At ValueTrend, we’ve been pretty concerned about the overbought conditions on the markets. Sure, we rode the rally for a while, but 3 weeks ago we brought our cash back up, and even went so far as to raise our cash levels to an aggressive 40% weighting in the Equity Platform. We made the move to cash based on technical signals such as this and this.
And yeah, we’ve been wrong for the entire three weeks.
So, should we capitulate and join in on the madness? Should we buy with abandon, to heck with the overbought technicals? Seems to me I asked myself that EXACT same question in the final quarter of 2017. Markets were experiencing the lowest level of volatility in 50 years. Nothing could go wrong, according to the overbought sentiment. Paradise for the bulls. We raised cash that summer—some 35%. And we stayed very wrong for about 4 months—underperforming markets. We made about half of the market return in 2017. We got some flack for that.
Then, along came a large pullback in January 2018. But it recovered. Whew, said the bulls! And then…. another market spanking in February. A bit of reprieve over the summer, a rally into October barely making it over the January high….then…bang! Along came a 20% decline over November/December. Our conservative cash weighting, along with some ( in our humble view) smart trades, brought us from an underperforming level in 2017 into an outperforming 2018. For the year, we lost something around 2%, vs double digit market losses. Many investors lost a huge portion of their 2017 gains during 2018. We held most of our gains. While we might be break-even with the buy/hold guys over those 2 years–we had much, much less volatility. And that’s our gig. We got some client love letters for our low volatility in 2018.
Funny how things change.
Well, here we go again. Take a look at our performance numbers. We are still beating the market for the longer and intermediate term. But we are getting our heads handed to us in the near-term because of January’s rally. We continue to hold our cash (although its now down to 35%), and we are either going to be very wrong for that decision, as we felt we were in late 2017…or very right, as we were ultimately proven to be in 2018.
In the end, I don’t know what will happen. But I do know that I hate losing clients money…along with my own. I hold my families wealth in the ValueTrend platforms..so I eat my own cooking. In fact, I hate losing money more than I like ignoring the overbought momentum and sentiment indicators, damning the torpedoes (“full speed ahead!”). Were I to do this, I’d be playing the “Greater Fool” game.Greater_fool_theory
Still, one does have to hold some money in the market. Here are a few area’s where we see value. These are overlooked markets with charts that are breaking out. In our way of looking at it, its better to bet on an undervalued sector with an emerging chart – vs. buying into a momentum play that is looking long in the tooth.
Germany got pounded along with Europe, but they remain the strongest horse in the race. There appears to be an early breakout from the EWG downtrend. Perhaps its a head and shoulders bottom in the works. We bought a position in this ETF recently, and might add to it if it proves fruitful.
ZEM: Emerging Markets
Nice bottom formation. We bought a pretty good sized chunk of this ETF on the neckline breakout. If the US keeps rates low, the emerging markets might just head north.
UNG: Natural Gas
This is not a play for the timid. Its got some risk. But for shorter termed traders, Nat Gas looks to be near the bottom of its trading range. And the seasonal months start for it soon. We bought a very small position in this ETF recently. Don’t play this type of position unless you are very confident in your ability to trade out on a loss or take a quick gain on technical signals. The ride can be very bumpy. Upside targets are $27.50 then $35. Risk is $20–below which would be a stop loss. Despite all of that gloom, I think this chart shows a fairly decent potential for the trade. We shall see.
ZMT: Base metals (C$ hedged)
Like Nat Gas, metals have some positive seasonal months coming. The producer sector looks to be testing a downtrend. This ETF, run by BMO, hedges the USD risk—so I chose it over its US based brethren. Its not yet broken the downtrend, so I legged in about half of what I would buy upon the actual breakout. I’m being a little more aggressive on the entry timing for this one, and I will sell if the trade turns sour.