ending 4/24/2013 saw a negative flow from mutual funds of -7.3 billion. This was only partially offset by a positive flow into equity ETF’s of $1.1 billion

When I looked at this data in February, all five criteria were positive. Looking back at the economic report tables, I’d say this data has been fairly positive until just the last half of April.

And that’s the problem with economic forecasting. At inflection points, it is impossible to know whether or not a turn in data is an aberration, a temporary blip, or the beginning of a trend reversal. The one point that keeps me mildly optimistic is that virtually every forecaster predicted a soft first quarter for 2013. So this has not been a surprise.

Investment strategy
I follow the “sell in May” strategy supported by The Stock Trader’s Almanac and their research. However, we use a low beta strategy instead of cash for the “go away” period. As I noted earlier, we replaced SPHB with SPLV a month ago. I would expect that we will have completely rotated into our summer low-beta holdings by the end of the week.

For our dividend portfolios, we have already adopted a low P/E screen to our holdings. I hope that a relatively low valuation and high dividend yield combination will prove to be a solid defensive strategy as well as providing reasonable gains over the next several months.

What I’ll be watching
For our seasonal strategy, we simply will not get more aggressive until the October/November time frame. We’ll collect dividends over the summer. However, we can—and will—get more defensive if conditions warrant. At this point, I am watching SPLV very closely. If it establishes a negative trend along with SPY and SPHB, I will be very concerned. I would look at the equity fund flow data to confirm that interest in stocks has waned to dangerous levels. In our dividend strategies, I hold JNK (SPDR Barclays Capital High Yield Bond ETF) for a combination of yield and as a tactical position. JNK continues to provide a slow but steady appreciation in its NAV. However, I am very nervous when high-yield debt is only paying a 6.01% yield (JNK yield from as of 4/28/2013). If JNK stalls or turns negative, we will move this holding to cash very quickly.

Is The Market Topping?

The following article originally appeared at MarketWatch on Friday 3/8/2013. Despite nervousness over new market highs, this rally appears to be in the early stages, not the end.

With the market hitting new highs (DOW) or closing in (S&P 500), the topic du jour for the past couple of weeks, has been whether or not the rally can continue.

In my last post, I noted that JNK, the SPDR High Yield bond index ETF, was dropping while the S&P 500 was continuing up. Since JNK and SPY have a high correlation (they tend to move in the same direction) something was due to give. Either SPY was due a selloff, or the correction in JNK was done and it would soon follow SPY up. As shown in the chart below from, Spy (the red and green candle chart) has moved on to new highs since the downturn started in JNK, shown by the vertical white line. Spy did pause a bit to digest the sequester non-event, but it didn’t even drop to its support level, shown by the longer up sloping white line. And in fact JNK did resume a modest uptrend.


The point being, SPY shrugged off two negative influences, a drop in high yield bond demand (lower price for JNK) and totally shrugged off the sequester.

This leads me to my next market indicator to watch.

The market seems to go through four distinct cycles:
1. Up on bad news
2. Up on good news
3. Down on good news
4. Down on bad news

It seems to me the market is still in phase #1, up on bad news, and hoping to get to #2, meaning news becomes consistently good. Not that all current news is bad by any means. In fact we’ve had some pretty good economic news lately. But when you include political events, news has been a mixed bag. And when confronted with bad news, the market is shrugging it off. Slow earnings growth? No problem, it will get better. Sequestration? No problem, it’s just politics. Italian election? No problem, the ECU will rein them in… And on really good news, good ISM report, the market is having really good days.

One easy way to follow the economic news is to use MarketWatch’s economic calendar.


On a daily basis you can track economic reports and see the market’s reaction. I like to look at the data at the end of the week for a bigger picture of the data and market trend. This leaves the more subjective political news. My observation is that the market is shrugging off nearly everything political. Perhaps the first crack in our current rally will be when the market actually reacts negatively to what would seem to be negative political news.

For now, my strategy is to stay bullish. While I personally can give a pretty ugly laundry list of reasons the market could (or should) go down, for now I’ll assume the market is smarter than I am, and not fight the trend.

Just One Thing…

…an occasional departure from my usual market/economic outlook to focus on financial planning issues.

My business practice is centered on our investment strategies that we implement for our clients. Our focus is on lower risk, high dividend income stocks. And a growth strategy utilizing Exchange Traded Funds (ETFs). However, coming from a decade plus of offering financial planning services, I realize that there are many other products and services that can be beneficial for a broad spectrum of investors.

With the aging of our population, a common concern that I am asked about is how to best fund potential outside assistance as we age – either from an in-home aid, senior care facility or nursing home. More and more this question is coming from my fellow “sandwich” generation peers – those of us still funding kids at home or college, and taking care of elder parent(s) at the same time.

Unfortunately too many phone calls come after the fact…as in “Mom just entered an assisted living facility, what do I do?” While there are “after the fact” steps to take, by far and away the best idea as in most things in life is to plan ahead!

For example I just found out that a client has moved into an assisted living facility. He happens to own an old annuity with substantial gains – all of which is taxable when he makes withdraws to pay for the facility. If I had known before he moved in, we could have transferred the annuity into a Qualified Long Term Care annuity and taken tax free withdraws to pay his bills. Since very little of the cost of assisted living is typically tax deductible, this could have saved my client a large amount of taxation in the coming years.

If you would like to learn more – in a non-sales environment, Michelle Prather of OneAmerica is offering a consumer oriented webinar discussing some unique products that can dramatically improve one’s financial security. I have looked at these products and feel that there are many opportunities for individuals to increase their long term security. In many cases simply by repositioning “rainy day” funds that are earning virtually nothing in savings accounts and short term CD’s today.

If you are interested in a personal plan please contact my office for an appointment. We are also looking at offering a “Lunch and Learn” presentation at our office on “Sandwich Generation Planning.” If interested please send me an email or call and we will prioritize the topic on our calendar.

You will not be contacted by anyone after viewing the webinar. If interested in more information you will need to contact my office.

Protecting Your Retirement Nest Egg

Presentation on costs of needing care and options available that most are
unaware of.

Register for a session now by clicking a date below:
Wed, Mar 13, 2013 6:30 p.m. – 7:00 p.m. EDT
Thu, Mar 21, 2013 2:00 p.m. – 2:30 p.m. EDT

Once registered you will receive an email confirming your registration with information you need to join the Webinar.

System Requirements
PC-based attendees
:  Windows® 7, Vista, XP or 2003 Server
Mac®-based attendees:  Mac OS® X 10.6 or newer
Mobile attendees:  iPhone®, iPad®, Android™ phone or Android tablet

Web Talk Radio Interview

I  was recently interviewed by Robert Margetic of Web Talk Radio for a piece on “The New Retirement – Its Your Attitude” The segment discusses new thinking that retirees must adapt to for a successful financial retirement.

Quoted in “Fiscal Cliff: Fact or Fiction?”

The article “Fiscal Cliff: Fact or Fiction?” appeared at discussing the coming Fiscal Cliff facing the U S economy.  I  provided the author with background information and is quoted in the article addressing investor strategy.

So How’s That Asset Allocation and Diversification Working Out For You?

Since the market top in 2007 adherents to a buy and hope investment strategies have been pretty disappointed with their results. Headlines have asked “Is Buy and Hold Dead?” Trading has become king.

The whole idea of a buy and hope with a diversified portfolio is that in using different asset classes, or types of investments, while one might be in decline, another will rise to smooth out the overall portfolios’ performance. Trouble is there hasn’t been much smoothing going on. Everything has been zigging and sagging at the same time. While this has been painfully obvious to those of us that watch the markets daily, it is always nice when someone actually runs the numbers and verifies what I’ve been observing.

Below is a chart from who always seems to come up with a good chart to show what’s been happening in the markets. The blue line shows the correlation among the stocks in the S&P 500 since 1980. Correlation is how closely  different stocks in the S&P 500 move together. Over the past month the correlation coefficient has popped up over the 80% level. Levels last seen during the stock market crash in 1987. There hasn’t been much zagging to offset the zigging since the pre-2006 time frame.

What’s this mean to the average investor? Risk management is changing. The “easy” strategies that work in bull markets are falling apart. Partly due to the overall bear market, but also guilty is the advent of the high frequency traders. Traders that trade hundreds of thousands of shares a day making small per share profits, but on huge volumes of shares.

The warning signs are clear, as we saw in the last post volatility is high and correlations are high, the only tools to reduce risk are hedging strategies, dividend strategies, and holding cash that all help to dampen volatility. Strategies that we use at 401 Advisor, LLC for our client portfolios.

S&P Downgrade

I fully expect the markets to be extremely volatile over the next few weeks as investors try and sort through the ramifications of the Standard and Poor’s downgrade of the U.S. During this time I hope to post frequently and offer a perspective on events as they unfold.

Today we’re seeing a major selloff in equities, currently down about 3% as of late morning on Monday. Let’s take a look at why.

First, what is NOT happening. U.S. interest rates are not skyrocketing up based on the “downgrade”. In fact the opposite is true. Interest rates on U.S. Treasuries are actually lower than they closed on Friday. Why? Everything is relative. While domestically the downgrade is the topic, the global reality is that Europe is still the same mess that it was on Friday. And our downgrade has more of an effect on Europe than it does on the U.S. There is no question that the U.S. is still the big dog in the global world of financial markets. We will not default on any of our payments. Period. The same cannot be said for the troubled countries in Europe – Greece, Spain, Italy, Ireland and Portugal. Although France is not on the “watch” list, they do not have the financial strength of the U.S. As such all the aforementioned countries will necessarily receive a downgrade to reflect their strength, or lack thereof, compared to the U.S.

Back home, you have government backed entities, such as FNMA and FMAC that cannot maintain higher ratings then the entity (the U.S. Government) that is backing them. Such downgrades will then ripple through the bond markets, as virtually everything will need to be moved down a notch in terms of their own ratings. We’re seeing this now as JNK – the SPDR High Yield Corporate Bond ETF, is dropping over 3%. (We sold our holdings of JNK last week when our signals triggered the sell). Overseas, Israeli bonds are suffering as their credit rating is based on the credit backing of the U.S.

Bottom line, is that the U.S. is still the largest and most stable of the world’s major economies. And in times of turmoil there is a financial flight to quality. That flight is into U.S. Treasuries which in turn is driving up prices – which drives down yields.

Tomorrow the Fed meets, expect a strongly worded statement from Mr. Bernanke on the solvency of the U.S., and the steps that the Fed will take to reassure global investors. That should at least temporarily halt the bleeding in the stock markets. Whether an actual rally can ensue will be determined by the ECB, and how they will handle their financial problems with Spain and Italy.

If your portfolio is not already in cash, or hedged my next post will address the decision making process on how and when to change your portfolio’s strategy. Our firm’s strategies are well defined and determined well in advance of our recent selloff. I can’t imagine looking at today’s market, and trying to make a rational decision on whether to sell, or hold on for this to pass. • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.