By: Chris Rowe — November 2, 2016
Make Your Portfolio Great Again
The stock market and commodity market made a strong advance higher and everyone cried because they "missed it".
And now those same people are waiting to see who our next president is before positioning their investment portfolio?
The market timing part of this has been accomplished. And, sure, it looks like its going lower. But it makes sense to get on this, now, and not try to be a hero by buying the absolute bottom.
Play (and win) the easy game. That means positioning yourself as a long-term investor or at the very least it's a good idea to look 6+ months out.
If you're wondering, the answer is "no", it's not too late to exit the underperforming positions.
When deciding what to exit, it makes sense to focus on positions that did not outperform the major averages during the last stock market advance. It makes sense to compare the timeframe between February 11th and July 14th. Here's a link to a page where you can easily do this.
After "$SPX", you can just add the symbols to the field, below the chart. You can use the scroll bar on the bottom and you can click the lower left part of the chart to get a bar graph instead of a line graph.
When the market topped out, in August, we suggested there was an increased likelihood of a pullback. So we suggested selling covered calls and naked puts as strategies to have someone else pay you to hold your stock positions.
Considering the market has drifted lower, selling premium was a great play. But I'd still say it's a great way to profit in the current market. So here's a link to that article where I summed up how to go about the strategy: "Don't Buy the Dip - Instead do This..."
Getting back to the current decline...
I hope to drill this into the minds of all True Market Insider readers who don't already know the three keys to money management, listed in order of importance:
- Risk Management
- Market Timing
Market timing is certainly an effective way to outperform the market benchmarks, but investors tend to overemphasize the market timing factor and they ultimately end up on the wrong side of the trade. It's also a great way to miss out on the finer things in life while you're mentally glued to the television and computer screen.
The stock market has pulled back significantly and the supply side is definitely still in control. So perhaps we will see further downside. Fine - let's do it.
** By the way, you can always review the NYSE BPI, along with my update on its most recent direction change, here. Save it to your bookmarks/favorites or make it the homepage of your browser. It is a game changer.
Is This "The Big One"?
Many investors are frightened after seeing price declines, which happens every time. They are afraid to jump in because they are afraid to own stocks in decline.
But since we use long-term, relative strength, rules-based investing, we can see the long-term picture of the entire global financial markets.
Using ultra-sophisticated long-term relative strength studies (too much to teach here), we can calculate and rank the long-term relative strength of the 6 major asset classes in the order listed, above.
Since U.S. equity is the strongest of the six asset classes we can confidently buy the pullback. It's highly unlikely that this is "the big one" (we don't think a stock market blood-bath is on the horizon).
We have entered the “strong 6-months” season from October 31st through April 30th.
What if you ONLY had your money invested in the stock market during the strong 6-month period?
Well, first of all you would have taken on a lot less risk as you would have sat in cash half of the time.
According to our friends at Stock Traders Almanac, if you only invested in the Dow Jones Industrial Average from October 31st - April 30th every year since 1950, a $10,000 grew to $853,425 with an average rate of return of 7.44% in each of those six-month periods.
If you invested only in the other 6 months, your $10,000.00 investment would currently be running at a loss!
How Should We Play it?
Relative strength investing is an approach that has proven time and time again to outperform market benchmarks on a risk-adjusted basis (hundreds of studies I've read, not to mention 20 years of personal experience).
Relative strength stocks, or "momentum" stocks, earn their title by significantly outperforming their benchmarks (like the S&P 500). Any stock with outstanding performance is called a momentum stock.
These types of stocks have a specific and somewhat predictable type of behavior, just like value stocks or growth stocks experience behavior that's well known to analysts.
I mention this so that you understand that the momentum stocks' decline being larger than that of the general stock market is not something to be concerned about.
They are typically more volatile than the average stock as, by their very definition, their price gains are much larger when the stock market is moving higher. Because they've gained so much ground during a stock market upswing, they need to give back some of those gains when the market takes a breather and pulls back.
That explains why I told you it makes sense to own stocks that outperformed and exit those that underperformed during the last upswing (as opposed to studying the time frame that included a decline).
The following three positions are probably going to be ultra-volatile. If you're not confident enough to hold them then you may get spun out of the positions. But if you've followed me for a while or if you've done research on high relative strength investing on your own, you may be able to
- PowerShares DWA Momentum ETF (Symbol: PDP)
- PowerShares DWA Energy fund (Symbol: DBE)
- PowerShares DWA Base Metals fund (Symbol: DBB)
PDP is a dynamic ETF that focuses on high momentum stocks. So you don't have to do any work here to find the momentum stocks. These are the stocks that do get somewhat beaten up to the downside but when it's time to start charging higher again, they tend to blow away market averages.
So PDP is how we can focus on the U.S. equity market, which is the strongest asset class.
The other two, DBE and DBB represent actual commodities (not commodity stocks).
Although U.S. equity happens to be the strongest of the six asset classes, on a relative strength basis, Commodities was an asset class that moves all the way from last place, #6, up to first place earlier this year. It had to give back some of the ground it gained so it pulled back to #2.
Energy and Industrial Metals (base metals) are the top 3 strongest sectors of the Commodities space (with Precious metals and Agriculturals holding the other two spots.
True Market Insiders spends hundreds of thousands of dollars for sophisticated market data and tools. They are repackaged, simplified and sold to subscribers but today I'm just giving you the simple cheat notes.
Unfortunately you can't rely on me to give you the exit alert because in order to do that, we'd have to assume you'll open the right email from me at the right time and that I'd happen to be writing an article on that day, etc. It's like me giving you a great move to make in a game of chess and then walking away. I can't speak to the next 10 moves made by you and your opponent.
But what I can tell you is this positioning is meant to be long-term positioning. It will likely not change much, over the next 6 months.
Chief Technical Strategist
True Market Insiders
(Please note that Rowe Wealth Management is a registered investment advisory firm, not currently accepting new investors. But we do offer risk management programs that can stress test your portfolio against various market environments as well as portfolio analysis and enhancement. True Market Insiders is not a registered investment advisor and can not give personalized advice. For more information on Rowe Wealth Management, you can email email@example.com.)
DISCLAIMER FOR Rowe Wealth Management LLC Registered Investment Advisor
NOT PERSONALIZED INFORMATION
The information contained on this website and in many emails is prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from a financial advisor and should not rely on information herein as the primary basis for their investment decisions until consulting with a financial advisor. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable (“information providers”). However, such information has not been verified by Rowe Wealth Management or the information provider and RWM and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein. RWM and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded). Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.
Unless otherwise stated, performance numbers are based on pure price returns, not inclusive of dividends, fees, or other expenses. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. You should consider this strategy’s investment objectives, risks, charges and expenses before investing. The examples and information presented do not take into consideration commissions, tax implications, or other transaction costs.
The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.
BACK TESTED PERFORMANCE
Some performance information presented is the result of back-tested performance. Back-tested performance is hypothetical (it does not reflect trading in actual accounts and costs including but not limited to trading fees, bid-ask spreads, trade errors) and is provided for informational purposes to illustrate the effects of the Rowe Wealth Management strategy during a specific period. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.
Back-tested performance results have certain limitations. Such results do not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money. Back-testing performance also differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight. Rowe Wealth Management believes the data used in the testing to be from credible, reliable sources, however; Rowe Wealth Management makes no representation or warranties of any kind as to the accuracy of such data. All available data representing the full platform of investment options is used for testing purposes.