First, stay tuned for monthly portfolio updates tomorrow. Also, I’ve made some tweaks to the Google docs portfolios on the right hand side of the blog, including average monthly returns at the top and, for some portfolios, a comparison to benchmarks. It seems like Google Finance doesn’t always have quotes for every security, so occasionally you will see ‘N/A’. If anyone has any ideas on a workaround, let me know. Thanks!
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I normally analyze charts of SPY but tonight I decided to take a look at QQQQ instead. You will see from the chart below that the short and intermediate trend is not positive for QQQQ as gauged by the fact that it is trading below the 20 and 50 day moving average. In addition, it has fallen below the upward sloping channel, the 20 day moving average is now sloping down and the 50 day moving average has flattened and will most likely be falling soon. Adam Hewison of MarketClub notes in this video that we are currently in “thin air” and his support point for the Nasdaq Composite over the next few months is 1671-1796 which would be a very healthy pullback.
For right now, the long term trend is still in place as QQQQ is trading above the 200 day moving average, however, the easy money was made in 2009 and the short-intermediate is a high risk situation for any bulls. In my opinion investors will need to be more selective with their stock positions and nimble with their trades in 2010. On December 15th, I suggested investors in SPY tighten stops and not be afraid to take profits. The current sell-off could simply be a consolidation at which point the next leg up will begin. However, I would not expect the easy profits of 2009 to come so easily in 2010.
No positions in stocks mentioned
I know many of you are interested in trend trading, so take a moment to get 4 free trading videos from INO’s Trend TV service.
Please read John Hussman’s recent article A Blueprint for Financial Reform. It makes great cocktail party fodder, barstool fodder, or fodder for your political reprentative next time you run into him or her. A summary:
- Immediately vest the FDIC (or other regulator that has a strict consumer-protection mandate) with the authority to take receivership / conservatorship of distressed bank and non-bank financial institutions, including bank holding companies, in the event of insolvency.
- Require a significant portion of the capital of bank and non-bank financial institutions to be in the form of convertible debt (contingent capital).
- Abandon the misguided and dangerous notion of “too big to fail” by making regulatory receivership / conservatorship a credible threat, and encouraging insolvent financial institutions to exercise the option of voluntary debt-equity swaps as an alternative to regulatory intervention.
- Approve the Volcker Rule.
- Prohibit the use of credit default swaps except for bona-fide hedging purposes.
- Require the originator or arranger of securitized mortgage loans to retain a substantial unhedged equity exposure to every securitization deal.
- Recognize that “toxic assets” remain on bank balance sheets. They have merely (and most probably temporarily) been written up, in an environment where FASB rules provide “significant discretion” in the valuation of these assets, and where “off balance sheet” assets will not be required to be brought onto balance sheets until first quarter reports are released.
- Discharge and replace Ben Bernanke and Timothy Geithner.
Bernanke’s Burn Notice — Why Now? Research Reveals Insight Into Fed Chairman’s Popularity
By Elliott Wave International
Like a spy who gets a burn notice (as depicted in USA Network’s hit series, Burn Notice), suddenly he lost his support. No one trusts him anymore. Why the sudden turnaround in his fortunes? Read More
Jon Markman makes a case for REITS in this article, The Sages are Wrong About Real Estate
Jim Jubak gives us 3 Stocks Whose Time Has Come
Below are the results of a custom screen which looks for a) earnings growers still reasonably priced as judged by the PEG ratio, b) low debt, c) a history of high return on equity and investment, and d) price momentum as gauged by the percentage the stock is trading to its 250 day high. The list is not a blanket ‘buy’ list, however my objective is to combine three of my favorite criteria used on Scott’s Investments (PEG, strong balance sheets, price momentum) into one screen. The stocks on the list could present either a trading opportunity for momentum investors or swing traders, or a list for further research for longer term growth-at-a-reasonable price investors. In either case, a stop loss is one of the simplest methods to protect your capital. For true momentum investors, I have put the symbols in bold/italics that score at least 80 (out of 100) using MarketClub’s proprietary trend scoring system. I will keep an eye on the list and update you in 2-4 weeks to see how each one performs.
The results of the screen are below:
||Current Trend Score
||LHC Group, Inc.
||Deckers Outdoor Corporation
||Patni Computer Systems Limite
Tom McClellan predicted last week that this decade will look much like the 1970s – sideways/flat where stock pickers and sector investing will dominate buy and hold. His prediction was based on historical analysis of DJIA and how the market tends to operate in cycles. The long term (40 year) cycle in his analysis ends around 2022 (see chart below). I have no idea if his prediction will come to fruition, but as investors we should always be prepared for the worst even if we hope for the best.
If we do see sideways action for much of the decade then I would be looking for
1) Dividends. At the very least you can collect a regular paycheck even if your investments do not appreciate.
2) High quality companies with a history of earnings growth and strong balance sheets (if you don’t want to do the research yourself one place to start would be AlphaClone).
3) International opportunities. If the US market is flat, there are most likely going to be profits elsewhere. One starting point I find useful is to look for countries with favorable demographics and relatively stable political-economic situations. Indonesia is one country which comes to mind and investors can invest directly via the Indonesia ETF ticker IDX, which has been a strong performer of late.
4) Market timing or sector rotation systems which have a history of outperformance. You can check the right hand hand side of my blog for several easy-to-follow examples. “Market timing” used be the equivalent of a four-letter word but research on the subject has shown it can reduce volatility in equity portfolios when done in a disciplined manner.
5) Methods for becoming a better technical trader. Learn how to use trend lines, support/resistance, and money management techniques in your investing; or, use proprietary systems with a strong following such as MarketClub which do the decision-making for you.
6) Consider commodities. The simplest way to invest in commodities is via ETFs. There are several, including GSG and DBC, which offer broad exposure to a variety of commodities.
Despite the headlines many of us read late last week, new bank regulations were not the main reason the market fell last week – China may have been a bigger reason as Barry Ritholtz argued after growing disgusted with blabbering headlines which attempt to encapsulate market activity into simple headlines:
But it doesn’t take much looking to see other, more plausible, less politically motivated explanations than the floated Volcker/Obama proposal. The market’s biggest losers were not finance related issues, but rather were commodity-related stocks.
While the financial sector suffered a 3% decline after some disappointing earnings from various banks, it was the commodities sector that got whacked 4.3%. China, the driver of much of recent economic improvements, made a major announcement they were restricting bank lending to cool inflation and slow the economy.
Don’t forget that I am on Twitter, all of my posts are now being automatically updated on Twitter. You can find me at http://twitter.com/scottsinvest. All of my posts are updated there instantly so you do not need to wait hours for an email to be sent to get my latest posts.
I’ve spent no time promoting myself on Twitter whatsoever but now is as good as time as any to start!
I have recently taken an interest in screening and backtesting various value strategies on my blog. I performed a new value screen and also backtested it based on the following criteria starting in 1/1/2002. The backtest rebalanced every 4 weeks and assumed .5% slippage and 0% return on cash (a note about slippage using StockScreen123 – stocks that pass the screen are equally weighted at each rebalance. Slippage is only calculated when selling out of a stocks that no longer passes and for new stocks. The slippage to bring stocks that remain from one period to the other are not taken into account):
- Price to Book < 1
- Return on Equity Last 12 Months > 0
- Return on Assets Last 12 Months > 0
- Total Debt to Equity < 40%
- Current Ratio > 3
- Price to Free Cash Flow Trailing 12 Months < 15
- Projected Earnings Next Fiscal Year > 0
- No OTC Stocks
- Daily Volume 20 Day Average > 20,000 shares
The primary difference in this screen versus others I performed in December and January are that I added an ‘uptrend’ criteria for the index. To put it simply, the screen/backtest goes to cash when the S&P 500 (the ‘index’) falls below its 200 day moving average. This is a simply strategy used in various portfolio strategies made popular in books such as Mebane Faber’s The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets and by Tom Lydon, author of The ETF Trend Following Playbook: Profiting from Trends in Bull or Bear Markets with Exchange Traded Funds.
There are positives and negatives to employing such a strategy. The benefit is that an investor can avoid periods of significant drawdown (2008 anyone?) but can also miss the first parts of substantial rallys (2009 anyone?). In addition, the strategy could lead to some whipsaw if the index is frequently closing above/below its moving average. However, one benefit of the strategy I used in this screen/backtest was to only re-screen every 4 weeks. Thus, the strategy only cares if the index is above or below the moving average at the end of the 4th week. Any movements above/below the moving average between the 4 week rebalancing is ignored.
The results of the current screen are below. Please treat it as a list for further investigation (do your own due diligence) and not a ‘buy’ list. Some possible areas for improvement (beyond changing the value criteria, which I have written about previously and will continue to feature different criteria in the future) would be to focus on each individual company’s technical trend using moving averages, trendlines, use of proprietary trend trading services like Trend TV, or other trend strategies such as those discussed in Trend Trading for a Living: Learn the Skills and Gain the Confidence to Trade for a Living (a book I recently reviewed for Seeking Alpha). In addition, below the table is the results of the backtest using stockscreen123 which is currently in beta. Again, please do your own due diligence.
||Free Trend Analysis
||Alamo Group, Inc.
||Dawson Geophysical Company
||Hot Topic, Inc.
||Northwest Pipe Company
||QLT Inc. (USA)
||American Oriental Bioengineer
||Internet Brands, Inc.
A $100 investment on 1/1/02 using this strategy would be valued at $357.70 today versus $99.1 for the S&P 500 (excluding dividends on both). Your starting date is important as well – had you invested in this strategy starting 1/1/05 you would be virtually in line with the S&P 500 today. However, $100 starting on 1/1/06 would be worth $121.8 today vs $91.20 in the S&P 500. In other words, the strategy is not perfect and will underperform the S&P 500 in certain periods.
The strategy historically holds less then 10 stocks so additional stop loss strategies on the individual holdings would be prudent as well.
Don’t forget that all of the portfolios I track can be found on the right hand side of my blog. Clicking on each portfolio will redirect you to a Google Docs spreadsheet.
Jim Jubak: 3 Stocks, 3 Sectors for Tough Times — How about building a portfolio that avoids niches, industries and sectors where global overcapacity will create a profitless recovery?
- Stocks he features are CSCO, GOOG, MRVL
John Hussman: Inflation Myth and Reality
” At present, inflation risks are hardly considered to be problematic by Wall Street. From the standpoint of the next few years, my impression is that this complacency is probably well-founded, but only because we are likely to observe a second wave of credit losses that will create fresh “safe-haven” demand for default-free government liabilities. From a longer-term perspective, however, I believe that inflation will be a major event in the latter part of the coming decade, with the consumer price index roughly doubling over the next ten years. As exchange rates and commodity prices tend to be more forward-looking and less “sticky” than the prices of goods and services, it is likely that these markets will move substantially well before the eventual peak in CPI inflation.”
Gary Shilling: 2010 Investment Strategies: Six Areas to Buy, 11 Areas to Sell “We see the 2010 investment climate dominated by weak economic growth here and abroad, led by U.S. consumer retrenchment. More government fiscal stimulus and continuing Fed policy ease are likely in this setting. So is low inflation or deflation.”
Shilling’s buy areas are:
- Treasury Bonds
- Incoming Producing Securities
- Consumer Staples and Food
- Small Luxury Items
- The Dollar
- Eurodollar Futures
Sell or avoid:
- US Stocks Generally
- Homebuilder and related stocks
- Big-ticket Consumer Discretionary Equities
- Consumer Lenders
- Low and Old Tech Capital Equipment Producers
- If you plan on selling your house, do so yesterday
- Junk Bonds
- Commercial Real-Estate
- Most Commodities
- Developing Country Stocks and Bonds
Below is a list of ETFs trading–but not necessarily closing–at new 52 week highs on Tuesday, January 19th and ranked in order of 1 year performance (leveraged ETFs are included). The purpose of the screen is to look for the hottest ETFs in the market today. This list includes also includes an additional trend score from -100 to +100 and all of the top ETFs score a perfect 100. Trend scores are obtained via a MarketClub subscription. The hottest ETF today according to the three criteria above is RSX, the Market Vectors Russia ETF. Obviously, this list has some potentially volatile opportunities. Additional due diligence, stop losses and a game plan are always recommended:
||Market Vectors Russia ETF
||iShares MSCI Turkey Invest Mkt Index
||SPDR S&P Emerging Europe
||Ultra Russell1000 Growth ProShares
||iPath DJ AIG Sugar TR Sub-Idx ETN
||iShares MSCI Chile Investable Mkt Idx
||iShares MSCI South Korea Index
||Ultra Consumer Services ProShares
||PowerShares FTSE RAFI US 1500 Small-Mid