Tuesday Readings

Below are some market-related articles I am reading this week:

The Next Flush May Be a Generational Bottom – Chicago Sean

The Seeds of  a New Secular Market are Being Sown – Abnormal Returns

The Reality of the Situation – John Hussman

Meanwhile, Back at the Ranch (pdf)  One Nation Under Germany (pdf) and To the Class of 2012 – John Mauldin

Why a ‘Balanced’ Portfolio May Not Work – Smart Money

Macro Tides: Where Are The Super Heroes? The Big Picture

Global Shiller CAPEs – Mebane Faber

Drachma! Cumberland Advisors

Monday Night Readings

Below are some investment related articles on my reading list this week:

Liquidation Syndrome – John Hussman

Re-Entry Signals Following 10 Month Moving Average Exit – Barry Ritholtz

 Dalio’s World – Barrons

Who is Responsible for the Greek Tragedy? Mohamed El-Erian

Dr. Frankenstein’s Europe (pdf) & China: Two Economic Models and the Ideological Divide  & The Clash of Generations (pdf) – John Mauldin

Does “Low Risk” Outperform? Portfolioist

Satyajit Das on JP Morgan’s Loss, the Volcker Rule’s Efficacy, and the Deeper Problems in the Banking Sector

Thinking the Unthinkable – David Kotok

 

Site Update

Posting over the next few weeks will be lighter than usual.  I still be updating portfolios at the end of this month, but I have put the Graham value screen on hold. I had originally planned on re-tooling the screen this month.

I am debating on how to best manage and focus the website going forward. What type of site and content interests you most? If you have constructive suggestions or feedback please feel free to email me.

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Gold and Apple Update

It has been a volatile week in global markets and an update on gold is overdue.  I last wrote about gold and its corresponding ETF, GLD, on May 4th.  For several months I monitored the long-term channel in gold, which was broken in April.  GLD did not break drastically below the channel, and depending on how precise the trend line was drawn you could argue it did not break below the channel until last week:

You will notice in the chart above the words “neck” and “head” drawn. GLD had been setting up for a potential inverse head and shoulders pattern, but last week’s sell-off violated this potential pattern.  The next price target is the low from December 2011 which we came close to touching this week. After the $148 level, $140 appears to be a potential level of significant support. The $140 level also corresponds with the 38.2% retracement level.

All of this does not imply that gold is doomed – these are simply key patterns and price levels to monitor. Gold could just as quickly reverse course, but a longer-term reversal would need to be confirmed by price action. A break-out above $174 and then obviously the all-time high around $186 would confirm an uptrend.

To see some fibonacci analysis on Apple (AAPL) from April 18th, see my chart on Chart.ly here. AAPL is fast approaching the $510 price level, which corresponds with the 23.6% retracement level:

Note on the chart above that the fibonacci price levels for AAPL all correspond with key levels of support and resistance. The points at which fibonacci and prior support/resistance align are important levels to watch as they may serve as potential levels of support/resistance in the future..

I never offer predictions on this site, although I do my best to offer analysis.  Technical analysis and charting is not for those who want to cling to an idea (or price target), because markets evolve, patterns fail, trends reverse, etc. Risk management is the most critical component of any investing plan. With all of that said (can you tell I am leery of being bombarded by emails from AAPL supporters?), if $510 support does not hold on AAPL, the next level of significant support is $425-$430.  AAPL is still in a long-term uptrend but it is fast approaching some key price levels.

The other interesting feature on AAPL’s daily chart are the two gaps in January and February.  The trading cliche is that gaps tend to fill (I have seen no statistical evidence to verify or refute this claim). The lower of the two gaps is just above the $427 price level, which again aligns with both the fibonacci retracement level and prior resistance (current support):

For those interested or new to charting, I highly recommend Peter Brandt’s blog – he wrote a nice piece yesterday, Chart Trading for Dummies.

Monday Night Readings

Below are some articles I am catching up on this week:

Gold & Gold Miners Closing in on Major Bottom – Traders Video Playbook

Historical Dividend Analysis Makes Us Bullish on Japan (pdf) – WisdomTree

Dancing at the Edge of a Cliff – John Hussman

Adaptive Asset Allocation: A True Revolution in Portfolio Management – Advisor Perspectives

On JP Morgan: Kid Dynamite, Dealbreaker, and James Bianco

Martin Wolf: The Journey Towards Becoming Japan

Waving the White Flag (pdf) – John Mauldin

Peter Brandt: Major Top Completed Today in Russell 2000 & NYSE Composite

High Yield Momentum Stock Portfolio, May Update

Once per month I update a high yield dividend stock momentum portfolio on Scott’s Investments.  The portfolio is comprised of the high yielding stocks in the S&P 500 with high price momentum.

The portfolio is a simple quantitative strategy and begins by screening the S&P 500 for stocks yielding greater than 4%. The results are then ranked by their 6 month returns.  The top stocks are then added to a hypothetical portfolio and tracked publicly on Scott’s Investments.  This month there were 59 results this month, two more than last month.

Now you can follow me on Stocktwits and Twitter!

Per a previous article, the highest momentum, high-yield stocks have historically out-performed lower yielding, lower momentum stocks.  The screen is more of a trading strategy and less of a passive income strategy, although the dividends do play an essential component in the overall returns. Thus, turnover could be high and the strategy is not for everyone but I have added a modification to the strategy to minimize turnover.

In order to limit turnover stocks with yields that have fallen below 4% due to share price appreciation will remain in the portfolio. Stocks will only be sold when yield falls below 4% due to dividend cuts or when the six-month performance would otherwise lag the top 10-11 stocks in the screen.  Currently this rule applies to Philip Morris (PM) and Kimco Realty (KIM), current portfolio holdings yielding less than 4%. They remain in the portfolio this month because its momentum would otherwise put it in the top 10.

Click here for MarketClub’s Top 50 Trending Stocks

The portfolio has turnover in two positions for May. H&R Block (HRB) and Lockheed Martin (LMT) are being sold and the proceeds used to purchase Altria (MO) and AT&T (T).  MO currently yields 5.16% and its 6-month performance of 20.23% ranks it fifth on the screen. T yields 5.24% and has a 6-month performance of 19.58%, the sixth highest momentum rank.

The High Yield Momentum Portfolio was designed to be fully invested at all times regardless of market conditions. However, as part of a larger portfolio there may be additional steps an investor can take to reduce risk and diversify strategies.  For example, the Ivy Portfolio uses a 10 month moving average to dictate an invested or cash position (signals are updated daily at Scott’s Investments).

Below are the top 15 high yield momentum stocks as of May 11th.  Keep in mind that only 10 stocks are held in the portfolio, the current holdings are italicized (the 2 new additions in bold) and the current holdings can be viewed on the right-hand side of Scott’s Investments and in the second table below.

Since inception the portfolio is up 9.58%, down just under 1% versus last month’s update. Returns exclude commissions, taxes, and are hypothetical:

Data source: Finviz.

Ticker Company Dividend Yield Trend Performance (Half Year)
CINF Cincinnati Financial Corp. 4.46% Here 30.63%
FII Federated Investors, Inc. 4.49% Here 25.00%
GCI Gannett Co., Inc. 5.98% Here 23.68%
LO Lorillard, Inc. 4.81% Here 23.18%
MO Altria Group Inc. 5.16% Here 20.23%
T AT&T, Inc. 5.24% Here 19.58%
HCBK Hudson City Bancorp, Inc. 4.95% Here 18.28%
HCN Health Care REIT, Inc. 5.26% Here 16.23%
MRK Merck & Co. Inc. 4.42% Here 15.17%
VTR Ventas, Inc. 4.21% Here 15.06%
VZ Verizon Communications Inc. 4.86% Here 14.52%
CMS CMS Energy Corp. 4.20% Here 13.92%
SCG SCANA Corp. 4.26% Here 13.90%
LMT Lockheed Martin Corporation 4.69% Here 13.45%
HCP HCP, Inc. 4.83% Here 13.19%

 

Position Purchase Price Purchase Date Cost Basis Current Value Percentage Gain/Loss Excluding Dividends Current Yield
MO 31.79 05/11/12 $9,918.48 $9,918.48 0.00% 5.16%
GCI 14.55 03/12/12 $11,058.00 $10,161.20 -8.11% 5.98%
CINF 34.45 02/10/12 $10,748.40 $11,256.96 4.73% 4.46%
MRK 37.91 02/10/12 $10,728.53 $10,762.49 0.32% 4.42%
FII 20.89 03/12/12 $11,050.81 $11,320.60 2.44% 4.49%
T 33.59 05/11/12 $9,909.05 $9,909.05 0.00% 5.24%
PM 75.58 12/09/11 $10,581.20 $12,061.00 13.99% 3.58%
KIM 17.79 04/10/12 $11,172.12 $12,315.08 10.23% 3.88%
HCBK 6.73 03/12/12 $11,064.12 $10,636.68 -3.86% 4.95%
LO 122.58 02/10/12 $10,664.46 $11,203.86 5.06% 4.81%

Mid-Week Readings

Below are a few investment articles for this Wednesday. It has been an eventful week, with equity markets and gold having sold off fairly heavily.  Gold looks to have broken below the right shoulder on the potential inverse head and shoulder pattern that was developing.

Risk Parity Research Summary, May 2012 – Empiritrage

A Seasonal Quandary – Tom McClellan

A Graphic Presentation (pdf) and A Leaderless World (pdf) – John Mauldin

The Mutual Funds and Managers to Avoid – Barry Ritholtz, Washington Post

Volatility Management for Better Absolute and Risk-Adjusted Performance  and Diversification: Still the Only Free Lunch and How to Beat the Market, and Why Most Investors Don’t– Advisor Perspectives

Long Term Secular Cycles on S&P – Barry Ritholtz

Risk Premia Harvesting Through Momentum (pdf) – Gary Antonacci

Unbalanced Risk – John Hussman