At ValueTrend, we pride ourselves in being one of the more open and “fully disclosing” Portfolio Managers on the street. Our clients receive very detailed email updates on the existing positions held within our models – including current and future expectations as to when we might be selling these holdings, or buying new positions in the future. Most Portfolio Managers do not give a heads-up to their clients on these kinds of moves.
While this information only goes out to our clients, I do like to reprint the occasional “ValueTrend Update” – which is the name of our emailed client update. BTW—even as a non-client, if you subscribe via our website’s newsletter sign-up, you will get an abbreviated version of these updates sent to you. The newsletter covers a birds-eye view of our current and future positioning, so it may be of value to you even if we don’t disclose the individual stock or ETF names we are trading.
Today’s blog is taken from our most recent client update.
“There are times to buy blue chip stocks, cyclical stocks, corporate bonds, U.S. Treasury instruments, and so on. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities.”
We’re making some moves in your ValueTrend Equity Platform that we thought you’d like hearing about.
Our outlook for the stock market is for choppy or possibly bearish behavior this summer.
No, we can’t say for sure that a correction will happen.
Assuming markets do decline – pinpointing the timing of that occurrence is unlikely.
Despite the fact that we can’t be certain of what the markets will do, we can quantitatively measure risk and return…and make decisions to oversight or underweight stocks based on that quantitative data. Wish this in mind…A few factors from our “Bear-o-meter” are making us cautious right now:
- Seasonality: We are into the “Worst Six Months” period for the stock market, which does not end until November. Studies have proven that – over time – it’s wise to be cautious over the summer months – especially coming into the fall.
- Sentiment: Sentiment studies show a current high confidence level of “dumb” money. Dumb money tracks retail investors through mutual fund and ETF flow, as well as small speculator trades. These less-knowledgeable investors are confident right now, and that’s bad – because they are usually wrong at market extremes. Interestingly, smart money is also confident, which is unusual – sentimentrader.com shows that returns are typically flat to negative in the month following such coincidences following a new market high.
- Breadth: Markets have risen on only a few concentrated sectors that are rising, with more sectors falling. Such a development is akin to a doctors’ patient who appears healthy externally, but displays internal signs of disease. Note the failure to make new highs on the black AD line below, vs. the new highs on the S&P 500 (red line). Chart courtesy www.freestockcharts.com.
- Volatility: The “VIX” is a measurement of option premiums. It measures implied volatility on the markets. It shows us when investors are confident, or when they’re worried. When investors are too confident, the VIX is low – and that’s a bad thing. You need some investor fear in order to keep the market from running away on itself. Right now, the VIX is exceedingly low – meaning that investors are too bullish, and don’t think there will be much volatility. Its currently at the same level as it was in 2007 – when investor confidence was high. Does anyone recall what happened after 2007?
- Elliott Wave prognosis: This is not part of our “Bear-o-meter”, but we thought you’d find it interesting. According to Elliott Wave Theory, markets move in 3 “up” waves with 2 pull backs separating these 3 waves. Each wave has characteristics. The final wave is characterized by a rapid rise and lower volatility (see the above comment re the VIX). There is a good chance that we are ready for a strong correction in the coming months. Please read this blog for details. Below is a chart of the current market with its waves marked on it.
What we’re doing about it
The ValueTrend Equity Platform hit new highs recently, and we want to keep those gains.
We are now at 33% cash in the equity model. We expect to raise a little more—perhaps even as high as 40% cash- in the coming weeks by selling a few more positions We will also be looking for an entry point into the US long treasury bond via an ETF. We expect that as/if/when the market corrects – money will flow back into bonds (which sold off over the winter) as a safe haven. That should make them rise a bit over the summer, plus pay the portfolio some interest.
Remember that ValueTrend has consistently had its BEST years when markets are down. That’s right – bad news for most investors is good news to our clients! Yes, you will still see some volatility. The only way to avoid such volatility is to completely step out of the market, which would imply that we are 100% certain of its direction. Sorry folks, nobody is THAT good!
Our strategy is to SELL when risk vs return potential is high, and then use that cash to BUY when the blood is running on the streets. We hold the cash then leap on opportunities when our indicators flash green.
Most of you have been with us long enough to have seen us do this effectively before. We cannot tell you the exact date or time we might re-enter with the cash we raise. Nor can we assure you that the markets will fall and provide us with cheap buying opportunities on stocks. They could keep rising, and we might regret holding cash. However, we can say with a HIGH degree of certainty that market conditions are quantitatively, historically and logically high risk right now! We can also assure you that it will not be emotion that keeps us in or out of the markets this summer. We will follow our system, and hopefully this should duplicate the success we have had in past market selloffs.
Again, to quote John Templeton:
“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest of fortitude and pays the greatest ultimate rewards.”
Your comments are very appreciated.
I like your explanation of your methodology. Have you ever considered creating an ETF that follows this approach? There is HAC.TO but it pays no dividend so an ETF that pays a dividend plus follows a smart buying/selling like yours with some covered call options would be nice.
Currently many of us, use multiple ETFs and it is a part-time job to monitor and juggle them.
Robert–I am working on it. I have received two separate offers to run an ETF using the equity platform methodology. I would expect this will materialize by year end or so. I’ll post on the blog when it happens–stay tuned!
$spx large cap being supported at rising 20 week moving average (2350).
$spen energy sector index now under support at 481.
$spt tech. sector index less than 20 points away from the tech bubble peak charted in march of 2000 (1000) on a monthly chart.
$spf financial sector index rolling over from resistance at the 50 day moving average. horizontal support at 380. coincides with the neckline of a head and shoulder topping pattern.
defensive market rising on fewer (fang) stocks: (utilities, health care, consumer staples)
(data equity clock)
Well I am certainly not thrilled with the narrow leadership this market presents JP. I just wrote a blog on the FANG stocks that you may enjoy. But overall, narrow breadth and other factors I have recently mentioned are not in the markets favor at this time.
Thanks for heads up Keith 🙂
Keep up the good work ….I will squeeze one question here , in case of correction do you prefer to hold USD or CND ?
I’m inclined to be biased to the USD Mike–the trend for the C$ is clearly down. Read this blog for more insight: https://www.valuetrend.ca/loonie-weakens-despite-rising-oil-falling-usd/
What I find difficult from here is that some of my positions have just broken-out from long-term resistance. I will not mention which ones, but some are in the REIT space. If a stock has just broken-out above strong resistance, and has held the break-out for 5 days, it doesn’t seem like it’s the time to sell, even if the VIX is low and the breath isn’t great. On top of that, the REIT space typically does well in the summer.
Tough. I think I’ll hold-on and react if those stocks fall back below resistance for a few days.
REIT’s are in the group of stocks that should often do well over the summer–defensive dividend/income plays are often an ok place to be even in a correction–the breakouts are further technical evidence that they should be held–so when we talk about a market pullback, it doesnt mean selling everything. You will note in my blog that i state my cash is 33%. I may hit 40%. But that will still leave 60% in the market.
I never imply or recommend a complete exit from the market when my system shows greater risk. Its simply greater risk vs. reward potential–it is not an absolute.