Weekend Reads

First, a note – I accidentally emailed an incorrect link yesterday. The correct link for Chris Vermeulen’s new book is here: Technical Trading Mastery.

Below is my weekend reading list:

High Payout Ratios Predict Higher Earnings – Huh? Turnkey Analyst

From IndexUniverse: Swedroe: Looking at Quality Factor & Our Top 10 Stories of 2013

Philosophical Economics: Valuation, Profit Margins and Stock Market Returns: Adventures in Curve Fitting

Merry Buyback Christmas – The Reformed Broker

Gary Shilling: Review and Forecast (pdf), What Has QE Wrought? (pdf) & Half & Half: Why Rowing Works (pdf) – John Mauldin

 

Book Offer + Free Newsletter

Chris Vermeulen of The Gold and Oil Guy and Algo Trades is offering his new book, Technical Trading Mastery, at half price.  The book will not be released until  February 2014 but you can get it instantly now from his site.

Also, as an added bonus if you buy the book before Jan 1st you get a FREE Lifetime membership to his new investing newsletter which is $97 per year!

Also, Options Trading Signals is offering a free one month subscription to their service. Users can sign up for the free month here.

Friday Investing Readings

Below is my investment reading list for this week:

Is Volatility for Misguided Geeks? Turnkey Analyst

Index Universe: Swedroe: Resist Temptations of Leverage ; ETF Portfolio Ideas for a Deflationary 2014

A Fool Thinks Himself to be Wise… – GestaltU

How Much Cash Should You Hold in Your Portfolio? Washington Post / Barry Ritholtz

A Noble Lie – Morningstar

Dogs and Cows of the Dow, Dividends and Buybacks – Mebane Faber

Dual ETF Momentum Portfolio – December Update

In February I announced a new “Dual ETF Momentum” spreadsheet. The idea was inspired by a paper written by Gary Antonacci and available on Optimal Momentum.

The spreadsheet is available on Scott’s Investment’s here. The objective of the spreadsheet is to track four pairs of ETFs and provide an “Invested” signal for the ETF in each pair with the highest relative momentum.

Relative momentum is gauged by the 12 month total returns of each ETF. The 12 month total returns of each ETF is also compared to a short-term Treasury ETF (a “cash” filter) in the form of iShares Barclays 1-3 Treasury Bond ETF (SHY). In order to have an “Invested” signal the ETF with the highest relative strength must also have 12-month total returns greater than the 12-month total returns of SHY. This is the absolute momentum filter which is detailed in depth by Antonacci, and has historically helped increase risk-adjusted returns.

An “average” return signal for each ETF is also available on the spreadsheet. The concept is the same as the 12-month relative momentum. However, the “average” return signal uses the average of the past 3, 6, and 12 (“3/6/12″) month total returns for each ETF. The “invested” signal is based on the ETF with the highest relative momentum for the past 3, 6 and 12 months. The ETF with the highest average relative strength must also have an average 3/6/12 total returns greater than the 3/6/12 total returns of the cash ETF.

Portfolio123 was used to test a similar strategy using the same portfolios and combined momentum score (“3/6/12″).  The test results were posted in last month’s update.

Below are the four portfolios along with current signals:

Return data courtesy of Finviz
Equity ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
US Equities VTI 28.56 15.05 Invested Invested
International Equities VEU 13.01 7.8
Cash SHY 0.3 0.32
Credit Risk ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
High Yield Bond HYG 5.81 4.18 Invested Invested
Interm Credit Bond CIU -0.16 0.87
Cash SHY 0.3 0.32
Real-Estate Risk ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
Equity REIT VNQ 2.67 -1.62 Invested
Mortgage REIT REM -6.66 -5.57
Cash SHY 0.3 0.32 Invested
Economic Stress ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
Gold GLD -27.04 -14
Long-term Treasuries TLT -14.43 -7.28
Cash SHY 0.3 0.32 Invested Invested

As an added bonus, the spreadsheet also has four additional sheets using a dual momentum strategy with broker specific commission-free ETFs for TD Ameritrade, Charles Schwab, Fidelity, and Vanguard. It is important to note that each broker may have additional trade restrictions and the terms of their commission-free ETFs could change in the future.

If you enjoy these types of tools and articles, please consider a donation!

More on this topic (What's this?)
Cloud M&A: Momentum Adds Twist
euNetworks Sees Growing Sales Momentum
How to Spot a Genuine Momentum Stock
Read more on Momentum at Wikinvest

December High Yield Dividend Champion Portfolio

In December 2010, I created a screen/hypothetical portfolio called the “High Yield Dividend Champion Portfolio.” The screen is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott’s Investments.

Like many of the screens, strategies, and portfolios I track and prefer, the High Yield Dividend Champion Portfolio uses a small number of historically relevant ideas to create a simple, yet powerful investment plan. As I previously detailed, “Some studies have shown that the, highest yielding, low payout stocks perform better over time than stocks with higher payouts and lower yields.”

The High Yield Dividend Champion Portfolio attempts to capture the best high yield, low payout stocks with a history of raising dividends. There are numerous ways to rank high yield/low payout stocks. The screening process for this portfolio starts with the “Dividend Champions” as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout for at least 25 consecutive years.

In January changes were made to the ranking system. We still begin with the Dividend Champion list, which is first sorted by yield and the lowest 50% yielding stocks are eliminated. Eliminating the lowest yielding stocks ensures only stocks with a relatively “high” yield make the portfolio.

The remaining stocks are then assigned a rank based on their yield (the higher the yield the higher the rank), payout ratio (the lower the payout ratio the higher the rank), 3 year dividend growth rate, and 5/10 year Dividend Acceleration/Deceleration (5-year average increase divided by 10-year average increase).  Extra weight is given to yield and payout ratio rankings.

The top 10 stocks based on the new ranking system make the portfolio. Stocks will be sold at the re-balance date (generally around the 5th of the month) when they drop out of the top 15 (to limit turnover) and are replaced with the next highest rated stock.

This month, as with the previous three months, there is no portfolio turnover. All current positions will be held until next month.

The top 15 stocks based on my ranking methodology are below and displayed in order of their overall ranking (figures are October month-end):

Name Symbol
Chevron Corp. CVX
Helmerich & Payne Inc. HP
Altria Group Inc. MO
UGI Corp. UGI
WGL Holdings Inc. WGL
Target Corp. TGT
ExxonMobil Corp. XOM
American States Water AWR
Universal Corp. UVV
Tompkins Financial Corp. TMP
Leggett & Platt Inc. LEG
Eagle Financial Services EFSI
McDonald’s Corp. MCD
Northwest Natural Gas NWN
MGE Energy Inc. MGEE

The current portfolio is below:

Position Purchase Date
CVX 12/6/2012
WGL 12/6/2012
HP 7/5/2013
UVV 4/5/2012
UGI 8/5/2013
LEG 8/5/2013
XOM 4/5/2013
MO 3/5/2013
AWR 7/5/2013
NWN 4/5/2013

The portfolio performance is below along with three benchmarks (log scale)

December Dividend Champion

If you enjoy these free tools, please consider making a donation on the home page of Scott’s Investments using the Paypal link in the upper-right corner!

Weekend Reads

Below is my reading for this past week and weekend:

Using Options to Capitalize on Strong Fundamentals for Gold – JW Jones

James Montier has a new piece out on GMO’s website (free registration required). Always recommended.

Doug Short on current market valuation here and here

John Mauldin: Euthanasia of the Economy and Arsonists Running the Fire Brigade

From Index Universe: Larry Swedroe on Inflation Fighters and The Profitability Factor. Cambria Payout ETF is live. Two Nobel Laureats…Two Tales of Value

A Quantitative Value ETF? Turnkey Analyst

From Mebane Faber: Small Caps, Cheap or Expensive?, The Most Important Yield Chart in the World , All-In With Momentum , and Building a Simple Sector Rotation on Momentum and Trend

 

More on this topic (What's this?)
Dividend Growth Stocks Protect Investors from Inflation
Inflation at Lowest Rate in Four Years
Today’s Fed Statement
Read more on Gold, Inflation at Wikinvest

ETFReplay Portfolio for December

Among the more popular portfolios on Scott’s Investments has been the ETFReplay.com Portfolio.  I previously detailed here and here how an investor can use ETFReplay.com to screen for best performing ETFs based on momentum and volatility.

The portfolio begins with a static basket of 15 ETFs. These 15 ETFs are ranked by 6 month total returns (weighted 40%), 3 month total returns (weighted 30%), and 3 month price volatility (weighted 30%). The top 4 are purchased  at the beginning of each month. When a holding drops out of the top 5 ETFs it will be sold and replaced with the next highest ranked ETF.

In addition, ETFs must be ranked above the cash ETF SHY in order to be included in the portfolio, similar to the absolute momentum strategy I profiled here. This modification could help reduce drawdowns during periods of high volatility and/or negative market conditions (see 2008-2009), but it could also reduce total returns by allocating to cash in lieu of an asset class.

The top 5 ranked ETFs as of 11/29/13 are below:

Top 50 Trending Stocks

6mo/3mo/3mo
HYG iShares iBoxx High-Yield Corp Bond
EFA iShares MSCI EAFE
VTI Vanguard MSCI Total U.S. Stock Market
RWX SPDR DJ International Real Estate
SHY Barclays Low Duration Treasury

Since cash (represented by SHY) is now the fifth highest rated ETF, anything rated above it qualifies for purchase. In October SHY was the third highest rated ETF and in November it was the fourth highest rated ETF.

For December the portfolio maintains positions in VTI, HYG and EFA. The portfolio held 25% cash in November, which is being allocated to RWX for December.

The strategy’s performance since inception is below, as is comparative performance of the SPDR S&P 500 ETF (SPY), iShares Growth Allocation (AOR), and the Permanent Portfolio (PRPFX):

ETFREPLAY

More on this topic (What's this?)
US Market ETF Trading Map
Using an ETF Portfolio
Core ETF Report
Read more on Exchange Traded Fund (ETF) at Wikinvest

Ivy & Commission Free ETF Portfolios – December Update

Early in 2012  Scott’s Investments added a daily Ivy Portfolio spreadsheet to track the 10 month moving average signals for two portfolios listed in Mebane Faber’s book The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. Faber discusses 5, 10, and 20 security portfolios that have trading signals based on long-term moving averages. The Ivy Portfolio spreadsheet tracks the 5 and 10 ETF Portfolios listed in Faber’s book. When a security is trading below its 10 month simple moving average, the position is listed as “Cash”. When the security is trading above its 10 month simple moving average the positions is listed as “Invested”.

The spreadsheet’s signals update once daily (typically in the late evening) using dividend/split adjusted closing price from Yahoo Finance. The 10 month simple moving average is based on the most recent 10 months including the current month’s most recent daily closing price.  Even though the signals update daily, it is not an endorsement to check signals daily. It simply gives the spreadsheet more versatility for users to check at his or her leisure.

The page also displays the percentage each ETF within the Ivy 10 and Ivy 5 Portfolio is above or below the current 10 month simple moving average, using both adjusted and unadjusted data. If an ETF has paid a dividend or split within the past 10 months, then when comparing the adjusted/unadjusted data you will see differences in the percent an ETF is above/below the 10 month SMA. This could also potentially impact whether an ETF is above or below its 10 month SMA. Regardless of whether you prefer the adjusted or unadjusted data, it is important to remain consistent in your approach. My preference is to use adjusted data when evaluating signals.

Top 50 Trending Stocks

The current signals based on November’s closing prices are below. As with recent months, US equities continue to show strength and developed international equities are also showing strength.

The first table is based on adjusted historical data and the second table is based on unadjusted price data. Adjusted data is my preferred method for averaging prices; however, if you use a charting or financial site which uses unadjusted prices you may see moving average signals closer to those in the unadjusted table:

adjusted ivy

 

 

unadjusted ivy

 

I also provide a “Commission-Free” Ivy Portfolio spreadsheet as an added bonus. This document tracks the 10 month moving averages for four different portfolios designed for TD Ameritrade, Fidelity, Charles Schwab, and Vanguard commission-free ETF offers.

Not all ETFs in each portfolio are commission free, as each broker limits the selection of commission-free ETFs and viable ETFs may not exist in each asset class. Other restrictions and limitations may apply depending on each broker.

Below are the 10 month moving average signals (using adjusted price data) for the commission-free portfolios:

free1

 

free2