Gold, Dollar, Stocks & Sentiment at Major Pivot Point

Chris Vermeulen from The Gold and Oil Guy gives us a new article today: “This chart shows intraday price action with my market internals. It is signaling a short term bottom within the overall uptrend on the equities market. The big question is if this is a just an opportunity to buy into this Fed induced bull market or the start of a larger correction?”

The full, free article is available here.

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Has Gold & Silver Finally Bottomed?
Gold Price Gravitating Lower Towards $1000
Read more on Gold, Pivot Point at Wikinvest

Value Stocks with Price Momentum

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I update the following portfolio/screen on a monthly basis on Scott’s Investments. January’s list of 19 stocks is here and returned an average of  2.68% for the top 5 stocks on the list versus 2.03% for SPY. The entire list of 19 stocks last month returned an average of .11%, led (now 2 months in a row) by Varian Semiconductor (VSEA) at 14.35% (NTES) at 12.07%.  

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. 
  • The stocks are then ranked based on fundamental factors as compiled by stockscreen123.

A whopping 40 stocks qualified for this month’s list, a new high.  This tells us individual stock momentum still exists in the market and the fundamental factors on the list are easy to find among the high momentum stocks.

This strategy of screening stocks has produced solid returns since this summer. For example, August’s list returned 16.17% versus 7.87% for SPY and July’s top 5 stocks returned over 19%.

The rational for this screen is based on backtests showing stocks with low PEG ratios, debt, and high returns on equity and price momentum have produced good historical returns. The screen has tested well historically in bullish periods and has suffered during significant market drawdowns. Strategies an investor could use to avoid major drawdowns would be to either a) abandon this type of strategy entirely when the SP 500 or another major index is below a long term moving average, or b) hedge positions with a position in SH or use short option strategies on an equity index or ETF like SPY.

Below are 1 and 5 year test results if an investor were to invest in the top 5 stocks in this screen every 4 weeks. Test results exclude commissions and dividends but include .5% slippage. Returns calculated by stockscreen123:

Once again Metropolitan Health Networks, MDF, is near the top of the list but is no longer ranked first, supplanted by Applied Industrial Technologies (AIT). Apple, AAPL, Mastercard (MA), Google (GOOG), and Intel (INTC), a new addition this month, are other well known companies on this month’s list.

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. For the full list of stocks and real-time results, please see the right hand side of Scott’s Investments.

No positions in stocks mentioned

Ticker Name Trend Rank PEG LT ROE% 5YAvg ROI% 5YAvg
AIT Applied Industrial Technologi Here 99.56 0.82 15.4 12.47
MDF Metropolitan Health Networks, Here 99.25 0.82 19.21 19.01
LRCX Lam Research Corporation Here 99.05 0.91 20.8 17.78
FCFS First Cash Financial Services Here 96 0.69 19.03 15.98
INTC Intel Corporation Here 94.24 0.89 16.28 14.96
SHOO Steven Madden, Ltd. Here 93.91 0.82 20.13 19.63
CBI Chicago Bridge & Iron Company Here 93.79 0.98 18.46 13.16
TRCR Transcend Services, Inc. Here 93.12 0.83 23.39 21.83
ASF Administaff, Inc. Here 92.09 0.69 16.52 13.25
LECO Lincoln Electric Holdings, In Here 92.07 0.94 17.24 13.35
EZPW EZCORP, Inc. Here 91.3 0.68 20.36 19.63
AAPL Apple Inc. Here 90.78 0.78 31.92 28.48
DTV DIRECTV Here 90.54 0.55 30.78 12.76
NTES, Inc. (ADR) Here 87.58 0.67 32.24 30.68
GIL Gildan Activewear Inc. (USA) Here 87.4 0.88 18.33 17.19
MA MasterCard Incorporated Here 87.3 0.72 29.76 22.24
AZO AutoZone, Inc. Here 85.93 0.98 646.25 24.99
FOSL Fossil, Inc. Here 85.62 0.85 16.07 15.34
PPDI Pharmaceutical Product Develo Here 84.55 0.88 15.3 14.51
SNHY Sun Hydraulics Corporation Here 83.88 0.18 19.58 18.03
CLC CLARCOR Inc. Here 83.8 0.95 14.31 12.2
DECK Deckers Outdoor Corporation Here 82.59 0.78 24.8 24.7
NVEC NVE Corporation Here 77.57 0.84 23.98 23.98
CRR CARBO Ceramics Inc. Here 77.53 0.85 14.4 13.55
BIDU, Inc. (ADR) Here 76.8 0.56 43.86 43.68
ALGN Align Technology, Inc. Here 76.02 0.77 12.73 12.67
GOOG Google Inc. Here 72.72 0.8 20.13 19.46
GSOL Global Sources Ltd. (Bermuda) Here 72.46 0.71 16.7 17.49
SEIC SEI Investments Company Here 71.63 0.96 27.44 30.91
GNTX Gentex Corporation Here 71.06 0.95 13 12.6
GA Giant Interactive Group Inc ( Here 66.65 0.95 19.8 19.75
TNDM Neutral Tandem Inc. Here 66.45 0.9 17.49 14.09
FSLR First Solar, Inc. Here 66.17 0.67 24.29 21.62
AVAV AeroVironment, Inc. Here 66.03 0.82 14.54 14.15
VLTR Volterra Semiconductor Corpor Here 65.86 0.79 15.44 15.25
BWLD Buffalo Wild Wings Here 64.59 0.84 15.86 13.7
SCSS Select Comfort Corp. Here 62.47 0.87 34.11 24.68
MASI Masimo Corporation Here 61.4 0.92 35.29 41.65
ANF Abercrombie & Fitch Co. Here 59.6 0.75 23.39 18.24
ESV ENSCO PLC Here 49.79 0.76 19.31 16.62

10 Highest Rated High Yield Dividend Champions

I wrote an exclusive article for Seeking Alpha today, 10 Highest Rated High Yield Dividend Champions.  In the article I discuss T, MO, JNJ, UVV, PBI, KMB, ED, VVC, CTL, and SON. The stocks were ranked based on yield (the higher the better), payout ratio (the lower the better), forward P/E (the lower the better), price momentum (the higher the better), and volatility (the lower the better).

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7 Higher Yield Dividend Growth Stocks
Is time spent learning dividend investing worth it?
Preventing Blind Spots in Dividend Investing
Read more on Hang Lung GRP, Dividend Investing at Wikinvest

Thursday Articles

Below are a few articles I’ve found interesting from this week:

Q&A: Paul Desmond of Lowry’s Reports, and Part 2 , courtesy of The Big Picture (original interview is 5 years old but still lots of valuable insight)

Stay Out of the ROOM (pdf) An Excerpt from Probable Outcomes: Secular Stock Market Insights – John Mauldin

Yield vs Risk – Geoff Considine

Nowhere Near Over – David Kotok

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Market Outlook
Read more on HSBC HLDG, CLP HLDGS, Original at Wikinvest

Building Commission Free ETF Portfolios for Vanguard and Fidelity

Thank you to those who have written reviews on Investimonials – I reached 10 reviews last weekend. If you have not left a review yet, feel free to do so at any time.  It’s a great way to spread the word about this site.

Also, don’t forget to follow me on Twitter!

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Last week I presented a commission free ETF portfolio for TD Ameritrade accounts.  Like a little kid, I ate the frosting first by starting with TD Ameritrade.  They currently offer over 100 commission free ETFs, making it relatively easy to allocate a commission-free portfolio among commodities, bonds, equities, and real estate.

The strategy for all three portfolios is identical.  Buy each ETF at the beginning of the month if it closed the previous month above its 10 month simple moving average.  Check each month at the beginning of the month and only sell the ETF if it closed the month below its 10 month simple moving average.  Keep any proceeds in cash (in other words, do not use the proceeds to purchase one of the other ETFs). Ignore any activity that occurs within the month.  For example, if the ETF closes the month above its 10 month SMA and falls below its 10 month SMA on the 8th, ignore this “noise”.  The positions should only be bought or sold at the beginning of the month.  Again, for those looking for more in-depth analysis of this strategy I would recommend Faber’s The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets.

For Vanguard and Fidelity customers, building a commission free diversified portfolio of 10 ETFs is more challenging.  Vanguard currently offers their ETFs commission free while Fidelity offers 30 iShares ETFs without commission.

My goal in creating the portfolios is to achieve exposure in commodities, bonds, equities, and real estate.  The primary hurdle is commodity exposure – neither Vanguard or Fidelity’s free iShares offerings have a pure commodity ETF like the TD Ameritrade portfolio.  Vanguard customers could achieve some commodity exposure via VDE (Energy) and/or VPU  (Utilities), but these holdings could have higher correlations to equities than there would be with the commodity ETFs in the TD portfolio, DBC and DJP.   For Fidelity accounts, there is no viable commodity ETF option.

The second issue with any commission free ETF portfolio for Vanguard accounts is that Vanguard does not offer a TIPS (Treasury Inflation Protected Securities) bond ETF.  TIPS tend to show lower correlation to other fixed-income ETFs and if choosing only two bond ETFs I prefer a TIPS related ETF as a compliment to a broad-based bond ETF.  For Fidelity customers, iShares TIP is offered as a commission free ETF but Fidelity lacks a commission-free international real estate ETF.

Thus, we are left with the following potential portfolios for Vanguard and Fidelity accounts:

VDE? Energy? Or Other?
VPU? Utilities? Or Other?
VNQI Global ex-U.S. Real Estate 0.35%
VNQ Vanguard REIT Index ETF 0.13%
TIP? 0.15%
BND Vanguard Total Bond Market ETF 0.12%
VWO Vanguard Emerging Markets Stock ETF 0.27%
VEU Vanguard FTSE All-World ex-US ETF 0.25%
VB Vanguard Small Cap ETF 0.14%
VTI Vanguard Total Stock Market ETF 0.07%
International Real Estate?
IYR Dow Jones US Real Estate 0.47%
TIP iShares Barclays TIPS Bond 0.20%
AGG Barclays Aggregate Bond 0.24%
EEM MSCI Emerging Markets 0.69%
IWM Russell 2000 0.28%
IWB Russell 1000 0.15%

There is no perfect solution.  However, given the relative low cost of trades among discount brokers, the best option may be to include three commission ETFs in both portfolios.  Thus, the portfolios cannot be called “commission free” but maintaining diversification and a broad mix of ETFs should be of higher concern than saving, at most, 3 commissions per month. However, using the tactical asset allocation strategy of following the 10 month simple moving average should result in much less than 3 commissions per month over the course of the year.

Therefore, the Vanguard/Fidelity “almost-commission-free” portfolios (with commission ETFs noted with an asterisk) are below.  The 3 “low cost” portfolios will be updated monthly starting in March.

Another options for investors is to open an account with a broker who offers free commissions per month.  Some brokers offers free commissions for larger accounts and others, such as Zecco, are more lenient in their free commissions.  Zecco offers 10 free trades per month with a $25,000 balance in your account (if interested Sign up for Zecco here).  In this scenario, an investor who met their qualifications would be guaranteed a commission free portfolio as long as the terms and conditions of their commission structure did not change.

VANGUARD Trend Analysis
DBA* PowerShares DB Agricultural Commodities Here
DBC* PowerShares DB Commodity Index Tracking Here
VNQI Global ex-U.S. Real Estate Here
VNQ Vanguard REIT Index ETF Here
TIP* iShares Barclays TIPS Bond Here
BND Vanguard Total Bond Market ETF Here
VWO Vanguard Emerging Markets Stock ETF Here
VEU Vanguard FTSE All-World ex-US ETF Here
VB Vanguard Small Cap ETF Here
VTI Vanguard Total Stock Market ETF Here
FIDELITY Trend Analysis
DBA* PowerShares DB Agricultural Commodities Here
DBC* PowerShares DB Commodity Index Tracking Here
VNQI* Global ex-U.S. Real Estate Here
IYR Dow Jones US Real Estate Here
TIP iShares Barclays TIPS Bond Here
AGG Barclays Aggregate Bond Here
EEM MSCI Emerging Markets Here
IWM Russell 2000 Here
IWB Russell 1000 Here

No positions

Precious Metal Scenarios

In this 4 minute video Adam Hewison gives us a “short gold position.” It does not mean he is bearish on gold, however the scenario pointed out in this video could make money by being short gold and long another important market.
The video points out what the scenario is, and which market you should be long in, against a short gold position. This is an interesting twist and a video you shouldn’t miss.
As always their videos are free to watch and there is no registration required.

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More on this topic (What's this?)
Has Gold & Silver Finally Bottomed?
Gold Price Gravitating Lower Towards $1000
Read more on Gold, Precious Metals at Wikinvest

Equity Curves for 3 ETF Strategies

A reader asked for the equity curves from the 3 ETF strategies I posted in this article.  Below are the equity curves, as of today. Note that the returns will be slightly different than the original article because today’s returns are included in the equity curves below.
The 10 month simple moving average system (strategy 1):
Buy and hold (strategy 2):
The 3/20/20 variation of strategy #3, relative strength:
The 6/3/3 variation of strategy #3, relative strength:

Equity curve and data courtesy of ETF Replay.

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Market Outlook
Read more on Hong KONG&CHINA Gas, Equity at Wikinvest

Netflix, Butterflies,& Option Expiration

JW Jones of Options Trading Signals give us an example of a near-expiration butterfly option trade on Netflix (NFLX) in this free article. Below is an excerpt:

One of the important functional characteristics of option positions in general is the extreme dynamic nature of their profitability. It is for this reason that it is often wise to remove part of a profitable position in order not to suffer economic loss, and, more importantly, the damage to emotional capital from allowing a winning position turning into a loser. 

When considering the dynamic nature of option positions, one of the fastest potential movers is a butterfly at expiration. As the position approaches expiration, the rapid decay of time premium results in extreme sensitivity to price movement. Butterflies turn from gentle creatures lazily flapping their wings in the breeze to man eating dragons as expiration approaches. Be prepared to slay the dragon before he can take your hard earned profits.

I have no position in NFLX

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10 Micro Cap Value Stocks With Big Potential

I am a member of AAII (American Association of Individual Investors) and one of their more popular screens is the Shadow Stock Screen.  I conduct a close replication of this screen on a monthly basis.  This is a very simple screen that seeks out small/microcap value stocks.  The screen criteria I use within stockscreen123 are:

  • 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 > $1
  • Price/book < .80
  • Price/sales < 1.2
  • Top 10 stocks are selected based on highest 52 week returns
  • Minimum average daily volume > 5k shares

This is the ninth month of performing the screen. Decembers results averaged 12.29% for the 10 stocks, led by Silverleaf Resorts’ (SVLF) return of over 38% in 4 weeks and Fuwei Films (FFHL) 34% 4 week return (returns are hypothetical and exclude commissions and taxes, free trades are always one option to avoid commissions).  The most recent month this strategy returned an average of 19.22% in four weeks.  As I have repeatedly stated this strategy tends to be high beta – it performs very well in bullish markets and may underperform in bear markets.  Clearly, it has been very profitable in recent months as equity markets continue to rise.

One option is to abandon this type of strategy or move to cash 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 above its 200 day moving average.  Another consideration is to hedge the strategy by shorting a small cap ETF or purchasing an inverse small cap ETF. 

Ticker Name Trend Rank MktCap Pr2 Sales TTM Pr2 Book Q EBITDA TTM EBITDA Q Pr52W %Chg
ABL American Biltrite Inc. Here 98.85 24.78 0.11 0.52 3.18 1.79 236.45
SVLF Silverleaf Resorts, Inc. Here 98.4 93.29 0.41 0.45 53.93 13.71 208.75
GFN General Finance Corporation Here 97.35 67.36 0.4 0.61 25.67 9.2 167.05
COBR Cobra Electronics Corporation Here 88.26 25.17 0.23 0.77 4.46 1.73 81.78
BSET Bassett Furniture Industries Here 82.46 84.33 0.36 0.79 1.77 2.83 62
HAST Hastings Entertainment, Inc. Here 80.13 54.93 0.1 0.54 39.02 2.01 57.18
MDH MHI Hospitality Corporation Here 78.6 27.48 0.36 0.69 14 3.64 54
SURW SureWest Communications Here 74.21 175.73 0.73 0.65 74.69 20.7 46.41
SGMA SigmaTron International Here 70.45 32.5 0.23 0.66 9.85 2.62 41.2
TGX Theragenics Corporation Here 69.38 62.23 0.76 0.78 11.09 2.28 40.15

The current top 10 stocks are also below.  FFHL, which had been a stellar performer in recent months on the list, returning nearly 29% last month alone, is no longer on this months list. I update the screen once per month on my site and track the results for free on the right hand side of the site. Full results for all months can be viewed on the right side of Scott’s Investments under “Micro Value Screen”. The tool used for the screen is stockscreen123. No positions in stocks mentioned

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Market Outlook
Read more on Hang Lung GRP, Value Investing at Wikinvest

Che Bernanke, Ben the Baby Killer, Or Unintended Consequences?

Tunisia has fallen, Egypt quickly followed.  Bahrain, Yemen, Morocco, Libya and others burn while their oligarchs cling to power with an iron fist. Other countries could soon follow, and for some, these mass uprisings are the welcome seeds of democracy for people who have known only oppression. For others, the unrest represents chaos and turmoil that will result in a further consolidation of power for a select few; or, perhaps even more frightening, the transfer of power to groups who wish harm to countries such as the United States.

What is driving this political turmoil and why is it happening now?  Without having looked at the recent GDP growth figures for the countries listed above, Maroc Telecom’s recent earnings, or Bahrain’s recent economic quarterly report, I believe “It’s the economy stupid”. More specifically, “it’s the micro-economy stupid”.

For those of us privileged enough to never want for food, to have heat and shelter, and to have freedom of movement (transportation)  it is easy to forget that for most of the world and for most of human history those privileges exist at the margin.  Most humans throughout history are concerned with where their next meal will come from and how to stay warm at night.  For most of today’s societies there are economic systems — albeit some very tenuous and inefficient systems in much of the world — for allocating these resources.  Not everyone, even the poor of the world, are hunting their next meal or building a cave in a fire.  They are exchanging money in their pocket for food and fuel.

So who is Che Bernanke, or Ben the Baby Killer?  I am, of course, referring to Ben Bernanke Chairman of the United States Federal Reserve and the primary architect of the recent policy of quantitative easing in the United States.  Bernanke thought deflation was a serious threat to any potential economic recovery after the near economic collapse of 2007-2009.   His policy of quantitative easing “creates” money — and, for Bernanke, hopefully some inflation — by using the Federal Reserve power to purchase government bonds and other financial assets thereby increasing banks reserves and further reducing interest rates.  The ultimate goal is to stimulate the economy and create some modest degree of inflation by pushing more money into the economy.

I do not want to argue the merits of whether Bernanke’s quantitative easing and policy of continued policy of near zero interest rates is good for the United States.  There are scores of commentators and economists who have been doing so for months.  I am concerned that the impact of his monetary policy on the rest of the world has not been given enough attention. Consider the following:

  • Much of the world’s commodities and financial transactions are priced in dollars.  When the dollar falls in value relative to other currencies, the price of commodities tends to rise.  
  • When the Fed floods the world with dollars in order to stimulate the US economy, the value of the US dollar depreciates because potential buyers of the dollar are not willing to pay as much for something – the dollar – which has become readily available.  
  • Thus, when the Fed has a policy of “easy money”, or is supplying the world with plenty of dollars as it is now via quantitative easing, much of the world sees higher commodity prices and inflation.  
The U.N. Food Price Index reached a record high in January 2011 but I want to emphasize that monetary policy is not the only driver of food and commodity prices. Drought, floods, natural disasters, labor strikes, and other government incentives/disincentives are significant forces.  However, monetary policy in the US can clearly have an impact especially when exercised to extremes.  
This leads us to Che Bernanke, or Ben the Baby Killer, depending on your perspective.  Easy money supply in the US has caused the prices of commodities used by the entire world to increase in cost.  The increase of these basic necessities such as food and fuel, which account for the majority of personal budgets in much of the world, has pushed those at the margin over the edge.  It’s not hard to imagine a scenario in which people, and even babies, go to bed hungry and cold at night, their parents unable to afford food.  
Do I believe Ben Bernanke is responsible for this potential scenario? No, the autocratic governments which steal resources, stifle democracy and generally oppress their citizens are to blame.  But some could rightfully argue Bernanke is the monetary butterfly who flapped his wings, causing revolution and famine halfway across the world…
Coupled with high unemployment as a result of either inefficient economic systems or as a trickle down of decreased global spending in recent years, frustrated citizens have taken their anger out on their oppressive governments.  Revolution is in the streets, which would make the Marxist Revolutionary Che Guevara proud. I’m not calling Ben Bernanke a Marxist by any means, but his monetary policy has rippled across the Atlantic and Pacific oceans, converging in Africa and the Middle East to potentially create a  new era of democratic rule in the region. As Che Guevara once said, “The revolution is not an apple that falls when it is ripe. You have to make it fall.”  
Perhaps, dressed in a hip Che t-shirt deep in the recesses of the Federal Reserve, ‘Ol Ben knows exactly what he’s doing…or then again, this could all simply be what economists call “unintended consequences”.

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Rising Interst Rates Historically A Positive For Equity Returns
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