Divot's Account Talk

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Acting locally, but thinking globally

A bit of a bounce back from yesterday's sell off, and the S&P 500 held at it's 50 day moving average (again). Is it time to jump back in? From what I'm seeing in the bullish percents, it looks as if the internal damage to the markets is still building.

Furthermore, nearly half of all stocks on the New York and NASDAQ are now trading below their 50 day moving averages. Note the downtrend in numbers of stocks trading above their 200 day MAs:

I'm still thinking the US stock funds are due for more down action.

Internationally, however, is starting to look interesting. The dollar is acting as if it may fall through support at multi-DECADE lows. This, of course, would be a tailwind to the EAFE.

Regardless of the exchange rates, the EAFE is substantially outperforming US stocks over the last 30 days anyway:

I'll be watching for breakouts by either the dollar (lower) or the EAFE (higher) to signal a re-entry here. Risk levels remain moderate in international bullish percentages, but those signals currently don't have a consensus for a bullish or bearish risk perspective. Put another way, a continued trend higher would be completely reasonable for the EAFE, unless the US markets completely melt down. Our superpower's markets are still the dog that wags the tail...

Still happily all cash,
 
Would ya wanna lend me some of that cash? There are so many dull wall flowers that are waiting for a date. I'd take'em all home if I could.

Perma-bull #1
 
New Blog Post - "Doctor, it hurts when I do this..."

"Doctor, it hurts when I do this..."


"Then don't do that!" comes the snappy reply.

I stated last week Tuesday that if the S&P closed above 1535, I would consider that to mark a new uptrend. Sure enough, the market managed that on Thursday alone and continued the move up on Friday. It kinda stings a little to be out of that action, (thank you to all the permabulls for your mature comments) but I say lost opportunity was worthwhile to be convinced of a new uptrend. Indeed looking at both the S&P 500 and the Wilshire 4500 charts, it's clear that both broke out of their trading range with little resistance waiting above.So I'm a believer - sort of. My risk indicators (major market bullish percents) still tell me that the market is at VERY high risk levels, with good evidence that supply is gaining in power. Therefore, I can't fully buy in. If this "new uptrend" survives the coming week's earnings reports, I can't see it lasting through the end of the year before supply will gain sufficient control to force a very significant correction. That's not to say the market won't wiggle its way higher up the wall of worry, and if it does I will gradually commit more funds as it proves the trend.

So, how much will I allocate to the market, and how? It appears the dollar has proven it will far further, while international markets show greater strength than US domestic equities. Therefore, I'll put double weight on the EAFE (the "I Fund") than any US sector. With larger cap companies getting as much as 50% of their income from foreign sources, the exchange rate will work in their favor - but that's a tough relationship to quantify.

Bottom line - I'll be allocated 20% I Fund, 10% C Fund, and 10% S Fund as of close of business tomorrow.

Thanks for reading and commenting.
 
New Blog Post - The Planning Process

The Planning Process


As of this afternoon, my TSP account is back in the market:

  • 20% - EAFE
  • 10% - S&P500
  • 10% - Wilshire 4500
The remaining 60% is still in government bonds.

Earlier in the morning, I closed the short positions in my brokerage account. I was in a couple very leveraged positions, anticipating an interest rate run up that would have pulled the rug out from under the utility sector. That didn't happen, and my losses were limited to about 1%.

I spent the evening evaluating current market opportunities in light of developments over the last 6 weeks. The market has proven the ability and will to break out higher, and I have to honor this bullish trend in spite of ample warning signs. As I stated in yesterday's post, market action could continue higher for some time - although I wouldn't be surprised to see a significant correction before year's end.

In the mean time, I want to position both my brokerage and TSP accounts to profit from the potential for an extended bull run. Small cap stocks, with a bullish percent around 50, definitely look to be the lower risk cap weighting (vs the mid-to-large caps around 70%). I ran some sector screens to identify the damaged and strong sectors this evening. Here's what I see, in order of descending preference:
Because risk is high, I'm going to use ETFs to move into these new positions rather than single stocks. I'll explain the rest of my selection process tomorrow.

Thanks for reading!


- Divot
 
New Blog Post - The Planning Process (continued)

This post will be a little different from my usual market commentary on the market indices tracked by the TSP funds. I'm expecting tomorrow to be a down day for most of the markets, but that discussion will wait for later in the week.

Since the markets have recently proven the ability to move above their triple tops, I'm now working to reenter long positions. My TSP account is now partially invested, and today I'll address how I'm managing my more flexible brokerage account. As I consider my strategy in the latter account, I have a couple of key considerations:

  1. What is the market direction?
  2. What is the market risk level?
To answer both these questions I'll look at the bullish percent charts. This gives me trend information that a price chart won't necessarily reveal.
I'm not concerned with every little wiggle here, but general position and trend direction are important. In the above charts, it appears that supply was overpowering demand on the New York and in the S&P500, but a resurgence of demand is pushing back recently. Both these indexes above the 70% mark - indicating that a lot of cash has already been put to work and most of the underlying stocks are already on buy signals. There's a tight balance between supply and demand on the NASDAQ, but risk levels are significantly lower since this index sits close to the 50% mark.

Based on the above, it appears that cautious investing in NASDAQ issues (think technology) and/or small-to-mid cap names will be preferable to the mega cap names of the S&P. I didn't show the Dow Jones 30 bullish percent chart above, but it's at 100% (big surprise there since it's been on a tear.)

Now that I know what the market conditions are, the next question is:

3. Which sectors are preferable?

Based on my sector screens, I'm looking at the following sectors:
  • Gaming
  • Wall Street
  • Software
  • Aerospace
  • Textiles
  • Semiconductors
Because of the overall market conditions at high risk levels, I'm not going to buy individual stocks. ETFs are a great way to avoid picking the one member of a sector that was about to tank while the rest fly away. Of course, there's more than one ETF associated with some of these sectors - and others may not provide me any ETF choices. I'm not a big fan of mutual funds, so I won't consider those (but the whys will have to wait). Now, to narrow the field I consider the following:
  • Fundamentals of the ETF's holdings - P/E, earnings growth rate, etc.
    • I find that this will often quickly differentiate between funds
  • Average Volume - needs to be at least in the high thousands to avoid "low volume no man's land"
With usually only a handful of names remaining, now I'll compare their relative strength. The following 30 day performance chart shows the finalists I'm considering in the software and semiconductor areas:

And the top three contestants seem to be XSD, IGW, and SMH, in order of increasing average P/E. IGW has the highest average earnings growth rate, and a quick look at its composition shows its top 10 holdings make up only 55% of total assets. This is a preferable situation to SMH, which shows its top 10 holdings comprise almost 83% of assets. I'm trying to buy diversification here.

After careful consideration, my preferences are IGW (iShares S&P GSTI Semiconductor) and PPA (PowerShares Aerospace & Defense), and IAI (iShares Dow Jones US Broker-Dealers). However, I won't just buy them straight out. I'll discuss entry points separately for these in a follow on post.

If anyone's read this far - thanks!
 
New Blog Post - Oh, no you don't!

Oh, no you don't!

That's how the buyers reacted today.

Take a look at the intraday chart of the S&P 500:
As always, there are plenty of reasons WHY - in fact, if you ask 10 different analysts you'll get 50 different answers... Still, it doesn't matter why: WHAT happened was that a 1% pull back was eagerly bought up. Pull back a little for the big picture perspective:
Notice how the previous highs were support for today's low. Also, today's low (1533) was pretty close to - and just above - a 38% Fibonacci retracement of 1528. All of this on a high volume day.

The Wilshire 4500 had a very similar performance today:
The small caps of the Wilshire 4500 closed almost exactly at the support level created by the early June high. The day's retracement low of 691 was also a near perfect Fibonacci rebound (as measured from the late June lows to last weeks high.)

This adds up to be some nice confirmation for an upward trend.

The EAFA picture isn't as clear cut as the above - it looks like there's room for another 1% consolidation down to support. On the other hand, the dollar's fall through support is pretty obvious at this point - and there's no telling how low this can go. That's going to be beneficial for the EAFE and large cap US companies that profit overseas.


One place NOT to be right now is Aggregate Bonds (AGG). Not only is it bumping up against the convergence of the 50 and 200 day moving averages, but the yields are all trending lower.


Based on all this, I'm going to add 10% to each of my TSP stock funds. After close of business tomorrow, I'll be:

  • 30% EAFE (I Fund)
  • 20% S&P 500 (C Fund)
  • 20% Wilshire 4500 (S Fund)
  • 30% cash (G Fund)
Thanks for reading!
 
New Blog Post - Catching a Breather

Catching a breather


Both I and the markets have been catching a breather over the past couple of trading days. I've been enjoying San Diego with my family, while the market has revisited the June 18 highs. These are showing strong support for prices and leaving open the path for continued advance by the markets. In fact, charts show a strong "formation" of multiple support levels just below current prices, which lends a lot of evidence that supports this "new" uptrend. I expect bullish markets to continue through the rest of week.

For example, S&P 500 support levels:

  • 1535 (0.5% lower)
  • 1525 (1 % lower)
  • 1510 (2 % lower)
  • 1490 (3.3 % lower)
Wilshire 4500 support levels:
  • Right here at 693
  • 686 (1 % lower)
  • 673 (2.9 % lower)
What's interesting about having all this price support right behind current prices is that market indicators I trust are not indicating clear sailing. I put a lot of credit in market breadth as a gauge. The NASDAQ "tech country" looks bad, the New York and Amex still look ugly, and nothing really looks good. What I'd really like to see here (for clarification), is these cumulative breadth charts popping up like Harry Potter book sales to confirm the recent break out on the price charts. Instead, they look pretty lethargic.With more to muddy the waters, the bullish percent charts (which I give the most credence to) seemed to slide dramatically lower due to Friday's action.
These charts tell me there are more sellers in the small caps than the large, which makes sense when you look again at the S&P vs. Wilshire charts above. Remember, bullish percent charts are not weighted for market capitalization while the S&P 500 is. Impact to me: give me a reason to shift away from the Wilshire to the S&P (break a support level, for instance) - and I'll not hesitate!

Finally, the EAFE continues to be buoyed by the US Dollar's slide lower. Foreign markets technicals look significantly better than US for a lot of reasons right now. This is actually the cleanest game to call right now, so I have a lot of confidence in my decision to overweight the foreign stocks.

Thanks for reading and commenting!
 
New Blog Post - A shakeout... OR?

A shakeout.. OR?


Today the broad market sold off throughout the afternoon. Volume was significantly high, and breadth was authoritatively negative. Remember what I said yesterday about support levels? The S&P crushed the first two I identified for you, and stopped (really saved by the bell) just above 1510. The 50 day moving average didn't even seem to offer any friction (that's not a good sign for bulls), and the "last ditch" of support I can see lives in the 1490 to 1500 area.
All the bullish percents are now in full retreat, while the advance/decline charts show an obvious and significant downslope. Both these signs are also not good for bulls over the next few months.
Comparing the following chart of the Wilshire 4500 to the S&P 500 above, you'll notice today's drop was significantly more severe to the small caps. This goes right along with my comments yesterday about the relative strength of the larger cap stocks. Again, I've highlighted the "last ditch" support level, which is less than 1% lower.
This talk of "last ditch" support levels sounds rather desperate - but it's just a term identifying a meaningful signal point. Buyers have already shown a willingness to step in at these levels in the past - a future failure to do so would show a change to the supply/demand balance. I've been saying that the market was on defense since 28 June. That alone should have already influenced the degree to which you'll commit to the markets.

I believe that today's action was a bit of an overreaction for one day's work - leaving us somewhat oversold. Tomorrow morning should give a bit of a bounce, but who knows if the close will be higher. Either way, tomorrow is a good opportunity to make a minor adjustment - not a jump completely out of stocks, but an opportunity to trim back the fat.

You've got to seek out what is working, then make a move at a meaningful point. The EAFE is showing considerable relative strength over the US markets. This chart shows exceptionally strong support at current price levels, with prices at the bottom of an upward sloping channel. Add to that fact that the Dollar continues its downward march, and I'm reiterating my support for the international markets.
Now, as for bonds... It takes a big man to admit he was wrong, and a bigger man to make fun up him. So go ahead! Honestly, I expected bond rates to jump with the treasury auctions this week, especially as prices met with the convergence of their 50 and 200 day moving averages.


[Chart available here]



Instead, the AGG is now trading above both its 50 and 200 day MA's, and rates have established an obvious downslope from their early June highs.


Bottom line here is that I consider the AGG to be at least equivalent to cash (the TSP G fund) for the near term. As I post this online, I'll be moving out of the Wilshire 4500 and into the AGG. This will leave my account:

  • 30% EAFE (TSP "I Fund")
  • 20% S&P 500 (TSP "C Fund")
  • 20% AGG (TSP "F Fund")
I'll be watching the remaining support levels on the US markets at the EAFE as signals to shift funds away from weakness and into strength. Overall, remember the market supply and demand balance is tilting further away from the bulls - so stock allocations should be conservative.

Thanks for reading!
 
Having read several of your post, I have to say that I enjoy your writing style and your ability to get your message across.

“A short story should be like a short skirt...long enough to cover the topic but short enough to keep it interesting”
 
JTH said:
Having read several of your post, I have to say that I enjoy your writing style and your ability to get your message across.

“A short story should be like a short skirt...long enough to cover the topic but short enough to keep it interesting”
Click to expand...

I agree! Very well written and understandable! Thanks Divot! :nuts:
 
New Blog Post - What I've been waiting for...

What I've been waiting for...

Short post this morning as I've got a 0715 tee time with my Dad and brother in law. Yesterday was confirmation for why I'm not "all in" with this market. I've been saying for a long time that risk levels were extremely high - and then I've been preaching since 28 June that this market is on defense. Yep, the downturn didn't happen right away - but when on defense the primary concern is capital PROTECTION, not accumulation.

I'd like to be all out today, but TSP's end-of-day transactions would leave me out at the bottom today.

I expect another UGLY day today, since none of the pros want to take a "wait and see" approach over the weekend. Monday will likely be a bit of a bounce, and I'll trim some more from my account holdings then.

Thanks for reading!
 
New blog post - A deceased feline

A deceased feline


Last week was an interesting one for the markets. In fact, the week was one of the worst seen in years. What’s going on here is a shift from a market controlled by demand to a market controlled by supply.
It’s worth reviewing what brought us to this point:
  • The markets initially showed weakness during the first week of June, when they fell out of rising trend channels. Reference the following chart of the S&P 500, and note the first retracement to the 50 day MA.
  • The rest of June saw a series of lower tops and lower bottoms, within a mostly horizontal trading range. Note the similar action between the S&P chart above the the Wilshire 4500 chart below:

This action demonstrated that buyers were drying up, even as the markets charted new highs. The real question is, where do we go from here?

I answer that question by looking at a chart that illustrates supply and demand - and the best way to do that is a bullish percent chart. Bullish percent charts track how many stocks within a group are on a point and figure "buy signal". What we see in the three charts below is that the New York, S&P, and NASDAQ bullish percents have fallen sharply recently. This has some correlation to the pricecharts above, but what it really shows is that price support levels have been broken through on an epidemic scale.


Note that these charts were earlier up in the 70% range - which is very high for a bullish percent chart. In my blog, I noted that the bullish percent charts reversed down on 28 June. This event is not a signal to immediately short the market, but instead puts us into a defensive mindset.

I can find confirmation that the market is being controlled by supply rather than demand by looking at cumulative breadth charts of the broad indexes. The charts below show that the number of declining stocks has begun to overwhelm the number of advancing stocks lately.

Again, this clearly shows that there are more sellers than buyers. Further, it establishes a downward drag on the markets. This confirms for me that near term, future stock prices will be lower rather than higher.

My response to this is to treat rebounds higher as opportunities to lighten up on stocks. This doesn't mean sell everything, but I'll scale out of funds that aren't holding their own. When the market dips lower, I'm not treating pullbacks as buying opportunities - at least, until the market goes back on offense.

I can identify which funds are performing better by comparing the relative strength - the percentage gains - of the funds against each other. The following chart shows that over the last month, the EAFE (or "I Fund") has enjoyed only half the losses of the small caps. Meanwhile, the AGG bond index (or "F Fund") has gained around a percent.

[Chart available at blog]

This isn't an effort to chase performance, but knowing that stocks are on defense, I need to protect capital by avoiding what's lagging.

Speaking of the AGG, or "F Fund", this chart shows a rather bullish scenario. The fund is trading above both its 50 and 200 day moving averages. Keep in mind that bonds and stocks are generally uncorrelated, so this looks like a good choice currently for some diversification within the defensive mindset I discussed earlier.

[Chart available at blog]

Now, taking a look at the EAFE, or "I Fund", we see that it has been well behaved until lately. This chart displays pullbacks that are not as dramatic as the US markets shown up top, and the trend WAS rather consistently up.

[Chart available at blog]

One thing to remember is that a primary influence on the I fund is the exchange rates against the US Dollar. The following chart shows that the overall trend for the dollar is lower. Although there's been a little try for higher ground in the last week, it appears that there's strong resistance around the 82 level, and the expectation from there would be lower still. This would lend some strength to the I Fund, but the same supply and demand logic that applied to US markets should be used here. Now isn't the time to overload on the I Fund, and up days are good opportunities to trim a little if you've been fully invested.


[Chart available at blog]

Let's wrap up with some specific expectations for the coming week. By applying some Fibonacci retracement analysis to the charts above, I've highlighted resistance levels where I would expect a rebound to stall out before proceeding lower. The S&P, Wilshire 4500, and EAFE charts have green horizontal lines drawn at these levels, which are (respectively): 1493, 670, and 80. Notice how each of these charts has shown earlier support/resistance at these same levels. This strengthens my expectations for a near term reversal down at those levels, given the supply-oriented market conditions.

Based upon the above analysis, I will personally move an additional 10% away from both my stock fund holdings (the I and C funds), and add to my bond holdings. This will leave my account configured:
  • 20% International (EAFE)
  • 10% Common Stocks (S&P 500)
  • 30% Fixed Income (AGG)
  • 40% Gov’t Bonds
This change will be effective as of close of business tomorrow.

Thanks for reading!
 
New blog post - Wall to Wall Trading

Wall to Wall Trading


Yogi Berra said, "you can observe a lot by watching." Today, we saw the market gap open (premarket futures were ludicrously high), then climb up to the Fibonacci retracement levels I identified for you yesterday (nearly EXACTLY), then drop back down for a high volatility wall to wall trading day.

This is why it's so important to understand where the flow of supply and demand is pushing the market currently. Risk management is the key here - It's not about trying to hit home runs all the time, but minimizing your losses at appropriate times. This doesn't mean being a "market sissy", running away every time the charts look scary. There's no reward without risk - but the risk must be calculated and appropriate for the situation. When the situation looks bad, a reduced exposure leaves cash available to act with audacity when confidence is restored.

I wrote a blog post on 3 June about this idea, where I used a bit of statistics to show the impact of this concept. I ran a simulation with a notional stock market and two investment accounts:
  • The simulated market had random gains/losses on a monthly basis that always resulted in a 10% annualized return.
  • Both accounts invest $400 every month over 40 years.
    • One of the accounts always stays in the market
    • The other participates in 80% of the gains but only 25% of the losses.
Put another way, the second account buys after 20% of a market upswing is already history - and then sticks with the market for the first 25% of a downswing before selling. After 50 iterations through the monte carlo:
  • The "buy and hold" account averaged 9.9% annualized return (+/- 1.5% standard deviation) and an average final account balance of $2.92 million.
  • The "risk managed" account averaged 12.6% annualized return (+/- 0.9% standard deviation) and an average final account balance of $6.22 million.
Some of my readers will doubtless accuse me of using statistics the way a drunk uses a lightpost - for support rather than illumination. However, it's worth noting that this scenario of random monthly returns is an unrealistic handicap to any trend following technique (including my own). The mid-to-long term trends that develop on Wall St. over months actually play to the strength of bullish percent analysis.

I'm not completely out of stocks at this point - I still have about 30% exposure as an insurance policy to participate in some early gains should the market make a "V" bottom and move straight back up from here. Given that the supply and demand indicators - bullish percents and market breadth - show us clearly on defense, I'm not anticipating that. The S&P 500 is resting right on its 200 day MA, but tonight's market futures seem to indicate that line may not hold up prices.


The Wilshire 4500 is in pretty much the same boat as the S&P, but being more volatile and lagging the large caps in terms of relative strength - I expect any future dips on this chart to be more severe.

The EAFE is by far the "least ugly" of the charts. It also rose right to its 38% Fibonacci level, and then plunged. Regardless, losses were significantly smaller here than on the US markets.

Thanks for reading!


- Divot
 
Divot,

Thanks for your updates. I really enjoy reading them.

A question if you will...your TSPTalk page (at the top) shows a "current Market Debrief TSP allocation" of:

30% International (EAFE)
20% Common Stocks (S&P 500)
20% Fixed Income (AGG)
30% Gov’t Bonds

but at the end of your update from 2 days ago it shows a move to:

20% International (EAFE)
10% Common Stocks (S&P 500)
30% Fixed Income (AGG)
40% Gov’t Bonds

Could you clarify which allocation you're currently using? I'm thinking the latter and that the top section just didn't update, but would appreciate your clarification. Thanks again for your work! The education is much appreciated.

ATCMickey
 
Mickey -

The latter allocation is correct, and there was a disconnect in the update process to my page that is being fixed.

Thanks for reading!
 
ditto Divot, :cheesy: I also appreciate very much the education. This also goes to milkman, 12%, weatherwinnie, Tom, nnutt, Paladin, and others who I will thank individually one of these days for their insight and willingness to share their knowledge with us. I am learning more and more every day and need all the help I can get. I retire end of this year. I am moving only 50% of savings, other 50 is in G permanently, I don't think I am jeopardizing retirement by doing this, all things considered, but I really need to do something to increase savings. All info on the subject is much appreciated.
 
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