September head-fakes, and my current strategy for the winter

September 18, 20192 Comments

 

Boxers sometimes use a technique where they move their head into an unprotected zone where the opponent will be tempted to take a swing at it. Meanwhile, the boxer has quickly moved his head back into the protected zone behind his gloves. When the opponent is swinging towards the “empty air”, he or she is now vulnerable to a counter move by the first boxer. This move is known as a “head fake”.

Stock markets sometimes do head fakes. After a period of negativity, it swings up for a few days. The crowd shouts “The bad markets are over.  It’s a buying opportunity!” Like the boxer, the stock market may be providing a false opportunity. It may be head-faking investors to take a swing by re-entering the market with new cash. When investors take that swing with their cash, the market moves back down again. Bam! The investor gets a left hook to the portfolio-right where it hurts!

 

 

The chart of the Shanghai, below, illustrates a head fake move that fooled investors into buying during the 3 year sideways choppy markets.

September could head-fake us

September is statistically the worst month of the year from a seasonal perspective. Chances of a negative return this month are greater than any other month of the year. In fact, it’s the last two weeks we need to worry about the most. This doesn’t mean the markets will fall in September with any degree of certainty. It simply means that, on average, markets are more likely to decline in September. Adding to the potential for volatility is the fact that the China Trade deals is still on the table. Here’s a blog on the coinciding Tweets by President Trump and stock market movements. The more the President Tweets, the greater the market volatility. There is a distinct potentiality for continued trade talk volatility over the coming month. This, combined with the September seasonal tendencies keeps us cautious.

 

What we’re doing to avoid a head-fake

The ValueTrend Equity Platform is currently positioned heavily between lower beta (volatility) stocks like REITs and staples.  Plus about 22% cash. We still hold a bit of precious metals via silver (<4%), although we suspect that gold and silver may underperform in the near future. This, after becoming so overbought this summer. As such, we might exit the silver position entirely if September volatility inspires a rally on the metal. The gold chart below shows us a currently overbought situation, noted via three black vertical dashed lines. When MACD crosses along with overbought RSI and stochastics hooks, gold tends to sell off. Silver is in a similar position (chart not posted) as gold is right now. I’ll up my exposure to precious metals upon a return to a better entry point. Right now, I’m thinking gold might be attractive again in the mid-low $1400’s. But I’ll wait until the technical signals suggest an entry point rather than circle a price at this point.

 

These defensive positions (staples, REITs, silver, cash) afford a lower risk going into October. Previously, they allowed the ValueTrend Equity platform to experience a positive return during the bearish month of August. So far, that positive return continues into September.  Of course, the trade-off, as always, with holding a defensive portfolio is that markets may rise despite the seasonal statistics and trade talk concerns. With a defensive portfolio we miss out a bit if markets rise. We’ll still make money – but we won’t keep up with a sharp rally. Conversely, if the market falls, as it did in August, we will miss out in a good way! Nobody knows the future. What we do know is that there is a greater case for caution than for aggressiveness within the current environment.

Trade deal rally likely

On the positive side, we are confident that the market will rally this winter as we enter into the US electoral year. President Trump wants to get re-elected. In order to increase his chances, he must negotiate and finalize the trade deal with China and Europe before the campaigning season begins in February or March. Markets are likely to rally strongly on trade deals being settled. We view this development as quite inevitable.

 

Inverted yield curve

After 30 years in the money management business, it sometimes makes me chuckle to hear relatively unsophisticated investors banter on about topics that are suddenly widely discussed in the financial press. Case in point is the negative yield curve. A year ago, most investors had never heard of this leading economic indicator. But now, everyone’s an expert. Much talk is being made of the inverted yield curve. Without boring you to death, I can assert that inverted yield curves do typically lead into recessions. But they are long leading indicators. Typically signalling recession a year ahead of the actuality. More information on the yield curve and the current expanding pattern seen on the markets (another widely discussed occurrence of late) can be found on this blog

Strategy

My view is to play the trade deal rally by rotating out of defensives in a month or so, and into more growth stocks. This, I expect, might allow us to take advantage of any strength over the winter brought on by trade deal hopes. Given the longer termed predictability of the dreaded yield inversion, I’ll retreat into defensive investing and precious metals once again, as it appears that a trade deal rally is fizzling out.

 

I’m at the MoneyShow this Friday!

Don’t forget to register early for the MoneyShow in the Metro Toronto Convention Center. I’m presenting this Friday September 20 at 4:15PM on something a little different. I’ll talk about trading capitulation candidates–higher risk/return plays. I’m looking forward to this talk! Here is a link to register, and find out more about my talk. Pre-registering doesn’t cost you anything, and helps you avoid the registration lineup.

 

2 Comments

  • If I look at a 3 year chart of Encana, it looks to me it may be forming a cup and handle pattern. Am I mistaken? I am just trying to recognize if I have the pattern nailed down and not necessarily asking for a recommendation.

    Reply
    • A H&S pattern isn’t in place until the full formation breaks out. Right now, ECA has made a left shouder, a head, but no right shoulder–let alone no neckline breakout. So we cant call it anything but a possible consolidation.

      Reply

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