Hate mail and Love letters

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.

Hate mail

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.

Love letters

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.

 

EWG: Germany

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.

 

15 Comments

  • Regarding the ETF : ZMT.TO on Feb 20 2019 blog.
    I was checking out that ETF on my broker charting site (Questrade) and found it has only 4 weeks of data as compared to your chart data. This link below also pertains to that discrepancy.

    https://www.newswire.ca/news-releases/bmo-asset-management-inc-announces-unit-consolidations-on-six-commodity-based-exchange-traded-funds-863258135.html

    What are your thoughts on this kind of Consolidation practice by a company.
    Personally I will stay away from anything where past historical data is deleted.
    Respectfully: Barry

    Reply
    • Barry-thanks for this… we always chart the top holdings in an ETF before buying, and we did like the charts of those stocks before buying. So, I feel it might be a reasonable play–after all, it comes down to what is held in the ETF right now while we own it. And we are satisfied with the majority of the weightings. But to be honest, your observation was not on our radar, so really appreciate you passing that on.
      BTW–On all of the positions noted EXCEPT ZEM, we have a half-position. So we are less exposed than normally to 3 of the 4 positions I write about. ZEM is a full-weight position for us.
      So, if for any reason ZMT or the others show bearish inclination, we will take less hit, and of course, will look for an ideal exit point.
      Thanks again–appreciate the insight.

      Reply
      • Hey Keith,

        How do you determine your position size? Is it simply a percent of your portfolio or do you consider other factors such as the volatility of the security, where your “stop loss” or exit points are if you have a maximum dollar amount that you are willing to risk, etc.

        Thanks,

        Josh

        Reply
        • Josh–our “full” position is 5%. We have read enough research that suggests about 20 stocks or so is the ideal mix of enough diversification, without being “di-worsified” as Peter Lynch once called it–that is, owning so many stocks that you become the market. This assumes fully invested–which we are not at this time (35% cash).
          From there, we look at the beta of the stock and or the sector and we take into account fundamental risk or safety. If the stock has enormous potential, with little risk, we can go as high as 7%. That rarely happens–although sometimes we will do that with a sector ETF. Conversely, if the stock has higher than normal risk for that potential reward, we go 3%. On some occasions, we will hold as little as 2% in a stock –again, that being an outlier. For example, I note on this blog we bought Nat Gas recently – and that its high risk/reward. So that was a 2% bit for us. Meanwhile, we recognize the risk of emerging markets, but also recognize its great chart–so we went 5% there. We went 3% in the German ETF due to somewhat higher risk, mainly based on the early phase of its chart.
          I noted that I would on some of these positions double down–ie if ZMT or EWG breaks the consolidation pattern, I will up them both to 5%.
          Hope that helps.

          Reply
  • Hello Keith,
    Your posting was perfect timing.
    The S&P 500 is has been flirting with 2775-2800 level….and there is obviously tonnes of overhead resistance. Also, big institutions will not be committing ‘new money’ at this level in the S&P 500. At this point, the market has run up too fast in the last 8 weeks. We need many months to consolidate this run up in the markets. Also, it should be noted the S&P 500 only stayed under 1500 level for a mere five days. This tells me, we have plenty of backfilling to do, including the low volumes during the first 4 weeks of January. Your post was perfect and I agree with you. I am sitting in 100% cash since Dec. and plan on staying in cash for many more months to come. The big institutions need to drop this market much lower again, in order for the market to be investible. And they will drop this market lower.

    Reply
    • Ray–certainly that 2800 resistance is a major factor to pay attention to.

      Reply
  • Ray: I couldn’t agree with you more. I have been selling and am at my highest cash level ever. (right now about 70%) . I am self investing, and, am by no means any kind of expert at it. My question to you Keith, and Ray is you say you are sitting in cash until possibly quite a few months, while the market consolidates. Do you just leave it in cash? Money market account? Some of my cash I put into an ETF for Canadian Gov’t bonds. Id like to make some money while waiting. Ill be selling 3 American Equities next week, and I guess my same question is where to park this American money I will have. Any suggestions? Id love to hear some particular places that you would suggest, if I may be so bold. I di d go into ZEM (at Keiths suggestion) about 6 weeks ago, so naturally me ears and eyes pricked up when I saw it mentioned here. Keith: I sure hope you will signal us when you technically see its time to get out of Emerging Markets. Thanks all for listening

    Reply
    • Tom, I’ll do my best to blog on positions I sell, but remember, the onus lies on you to follow the charts and make your own decisions. I often don’t get around to blogging on such things for a week or so after I have already traded, so never rely on me, or anyone else, for your entry exit timing.

      Reply
    • Mark–$18 is the significant low (the $17.50 low was a capitulation low, less significant) so i wouldn’t want to see it go below $18 for more than 3 days…see my book Sideways for the “3 day rule”

      Reply
    • yes for 3 reasons
      -The daily chart continues to be in a neartermed uptrend and the weekly shows a clean break after a base from the prior downtrend.
      -Seasonals stay strong typically until May
      -A china deal implies further upside, so as news comes out, this is good for metals, and hopefully the producers.
      So for the time being I am in.
      I will keep an eye to sell in a few weeks, but would hold if there is not a break in trend.

      Reply

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