Monday Readings

Don’t forget to check back in the next couple of days as I update several of the free portfolios tracked on the site. Or better yet subscribe for free on the left hand side of the blog to get email updates!

Close Those Longs in the Bond Market! – Prieur du Plessis

US Stock Market Returns – What is in Store? – Prieur du Plessis

60-Year Cycle in Interest Rates – Tom McClellan

The Dark Side of Deficits – John Mauldin

3 Takeover Targets to Take Aim At – Jim Jubak

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More on this topic (What's this?)
Equity Risk Premium In A Rising Interest Rate Environment
Anticipating The Rate Hike
Read more on Bond Investing, Interest Rates at Wikinvest

Buy — Don’t Hold: A Book Review

In Buy–DON’T Hold: Investing with ETFs Using Relative Strength to Increase Returns with Less Risk author Leslie N. Masonson lays out a strategy for individual investors to use relative strength to increase returns and reduce risk. His primary vehicle for doing so is ETFs. The first step in his process is to identify the individual investors personal risk tolerance. Once Masonson shows readers how to determine his or her risk level, he presents his methodology for determining the overall equity market’s primary trend.

Masonson uses what he calls “The Stock Market Dashboard” as a gauge for determining the overall market’s trend, which is his first step in determining whether to be fully/partially invested or in cash. The dashboard is comprised of seven technical indicators which are seemingly a random collection of well known indicators. While he gives historical evidence of the dashboards market timing capabilities in March 2009 and near the top in 2007, I would like to see more comprehensive and academic backtests. Also, I found myself wondering if the use of seven indicators was perhaps too complicated. Mebane Faber showed in The Ivy Portfolio that a simple moving average system can be effective in reducing portfolio volatility. However, to Masonson’s credit his site tracks the dashboard signals so we will see how they perform out of sample in the months and years ahead.

The next step in Masonson’s process is to invest using ETFs when the dashboard indicates a positive market trend. However, he does not propose simply asset allocation models; rather, he suggests using relative strength to determine in which ETFs to invest. He provides a few free ETF centered websites to determine which ETFs have the highest relative strength. In addition to discussing these free sites, he wastes, in my opinion, a chapter promoting two separate pay services.
Masonson’s book also had a personal twist for this author. In chapter 6 he cites an article I wrote for Seeking Alpha and my site in October 2009. However, while I’m flattered to be a source, his citation was incorrect and somewhat lazy. My article (viewable here and here) was primarily a review of a study done by CXO Advisory. I was a secondary source, the primary source was the study done by CXO; thus, it would have been appropriate to cite CXO directly. However, to Masonson’s defense with new technology (the Internet) comes new obstacles for authors – the original URL from CXO is no longer valid but the updated article can be viewed here. In addition, the title of my article was cited incorrectly in the book, the correct title is “Backtesting a Sector ETF Momentum Strategy” and not “Backtesting a Sector Momentum Strategy” as cited in the book.

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More on this topic (What's this?)
US Market ETF Trading Map
Core ETF Report
The Risk In Chasing Performance
Read more on Exchange Traded Fund (ETF), Risk at Wikinvest

SPY: Looking Ahead to This Week

Once per week I provide a summary on my site of SPY and the S&P 500. This past week saw some interesting action with the market trading down for much of the week before a strong finish on Friday.  This leaves bears and bulls wondering if a short-term bottom is in.

Last week, SPY twice bounced off a support level in the $104.30 range so I’m going to watch this price level next week as potential support.  Failure to hold this level could mean a quick drop to $101.1-$101.64. The 20, 50, and 200 moving averages are either trending down or flat which indicates the trend is still negative.  However, with Friday’s strong finish, it is possible we will see a continuation next week of Friday’s action.  If so, the first price level to watch is the 50 day moving average around $108.61 as of Friday’s close.

Chris Vermeulen of stated that “The equities market has been tried to bottom all week and Friday’s price action looks strong. While the chart looks strong the market internals are telling me the opposite. Last week we saw a gap down and Friday that gap window was filled. With heavy volume resistance just above the current price the odds are pointing to lower prices.” His chart is below:

September is historically a difficult month for the S&P 500 (chart courtesy of The Big Picture).  This does not guarantee we are heading for a poor September, but it is certainly something to keep in the back of one’s mind as trades are considered, especially given the recent negative action in equities.

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More on this topic (What's this?)
Market Outlook
Chasing: The Kiss of Death For Traders
Read more on SPDR S&P 500 ETF at Wikinvest

Market Readings

The First MLP ETF is Here – ETF Trends

Hedging Tail Risk With the VIX – Condor Options

James Montier from GMO discusses the importance of dividends in A Man From a Different Time

How We Get Through This Mess – John Mauldin

Momentum Investing (pdf) – Tobias Moskowitz

Mr. Gross Goes to Washington – Bill Gross

Find out what’s inside Trend TV Click Here

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Has Gold & Silver Finally Bottomed?
Is time spent learning dividend investing worth it?
Read more on Gold, Volatility Index (VIX), How To Invest at Wikinvest

Top Stocks Based on PEG and Momentum

I conduct the following screen on a monthly basis. Early out-of-sample results have been mixed, performing well during bullish environments and poorly during bearish/choppy markets.  Last month’s list here, June’s list is here, May’s list is here, Aprils’ list is here, March’s list is here, February’s list is here and January’s here. The screen looks for the following:

  • earnings growers still reasonably priced as judged by the PEG ratio
  • low debt
  • a history of high return on equity and investment, and
  • price momentum as gauged by the percentage the stock is trading to its 250 day high.
January’s list returned 1.39% vs .57% for SPY. February’s list returned a solid 11.78% vs. 6.77% for SPY. March returned 7.91% vs. 4.23% for SPY, April was a down month, nearly matching SPY in returning -11.57% vs -11.52% for SPY, May’s list returned -6.55% vs -.56% for SPY, June’s list returned -1.74% vs. 3.27% for SPY and last month’s list returned a sour -10.36% vs -5.55% for SPY.  One note on May’s list is that due to the pullback in the market there were very few stocks that qualified for the list, four in total. 

When the screen results in more than 5-10 stocks I have also started tracking returns of the top  5 or 10 stocks at the beginning of each list.  The top stocks are selected based on fundamental factors.   For the full list of stocks and results, please see the right hand side of Scott’s Investments.

The screen has tested well historically in bullish periods so strategies an investor could use to avoid drawdowns would be to either a) abandon this type of strategy entirely when the S&P 500 or another major index is below a long term moving average, or b) hedge positions with a position in SH or write a short option strategy on an equity index or ETF like SPY.
This month’s list contains only three stocks, which tells us the overall market is showing very few stocks trading near their 52 week highs.

Two possible tools an investor could use to conduct this screen on his/her own are stockscreen123 or Finviz. This screen was conducted using stockscreen123.

No positions in stocks mentioned 


Ticker Name Trend Rank MktCap Industry
FOSL Fossil, Inc. Here 97.03 2978.91 Jewelry & Silverware
FCFS First Cash Financial Services Here 91.29 700.6 Retail (Specialty)
PCLN Incorporated Here 76.98 14119.36 Business Services

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PEG Buys a Fiber Network From Gore
Market Outlook
Read more on SPDR S&P 500 ETF, Price to Earnings Growth at Wikinvest

6 Dividend Aristocrats to Consider

In a continued effort to expand the focus of my site’s screens and hypothetical portfolios, this article is a fourth follow-up to an article written in early April focusing on the S&P 500 Dividend Aristocrats. The S&P 500 Dividend Aristocrats index measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years. The current list has 43 constituents and the entire list is available from S&P or on my site.
If an investor wanted to replicate the list the best option is probably SDY, the SPDR Dividend ETF, which is a variation of the Aristocrats – it seeks to replicate the “High Yield” Dividend Aristocrats Index. An alternative is to start with the Aristocrat list and then reduce the list of candidates through screens and/or fundamental analysis. I screened for Aristocrats which had a sustainable payout ratio, a high dividend yield, reasonable debt/equity ratio, and moderately positive return on assets and equity.

Using Finviz, which has some of the better screeners and charts available, I screened the Aristocrat list for:

    • Payout Ratio < 80%,
    • Dividend Yield > 3%

    • Return on Assets > 10%

    • Return on Equity > 10%
    • Total Debt/Equity < 1

Below is a list of 6 Aristocrats which are worthy of further consideration, especially if one is seeking yield or seeking to reduce exposure to non-dividend paying companies. All of the companies on the list are familiar names and they were also all on last month’s list and the previous month’s list which tells me this could be a relatively low turnover strategy.  Another thought is to hedge the list with a short position in the S&P 500 is below its 200 day moving average.  One such vehicle for doing so is SH.  Obviously, hedging could reduce returns but also reduce drawdowns and volatility.  Or, an investor could only purchase stocks which are above its 200 day moving average.  I have added the percent each stock is above/below its 200 day SMA.  MCD was also featured in an article I wrote earlier this month about dividend growers.

No positions

Company Trend Dividend Yield Payout Ratio Debt / Equity 200-Day SMA Price
ABT Abbott Laboratories Here 3.56% 48.89% 0.93 -2.73% 49.48
JNJ Johnson & Johnson Here 3.72% 40.96% 0.22 -6.12% 58.01
KO The Coca-Cola Company Here 3.16% 52.85% 0.46 3.09% 55.66
LLY Eli Lilly & Co. Here 5.77% 50.65% 0.67 -1.08% 33.97
MCD McDonald’s Corp. Here 3.03% 48.30% 0.81 10.14% 72.72
MHP The McGraw-Hill Companies, Inc. Here 3.37% 36.17% 0.65 -12.36% 27.93

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More on this topic (What's this?) Read more on Dividend aristocrats, HK EL Holdings at Wikinvest

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An Update on SPY

Once per week I provide a summary on my site of SPY and the S&P 500.  Last week SPY closed down slightly for the week at $107.53.  SPY is in much of the same place as it was last week, trading below its 20, 50 and 200 day moving average.  It remains wedged between some key support and resistance levels, thus this week I echo much of what I said last week which was:  

“On the upside, $113.20  continues to be a strong level of resistance.  If we continue to drift lower support could be found at $104.38 and then $101.10-$101.64.  Failure to hold $101.10 could spell further declines.”

Failure to hold $101.10 could lead to further declines to $94.61.  In the meanwhile, continue to watch key price levels while keeping in mind that the overall trend is negative.

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More on this topic (What's this?)
Market Outlook
Chasing: The Kiss of Death For Traders
Read more on SPDR S&P 500 ETF at Wikinvest

10 Microcap Value Stocks to Consider

I am a member of AAII (American Association of Individual Investors) and was recently reading one of their more popular screens, the Shadow Stock Screen.  I decided to run my own test of the screen with a few small twists.  This is a very simple screen that seeks out small/microcap value stocks.  The screen criteria I used are below:

  • No over-the-counter stocks
  • No financial stocks
  • Market cap > $20 Million and < $200 million
  • Previous EBITDA quarter and trailing twelve months are positive
  • Share price > $4
  • Price/book < .80
  • Price/sales < 1.2
  • Top 10 stocks are selected based on highest 52 week returns

This is the fifth month of performing the screen.  The first month’s list performed poorly, returning -15.35% versus -13.2% on VBR, the small cap value ETF.  The second month beat the benchmark, returning .50% vs .04% on VBR. Last month’s list returned an average of -4.38% versus -2.26% for VBR over the same period.

I would describe this as a high beta strategy – it performs very well in bullish markets and underperforms in bear markets.  I said previously that “this is not a strategy I am investing in.  However, if an investor was looking to add some risk to his or her portfolio, this one could certainly add some ‘juice’.”  One additional option which I have mentioned on other screens is to abandon this type of strategy when an underlying index such as the Russell 2000 is trading below a long term moving average such as the 200 day moving average.  Currently the Russell 2000 is below its 200 day moving average.

The current top 10 stocks are also below.  I update the screen once per month on my site and track the results for free on the right hand side of the site. The tool used for the screen is stockscreen123

No disclosures

Ticker Name Free Trend Analysis Last Rank
ESCA Escalade, Inc. Here 5.05 98.46
HAST Hastings Entertainment, Inc. Here 7.37 94.35
SGMA SigmaTron International Here 5.69 92.63
AHC A. H. Belo Corporation Here 6.62 92.11
RCKY Rocky Brands, Inc. Here 7.67 89.93
FLXS Flexsteel Industries, Inc. Here 13.4 89.43
PTSI P.A.M. Transportation Service Here 11.29 84.34
CGL.A Cagle’s, Inc. Here 6.55 81.28
GRB Gerber Scientific, Inc. Here 5.03 79.82
MPAA Motorcar Parts of America, In Here 6.94 78.89

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