Archive for the ‘Strategy’ Category

S & P 500 Seasonality – cue the Jaws music

Thursday, August 19th, 2010

We’re coming up on that treacherous time of year . . . September and October.  It didn’t matter in 2009, because most were all beared-up for the Fall.  This year also seems like the year of disbelief.

We’re in the worst of the four years of a Presidential administration–who’d have noticed?–according to history stretching back to 1900.  Next year will be the third year, which has historically been the best.  (It’s also the year when some say we meet the Four Horsemen of the Apocalypse, but we can worry about them when we see ‘em.) 

As to seasonality, it has tended to be pretty mild in year 3, although it does suggest a lower low in September.  Based on the lousy year so far, though, that’s only a 6% move lower.

For now, our thinking is that we stick with the consensus of our various services, which is to be modestly over-weighted to equities, but it would be hard to fault one who raised cash in anticipation of a lousy September/October.  After all, it’s easier to make up for lost opportunities than it is to make up for lost losses.


The Magazine Cover Phenomenon Strikes Again

Wednesday, June 16th, 2010

It’s uncanny how often this works.  Use magazine covers as a contrary indicator.  Don’t invest with them.  And, for my money, The Economist is one of the best global magazines available.  It makes Time and Business Week look like People magazine, but they’re as susceptible as any in getting to stories late.


Interview – Jason Trennert, Strategas Research Partners

Wednesday, May 19th, 2010

This past Friday I spent some time on the phone interviewing Jason Trennert, the Chief Investment Officer at one of our investment strategy services, Strategas Research Partners. I had about ten questions to throw at Jason, the same questions I’ll pose to some other investment heavies.  I think you’ll enjoy reading this, as Jason takes a unique look at the various markets, drawing on history, economics, and finance to form strategies and opinions.  I believe that, like me, you’ll find that Jason’s views form a narrative of sorts that’s internally consistent and persuasive.

I’ve pasted in a little bit about the firm from its website, and below that is the interview. You can find the firm’s website here.

Read on



Sell in May and Go Away . . . or not

Friday, May 14th, 2010

This is one of the oldest investment saws out there, and that’s a testimony to its durability.  The Stock Trader’s Almanac–I’m using the 2008 version so it missed out on that horrendous Autumn, and also 2009′s great Summer run–has compiled statistics back to 1950 regarding its Six-Months Switching Strategy.  It found that a $10,000 investment grew to $578,413 by just investing from November – April, but grew to just $341 when invested in all of the May – October periods.  Notice, too, that one would have been ill served by following the strategy over the last two years, so it’s clearly not fool proof.

David Kotok, of Cumberland Advisors, did some work on this phenomenon and discovered that the determining factor–make that A determining factor–is monetary policy, or whether the Fed is easing, tightening, or neutral on the monetary gas pedal–mostly measured by interest rate policy. 

  • If it’s tightening, one should sell in May and go away
  • If it’s easing, one should not sell in May, but stay invested, ceteris parabis
  • If the Fed is neutral–and this seems to be a key, but unstated, conclusion from Cumberland’s work (see the original at the link below)–there are other factors that explain seasonality

Here’s Cumberland’s conclusion:

So, what do we do in 2010?

The Fed is unlikely to raise the targeted Fed Funds rate between May and October this year. They cannot lower it, since it currently is between zero and a quarter of one percent. Therefore, the application of the results of our historical study is hampered by the existence of the zero-interest-rate lower boundary. For this reason, we have to assume the Fed is either neutral or easing, and cannot be sure which applies. We have no history to guide us.

The same logic applies to other markets of the world. When we survey central banks, we find that Japan is unlikely to raise its targeted policy interest rate. It is currently near zero. The UK is also unlikely to raise its policy interest rate. In Europe, we are witnessing a massive easing of credit as the European Central Bank and the European Union create their version of a crisis response. Their policy may be likened to our American TARP and Federal Reserve activities following the failure of Lehman Brothers.

The Federal Reserve’s expansion of international swap lines appears to us to be a form of easing. Granted, it comes in response to the European crisis and the ECB initiative. However, easing is easing, no matter what form it takes.

As a result, we enter the May-October period with the working assumption that the G4 central banks are collectively easing. This should neutralize the negative seasonals in 2010. That is bullish for stock prices.

Here is the complete article.

Ned Davis Research is one of our key investment strategy providers.  (I should probably call them something like a key investment strategy partner, but who’s kidding who:  we write them a check; they send us e-mails).  Every year, NDR puts together a composite of how the year might unfold based on three historic studies:

  • Four-year Presidential cycle
  • 10-year (decennial) cycle
  • Annual seasonality.

Here is a link to the chart.  (Just kidding, Ned & Co. if you’re out scanning the internet for copyright violations).

To avoid getting a hand-slapping from the fine folks at NDR, let me just describe the chart:  sell in May and go away.  The twist that they put on this is that they “don’t fight the tape,” which is to say that they allow their strategy to be guided by various readings and indicators.  They don’t sell just because the calendar gets flipped from April to May.

So far, however, the market seems to be holding the un-edited script that says sell in May and go away.  If we decide to go with this thinking you’ll be the first group–okay, second–to know.  First, we sell out our client accounts, then we put something on the blog.  If you want to be in the first group, you know how to find us.  Click here for starters.


Beginning-of-the-Week Thoughts

Monday, April 12th, 2010

I usually go through this exercise–mentally only or on paper–of cataloging my current fears and concerns and why they might be wrong.  This time, I thought I’d do it electronically.

Volatility seems troublingly low

Implied volatility is at levels that, in the past, have suggested trouble for markets, and there seems plenty to worry about.  What’s more, stock markets have moved strongly higher, including something like 30+ days without a correction in the S & P 500.  Volatility is now investable with the advent of iPath S & P 500 VIX Short- (VXX) and Medium-term (VXZ) Futures Exchange Traded Notes (ETN).  Basically, they’re like ETFs in a different guise.  When volatility rises, their prices go up, and vice versa.

Here’s the chart.

A slam-dunk sell, right?

Not so fast, Tiger.  While dips below 20 have also been decent long-term indications of trouble ahead, it was painfully wrong, for a long time, as shown below, and a return to those levels would produce a very painful loss in either of the volatility ETNs.  And, as difficult as it has been to spot mini-tops since the bear market bottom a year ago, one has to be especially careful of using single indicators to suggest bailing.

The weekend “rescue” of Greece by the other European Union nations is only a short-term fix.  The rest of the PIGS–including Greece–are not done squealing.

I haven’t come across much to counter this line of thinking.  Seems to me these are big risks that have been papered over.  Here’s an excerpt from an update from David Kotok of Cumberland Advisors.  He’s a sharp knife, and he thinks the situation in Europe will be resolved okay.

We believe there will be a Greek version of the “hunkering down” outcome. We saw the Baltic version of this process recently in Latvia, where an austerity program cut the deficit in half last year and markets immediately resumed functionality.

Furthermore, we believe the euro will not only survive this test but emerge stronger and more reliable after it. The other EU countries are already moving to improve their fiscal process.

For the present we are underweight Europe in our global portfolios and we are watching carefully before taking a bullish position on the euro. Notwithstanding the recent news, it is still too soon to buy. But when the buying opportunity comes it will come fast, and the nimble will benefit. Surviving this crisis and successfully improving the internal European banking system are the key to the euro emerging as a battle-tested reserve currency.

What we see happening in Greece and in the euro zone is monumental in monetary history.

Maybe one of our bullish datapoints is becoming less bullish.

We’ve had this idea of a bubble in bonds as front and center amongst our bullish data points.  The idea is that, with a record amount of flows into bonds and bond funds by investors fleeing–following a shellacking in stocks in 2008–to safety–the first minus sign in a bond fund investor’s account statement, along with a continued rise in stock prices, and those flows will reverse back to stocks.

Today’s Barron’s had an article titled, “Accentuating the Positive, at Last,” with a sub-title that read,

“Retail investors are finally warming to U.S. stocks, as worries about a double-dip recession subside.  Good news:  one analyst sees the S & P 500 rising another 10% to 15% over the next six months. ”

That article also pointed out that retail (i.e. non-institutional) flows into equity funds were positive for four weeks straight.  And mutual fund managers aren’t letting that cash sit around, which would be a source of buying power.  Recently, Ned Davis mentioned that equity fund mutual funds have their lowest levels of cash–even adjusting for the ultra-low cash yields (which raises the opportunity cost of holding cash)–ever.

What’s more, in at least the 10-year Treasury futures pits, the speculators–this is the group traditionally left holding the bag when markets turn–have their largest ever short position.  They’re very bearish toward the 10-year, and that’s a pretty good proxy for bonds, in general.  I think it’s hard to find a bond bull.

Earnings expectations are high.  Stocks are set to disappoint.

That’s my worry; it’s not the company line. 

Analysts really have high expectations for companies.  According to the consensus of analysts surveyed by Bloomberg, earnings for fiscal 2010 are expected to be 19.9% for the S & P 500 excluding financials; 15.8% for 2011.  In 2010, Financials are expected to show growth of 99.1%; Energy 44.0%; Technology 34.2%.

According to Ned Davis Research, those estimates are in a zone that has, historically, produced per annum returns of minus (-) 3.4%.  Contrarians won’t be surprised to learn that stocks perform best when estimates are the worst.