Posts Tagged 'S&P'

Portfolio Alert

In my last post I said that we were growing increasingly concerned over the deteriorating market since last week’s election.

A key area of support historically has been the 200 day moving average (DMA). The DMA is just the average price of a stock or an index for the past 200 market days, or approximately one year. When the current price drops below the average price of the past year, it has been common to see a much deeper decline. While it is always tempting to say, “This time is different” things rarely really are different. The reasons the market may go down, or up, will always be different, but the actual market cycles are really fairly consistent.

As of the market close on Thursday the 15th, SPY – the S&P 500 tracking ETF, has closed below the 200 DMA for 4 of the last 5 days. We consider this to be a very bearish sign. So far, we have sold 20% of our most volatile holdings in our ETF Seasonal Growth strategies leaving us with a 25% cash position. In our income strategies we have sold up to a 20% position and have also kept that in cash. Our smaller growth accounts that only trade one security are all in cash. Our 401(k)’s are still fully invested. Due to the trading restrictions in 401(k) plans we do delay our buys and sells to try and avoid “whipsaws.” That is getting a signal to get right back into the market after a sell signal. This can result in trading restrictions from the 401(k) plan.

Looking forward, we will continue to sell holdings in our growth strategies, and buy a “short ETF.” A security that goes up, when the market goes down, to further hedge our accounts. Our dividend portfolios will go short with 20% of their holdings. I’ll also look at holdings and focus on defensive industries. Currently we are over weighted in energy and I plan on continuing that overweighting. I would expect the 401(k) accounts to go to cash in the next couple of trading days, unless we see a dramatic improvement in the market.

Look for future posts as we do make portfolio adjustments.


Post Election Outlook

US markets have sold off since Tuesday’s election. At this point I’ll take a politically neutral stance and repeat what I said before the election. The market wanted to see a “mandate” win. And while the electoral college spread was fairly wide, the popular vote was very close. It is now a wait and see game on whether the Republicans feel as if they had enough support to threaten blockage of any tax increase proposals to deal with the fiscal cliff. Or if they feel the better strategy is to acquiesce to the victor. Until this issue is resolved the markets will probably stay unhappy.

In addition, with 24/7 election coverage over, there once again has been a realization that we are not alone in the world. Europe is back to the forefront as well as the Middle East and China.

Last week the S&P 500 breached its 200 DMA and closed just below that level. As a function of our strategy and remaining disciplined to that strategy we expect to start the process of taking defensive action in accounts if it looks like the market will close below the 200 DMA consistently this week.

As a side note, I have said repeatedly that the specific strategy that one uses to trigger defensive action isn’t crucial because no single strategy can be the best for all occasions but they can be reasonably effective in protecting against large declines. For example the RBS Trendpilot funds take action after five days below the 200 DMA, Jack Ablin from BMO waits until the SPX goes 5% below the 200 DMA. Our actual sell signal uses the SPX Total Return Index which adjusts for dividends reinvested in the index. This too gives us a delayed signal.

In terms of thinking about what sort of defensive action to take, a reason to give the market the benefit of the doubt and not get too aggressive is that the 200 DMA is still sloping upward and likely to do so for quite a while yet. One reason to not give the market the benefit of the doubt is that in terms of normal cycle duration (both for the economy and the stock market) we are late in the cycle. There is no way to know with certainty if we are at the end of the cycle but by definition if it is late in the cycle then it is close to the end of the cycle.

Right here right now there is no way to know if the market is on the verge of going down a lot. We may all have an opinion, or not, and some will be right and some will be wrong. Being right is far more difficult than the simple action of sticking to whatever strategy was laid out before the market started going down. The idea there is that a strategy laid out before the market started going down was done so with no emotion involved. Anyone may or may not have an emotional reaction but the important thing is not succumbing to the emotion, all that needs to be done is to remain disciplined and we all have more control over that than being correct right now about whether this is or is not going to be a large decline.

Hopefully the market will take back its 200 DMA this week and we won’t have to deal with this now but the important thing is the no matter what we might want we will take action consistent with being disciplined to our stated strategy. I will disclose any defensive action we take on the blog.

Is There Value Left in Low-Beta Market Sectors?

Today’s post appeared at and is reprinted below for my blog readers and clients, Aug. 9, 2012:

Low-beta stocks have been a good alternative for clients who want safety without going to cash. But value plays in this sector are getting hard to find—even utilities are getting overvalued. Is it time to move to higher beta investments? Here’s what to watch.

Since April we’ve been following our revised “Sell in May” seasonal discipline. Most advisors are probably aware of the Wall Street adage “Go away in May; don’t come back until November.” I adapt the “sell” part to “rotate to low-beta holdings.” While the strategy has worked out well so far this year, there are still nearly three months left in the seasonally soft period before the “buy” signal hits in late October or early November.

At that time I will start looking to rotate into higher-beta holdings. But that leaves the question of what to do with new investors. Is this the time to be committing more money to the same low-beta holdings? The answer provides an interesting look at the markets.

Despite what appears to me as horrid fundamentals, the market, as shown in Figure 1 using SPY, the S&P 500 tracking ETF, is definitely in a technically solid bull trend, and looks like it could challenge the year’s highs set in March.

Figure 1: SPY One Year


Despite what seems like endless whipsaws from Europe’s news de jour, volatility has actually diminished substantially since the third and fourth quarters of 2011. This can be seen in Figure 1 of SPY as well as in Figure 2 of the VIX.

Figure 2: VIX One Year


In Figure 3, I have graphed the S&P Low Volatility Index (green line) vs. the S&P High Beta Index (blue line) for the past year. While the low-volatility index is the clear winner for the past year, its relative gains have come from the “sell” seasons, to the left and right of the two vertical lines.

Figure 3: SPLV vs. SPHB One Year


This brings me back to my specific question “After a run of low-beta vs. high-beta stocks, is there still value to be found in low-beta holdings?” In general, considering the market and macro view as having turned somewhat negative, low-beta holdings can be a source of security in turbulent times. However, if they have become too pricey, could it be a better strategy to literally “go away” into cash? Or, if you see this as a market/economic bottom, is it time to look at higher-beta offerings?

It boils down to P/E

My basic definition of “value” lies in the P/E ratio. Ideally I want to be buying holdings with a P/E somewhat lower than the market. I see this as both offering a bit of a cushion to the downside and as offering greater upside if the P/E rises to a market multiple from “P” expansion relative to the “E.”

In Table 1, below, I have created a chart of the top sector holdings for both SPLV and SPHB. Then I looked at the current P/E ration for each sector, using the SPDR sector ETF or the Vanguard ETF for the Information Technology sector.

Table 1: Select Sector P/E Ratios

Source: Bill DeShurko,,

From the table above, we see SPLV is trading at a P/E premium to SPY of 17%, while SPHB is trading at a discount of over 11%. Unfortunately, there is not enough history to the indexes to look at historic relationships, so we’re left to guess at what levels mark over- and undervalued. However, I do think it is a safe conclusion to say that SPLV is getting pricey, and therefore may not be the low-beta play that one might be expecting should we have a market decline.

Delving deeper into the data, in Table 2, I ran a simple screen on utility stocks (the criteria are listed in the footnote on Table 2). Suffice it to say these are pretty simple criteria and rather low hurdles to expect a stock—especially a utility company stock—to clear.

Table 2: Utility Stock Value Screen


Using the same screener, only screening for U.S. stocks and the utility sector produces a list of 97 potential candidates. Finding only four that meet this screen tells me that utilities are getting overvalued. The last time utilities approached P/Es this high was the end of 2011. As seen in Figure 4, utilities flattened out for the first five months of 2012, the area between the vertical bars, as the “E” caught up with the “P.”

Figure 4: XLU One Year



The market has gone into a “risk on, risk off” mode for the last couple of years. You can see the cycle by comparing Standard & Poor’s Low Beta and High Volatility indexes. Clearly, on a one-year basis (as seen in Figure 3), the low-volatility index is the clear winner. The question is, can low-volatility sectors, and stocks still outperform, or do they need to correct to bring valuations down?

The answer to where to invest lies in your macro view of the market. As long as uncertainty persists, (fiscal cliff, election, Europe, slowing global economies), there will always be demand for lower risk investments. And in a near-zero interest rate environment, low beta stocks have offered an investment option. But after a solid run, relative to higher risk (higher beta) stocks, are lower risk holdings setting up for a normal mean reversion correction?

Conversely, if your confidence is high that we somehow muddle through our current list of problems, valuations are getting very compelling, as historical “growth” sectors are becoming value plays.

In digging deeper into the index holdings, there do appear to be a few value plays left. Personally, I’ll try to continue to find the individual stocks that meet my criteria in the low-beta sectors. But I’ll be watching my screens carefully for SPHB to gain solid momentum over SPLV. Historically the market is positive after presidential elections, and SPHB being both a bullish play and an undervalued bullish play could add some pop to client portfolios for the year.

Pre Mid-Year Wrap Up

As we head into the July Fourth Holiday I’m struck by what an appropriate holiday to be celebrating based on our financial markets. No, not so much the Patriotic implications, but the fireworks!! Every day when I come to work and power up the computer I’m expecting to see new “fireworks” exploding on my screen as some new catastrophe of the day has lopped a couple hundred points off the DOW.

Instead, surprisingly to me, the markets have really fared fairly well this year with SPY, the S&P 500 tracking ETF up just over 5% for the year.

Unfortunately 5% can be wiped away in just a couple days if fireworks are really ignited. Not surprisingly, I’ve received several phone calls from investors asking what our outlook and strategy are as we head into the second half of the year.

Since today is the 3rd, and a shortened trading day, and I plan on going out of town for the rest of the week, this will not be THE 2nd half of 2012 Outlook piece. But I thought I’d send out a brief note before what will be a very long weekend for some of us.

Bottom line the economic news that hit over the weekend was pretty bad. Virtually every single country showed flat or slowing growth in manufacturing as indicated by the PMI numbers that came out over the weekend. And yet the market has held up. The one Wall St. axiom I quote often is, “Don’t fight the Fed.” Meaning when the Federal Reserve is easing, or trying to stimulate the economy, the stock market will generally react favorably. Today, it is not just the U S Fed that looks to be moving closer to a new round stimulus. With the generally weak global PMI numbers China is loosening their lending requirements, Brazil looks to be reversing their currency policy and strengthening the Real before the World Cup and Olympic events that they will be hosting, and of course the big one, Germany has blinked first, and looks like they will accept a more accommodative policy for the rest of the Euro Zone.

Our strategy has changed a bit. I have sold SH, an ETF that acts in the reverse of the S&P 500, from our income portfolios. This 20% position did very well dampening our volatility for May and June, but I think July may be a decent month as Central Banks look to speed up the printing presses. Until next week, I’ll leave this in cash or a neutral position and see what happens when Wall St. returns from the Holiday. This does leave our targeted income a little short, so I will be making a move soon. Our ETF Seasonal Growth strategies are unchanged. Our low Beta (volatility) strategy has done very well since our “go away in May” sell signal tripped early in mid April this year.

For those of you that trade on your own, UNG the ETF that tracks natural gas has been moving up, and is right at resistance at $19.50. If it holds above this level it could be a buy. For really aggressive investors, Brazil might be a play heading into the winter Olympics. Neither holding would be appropriate for our strategies.

Of course past performance is no guarantee of future results. And any ideas suggested in this post require significant additional research before implementing into any portfolio.

Sell in May Looks Pretty Good So Far

My last post on April 26, “Why I’m Worried,” I went through several fundamental and technical indicators that showed the first quarters rally was likely to have ended. From an investment perspective our client accounts were moved to low beta stocks and ETF’s. I sold JNK. And last week added another defensive layer by adding SH, Powershares Inverse S&P 500 ETF to our income portfolios. Here’s a wrap up of why I am growing more bearish.

  • Corporate Earnings. First quarter earnings came in very strong relative to expectations. That should have been a good sign, but it failed to move the market upwards.
  • Citibank Economic Surprise Index (Figure1.) The stock market is based on expectations more than reality. As the chart in Figure 1. indicates actual economic data has been coming in below expectations. The index has flattened recently, but this could be from lowered expectations, as estimates have been missing for the past 3 months. Look for a trend reversal as one signal that the market may have bottomed.

Figure 1. Citibank Economic Expectations Index.

  • St. Louis Fed Financial Conditions Index and Chicago Fed Manufacturing Index.  Last time I looked the CFNAI-3MA (3 month moving average) was weekly trending up and the STLFSI was trending down, but still at troubling levels. These indices have continued to weaken as seen in Figure 2. My comment a month ago was that financial conditions were not at levels to support strong economic activity. As seen below financial stress has turned back up (bad) in the latest reading. Expect CFNAI to continue to trend lower with its next release.

Figure 2. STLFSI and CFNAI-3MA.

  • Yield Curve Figures 4. And 5. The yield curve has been a fairly decent economic indicator. Reliable enough that the Federal Reserve has a formula that predicts GDP growth based on the spread between 10 yr and 3 month Treasuries. Figure 4 shows that the yield curve has been flattening as long term rates are declining. The current yield curve is the black line; the fading lines show recent history.  Figure 5 shows that at current rates the Fed is anticipating real GDP growth of around 0.7%. Not impressive, but still positive. Continue watching the long end of the yield curve. As rates come down the expectation for GDP growth will be lowered too.

Figure 3. Yield Curve.

Figure 4 Future GDP Growth as Predicted by the Yield Curve.

  • Europe.  This is a topic worthy of a book. Actually I’m sure, dozens of books over the next decade or so. But the real issue, is what affect will, whatever happens, have on the U.S.? For a clue, take a look at the recent performance of our “too big to fail” banks; JPMorgan (JPM), Citi Group (C), and Bank of America (BAC).  Simply put, these stocks have tanked since mid March.   Yes interest rates have come down which will hurt earnings, but not enough to see 40% drops in price. Investors are definitely seeing problems ahead. While my understanding is that they are not directly exposed to European sovereign debt, they are exposed through the CDS market – as re-insurers of sovereign debt.

Figure 5. BAC, C and JPM

  • Continuing Divergence Between SPLV and SBHB. The Stand and Poors High Beta (SPHB) and Low Volatility (SPLV) Indices shows a continuing flight away from the higher beta “risk on” stocks in the S&P 500. Since the stock market high in early April the low volatility index has continued to hold its own, while the S&P 500 (SPY) and the High Beta Index have continued to decline.

Figure 6. SPY vs SPHB vs SPLV

  • JNK Below 30 day Moving Average. A month ago I sold JNK (Spider High Yield Bond Index ETF), shortly after it broke down through its 30 day moving average. Since then JNK has continued to tumble. What makes this interesting is that if expectations are that U.S. corporations can weather a Euro storm, JNK would not be dropping off as it has the last 30 days or so. Clearly, the markets are indicating that there is a serious worry that whatever happens in Europe, will have a negative impact on both our economy and corporate earnings.

Figure 7. JNK and 30 Day Moving Average


No indicator is 100% certain in predicting either the economy or the stock market. As an investment advisor I’m entrusted with clients’ business and personal wealth. It is incumbent upon me to adjust our holdings as the market indicates either softening or recovery. It is about probabilities, not certainties.

What we’re seeing now, across a fairly broad spectrum of indicators, is that investors are worried. There are more sellers than buyers of risk assets. Period. The questions are, “Is this a time to be a contrarian?” My personal opinion is that if Greece exits the Euro there is a strong likelihood of another 40% drop or more in our markets. The next question then is not “whether” this will happen, it is “what are the consequences if it does?” Are you and your clients willing to live through another sell off? If not, the only prudent response is to take risk off the table and take a wait and see approach.

What to Look For

The US economic calendar heats up quite a bit on Thursday, May 31 and
Friday, June 1:

Thursday: ADP Employment, Jobless Claims and GDP (first revision to Q1)
Friday: Government Employment Situation, Personal Income & Outlays, ISM Mfg, Construction Spending

If these reports are terrific, then we may spring higher. Unfortunately, if the economic reports show weakness, and then coupled with the debt problems in Europe, the markets could resume their spring sell off and extend into summer.

Watch the economic indicators listed above for a turn around. If corporate earnings and GDP can continue to grow in the face of European turmoil we could be setting up for the end of this 12 year old secular bear market. It is just looking more likely that we will have to go lower first, before we see a return to a long term secular bull market.

A look at the news…

I ran across a couple articles in the news this week and thought I’d pass them on. Then finish with a quick market outlook for this week.

In the, “I have some good news…and some bad news…” category, this is from Seeking Alpha,

Strategists See Biggest S&P 500 Gain Since ’98
Wall Street strategists say the Standard & Poor’s 500 Index, after falling within 1 percent of a
bear market this week, will post the biggest fourth-quarter rally in 13 years even after they cut forecasts at a rate exceeded only during the credit crisis.

The benchmark index for U.S. stocks will climb 14 percent from yesterday to end 2011 at 1,300,according to the average estimate of 12 strategists surveyed by Bloomberg. The last time they were this bullish in October was 2008, when the group predicted a 27 percent gain and the index lost 18 percent.

So analysts just cut the crap out of projected third and fourth quarter earnings, but still predict a huge rally. Wow, and you wonder why people support the “Occupy Wall Street” rallies?

On a lighter note, there was this from MarketWatch: “Why Geezers Give the Best Investment Advice” In the article they site another article entitled “What is the Age of Reason?” that concludes that “…middle-aged people make fewer mistakes with finances than those that are younger or older. The research even pegged the optimal point in life for handling money-related decisions: 53…so the next time you talk with a financial advisor …instead of asking about investment performance, you might want to ask, ‘How old are you?’” Interesting to note that of the four authors, the oldest was forty.

Must say, although I’m a bit offended at the “geezers” reference I couldn’t agree more with the study’s findings. (note: I was born in 1957)

What to Expect from The Week Ahead
Looking at a chart of SPY (the S&P 500 Index ETF), there are three things to take note. First, the fairly horizontal yellow line is the 200 day moving average. Very simply we are still in a secular, or long term bear market until the market crosses back above this line. History shows that it is prudent to be careful while the market is trading under the 200SMA. The two horizontal lines show the trading range the market has been in since this spring. While SPY broke through the bottom line (support) for a day it did finish the week back within the trading range. However, the yellow arrow shows where the rally last failed to rise up to prior resistance (the upper line) and headed downward again. The last set of parallel lines slope downward and may indicate the start of a new downward movement.

Looking ahead for the week, what we don’t want to see is SPY dropping below the horizontal support line –around 112 for SPY or 1120 for the S&P 500. Breaking below 107 would be a likely confirmation of the new downtrend. Ideally we rally a little on the week and head back up to the 122.50 range, and at least confirm the trading range. Earnings season kicks off on Monday. The Kansas City Fed also releases its financial stress index for September, (more on that after the release).

Bottom line? Defense still rules, until the market rallies above the 1225 level on the S&P 500.

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.

Just Saying – Debt Ceiling

This has been a brutal post Debt Ceiling Debate Agreement -week in the markets, eight consecutive down days resulting in a drop of 6.76% for the S&P 500. Then on Wednesday, with the market down nearly another 1%, the market turns and rallies into the black by about a ½% for the day on strong volume. Today we’re looking at another 2% sell off. So what happened on Thursday to cause a short term reversal? Could it be news that if the market had finished lower, it would have set a nine day losing streak, not seen since the days of Jimmy Carter?

I’m not usually one to jump on conspiracy theories, but here’s how I see it. On several occasions Federal Reserve Chairman Ben Bernanke has mentioned how important a rising stock market is to jump starting the economy. The last thing the Fed needs now is another stock market crash with the economy on life support after the GDP revisions from earlier this week. The last thing this President needs is any comparisons to former President Jimmy Carter’s administration as we head into an election year. Coincidently (or maybe not), we see a huge infusion of cash in the market.

What’s this mean to investors now? All I can say is what we at 401 Advisor, LLC are doing now – which is selectively selling positions in our portfolios to raise cash, and as of today we are buying SH – ProShares Short S&P 500 ETF. By the end of the day we should be about 10% short the S&P 500 and have another 15% or so in cash, depending on our overall strategy. Dividend portfolios have held up well so we will remain more fully invested, and collect our dividends, unless we see a stronger economic downturn than indicated now.

But I wouldn’t hit the panic button just yet. Gold’s rally is an indication that just about everyone now expects QE III. The market has rallied strongly on the heels of QE I and QE II. We’re only off 10% from our highs this year. 10% is just not a major move – yet. Be cautious.

Below is a graph of our results of our Dividend and Income Plus Portfolio at Our portfolio is represented by the Green Line, the S&P 500 the Purple Line. This account mirrors client portfolios that we manage in our office. We are still positive for 1 month, 3 month and 12 month performance, and only down -.01% month to date. Just an indication that what you own matters in this environment. Conservative investors are still in control in this market. • 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.