The State of the Markets:
In my humble opinion, one of the keys to success in the investing business is the ability to remain both objective and flexible. Early in my career, I would occasionally "fall in love" with my positions, largely due to the fact that those positions had proved successful. In short, I didn't want to "lose that lovin' feeling" by making a change.
However, I finally learned that the only constant in life and the stock market is indeed change. And since change can be hard, it is important to be open and ready when it is time to pull the trigger.
To be sure, these thoughts apply to the current stock market environment. As I'm sure you are aware, there are any number of reasons to worry about the state of the market. And yet, so far at least, the bulls have been able to keep on keepin' on in what appears to be an ongoing secular bull market cycle.
This is not to say that the ride has been smooth. In fact, 2018 has been anything but so far as volatility has found its way back into the game and algo-induced/fast-money freak-outs have become a regular occurrence. And to hear the bears tell it, this alone is reason enough to believe that the good times are about to end.
Asking Myself Some Tough Questions
And yet, I continue to believe that the current corrective phase will be resolved to the upside. But at the same time, I must admit that I've been asking myself some questions lately. Am I guilty of being stubborn here? Have I fallen in love with the gains from this bull run? Am I ignoring the threats from the headlines?
Given the fact that I'm asking these kind of questions, I believe the answer to all of the above is, no. And should my major market models turn red, I will indeed make a change.
But that is really the point. While everything isn't exactly peachy keen in indicator-land, there also isn't much of a case to be made for the bears here.
Reasons Not To Be Negative
For example, the Daily Advance/Decline Line recently hit a new high. The bottom line is this just doesn't happen at the beginning of bear markets. No, it's actually the opposite that tends to occur as the A/D lines (and other breadth indicators) tend to break down and begin to trend lower long BEFORE the indices start to roll over.
The same can be said for stock market momentum, which isn't half bad at this point in time. Oh, and don't look now fans, but the small-cap indices hit fresh all-time highs yesterday. Again, this type of stuff just doesn't happen when the bears are starting to grab control of the game.
Sure, there is a flipside to this coin. And I expect to get a bunch of emails citing examples of indicators that ARE breaking down and DO tend to lead the indices. In fact, my favorite "leading indicators" model recently gave a sell signal. So, as I said, everything isn't peachy keen here.
My Guiding Light
But then there is my "Desert Island Model." The model I would choose to employ if I was stranded on a desert island (or vacationing in a foreign land for a few weeks) and had to manage money with but one indicator. The good news is that this model remains positive and on a buy signal.
The current reading of the model's component indicators is 80%, which, as you might surmise, is a healthy score. Thanks to the computers at Ned Davis Research Group, tests show that since late 1979, the S&P 500 would have risen at an annualized rate of nearly 25% when this model reading was positive. So, there's that.
Conversely, when the model reading has been negative, the S&P has lost ground at a rate of more than -20% per year. Yikes.
And then there is the neutral zone, which, to me, is where managers tend to muck things up. This is where the outlook for stocks is cloudy and mistakes are easy to make. So, when the model has been neutral, I think it is interesting to note that the S&P has gained at a rate of almost 8% per annum. The important thing here is that the S&P 500 itself has gained 8.8% per year over the time frame.
My takeaway from this data is that from a longer-term perspective, it is usually best to stick with the bulls - especially when things are murky - unless the model is negative, of course.
Looking at the data over the last 10 years, which includes a decent chunk of the Credit Crisis Bear, I see that when the model was positive, stocks gained at a rate over 22% per year. When the model was negative, the S&P lost ground at an alarming -44% rate. And when the model was neutral, the market gained more than 13% per year.
Now consider that the buy-and-hold of the S&P 500 was 7% per year over this time frame and it becomes clear to me that the gameplan should be to give the bulls the benefit of any/all doubt - unless/until the model is negative.
The Bottom Line
Yes, there are lots of things to fret about at this point in time. But from my seat, this is a perfect example of the type of market environment where it is easy to muck things up by "doing too much." So, instead of trying to trade around all the headlines, the tweets, and the ensuing volatility, I think it is best to listen to the message of my big-picture models and give the bulls a chance.
Oh, and one more thing... Traditionally, managers have used the bond market as a way to cushion their portfolios during "sloppy" periods. But I think it is VERY important to recognize that although it's been a rough ride in the stock market in 2018, bonds are down year-to-date (the Barclays Aggregate Bond index is down -1.6% so far in 2018) and stocks are up about 2%. As such, sticking with the bulls appears to have been the right call. Well, so far at least.
And for me, this is the reason that one must remain open minded and flexible in order to survive years like this one. Best of luck to everyone out there.
Each year, NAAIM (National Association of Active Investment Managers) hosts a competition to identify the best actively managed investment strategies. In April, HCR's Dave Moenning took home first place for his flagship risk management strategy.
Want to Learn More? Contact Dave
Remember happiness doesn't depend upon who you are or what you have; it depends solely on what you think. -Dale Carnegie
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research
HCR Focuses on a Risk-Managed Approach to Investing
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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.
Today's Model Review:
LEADERS Model: The LEADERS currently holds 20% positions in the Consumer Discretionary, Technology, Health Care, Financials, and Energy sectors.
CORE Model (Risk Managed Exposure):
Today's CORE model's exposure target: 60%
Current CORE Model exposure: 75%
To review, the goal of this model is to stay in tune with the overall risk/reward environment. Therefore, we make adjustments only when there is a meaningful and sustained divergence between the target model reading and our current positions.
TRADING Model: We currently hold trades in gold, commodities, global technology, and the internet sector.
2018 YTD Performance Update:
DD LEADERS: +4.0%
S&P 500: +2.0%
|Daily Decision Trading Service
Current Portfolio Summary
|The LEADERS Model|
|% of |
|Technology Select Sector SPDR||XLK||20%||12.1.16||$46.64||Buy|
|Health Care Select Sector SPDR||XLV||20%||11.27.17||$81.79||Buy|
|Consumer Discretionary Select Sector SPDR||XLY||20%||2.9.18||$99.67||Buy|
|Financials Select Sector SPDR||XLF||20%||2.12.18||$27.94||Strong Buy|
|Energy Select Sector SPDR||XLE||20%||5.2.18||$73.57||Buy|
|The CORE EXPOSURE Model|
|% of |
|SPDR S&P 500 ETF||SPY||37.5%||4.17.18||$269.78||Buy|
|iShares S&P Small-Cap||IJR||37.5%||4.17.18||$79.83||Buy|
|The TRADING Model|
|% of |
|PowerShares Commodity Index ETF||DBC||25%||5.2.18||$17.43||Buy|
|First Trust Internet Index||FDN||25%||2.26.18||$124.00||Buy|
|iShares Global Technology||IXN||25%||2.26.18||$165.40||Buy|
|SPDR Gold Shares||GLD||25%||4.17.18||$127.27||Buy|
% of Model Explained
The number shown in this column represents the percentage of the the model this position represents.
Current Rating Explained
This is our rating for the day. The Current Rating tells you what action we would take if we did not currently hold the position. A "Buy" rating means we would be willing to purchase the position at current prices. A "Strong Buy" suggests this would be our first choice to buy. A "Hold" rating indicates we would not make new purchases at current levels. And a "Sell" rating indicates we will likely exit the position in the near-term.
Positions Can Change
Positions often change during the trading session. Remember that we will send a Trade Alert via SMS Text Message and/or Email BEFORE we ever make a move in the models.
About the Daily Decision Models:
The Daily Decision is designed to be a simple, easy-to-follow e-letter service showcasing 3 different model portfolios. The LEADERS model is the flagship, growth oriented strategy that focuses on "where the action is" in terms of market leadership. The CORE model is a longer-term, risk-managed approach to keeping exposure to market risk in line with prevailing conditions. And as the name implies, the TRADING model is intended to be a tactical, opportunistic trading strategy.
Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: SPY, IJR XLK, XLV, XLY, XLF, DBC, FDN, IXN, GLD Note that positions may change at any time.
Wishing You All The Best in Your Investing Endeavors!
The Front Range Trading Team
NOT INVESTMENT ADVICE. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Investors should always consult an investment professional before making any investment.