Apologies for the choppy sentences in today’s blog. I copied it from another piece I had written, modified it for the blog–and it did not copy properly. I’m too lazy to figure out how to correct it. Bear with the sentence breaks…I believe you will get alot out of today’s blog.
My outlook on the market is for a continuation of the 2018 – present multi-month swings. Sooner or later, the market can and will break out of a sideways volatility period. I can’t tell you if that will happen in a week, a month, or a year. If you look at the chart below, you will note that we are in the third period of sideway volatility since 2009. Note how the last 2
sideways periods lasted 18+ months. We’re about 15 months into the
current choppy sideways period. So there may be more to come.
In light of an overvalued North American market, we at ValueTrend are
trying to focus on areas that are likely to do well in a period of chop.
We’ve been buying Emerging Markets, commodities such as metals and energy, China, and even a bit of Europe. These are all contrarian ideas.
They have been beaten up, based, and appear to be receiving some new moneyflow. Stocks following the same pattern are on our list. Some are
contrarian ideas that may take a while to move, but appear undervalued on our fundamental and technical screens. Sure, we have a few growth orientated momentum stocks. They’ve done well. But we don’t want to be as exposed to these high flyers as the market is. For this reason, most of our new ideas now come from the “value” side of the ledger, rather
than the “growth” side.
How we are trading this market
As noted, we are searching for value stocks within an overbought market. As such, we are looking for stocks and securities that are rebounding from a
support level, or which have broken a downtrend by basing and
illustrating signs of an upward breakout. Bottom feeding strategies like
this make sense in a choppy market. But – there is a catch. Such stocks
may not turn around as quickly as anticipated. This is the risk of value
investing. Depressed and overlooked securities can be opportunistic. But that opportunity can be a double edged sword. A rebounding company or sector can be a magnificent thing to take advantage of – but signs of
continued weakness can punish the security further. As such, we tend to leg into these stocks in 2 increments. In that way, we have a smaller
commitment if the trade goes sour. And we can add to it if things are
We also have to keep a tight watch on support levels for these fallen
angels. If a stock drops below a noted support level, we don’t spend much time waiting around for a rebound. We’re trying to stick with 3-4 day
break rule, meaning that if a stock breaks support – we sell it if it doesn’t rebound within that 3-4 day period. So here’s how it works:
1. We decide on our position size (e.g. – we want a 5% position)
2. We buy roughly half of that position (e.g.-2-3%)
3. If the stock or ETF moves favorably, we add the second portion to bring us up to the 5% weighting
4. If the stock breaks support/moves unfavorably, we sell after 3 days –
which affords the stock enough time to do an oversold bounce (if any)
Two example of this 2-stage leg-in style include stocks such as Onex
(ONEX) and some of our commodity positions of late like the BMO metals ETF (ZMT). We bought these positions and added to them in two leg
intervals as they affirmed our original analysis. By buying in increments, we had better confidence in taking a larger position, and have profited
by that strategy.
Two examples of stocks that were stopped out include CVS and WBA after negative financial reports. By limiting losses through a 2-stage buy-in on both of these stocks (3% original buy level each, no additional capital committed) and a tight stop-loss trading strategy, we were able to reduce the risk of further downside. We then redeployed that capital into better ideas. Of note:
Sometimes you don’t have an immediate replacement…the “better idea” may just be adding to cash!
Does it work?
Effectively, this buy/sell strategy affords us to keep our winners and even add to them, while it reduces our exposure to losers and cuts their losses for better use of the capital. It’s been working very well for us so far. We’ve held between 15% to 30% cash consistently through the past 12 months. Recall that the ValueTrend mantra is to “Limit your risk, Keep your money”. We want good returns while experiencing a lower level of risk and volatility than markets. Cash is one tool to help with that goal when times are uncertain.
Despite the cash, our performance in the Equity Platform has been in line with the market over the past year, and has outperformed over the longer term. Being able to perform in line or better than the market while holding almost a third in cash suggests that our stock picking and trading strategy has provided positive alpha vs the indices. We’ve had market returns with a lower risk profile. Have your cake and eat it too!
New product launch: Taking applications NOW
I’m excited to note that we are launching a new platform… our new ValueTrend Aggressive Growth Strategy (VTAGS). The platform is now officially being offered to clients who hold a balanced portfolio within our other platforms. Note that this platform is not designed to replace the ValueTrend Equity Platform. It is a compliment to it.
VTAGS is generally recommended for a smaller portion of an overall investment portfolio, and only for those clients who understand the trade-offs between risk and reward in a higher growth strategy. We want to keep the platform small and contained for greater trading efficiency and liquidity. As such, we may at some point cap the platform after a maximum capital level is invested in the strategy.
We’ll be taking applications for the VTAGS strategy effective immediately, with the anticipated investment inception date (aka the “go live” date) of June 1, 2019.
The VTAGS strategy will not be offered as a standalone product for new clients. You must hold a minimum of $500,000 in family assets with us diversified through our other platforms: If you are interested…Please contact either Craig or Keith to for a full description of the VTAGS strategy and to discuss how ValueTrend can administer your entire portfolio needs.