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Bull Market? No, The Bear Still Rules For Now (Full Report)


  • Bull Market? No, The Bear Still Rules
  • MacroView: The Fed Can’t Fix What’s Broken
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha


2020 Investment Summit – April 2nd.

The “2020 SOCIALLY DISTANT INVESTMENT SUMMIT” is coming on Thursday, April 2nd.

Click the link below to receive an email with a special “invitation only” link when the summit goes “live.” (Current newsletter subscribers are already registered.)


Catch Up On What You Missed Last Week


NOTE: During these tumultuous times, we are unlocking our full newsletter to help you navigate the markets safely. Make sure you subscribe to RIAPRO.NET (Free 30-Day Trial) if you want to keep receiving the full report after the storm passes.


Bull Market? No, The Bear Still Rules For Now.

Last week, we asked the question, “Is the bear market over?”

Our answer was simple: The ‘Bear Market’ won’t be over until the credit markets get fixed.”

On Monday, the market sold off to new lows, forcing the Federal Reserve to inject more liquidity to try and stabilize the “broken” credit market.  Then on Tuesday, before the markets opened, we wrote:

“From a purely technical basis, the extreme downside extension, and potential selling exhaustion, has set the markets up for a fairly strong reflexive bounce. This is where fun with math comes in.

As shown in the chart below, after a 35% decline in the markets from the previous highs, a rally to the 38.2% Fibonacci retracement would encompass a 20% advance.

Such an advance will ‘lure’ investors back into the market, thinking the ‘bear market’ is over.”

Chart Updated Through Friday

Not surprisingly, here were the headlines, almost exactly as we wrote them:

Well, you get the idea.

While it was indeed a sharp “reflex rally,” and expected, “bear markets” are not resolved in a single month. More importantly, “bear markets” only end when NO ONE wants to buy it.” 

Fed Can’t Fix It

As noted above, the “bear market” will NOT be over until the credit market is fixed. We are a long way from that being done, given the blowout in yields currently occurring.

However, the Fed is throwing the proverbial “kitchen sink” at the issue. As Jim Bianco noted on Friday:

“In just these past few weeks:

  • The Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook.
  • That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond-buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

  • CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.
  • PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.
  • TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.
  • SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.
  • MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-sized businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this.”

However, on Friday, the Federal Reserve ran into a problem, which could poses a risk for the markets going forward. As Jim noted, the mind-boggling pace of bond purchases quickly hit the limits of what was available to pledge for collateral.

Or rather, the Fed’s “unlimited QE,” may not be so “unlimited” after all.

The consequence is the Fed is already having to start cutting back on its QE program. That news fueled the late-day sell-off Friday afternoon. (Charts courtesy of Zerohedge)

While Congress did pass the “CARES” act on Friday, it will do little to backstop what is about to happen to the economy for two primary reasons:

  1. The package will only support the economy for up to two months. Unfortunately, there is no framework for effective and timely deployment; firms are already struggling to pay rents, there are pockets of funding stress in credit markets as default risks build, and earnings guidance is abandoned. 
  2. The unprecedented uncertainty facing financial markets on the duration of social distancing, the depth of the economic shock and when the infection rate curve will flatten, and there are many unknowns which will further undermine confidence.

Both of these points are addressed in this week’s Macroview but here are the two salient points to support my statement:

Most importantly, as shown below, the majority of businesses will run out of money long before SBA loans, or financial assistance, can be provided. This will lead to higher and longer-duration of, unemployment.”

“While there is much hope that the current ‘economic shutdown’ will end quickly, we are still very early in the infection cycle relative to other countries. Importantly, we are substantially larger than most, and on a GDP basis, the damage will be worse.”

What the cycle tells us is that jobless claims, unemployment, and economic growth are going to worsen materially over the next couple of quarters.

The problem with the current economic backdrop, and mounting job losses, is the vast majority of American’s were woefully unprepared for any type of disruption to their income going into the recession. As job losses mount, a virtual spiral in the economy begins as reductions in spending put further pressures on corporate profitability. Lower profits leads to higher unemployment and lower asset prices until the cycle is complete.

The Bear Still Rules

This past week, we published several pieces of analysis for our RIAPro Subscribers (30-Day Risk Free Trial) discussing why this was a “bear market rally” to be sold into. On Friday, our colleague, Jeffery Marcus of TP Analystics, penned the following:

  1. The long term bull pattern that existed since the 3/9/09 is over. That means the pattern of investors confidently buying every decline is over.
  2. The market became historically oversold on 3/23 using many metrics, and that oversold condition coincided with the long term support area of S&P 500 2110-2180.
  3. The short-covering and rebalancing had a lot to do with the size and speed of the 3-day rally.  Also, we know the lack of  ETF liquidity played a huge role as well as algorithmic trading.
  4. Technically the market can still go up 6.9% higher from here to hit the 50% retracement level (3386 – 2237 = 1149/2 = 574 + 2237 = 2811….2811/2630 = +6.9%.) I would not bet on it.
  5. The market only sustains a rally once there is light at the Coronavirus tunnel. 
  6. I do not think the S&P 500 will hit a new high this year. Maybe not in 2021, either.

His analysis agrees with our own, which we discussed with you last week.

“The good news is the markets are now more extremely oversold on a variety of measures than at just about any other point in history.

Warning: Any reversal will NOT BE the bear market bottom. It will be a ‘bear market’ rally you will want to ‘sell’ into. The reason is there are still many investors trapped in ‘buy and hold’ and ‘passive indexing’ strategies that are actively seeking an exit. Any rallies will be met with redemptions.

Most importantly, all of our long-term weekly ‘sell signals’ have now been triggered. Such would suggest that a rally back to the ‘bullish trend line’ from 2009 will likely be the best opportunity to ‘sell’ before the ‘bear market’ finds its final low.”

Last week’s chart updated through Friday’s close.

While the recent lows may indeed turn out to be “the bottom,” I highly suspect they won’t. Given the sell signals have been registered at such high levels, the time, and distance, needed to reverse the excesses will require a deeper market draw.

As Jeff Hirsch from Stocktrader’s Alamanc noted:

“While we are all rooting for the market to find support here so much damage has been done. A great deal of uncertainty remains for the economy and health crisis. This looks like a bear market bounce. 

History suggests that we are in for some tough sledding in the market this year with quite a bit of chop. When the January Barometer came in with a negative reading, our outlook for 2020 began to diminish as every down January since 1950 has been followed by a new or continuing bear market, a 10% correction, or a flat year. Then another warning sign flashed when DJIA closed below its December closing low on February 26, 2020 as the impact of this novel coronavirus began to take its toll on Wall Street.

In the March Outlook, we presented this graph of the composite seasonal pattern for the 22 years since 1950 when both the January Barometer as measured by the S&P 500 were down, and the Dow closed below its previous December closing low in the first quarter. Below is a graph of DJIA, S&P 500 and NASDAQ Composite for 2020 year-to-date as of the close on March 25. Comparing 2020 market action to these 22 years, suggests a choppy year ahead with the potential for several tests of the recent low.”

“The depth of this waterfall decline may be too deep for the market to rebound quickly. This bear market also put this year’s Best Six Months (November-April) at risk of being negative. The record of down Best Six Months is not encouraging and it reminds us of a salient quote from the Almanac from an old market sage,

If the market does not rally, as it should during bullish seasonal periods, it is a sign that other forces are stronger and that when the seasonal period ends those forces will really have their say.’— Edson Gould (Stock market analyst, Findings & Forecasts, 1902-1987)'”

On a short-term basis, the market is also suggesting some risk. The daily chart below shows the market rallied to, and failed at, the first level of the Fibonacci retracement we outlined last week, suggesting profits be taken at this level. While there are two remaining targets for the bear market rally, the probabilities weigh heavily against them. (This doesn’t mean they can’t be achieved, it is “possible,” just not “probable.”)

Furthermore, with the “Death Cross” triggering on Friday (the 50-dma crossing below the 200-dma), this will put further downside pressure on any “bear market” advance from current levels.

Given the magnitude, and multiple confirmations, of these signals, it is far too soon to assume the “bear market” is over. This is particularly the case, given the sell-off is less than one-month-old.

Bear markets, and recessions, tend to last 18-months on average.

The current bear market and recession are not the results of just the “coronavirus” shock. It is the result of many simultaneous shocks from:

  • Economic disruption
  • Surging unemployment
  • Oil price shock
  • Collapsing consumer confidence, and
  • Most importantly, a “credit event.”

We likely have more to go before we can safely assume we have turned the corner.

In the meantime, use rallies to raise cash. Don’t worry about trying to “buy the bottom.” There will be plenty of time to see “THE” bottom is in, and having cash will allow you to “buy stocks” from the last of the “weak hands.” 


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite

Note: The technical gauge bounced from the lowest level since both the “Dot.com” and “Financial Crisis.” However, note the gauge bottoms BEFORE the market bottoms. In 2002, lows were retested. In 2008, there was an additional 22% decline in early 2009.


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Finally, the markets bounced this past week.

However, don’t get too excited; there has been a tremendous amount of technical damage done which keeps us on the sidelines for now.

Improving – Discretionary (XLY), and Real Estate (XLRE)

We previously reduced our weightings to Real Estate and liquidated Discretionary entirely over concerns of the virus and impact on the economy. No change this week. We are getting more interested in REITs again, but are going to select individual holdings versus the ETF due to leverage concerns in the REITs.

Discretionary is going to remain under pressure due to people being able to go out and shop. This sector will eventually get a bid, so we are watching it, but we need to see an eventual end to the isolation of consumers.

Current Positions: No Positions

Outperforming – Technology (XLK), Communications (XLC), Staples (XLP), Healthcare (XLV), and Utilities (XLU)

Early last week, we shifted exposures in portfolios and added to our Technology and Communications sectors, bringing them up to weight. We also added QQQ, which was closed out on Friday.

Current Positions: XLK, XLC, 1/2 weight XLP, XLV

Weakening – None

No sectors in this quadrant.

Current Position: None

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

No change from last week, with the exception that performance continued to be worse than the overall market.

These sectors are THE most sensitive to Fed actions (XLF) and the shutdown of the economy. We eliminated all holdings in late February and early March.

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Four weeks ago, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. We remain out of these sectors for now.

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunities only.

Current Position: None

S&P 500 Index (Core Holding) – Given the rapid deterioration of the broad market, we sold our entire core position holdings for the safety of cash. We did add a small trading position in QQQ on Monday afternoon, and sold it on Friday.

Current Position: None

Gold (GLD) – We added a small position in GDX recently, and increased our position in IAU early this week. With the Fed going crazy with liquidity, this will be good for gold long-term, so we continue to add to our holdings on corrections.

Current Position: 1/4th weight GDX, 1/2 weight IAU

Bonds (TLT) –

Bonds regained their footing this week, as the Fed became the “buyer” of both “first” and “last” resort. Simply, “bonds will not be allowed to default,” as the Fed will guarantee payments to creditors. We have now reduced our total bond exposure to 20% of the portfolio from 40% since we are only carrying 10% equity currently. (Rebalanced our hedge.) 

Current Positions: SHY, IEF, BIL

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

Despite the headlines of the “biggest rally in history” this past week, it’s easy to get sucked into the “Media headline” hype. However, let’s put this into some perspective:

Over the last “X” days the S&P 500 is:

  • 5-days: +10.2% 
  • 6-days: +5.4%
  • 10-days: -6.25%

It is much less exciting when compared to the fastest 30% plunge in history.

Keeping some perspective on where we are currently is very important. It’s easy to get swayed by the media headlines, which can lead us into making emotional investment mistakes. More often than not, emotional decisions turn out poorly.

We are starting our process of adding equities to the ETF models. As we head out of this bear market, ETF’s will have less value relative to our selective strategies.

This doesn’t mean we won’t use ETF’s at all, but we will selectively use them to fill in gaps to our individual equity selection, or for short-term trading opportunities.

Such was the case on Monday when we took on a position in QQQ for a bounce, and was subsequently closed out on Friday.

We also added small holdings of CLX and MRK to our long-term equity portfolio, as well as increased our exposure to IAU.

We continue to remain very defensive, and are in an excellent position with plenty of cash, reduced bond holdings, and minimal equity exposure in companies we want to own for the next 10-years.

We are just patiently waiting for the right opportunity to buy large chunks of these holdings with both stable, and higher yields.

Let me repeat from last week:

  1. The ONLY people who care more about your money than you, is all of us at RIA Advisors.
  2. We will NOT “buy the bottom” of the market. We will buy when we SEE the bottom of the market is in and risk/reward ratios are clearly in our favor. 
  3. This has been THE fastest bear market in history. We are doing our best to preserve your capital so that you meet your financial goals. Bear markets are never fun, but they are necessary for future gains. 
  4. We’ve got this.

Please don’t hesitate to contact us if you have any questions, or concerns.

Lance Roberts

CIO


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Bull Market? No, The Bear Still Rules For Now.


  • Bull Market? No, The Bear Still Rules
  • MacroView: The Fed Can’t Fix What’s Broken
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha


2020 Investment Summit – April 2nd.

The “2020 SOCIALLY DISTANT INVESTMENT SUMMIT” is coming on Thursday, April 2nd.

Click the link below to receive an email with a special “invitation only” link when the summit goes “live.” (Current newsletter subscribers are already registered.)


Catch Up On What You Missed Last Week


Bull Market? No, The Bear Still Rules For Now.

Last week, we asked the question, “Is the bear market over?”

Our answer was simple: The ‘Bear Market’ won’t be over until the credit markets get fixed.”

On Monday, the market sold off to new lows, forcing the Federal Reserve to inject more liquidity to try and stabilize the “broken” credit market.  Then on Tuesday, before the markets opened, we wrote:

“From a purely technical basis, the extreme downside extension, and potential selling exhaustion, has set the markets up for a fairly strong reflexive bounce. This is where fun with math comes in.

As shown in the chart below, after a 35% decline in the markets from the previous highs, a rally to the 38.2% Fibonacci retracement would encompass a 20% advance.

Such an advance will ‘lure’ investors back into the market, thinking the ‘bear market’ is over.”

Chart Updated Through Friday

Not surprisingly, here were the headlines, almost exactly as we wrote them:

Well, you get the idea.

While it was indeed a sharp “reflex rally,” and expected, “bear markets” are not resolved in a single month. More importantly, “bear markets” only end when NO ONE wants to buy it.” 

Fed Can’t Fix It

As noted above, the “bear market” will NOT be over until the credit market is fixed. We are a long way from that being done, given the blowout in yields currently occurring.

However, the Fed is throwing the proverbial “kitchen sink” at the issue. As Jim Bianco noted on Friday:

“In just these past few weeks:

  • The Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook.
  • That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond-buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

  • CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.
  • PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.
  • TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.
  • SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.
  • MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-sized businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this.”

However, on Friday, the Federal Reserve ran into a problem, which could poses a risk for the markets going forward. As Jim noted, the mind-boggling pace of bond purchases quickly hit the limits of what was available to pledge for collateral.

Or rather, the Fed’s “unlimited QE,” may not be so “unlimited” after all.

The consequence is the Fed is already having to start cutting back on its QE program. That news fueled the late-day sell-off Friday afternoon. (Charts courtesy of Zerohedge)

While Congress did pass the “CARES” act on Friday, it will do little to backstop what is about to happen to the economy for two primary reasons:

  1. The package will only support the economy for up to two months. Unfortunately, there is no framework for effective and timely deployment; firms are already struggling to pay rents, there are pockets of funding stress in credit markets as default risks build, and earnings guidance is abandoned. 
  2. The unprecedented uncertainty facing financial markets on the duration of social distancing, the depth of the economic shock and when the infection rate curve will flatten, and there are many unknowns which will further undermine confidence.

Both of these points are addressed in this week’s Macroview but here are the two salient points to support my statement:

Most importantly, as shown below, the majority of businesses will run out of money long before SBA loans, or financial assistance, can be provided. This will lead to higher and longer-duration of, unemployment.”

“While there is much hope that the current ‘economic shutdown’ will end quickly, we are still very early in the infection cycle relative to other countries. Importantly, we are substantially larger than most, and on a GDP basis, the damage will be worse.”

What the cycle tells us is that jobless claims, unemployment, and economic growth are going to worsen materially over the next couple of quarters.

The problem with the current economic backdrop, and mounting job losses, is the vast majority of American’s were woefully unprepared for any type of disruption to their income going into the recession. As job losses mount, a virtual spiral in the economy begins as reductions in spending put further pressures on corporate profitability. Lower profits leads to higher unemployment and lower asset prices until the cycle is complete.

The Bear Still Rules

This past week, we published several pieces of analysis for our RIAPro Subscribers (30-Day Risk Free Trial) discussing why this was a “bear market rally” to be sold into. On Friday, our colleague, Jeffery Marcus of TP Analystics, penned the following:

  1. The long term bull pattern that existed since the 3/9/09 is over. That means the pattern of investors confidently buying every decline is over.
  2. The market became historically oversold on 3/23 using many metrics, and that oversold condition coincided with the long term support area of S&P 500 2110-2180.
  3. The short-covering and rebalancing had a lot to do with the size and speed of the 3-day rally.  Also, we know the lack of  ETF liquidity played a huge role as well as algorithmic trading.
  4. Technically the market can still go up 6.9% higher from here to hit the 50% retracement level (3386 – 2237 = 1149/2 = 574 + 2237 = 2811….2811/2630 = +6.9%.) I would not bet on it.
  5. The market only sustains a rally once there is light at the Coronavirus tunnel. 
  6. I do not think the S&P 500 will hit a new high this year. Maybe not in 2021, either.

His analysis agrees with our own, which we discussed with you last week.

“The good news is the markets are now more extremely oversold on a variety of measures than at just about any other point in history.

Warning: Any reversal will NOT BE the bear market bottom. It will be a ‘bear market’ rally you will want to ‘sell’ into. The reason is there are still many investors trapped in ‘buy and hold’ and ‘passive indexing’ strategies that are actively seeking an exit. Any rallies will be met with redemptions.

Most importantly, all of our long-term weekly ‘sell signals’ have now been triggered. Such would suggest that a rally back to the ‘bullish trend line’ from 2009 will likely be the best opportunity to ‘sell’ before the ‘bear market’ finds its final low.”

Last week’s chart updated through Friday’s close.

While the recent lows may indeed turn out to be “the bottom,” I highly suspect they won’t. Given the sell signals have been registered at such high levels, the time, and distance, needed to reverse the excesses will require a deeper market draw.

As Jeff Hirsch from Stocktrader’s Alamanc noted:

“While we are all rooting for the market to find support here so much damage has been done. A great deal of uncertainty remains for the economy and health crisis. This looks like a bear market bounce. 

History suggests that we are in for some tough sledding in the market this year with quite a bit of chop. When the January Barometer came in with a negative reading, our outlook for 2020 began to diminish as every down January since 1950 has been followed by a new or continuing bear market, a 10% correction, or a flat year. Then another warning sign flashed when DJIA closed below its December closing low on February 26, 2020 as the impact of this novel coronavirus began to take its toll on Wall Street.

In the March Outlook, we presented this graph of the composite seasonal pattern for the 22 years since 1950 when both the January Barometer as measured by the S&P 500 were down, and the Dow closed below its previous December closing low in the first quarter. Below is a graph of DJIA, S&P 500 and NASDAQ Composite for 2020 year-to-date as of the close on March 25. Comparing 2020 market action to these 22 years, suggests a choppy year ahead with the potential for several tests of the recent low.”

“The depth of this waterfall decline may be too deep for the market to rebound quickly. This bear market also put this year’s Best Six Months (November-April) at risk of being negative. The record of down Best Six Months is not encouraging and it reminds us of a salient quote from the Almanac from an old market sage,

If the market does not rally, as it should during bullish seasonal periods, it is a sign that other forces are stronger and that when the seasonal period ends those forces will really have their say.’— Edson Gould (Stock market analyst, Findings & Forecasts, 1902-1987)'”

On a short-term basis, the market is also suggesting some risk. The daily chart below shows the market rallied to, and failed at, the first level of the Fibonacci retracement we outlined last week, suggesting profits be taken at this level. While there are two remaining targets for the bear market rally, the probabilities weigh heavily against them. (This doesn’t mean they can’t be achieved, it is “possible,” just not “probable.”)

Furthermore, with the “Death Cross” triggering on Friday (the 50-dma crossing below the 200-dma), this will put further downside pressure on any “bear market” advance from current levels.

Given the magnitude, and multiple confirmations, of these signals, it is far too soon to assume the “bear market” is over. This is particularly the case, given the sell-off is less than one-month-old.

Bear markets, and recessions, tend to last 18-months on average.

The current bear market and recession are not the results of just the “coronavirus” shock. It is the result of many simultaneous shocks from:

  • Economic disruption
  • Surging unemployment
  • Oil price shock
  • Collapsing consumer confidence, and
  • Most importantly, a “credit event.”

We likely have more to go before we can safely assume we have turned the corner.

In the meantime, use rallies to raise cash. Don’t worry about trying to “buy the bottom.” There will be plenty of time to see “THE” bottom is in, and having cash will allow you to “buy stocks” from the last of the “weak hands.” 


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite

Note: The technical gauge bounced from the lowest level since both the “Dot.com” and “Financial Crisis.” However, note the gauge bottoms BEFORE the market bottoms. In 2002, lows were retested. In 2008, there was an additional 22% decline in early 2009.


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Finally, the markets bounced this past week.

However, don’t get too excited; there has been a tremendous amount of technical damage done which keeps us on the sidelines for now.

Improving – Discretionary (XLY), and Real Estate (XLRE)

We previously reduced our weightings to Real Estate and liquidated Discretionary entirely over concerns of the virus and impact on the economy. No change this week. We are getting more interested in REITs again, but are going to select individual holdings versus the ETF due to leverage concerns in the REITs.

Discretionary is going to remain under pressure due to people being able to go out and shop. This sector will eventually get a bid, so we are watching it, but we need to see an eventual end to the isolation of consumers.

Current Positions: No Positions

Outperforming – Technology (XLK), Communications (XLC), Staples (XLP), Healthcare (XLV), and Utilities (XLU)

Early last week, we shifted exposures in portfolios and added to our Technology and Communications sectors, bringing them up to weight. We also added QQQ, which was closed out on Friday.

Current Positions: XLK, XLC, 1/2 weight XLP, XLV

Weakening – None

No sectors in this quadrant.

Current Position: None

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

No change from last week, with the exception that performance continued to be worse than the overall market.

These sectors are THE most sensitive to Fed actions (XLF) and the shutdown of the economy. We eliminated all holdings in late February and early March.

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Four weeks ago, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. We remain out of these sectors for now.

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunities only.

Current Position: None

S&P 500 Index (Core Holding) – Given the rapid deterioration of the broad market, we sold our entire core position holdings for the safety of cash. We did add a small trading position in QQQ on Monday afternoon, and sold it on Friday.

Current Position: None

Gold (GLD) – We added a small position in GDX recently, and increased our position in IAU early this week. With the Fed going crazy with liquidity, this will be good for gold long-term, so we continue to add to our holdings on corrections.

Current Position: 1/4th weight GDX, 1/2 weight IAU

Bonds (TLT) –

Bonds regained their footing this week, as the Fed became the “buyer” of both “first” and “last” resort. Simply, “bonds will not be allowed to default,” as the Fed will guarantee payments to creditors. We have now reduced our total bond exposure to 20% of the portfolio from 40% since we are only carrying 10% equity currently. (Rebalanced our hedge.) 

Current Positions: SHY, IEF, BIL

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

Despite the headlines of the “biggest rally in history” this past week, it’s easy to get sucked into the “Media headline” hype. However, let’s put this into some perspective:

Over the last “X” days the S&P 500 is:

  • 5-days: +10.2% 
  • 6-days: +5.4%
  • 10-days: -6.25%

It is much less exciting when compared to the fastest 30% plunge in history.

Keeping some perspective on where we are currently is very important. It’s easy to get swayed by the media headlines, which can lead us into making emotional investment mistakes. More often than not, emotional decisions turn out poorly.

We are continuing our process of blending the Equity and ETF models. As we head out of this bear market, ETF’s will have much less value relative to our selective strategies.

This doesn’t mean we won’t use ETF’s at all, but we will selectively use them to fill in gaps to our individual equity selection, or for short-term trading opportunities.

Such was the case on Monday when we took on a position in QQQ for a bounce, and was subsequently closed out on Friday.

We also added small holdings of CLX and MRK to our long-term portfolio, as well as increased our exposure to IAU.

We continue to remain very defensive, and are in an excellent position with plenty of cash, reduced bond holdings, and minimal equity exposure in companies we want to own for the next 10-years.

We are just patiently waiting for the right opportunity to buy large chunks of these holdings with both stable, and higher yields.

Let me repeat from last week:

  1. The ONLY people who care more about your money than you, is all of us at RIA Advisors.
  2. We will NOT “buy the bottom” of the market. We will buy when we SEE the bottom of the market is in and risk/reward ratios are clearly in our favor. 
  3. This has been THE fastest bear market in history. We are doing our best to preserve your capital so that you meet your financial goals. Bear markets are never fun, but they are necessary for future gains. 
  4. We’ve got this.

Please don’t hesitate to contact us if you have any questions, or concerns.

Lance Roberts

CIO


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Everyone Wanting To Buy Suggests The Bear Still Prowls (Full Report)


  • Everyone Wanting To Buy Suggests The Bear Still Prowls
  • MacroView: Mnuchin & Kudlow Say No Recession?
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


NOTE: During these tumultuous times, we are unlocking our full newsletter to help you navigate the markets safely. Make sure you subscribe to RIAPRO.NET (Free 30-Day Trial) if you want to keep receiving the full report after the storm passes.


Everyone Wanting To Buy Suggests The Bear Still Prowls

“If you own 10% equities, as we do, and the market falls 100%, you will lose 10%. That said, you have 90 cents on the dollar to buy equities for free.” – Michael Lebowitz

Let me explain his comment.

Last week, we wrote a piece titled: Risk Limits Hit. When Too Little Is Too Much in which we discussed reducing our equity risk to our lowest levels. 

For the last several months, we have been issuing repeated warnings about the market. While such comments are often mistaken for “being bearish,” we have often stated it is our process of managing “risk,” which is most important.

Beginning in mid-January, we began taking profits out of our portfolios and reducing risk. To wit:

‘On Friday, we began the orderly process of reducing exposure in our portfolios to take in profits, reduce portfolio risk, and raise cash levels.’

Importantly, we did not ‘sell everything’ and go to cash.

Since then, we took profits and rebalanced risk again in late January and early February as well.

On Friday/Monday, our ‘limits’ were breached, which required us to sell more.”

There are a couple of important things to understand about our current equity exposure. 

To begin with, we never go to 100% cash. The reason is that “psychologically” it is too difficult for clients to start “buying” when the market finally bottoms. Seeing the market begin to recover, along with their portfolio, makes it easier to fight the fear the market is “going to zero.”

Secondly, and most importantly, at just 10% in current equity exposure, the market could literally fall 100% and our portfolios would only decline by 10%. (Of course, given we still have 90% of our capital left, we can buy a tremendous amount of “free assets.”)

Of course, the market isn’t going to zero.

However, let’s map out a more realistic example. 

In this week’s MacroView, we discussed the “valuation” issue

“If our, and Mr. Rosenberg’s, estimates are correct of a 5-8% recessionary drag in the second quarter of 2020, then an average reduction in earnings of 30% is most likely overly optimistic. 

However, here is the math:

  • Current Earnings = 132.90
  • 30% Reduction = $100 (rounding down for easier math)

At various P/E multiples, we can predict where “fair value” for the market is based on historical assumptions:

  • 20x earnings:  Historically high but markets have traded at high valuations for the last decade. 
  • 18x earnings: Still historically high.
  • 15x earnings: Long-Term Average
  • 13x earnings: Undervalued 
  • 10x earnings: Extremely undervalued but aligned with secular bear market bottoms.

You can pick your own level where you think P/E’s will account for the global recession but the chart below prices it into the market.”

So, let’s assume our numbers are optimistically in the “ballpark” of a valuation reversion, and earnings are only cut by 30% while the market bottoms at 1800, or 18x earnings. (I say optimistically because normal valuation reversions are 15x earnings or less.)

Here’s the math:

  • For a “buy and hold” investor (who is already down 20-30% from the peak) will lose an additional 22%. 
  • For a client with 10% equity exposure, they will lose an additional 2.2%. 

When the market does eventually bottom, and it will, it will be far easier for our clients to recover 10% of their portfolio versus 50% for most “buy and hold” strategies. 

As we have often stated, “getting back to even is not an investment strategy.”  

Is The Bear Market Over?

This is THE QUESTION for investors. Here are a few articles from the past couple of days:

And then you have clueless economists, like Brian Wesbury from First Trust, who have never seen a “bear market,” or “recession,” until it’s over.

March 6th.

Why is this important? Because “bear markets don’t bottom with optimism, they end with despair.”

As I wrote last week:

“Bob Farrell, a legendary investor, is famous for his 10-Investment Rules to follow.

Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend – Rule #8

  1. Bear markets often START with a sharp and swift decline.
  2. After this decline, there is an oversold bounce that retraces a portion of that decline.
  3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.

The chart above shows the stages of the last two primary cyclical bear markets versus today (the 2020 scale has been adjusted to match.)

The answer to the question is simply this:

“When is it time to start buying the market? When you do NOT want to.”

Bond Market Implosion

At the moment, the Federal Reserve is fighting a potentially losing battle – the bond market. 

  • After cutting rates to zero and launching QE of $700 billion – the markets crashed. 
  • The ECB starts an $800 billion QE program, and the markets fail to move. 
  • The Fed injected liquidity into money markets, the credit market, and is buying municipal bonds. 
  • And the market crashed more. 

The Fed has literally turned on a “garden hose” to extinguish a literal “bon(d)fire.” 

This was no more evident than their action this past week to revive a program from the financial crisis called the Primary Dealer Credit Facility (PDCF) to bailout hedge funds and banks. Via Mike Witney:

The Fed is reopening its most controversial and despised crisis-era bailout facility, the Primary Dealer Credit Facility. The facility’s real purpose is to transfer the toxic bonds and securities from failing financial institutions and corporations (through an intermediary) onto the Fed’s balance sheet.

The objective of this sleight of hand is to recapitalize big investors who, through their own bad bets, are now either underwater or in deep trouble. Just like 2008, the Fed is now doing everything in its power to save its friends and mop up the ocean of red ink that was generated during the 10-year orgy of speculation that has ended in crashing markets and a wave of deflation. Check out this excerpt from an article at Wall Street on Parade. Here’s an excerpt:

“Veterans on Wall Street think of the PDCF as the cash-for-trash facility, where Wall Street’s toxic waste from a decade of irresponsible trading and lending, will be purged from the balance sheets of the Wall Street firms and handed over to the balance sheet of the Federal Reserve – just as it was during the last financial crisis on Wall Street.”

– (“Fed Announces Program for Wall Street Banks to Pledge Plunging Stocks to Get Trillions in Loans at ¼ Percent Interest” Wall Street on Parade)

In other words, the PDCF is a landfill for distressed assets that have lost much of their value and for which there is little or no demand. And, as bad as that sounds, the details about the resuscitated PDCF are much worse.”

If you have any doubt how bad it is in the bond market, just take a look at what happened to both investment grade and junk bond spreads. (Charts courtesy of David Rosenberg)

As they say: “That clearly ain’t normal.” 

More importantly, the “Bear Market” won’t be over until the credit markets get fixed.

Hunting The Bear

It was a pretty stunning week in the market. Over the last 5-days, the market declined an astonishing, or should I say breathtaking, 15%. The last time we saw a one week decline of that magnitude was during the “Lehman” crisis. (Of course, with hedge funds blowing up all week, this is precisely what the Fed has been bailing out.)

Since the peak of the market at the end of February, the market is now down a whopping 32%.

Surely, we are close to a bottom?

Let’s revisit our daily and weekly charts for some clues as to where we are, what could happen next, and what actions to take.

On a daily basis, the market is extremely stretched and deviated to the downside. Friday’s selloff smacked of an “Oriental Rug Company” where it was an “Everything Must Go Liquidation Event.” 

Remember all those headlines from early this year:

Well….

This selloff completely reversed the entire advance from the 2018 lows. That’s the bad news.

The good news is the markets are now more extremely oversold on a variety of measures than at just about any other point in history. 

Such a reversal, particularly given the “speed and magnitude” of the decline, argues for a “reversal” of some sort. 

Warning: Any reversal will NOT BE the bear market bottom. It will be a “bear market” rally you will want to “sell” into. The reason is there are still many investors trapped in “buy and hold” and “passive indexing” strategies which are actively seeking an exit. Any rallies will be met with redemptions.

As noted above, bear markets do not end with investors wanting to “buy” the market. They end when “everyone wants to sell.” 

And, NO, investors are “not different this time.” 

This “bear market” rally scenario becomes more evident when we view our longer-term weekly “sell signals.”  As we warned last week:

“With all of our signals now triggered from fairly high levels, it suggests the current selloff is not over as of yet. In other words, we will see a rally, followed by a secondary failure to lower lows, before the ultimate bottom is put in.” 

Unfortunately, we have yet to see any attempt at a sustained rally. 

More importantly, with the failure of the markets to hold lows this week, both of our long-term weekly “sell signals” have now been triggered. Such would suggest that a rally back to the “bullish trend line” from 2009 will likely be the best opportunity to “sell” before the “bear market” finds its final low.

Where will that low likely be:

Let’s update our mapping from last week:

  1. A retest of current lows that holds is a 27% decline. – Failed
  2. A retest of the 2018 lows, which is most likely, an average recessionary decline of 32.8% – Current
  3. A retest of the 2016 lows, coincident with a “credit event,” would entail a 50.9% decline.  – Pending Possibility.

Given the magnitude, and multiple confirmations, of these signals, it is far too soon to assume the “bear market” is over. This is particularly the case, given the selloff is less than one-month old.

Bear markets, and recessions, tend to last 18-months on average.

The current bear market and recession are not the result of just the “coronavirus” shock. It is the result of many simultaneous shocks from:

  • Economic disruption
  • Surging unemployment
  • Oil price shock
  • Collapsing consumer confidence, and
  • A “credit event.”

We likely have more to go before we can safely assume we have turned the corner.

In the meantime, use rallies to raise cash. Don’t worry about trying to “buy the bottom.” There will be plenty of time to see “THE” bottom is in, and having cash will allow you to “buy stocks” from the last of the “weak hands.” 


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet  


Performance Analysis


Technical Composite

Note: The technical gauge is now at the lowest level since both the “Dot.com” and “Financial Crisis.” However, note the gauge bottoms BEFORE the market bottoms. In 2002, lows were retested. In 2008, there was an additional 22% decline into early 2009.


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

For the 3rd week in a row:

“Everything was crushed again this past week, so the difference between leading and lagging sectors is which sector fell faster or slower than the S&P 500 index itself.” 

Improving – Discretionary (XLY), and Real Estate (XLRE)

We previously reduced our weightings to Real Estate and liquidated Discretionary entirely over concerns of the virus and impact to the economy. No change this week. 

Current Positions: 1.2 weight XLRE

Outperforming – Technology (XLK), Communications (XLC), Staples (XLP), Healthcare (XLV), and Utilities (XLU)

The correction in Technology last week broke support at the 200-dma but finished the week very close to the May 2019 lows. Communication and Utilities didn’t perform as well but also held up better during the decline on a relative basis. The same is true for Utilities and Staples. These are our core ETF’s right now at which we are carrying substantially reduced exposure.

Current Positions: 1/2 weight XLK, XLC, XLU, XLP, XLV

Weakening – None

No sectors in this quadrant.

Current Position: None

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

No change from last week, with the exception that performance continued to be worse than the overall market.

These sectors are THE most sensitive to Fed actions (XLF) and the shutdown of the economy. We eliminated all holdings in late February and early March. 

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Three weeks ago, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. Remain out of these sectors for now. 

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunities only. 

Current Position: None

S&P 500 Index (Core Holding) – Given the rapid deterioration of the broad market, we sold our entire core position holdings for the safety of cash.

Current Position: None

Gold (GLD) – Gold broke our stop, and we sold our holdings. We are now on the watch for an entry point if Gold can climb back above the 200-dma. 

Current Position: None

Bonds (TLT) –

Bonds collapsed last week as the “credit event” we have been concerned about took shape. We had previously taken profits and reduced our bond holdings duration and increased credit quality. We have now reduced our total bond exposure to 20% of the portfolio from 40% since we are only carrying 10% equity currently. (Rebalanced our hedge.) 

Current Positions: SHY, IEF, BIL

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

I know it is ugly. 

The S&P 500 is down nearly 32% in just three weeks. 

That’s scary.

However, it is important to keep some perspective on where we are currently. 

Last Monday, we further reduced our equity to just 10% (from 25% previously) of the portfolio

What does that mean?  Here is some math:

If the market goes to ZERO from here, (it’s not going to) your MAXIMUM loss is just 10%.

This is recoverable, particularly if we could buy a portfolio of assets for FREE.

We currently expect a maximum decline from current levels of 20%. This would be a 2% net hit to portfolios leaving us with a LOT of cash to buy distressed assets at 50% off. 

This is the opportunity we have been waiting for during the entire last decade.

Currently, we are busy rebuilding all of our portfolio models, rethinking risk management in a post-bear market environment, and what role the future of “fixed income” will play in asset allocations.

These are all essential questions that we need solid answers for.

We are in an excellent position with plenty of cash, reduced bond holdings, and minimal equity exposure in companies we want to own for the next 10-years. We are just patiently waiting to buy large chunks of these holdings soon with both stable and higher yields. 

Let me assure you of four things;

  1. The ONLY people who care more about your money than you, is all of us at RIA Advisors.
  2. We will NOT “buy the bottom” of the market. We will buy when we SEE the bottom of the market is in and risk/reward ratios are clearly in our favor. 
  3. This has been THE fastest bear market in history. We are doing our best to preserve your capital so that you meet your financial goals. Bear markets are never fun, but they are necessary for future gains. 
  4. We’ve got this.

Please don’t hesitate to contact us if you have any questions, or concerns. 

Lance Roberts

CIO


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Everyone Wanting To Buy Suggests The Bear Still Prowls


  • Everyone Wanting To Buy Suggests The Bear Still Prowls
  • MacroView: Mnuchin & Kudlow Say No Recession?
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Everyone Wanting To Buy Suggests The Bear Still Prowls

“If you own 10% equities, as we do, and the market falls 100%, you will lose 10%. That said, you have 90 cents on the dollar to buy equities for free.” – Michael Lebowitz

Let me explain his comment.

Last week, we wrote a piece titled: Risk Limits Hit. When Too Little Is Too Much in which we discussed reducing our equity risk to our lowest levels. 

For the last several months, we have been issuing repeated warnings about the market. While such comments are often mistaken for “being bearish,” we have often stated it is our process of managing “risk,” which is most important.

Beginning in mid-January, we began taking profits out of our portfolios and reducing risk. To wit:

‘On Friday, we began the orderly process of reducing exposure in our portfolios to take in profits, reduce portfolio risk, and raise cash levels.’

Importantly, we did not ‘sell everything’ and go to cash.

Since then, we took profits and rebalanced risk again in late January and early February as well.

On Friday/Monday, our ‘limits’ were breached, which required us to sell more.”

There are a couple of important things to understand about our current equity exposure. 

To begin with, we never go to 100% cash. The reason is that “psychologically” it is too difficult for clients to start “buying” when the market finally bottoms. Seeing the market begin to recover, along with their portfolio, makes it easier to fight the fear the market is “going to zero.”

Secondly, and most importantly, at just 10% in current equity exposure, the market could literally fall 100% and our portfolios would only decline by 10%. (Of course, given we still have 90% of our capital left, we can buy a tremendous amount of “free assets.”)

Of course, the market isn’t going to zero.

However, let’s map out a more realistic example. 

In this week’s MacroView, we discussed the “valuation” issue

“If our, and Mr. Rosenberg’s, estimates are correct of a 5-8% recessionary drag in the second quarter of 2020, then an average reduction in earnings of 30% is most likely overly optimistic. 

However, here is the math:

  • Current Earnings = 132.90
  • 30% Reduction = $100 (rounding down for easier math)

At various P/E multiples, we can predict where “fair value” for the market is based on historical assumptions:

  • 20x earnings:  Historically high but markets have traded at high valuations for the last decade. 
  • 18x earnings: Still historically high.
  • 15x earnings: Long-Term Average
  • 13x earnings: Undervalued 
  • 10x earnings: Extremely undervalued but aligned with secular bear market bottoms.

You can pick your own level where you think P/E’s will account for the global recession but the chart below prices it into the market.”

So, let’s assume our numbers are optimistically in the “ballpark” of a valuation reversion, and earnings are only cut by 30% while the market bottoms at 1800, or 18x earnings. (I say optimistically because normal valuation reversions are 15x earnings or less.)

Here’s the math:

  • For a “buy and hold” investor (who is already down 20-30% from the peak) will lose an additional 22%. 
  • For a client with 10% equity exposure, they will lose an additional 2.2%. 

When the market does eventually bottom, and it will, it will be far easier for our clients to recover 10% of their portfolio versus 50% for most “buy and hold” strategies. 

As we have often stated, “getting back to even is not an investment strategy.”  

Is The Bear Market Over?

This is THE QUESTION for investors. Here are a few articles from the past couple of days:

And then you have clueless economists, like Brian Wesbury from First Trust, who have never seen a “bear market,” or “recession,” until it’s over.

March 6th.

Why is this important? Because “bear markets don’t bottom with optimism, they end with despair.”

As I wrote last week:

“Bob Farrell, a legendary investor, is famous for his 10-Investment Rules to follow.

Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend – Rule #\8

  1. Bear markets often START with a sharp and swift decline.
  2. After this decline, there is an oversold bounce that retraces a portion of that decline.
  3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.

The chart above shows the stages of the last two primary cyclical bear markets versus today (the 2020 scale has been adjusted to match.)

The answer to the question is simply this:

“When is it time to start buying the market? When you do NOT want to.”

Bond Market Implosion

At the moment, the Federal Reserve is fighting a potentially losing battle – the bond market. 

  • After cutting rates to zero and launching QE of $700 billion – the markets crashed. 
  • The ECB starts an $800 billion QE program, and the markets fail to move. 
  • The Fed injected liquidity into money markets, the credit market, and is buying municipal bonds. 
  • And the market crashed more. 

The Fed has literally turned on a “garden hose” to extinguish a literal “bon(d)fire.” 

This was no more evident than their action this past week to revive a program from the financial crisis called the Primary Dealer Credit Facility (PDCF) to bailout hedge funds and banks. Via Mike Witney:

The Fed is reopening its most controversial and despised crisis-era bailout facility, the Primary Dealer Credit Facility. The facility’s real purpose is to transfer the toxic bonds and securities from failing financial institutions and corporations (through an intermediary) onto the Fed’s balance sheet.

The objective of this sleight of hand is to recapitalize big investors who, through their own bad bets, are now either underwater or in deep trouble. Just like 2008, the Fed is now doing everything in its power to save its friends and mop up the ocean of red ink that was generated during the 10-year orgy of speculation that has ended in crashing markets and a wave of deflation. Check out this excerpt from an article at Wall Street on Parade. Here’s an excerpt:

“Veterans on Wall Street think of the PDCF as the cash-for-trash facility, where Wall Street’s toxic waste from a decade of irresponsible trading and lending, will be purged from the balance sheets of the Wall Street firms and handed over to the balance sheet of the Federal Reserve – just as it was during the last financial crisis on Wall Street.”

– (“Fed Announces Program for Wall Street Banks to Pledge Plunging Stocks to Get Trillions in Loans at ¼ Percent Interest” Wall Street on Parade)

In other words, the PDCF is a landfill for distressed assets that have lost much of their value and for which there is little or no demand. And, as bad as that sounds, the details about the resuscitated PDCF are much worse.”

If you have any doubt how bad it is in the bond market, just take a look at what happened to both investment grade and junk bond spreads. (Charts courtesy of David Rosenberg)

As they say: “That clearly ain’t normal.” 

More importantly, the “Bear Market” won’t be over until the credit markets get fixed.

Hunting The Bear

It was a pretty stunning week in the market. Over the last 5-days, the market declined an astonishing, or should I say breathtaking, 15%. The last time we saw a one week decline of that magnitude was during the “Lehman” crisis. (Of course, with hedge funds blowing up all week, this is precisely what the Fed has been bailing out.)

Since the peak of the market at the end of February, the market is now down a whopping 32%.

Surely, we are close to a bottom?

Let’s revisit our daily and weekly charts for some clues as to where we are, what could happen next, and what actions to take.

On a daily basis, the market is extremely stretched and deviated to the downside. Friday’s selloff smacked of an “Oriental Rug Company” where it was an “Everything Must Go Liquidation Event.” 

Remember all those headlines from early this year:

Well….

This selloff completely reversed the entire advance from the 2018 lows. That’s the bad news.

The good news is the markets are now more extremely oversold on a variety of measures than at just about any other point in history. 

Such a reversal, particularly given the “speed and magnitude” of the decline, argues for a “reversal” of some sort. 

Warning: Any reversal will NOT BE the bear market bottom. It will be a “bear market” rally you will want to “sell” into. The reason is there are still many investors trapped in “buy and hold” and “passive indexing” strategies which are actively seeking an exit. Any rallies will be met with redemptions.

As noted above, bear markets do not end with investors wanting to “buy” the market. They end when “everyone wants to sell.” 

And, NO, investors are “not different this time.” 

This “bear market” rally scenario becomes more evident when we view our longer-term weekly “sell signals.”  As we warned last week:

“With all of our signals now triggered from fairly high levels, it suggests the current selloff is not over as of yet. In other words, we will see a rally, followed by a secondary failure to lower lows, before the ultimate bottom is put in.” 

Unfortunately, we have yet to see any attempt at a sustained rally. 

More importantly, with the failure of the markets to hold lows this week, both of our long-term weekly “sell signals” have now been triggered. Such would suggest that a rally back to the “bullish trend line” from 2009 will likely be the best opportunity to “sell” before the “bear market” finds its final low.

Where will that low likely be:

Let’s update our mapping from last week:

  1. A retest of current lows that holds is a 27% decline. – Failed
  2. A retest of the 2018 lows, which is most likely, an average recessionary decline of 32.8% – Current
  3. A retest of the 2016 lows, coincident with a “credit event,” would entail a 50.9% decline.  – Pending Possibility.

Given the magnitude, and multiple confirmations, of these signals, it is far too soon to assume the “bear market” is over. This is particularly the case, given the selloff is less than one-month old.

Bear markets, and recessions, tend to last 18-months on average.

The current bear market and recession are not the result of just the “coronavirus” shock. It is the result of many simultaneous shocks from:

  • Economic disruption
  • Surging unemployment
  • Oil price shock
  • Collapsing consumer confidence, and
  • A “credit event.”

We likely have more to go before we can safely assume we have turned the corner.

In the meantime, use rallies to raise cash. Don’t worry about trying to “buy the bottom.” There will be plenty of time to see “THE” bottom is in, and having cash will allow you to “buy stocks” from the last of the “weak hands.” 


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet  


Performance Analysis


Technical Composite

Note: The technical gauge is now at the lowest level since both the “Dot.com” and “Financial Crisis.” However, note the gauge bottoms BEFORE the market bottoms. In 2002, lows were retested. In 2008, there was an additional 22% decline into early 2009.


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

For the 3rd week in a row:

“Everything was crushed again this past week, so the difference between leading and lagging sectors is which sector fell faster or slower than the S&P 500 index itself.” 

Improving – Discretionary (XLY), and Real Estate (XLRE)

We previously reduced our weightings to Real Estate and liquidated Discretionary entirely over concerns of the virus and impact to the economy. No change this week. 

Current Positions: 1.2 weight XLRE

Outperforming – Technology (XLK), Communications (XLC), Staples (XLP), Healthcare (XLV), and Utilities (XLU)

The correction in Technology last week broke support at the 200-dma but finished the week very close to the May 2019 lows. Communication and Utilities didn’t perform as well but also held up better during the decline on a relative basis. The same is true for Utilities and Staples. These are our core ETF’s right now at which we are carrying substantially reduced exposure.

Current Positions: 1/2 weight XLK, XLC, XLU, XLP, XLV

Weakening – None

No sectors in this quadrant.

Current Position: None

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

No change from last week, with the exception that performance continued to be worse than the overall market.

These sectors are THE most sensitive to Fed actions (XLF) and the shutdown of the economy. We eliminated all holdings in late February and early March. 

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Three weeks ago, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. Remain out of these sectors for now. 

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunities only. 

Current Position: None

S&P 500 Index (Core Holding) – Given the rapid deterioration of the broad market, we sold our entire core position holdings for the safety of cash.

Current Position: None

Gold (GLD) – Gold broke our stop, and we sold our holdings. We are now on the watch for an entry point if Gold can climb back above the 200-dma. 

Current Position: None

Bonds (TLT) –

Bonds collapsed last week as the “credit event” we have been concerned about took shape. We had previously taken profits and reduced our bond holdings duration and increased credit quality. We have now reduced our total bond exposure to 20% of the portfolio from 40% since we are only carrying 10% equity currently. (Rebalanced our hedge.) 

Current Positions: SHY, IEF, BIL

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

I know it is ugly. 

The S&P 500 is down nearly 32% in just three weeks. 

That’s scary.

However, it is important to keep some perspective on where we are currently. 

Last Monday, we further reduced our equity to just 10% (from 25% previously) of the portfolio

What does that mean?  Here is some math:

If the market goes to ZERO from here, (it’s not going to) your MAXIMUM loss is just 10%.

This is recoverable, particularly if we could buy a portfolio of assets for FREE.

We currently expect a maximum decline from current levels of 20%. This would be a 2% net hit to portfolios leaving us with a LOT of cash to buy distressed assets at 50% off. 

This is the opportunity we have been waiting for during the entire last decade.

Currently, we are busy rebuilding all of our portfolio models, rethinking risk management in a post-bear market environment, and what role the future of “fixed income” will play in asset allocations.

These are all essential questions that we need solid answers for.

We are in an excellent position with plenty of cash, reduced bond holdings, and minimal equity exposure in companies we want to own for the next 10-years. We are just patiently waiting to buy large chunks of these holdings soon with both stable and higher yields. 

Let me assure you of four things;

  1. The ONLY people who care more about your money than you, is all of us at RIA Advisors.
  2. We will NOT “buy the bottom” of the market. We will buy when we SEE the bottom of the market is in and risk/reward ratios are clearly in our favor. 
  3. This has been THE fastest bear market in history. We are doing our best to preserve your capital so that you meet your financial goals. Bear markets are never fun, but they are necessary for future gains. 
  4. We’ve got this.

Please don’t hesitate to contact us if you have any questions, or concerns. 

Lance Roberts

CIO


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

 

Market Crash. Is It Over, Or Is It The “Revenant”


  • Market Crash: Is It Over, Or Is It The Revenant?
  • MacroView: Fed Launches A Bazooka To Kill A Virus
  • Financial Planning Corner: Tips For A Volatile Market
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Market Crash. Is It Over, Or Is The “Revenant?”

If you haven’t seen the movie “The Revenant” with Leonardo DiCaprio, it is a 2015 American survival drama describing frontiersman Hugh Glass’s experiences in 1823. Early in the movie, Hugh, an expert hunter, and tracker, is mauled by a grizzly bear. (Warning: the scene is very graphic)

In the scene, the attack comes in three distinct waves.

  1. The bear attacks, and brutally mauls Hugh, who plays dead to survive. The attack subsides.
  2. The bear comes back, and Hugh shoots it, provoking the bear to maul him some more.
  3. Finally, Hugh pulls out his knife as the bear attacks for a final fight to the death. (Hugh wins if you don’t want to watch the video.)

Interestingly, this is also how a “bear market” works.

Bob Farrell, a legendary investor, is famous for his 10-Investment Rules to follow.

Rule #8 states:

Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

  1. Bear markets often START with a sharp and swift decline.
  2. After this decline, there is an oversold bounce that retraces a portion of that decline.
  3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.

The chart above shows the stages of the last two primary cyclical bear markets versus today (the 2020 scale has been adjusted to match.)

As would be expected, the “Phase 1” selloff has been brutal.

That selloff sets up a “reflexive bounce.”  For many individuals, they will feel like” they are “safe.” This is how “bear market rallies” lure investors back in just before they are mauled again in “Phase 3.”

Just like in 2000, and 2008, the media/Wall Street will be telling you to just “hold on.” Unfortunately, by the time “Phase 3” was finished, there was no one wanting to “buy” anything. 

One of the reasons we are fairly certain of a further decline is due to the dual impacts of the “COVID-19” virus, and oil price shock. As noted in our MacroView:

“With the U.S. now shutting down and entrenching itself in response to the virus, the economic impact will be worsened. However, given that economic data is lagging, and we only have numbers that were mostly pre-virus, the reports over the next couple of months will ultimately reveal the extent of the damage.

With oil prices now at $30/bbl and 10-year breakeven rates to 0.9%, the math is significantly worse, and that is what the severity of the recent selloff is telling us. Over the next two quarters, we could see as much as a 3% clip off of current GDP.”

Unfortunately, while asset prices have declined, they have likely not fully accounted for the impact to earnings, permanently lost revenues, and the recessionary impact from falling consumer confidence. Historically, the gap between asset prices and corporate profits gets filled. 

In Playing Defense: We Don’t Know What Happens Next,” I estimated the impact on earnings that is still coming.

What we know, with almost absolute certainty, is that we will be in an economic recession within the next couple of quarters. We also know that earnings estimates are still way too elevated to account for the disruption coming from the COVID-19.”

“What we DON’T KNOW is where the ultimate bottom for the market is. All we can do is navigate the volatility to the best of our ability and recalibrate portfolios to adjust for downside risk without sacrificing the portfolio’s ability to adjust for a massive ” bazooka-style ” monetary intervention from global Central Banks if needed quickly. 

This is why, over the last 6-weeks, we have been getting more “defensive” by increasing our CASH holdings to 15% of the portfolio, with our 40% in bonds doing the majority of the heavy lifting in mitigating the risk in our remaining equity holdings. 

Interestingly, the Federal Reserve DID show up on Thursday as expected. In a statement from the New York Fed:

The Federal Reserve said it would inject more than $1.5 trillion of temporary liquidity into Wall Street on Thursday and Friday to prevent ominous trading conditions from creating a sharper economic contraction.

If the transactions are fully subscribed, they would swell the central bank’s $4.2 trillion asset portfolio by more than 35%.” – WSJ

As you can see in the chart below, this is a massive surge of liquidity hitting the market at a time the market is sitting on critical long-term trend support.

Of course, this is what the market has been hoping for.

  • Rate cuts? Check
  • Liquidity? Check

On Friday, the market surged, and ALMOST recouped the previous day’s losses. (Sorry, it wasn’t President Trump’s speech that boosted the market.)

However, this rally, and liquidity flush, most likely does not negate the continuation of the bear market. The amount of technical damage combined with a recession, and a potential surge in credit defaults almost ensures another leg of the beg market is yet to come. 

A look at the charts can also help us better understand where we currently reside.

Trading The Bounce

In January, when we discussed taking profits out of our portfolios, we noted the markets were trading at 3-standard deviations above their 200-dma, which suggested a pullback, or correction, was likely.

Now, it is the same comment in reverse. The correction over the last couple of weeks has completely reversed the previous bullish exuberance into extreme pessimism. On a daily basis, the market is back to oversold. Historically, this condition has been sufficient for a bounce. Given the oversold condition (top panel) is combined with a very deep “sell signal” in the bottom panel, it suggests a fairly vicious reflexive rally is likely as we saw on Friday.

The question, of course, is where do you sell?

Looking at the chart above, it is possible for a rally to the 38.2%, or 50% retracement levels. However, with the severity of the break below the 200-dma, the 61.8% retracement level, where the 200-dma now resides, will be very formidable resistance. With the Fed’s liquidity push, it is possible for a strong “Phase 2” rally. Our plan will be to reduce equity exposure at each level of resistance and increase our equity hedges before the “Phase 3” mauling ensues. 

The following chart is a longer-term analysis of the market and is the format we use for “onboarding” our clients into allocation models. (Vertical black lines are buy periods)

“But Lance, how do you know that Friday wasn’t THE bottom?”

A look at longer-term time-frames gives us some clues.

With all of our longer-term weekly “sell signals” now triggered from fairly high levels, it suggests the current selloff is not over as of yet. In other words, we will see a rally, followed by a secondary failure to lower lows, before the ultimate bottom is put in. 

I have mapped out the three most logical secondary bottoms for the market, so you can assess your portfolio risk accordingly. 

  1. A retest of current lows that holds is a 27% decline.
  2. A retest of the 2018 lows, most likely, is an average recessionary decline of 32.8%
  3. A retest of the 2016 lows, coincident with a “credit event,” would entail a 50.9% decline. 

Given the weekly signals have only recently triggered, we can look at monthly data to confirm we still remain confined to a “bearish market” currently. 

On a monthly basis, sell signals have been triggered. However, these signals are NOT VALID until the end of the month. However, given the depth of the decline, it would likely require a rally back to all-time highs to reverse those signals. This is a very high improbability.

Assuming the signals remain, there is an important message being sent, as noted in the top panel. The “negative divergence” of relative strength has only been seen prior to the start of the previous two bear markets, and the 2015-2016 slog. While the current selloff resembles what we saw in late 2015, there is a risk of this developing into a recessionary bear market later this summer. The market is holding the 4-year moving average, which is “make or break” for the bull market trend from the 2009 lows.

However, we suspect those levels will eventually be taken out. Caution is advised.

What We Are Thinking

Since January, we have been regularly discussing taking profits in positions, rebalancing portfolio risks, and, most recently, moving out of areas subject to slower economic growth, supply-chain shutdowns, and the collapse in energy prices. This led us to eliminate all holdings in international, emerging markets, small-cap, mid-cap, financials, transportation, industrials, materials, and energy markets. (RIAPRO Subscribers were notified real-time of changes to our portfolios.)

There is “some truth” to the statement “that no one” could have seen the fallout of the “coronavirus” being escalated by an “oil price” war. However, there have been mounting risks for quite some time from valuations, to price deviations, and a complete disregard of risk by investors. While we have been discussing these issues with you, and making you aware of the risks, it was often deemed as “just being bearish” in the midst of a “bullish rally.” However, it is managing these types of risks, which is ultimately what clients pay advisors for.

It isn’t a perfect science. In times like these, it gets downright messy. But this is where working to preserve capital and limit drawdowns becomes most important. Not just from reducing the recovery time back to breakeven, but in also reducing the “psychological stress,” which leads individuals to make poor investment decisions over time.

As noted last week:

“Given the extreme oversold and deviated measures of current market prices, we are looking for a reflexive rally that we can further reduce risk into, add hedges, and stabilize portfolios for the duration of the correction. When it is clear, the correction, or worse a bear market, is complete, we will reallocate capital back to equities at better risk/reward measures.”

We highly suspect that we have seen the highs for the year. Most likely, we are moving into an environment where portfolio management will be more tactical in nature, versus buying and holding. 

Take some action on this rally. 

If this is a “Phase 2” relief rally of a bear market, you really don’t want to be around for the “final mauling.”


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders

NOT A RIAPro SUBSCRIBER YET? 

WE ARE UNLOCKING OUR SUBSCRIBER SECTION AGAIN THIS WEEK TO ASSIST YOU IN MANAGING YOUR PORTFOLIO IN THESE CHALLENGING TIMES. 

Need to know what specifically to buy and sell in your portfolio? We cover it every week, and every day on RIA PRO along with everything we are doing in our client portfolios. 

Try RISK-FREE for 30-days


S&P 500 Tear Sheet  


Performance Analysis


Technical Composite


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Everything was crushed again this past week, so the difference between leading and lagging sectors is which sector fell faster or slower than the S&P 500 index itself. 

Improving – Discretionary (XLY), Real Estate (XLRE), and Staples (XLP)

Last week, we rebalanced our weightings in Real Estate and Staples, as these sectors are now improving in terms of relative performance. After getting very beaten up, we are looking not only for the “risk hedge” of non-virus related sectors but an eventual outperformance of the groups. 

We sold our entire stake in Discretionary due to potential earnings impacts from a slowdown in consumption, supply chain problems, and inventory issues. This worked well as Discretionary fell sharply last week. 

Current Positions: Target Weight XLU, XLRE

Outperforming – Technology (XLK), Communications (XLC), and Utilities (XLU)

The correction in Technology this past week broke support at the 200-dma but finished the week very close to our entry point, where we had slightly increased our exposure. These have “anti-virus” properties, so we are looking for the “risk hedge” relative to the broader market. Communication and Utilities didn’t perform as well but also held up better during the decline on a relative basis. We are watching Utilities and may reduce exposure if interest rates begin to rise due to the Fed. The same with Real Estate as well. 

Current Positions: Target weight XLK, XLC, XLU

Weakening – Healthcare (XLV)

We did bring our healthcare positioning back to portfolio weight as the sector will ultimately benefit from a “cure” for the “coronavirus.” Also, with Bernie Sanders now lagging Joe Biden on the Democratic ticket, this removes some of the risks of “nationalized healthcare” from the sector. 

Current Position: Target weight (XLV)

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

We had started to buy a little energy exposure previously but closed out of the positions as we were stopped out of our holdings week before last. We are going to continue to monitor the space due to its extreme oversold condition and relative value and will re-enter our positions when stability starts to take hold. 

We also sold Financials due to the financial risk from a recessionary impact on the outstanding corporate debt which currently exists. The Fed’s rate cut also impacts the bank’s Net Interest Margins, which makes them less attractive. Industrials and Materials have too much exposure to the “virus risk” for now.

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Week before last, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. Remain out of these sectors for now. However, given that Central Banks are going “all in” on stimulus, we may look for a trade in these sectors short-term.

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunity only. 

Current Position: None

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – We have decided to consolidate our long-term “core” holding into IVV only. We sold RSP and VYM and added to IVV. The reason for doing this is the disparity of performance between the 3-holdings. Since we want an “exact hedge” for our portfolio, IVV is the best match for a short-S&P 500 ETF.

Current Position: IVV

Gold (GLD) – This past week, Gold sold off as the Fed introduced liquidity giving the bulls hope and removing the “fear” factor in stocks. There was also a massive “margin call” that led to a liquidation event. Gold is VERY oversold currently. Add positions to portfolios with a stop $140. We sold our GDX position due to the fact mining is people-intensive and is located in countries most susceptible to the virus. 

Current Position: IAU (GOLD)

Bonds (TLT) –

Bonds also broke out to new highs as the correction ensued. Last Friday, we took profits in our 20-year bond position (TLT) to reduce our duration slightly, raise cash, and take in some profits. Bonds are extremely overbought now, so be cautious, we are maintaining the rest of our exposures for now, but we did rebalance our duration by selling 1/2 of IEF and adding to BIL. 

Current Positions: DBLTX, SHY, IEF, PTIAX, BIL

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

Thank goodness. The market finally responded to the Fed on Friday. 

Please read “Trading The Bounce” above as it details our plan on how we are going to trade this liquidity rally. 

As noted last week:

“Staying true to our discipline and strategy is difficult when you have this type of volatility. We question everything, every day. Are we in the right place? Do we have too much risk? Are we missing something? 

The ghosts of 2000, and 2008, stalk us both, and we are overly protective of YOUR money. We do not take our jobs lightly.”

We took some further actions to increase cash, further rebalance risks this past week. We are now using this rally to add hedges, and reduce equities until the current “sell signals” reverse. As noted, this is most likely a “bear market” rally that will fail. 

However, if it is the beginning of a new “bull market,” then we will simply remove hedges and add to our equity longs. 

Be assured we are watching your portfolios very closely. However, if you have ANY questions, comments, or concerns, please don’t hesitate to email me.

Portfolio Actions Taken Last Week

  • New clients: Only adding new positions as needed.
  • Dynamic Model: Sold VOOG, and hedged portfolio. Currently unhedged. 
  • Equity Model: Sold IEF and added to BIL to shorten bond portfolio duration. Sold RSP and VYM, and added slightly to IVV to rebalance our CORE holdings for more effective hedges. 
  • ETF Model: Same as Equity Model.

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

 

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Market Crash. Is It Over, Or Is It The “Revenant”


  • Market Crash: Is It Over, Or Is It The Revenant?
  • MacroView: Fed Launches A Bazooka To Kill A Virus
  • Financial Planning Corner: Tips For A Volatile Market
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Market Crash. Is It Over, Or Is The “Revenant?”

If you haven’t seen the moving “The Revenant” with Leonardo DiCaprio, it is a 2015 American survival drama describing frontiersman Hugh Glass’s experiences in 1823. Early in the movie, Hugh, an expert hunter, and tracker, is mauled by a grizzly bear. (Warning: the scene is very graphic)

In the scene, the attack comes in three distinct waves.

  1. The bear attacks, and brutally mauls Hugh, who plays dead to survive. The attack subsides.
  2. The bear comes back, and Huge shoots it, provoking the bear to maul him some more.
  3. Finally, Huge pulls out his knife as the bear attacks for a final fight to the death. (Hugh wins if you don’t want to watch the video.)

Interestingly, this is also how a “bear market” works.

Bob Farrell, a legendary investor, is famous for his 10-Investment Rules to follow.

Rule #8 states:

Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

  1. Bear markets often START with a sharp and swift decline.
  2. After this decline, there is an oversold bounce that retraces a portion of that decline.
  3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.

The chart above shows the stages of the last two primary cyclical bear markets versus today (the 2020 scale has been adjusted to match.)

As would be expected, the “Phase 1” selloff has been brutal.

That selloff sets up a “reflexive bounce.”  For many individuals, they will feel like” they are “safe.” This is how “bear market rallies” lure investors back in just before they are mauled again in “Phase 3.”

Just like in 2000, and 2008, the media/Wall Street will be telling you to just “hold on.” Unfortunately, by the time “Phase 3” was finished, there was no one wanting to “buy” anything. 

One of the reasons we are fairly certain of a further decline is due to the dual impacts of the “COVID-19” virus, and oil price shock. As noted in our MacroView:

“With the U.S. now shutting down and entrenching itself in response to the virus, the economic impact will be worsened. However, given that economic data is lagging, and we only have numbers that were mostly pre-virus, the reports over the next couple of months will ultimately reveal the extent of the damage.

With oil prices now at $30/bbl and 10-year breakeven rates to 0.9%, the math is significantly worse, and that is what the severity of the recent selloff is telling us. Over the next two quarters, we could see as much as a 3% clip off of current GDP.”

Unfortunately, while asset prices have declined, they have likely not fully accounted for the impact to earnings, permanently lost revenues, and the recessionary impact from falling consumer confidence. Historically, the gap between asset prices and corporate profits gets filled. 

In Playing Defense: We Don’t Know What Happens Next,” I estimated the impact on earnings that is still coming.

What we know, with almost absolute certainty, is that we will be in an economic recession within the next couple of quarters. We also know that earnings estimates are still way too elevated to account for the disruption coming from the COVID-19.”

“What we DON’T KNOW is where the ultimate bottom for the market is. All we can do is navigate the volatility to the best of our ability and recalibrate portfolios to adjust for downside risk without sacrificing the portfolio’s ability to adjust for a massive ” bazooka-style ” monetary intervention from global Central Banks if needed quickly. 

This is why, over the last 6-weeks, we have been getting more “defensive” by increasing our CASH holdings to 15% of the portfolio, with our 40% in bonds doing the majority of the heavy lifting in mitigating the risk in our remaining equity holdings. 

Interestingly, the Federal Reserve DID show up on Thursday as expected. In a statement from the New York Fed:

The Federal Reserve said it would inject more than $1.5 trillion of temporary liquidity into Wall Street on Thursday and Friday to prevent ominous trading conditions from creating a sharper economic contraction.

If the transactions are fully subscribed, they would swell the central bank’s $4.2 trillion asset portfolio by more than 35%.” – WSJ

As you can see in the chart below, this is a massive surge of liquidity hitting the market at a time the market is sitting on critical long-term trend support.

Of course, this is what the market has been hoping for.

  • Rate cuts? Check
  • Liquidity? Check

On Friday, the market surged, and ALMOST recouped the previous days losses. (Sorry, it wasn’t President Trump’s speech that boosted the market.)

However, this rally, and liquidity flush, most likely does not negate the continuation of the bear market. The amount of technical damage combined with a recession, and a potential surge in credit defaults almost ensures another leg of the beg market is yet to come. 

A look at the charts can also help us better understand where we currently reside.

Trading The Bounce

In January, when we discussed taking profits out of our portfolios, we noted the markets were trading at 3-standard deviations above their 200-dma, which suggested a pullback, or correction, was likely.

Now, it is the same comment in reverse. The correction over the last couple of weeks has completely reversed the previous bullish exuberance into extreme pessimism. On a daily basis, the market is back to oversold. Historically, this condition has been sufficient for a bounce. Given the oversold condition (top panel) is combined with a very deep “sell signal” in the bottom panel, it suggests a fairly vicious reflexive rally is likely as we saw on Friday.

The question, of course, is where do you sell?

Looking at the chart above, it is possible for a rally to the 38.2%, or 50% retracement levels. However, with the severity of the break below the 200-dma, the 61.8% retracement level, where the 200-dma now resides, will be very formidable resistance. With the Fed’s liquidity push, it is possible for a strong “Phase 2” rally. Our plan will be to reduce equity exposure at each level of resistance and increase our equity hedges before the “Phase 3” mauling ensues. 

The following chart is a longer-term analysis of the market and is the format we use for “onboarding” our clients into allocation models. (Vertical black lines are buy periods)

“But Lance, how do you know that Friday wasn’t THE bottom?”

A look at longer-term time-frames gives us some clues.

With all of our longer-term weekly “sell signals” now triggered from fairly high levels, it suggests the current selloff is not over as of yet. In other words, we will see a rally, followed by a secondary failure to lower lows, before the ultimate bottom is put in. 

I have mapped out the three most logical secondary bottoms for the market, so you can assess your portfolio risk accordingly. 

  1. A retest of current lows that holds is a 27% decline.
  2. A retest of the 2018 lows, most likely, is an average recessionary decline of 32.8%
  3. A retest of the 2016 lows, coincident with a “credit event,” would entail a 50.9% decline. 

Given the weekly signals have only recently triggered, we can look at monthly data to confirm we still remain confined to a “bearish market” currently. 

On a monthly basis, sell signals have been triggered. However, these signals are NOT VALID until the end of the month. However, given the depth of the decline, it would likely require a rally back to all-time highs to reverse those signals. This is a very high improbability.

Assuming the signals remain, there is an important message being sent, as noted in the top panel. The “negative divergence” of relative strength has only been seen prior to the start of the previous two bear markets, and the 2015-2016 slog. While the current selloff resembles what we saw in late 2015, there is a risk of this developing into a recessionary bear market later this summer. The market is holding the 4-year moving average, which is “make or break” for the bull market trend from the 2009 lows.

However, we suspect those levels will eventually be taken out. Caution is advised.

What We Are Thinking

Since January, we have been regularly discussing taking profits in positions, rebalancing portfolio risks, and, most recently, moving out of areas subject to slower economic growth, supply-chain shutdowns, and the collapse in energy prices. This led us to eliminate all holdings in international, emerging markets, small-cap, mid-cap, financials, transportation, industrials, materials, and energy markets. (RIAPRO Subscribers were notified real-time of changes to our portfolios.)

There is “some truth” to the statement “that no one” could have seen the fallout of the “coronavirus” being escalated by an “oil price” war. However, there have been mounting risks for quite some time from valuations, to price deviations, and a complete disregard of risk by investors. While we have been discussing these issues with you, and making you aware of the risks, it was often deemed as “just being bearish” in the midst of a “bullish rally.” However, it is managing these types of risks, which is ultimately what clients pay advisors for.

It isn’t a perfect science. In times like these, it gets downright messy. But this is where working to preserve capital and limit drawdowns becomes most important. Not just from reducing the recovery time back to breakeven, but in also reducing the “psychological stress,” which leads individuals to make poor investment decisions over time.

As noted last week:

“Given the extreme oversold and deviated measures of current market prices, we are looking for a reflexive rally that we can further reduce risk into, add hedges, and stabilize portfolios for the duration of the correction. When it is clear, the correction, or worse a bear market, is complete, we will reallocate capital back to equities at better risk/reward measures.”

We highly suspect that we have seen the highs for the year. Most likely, we are moving into an environment where portfolio management will be more tactical in nature, versus buying and holding. 

Take some action on this rally. 

If this is a “Phase 2” relief rally of a bear market, you really don’t want to be around for the “final mauling.”


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet  


Performance Analysis


Technical Composite


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Everything was crushed again this past week, so the difference between leading and lagging sectors is which sector fell faster or slower than the S&P 500 index itself. 

Improving – Discretionary (XLY), Real Estate (XLRE), and Staples (XLP)

Last week, we rebalanced our weightings in Real Estate and Staples, as these sectors are now improving in terms of relative performance. After getting very beaten up, we are looking not only for the “risk hedge” of non-virus related sectors but an eventual outperformance of the groups. 

We sold our entire stake in Discretionary due to potential earnings impacts from a slowdown in consumption, supply chain problems, and inventory issues. This worked well as Discretionary fell sharply last week. 

Current Positions: Target Weight XLU, XLRE

Outperforming – Technology (XLK), Communications (XLC), and Utilities (XLU)

The correction in Technology this past week broke support at the 200-dma but finished the week very close to our entry point, where we had slightly increased our exposure. These have “anti-virus” properties, so we are looking for the “risk hedge” relative to the broader market. Communication and Utilities didn’t perform as well but also held up better during the decline on a relative basis. We are watching Utilities and may reduce exposure if interest rates begin to rise due to the Fed. The same with Real Estate as well. 

Current Positions: Target weight XLK, XLC, XLU

Weakening – Healthcare (XLV)

We did bring our healthcare positioning back to portfolio weight as the sector will ultimately benefit from a “cure” for the “coronavirus.” Also, with Bernie Sanders now lagging Joe Biden on the Democratic ticket, this removes some of the risks of “nationalized healthcare” from the sector. 

Current Position: Target weight (XLV)

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

We had started to buy a little energy exposure previously but closed out of the positions as we were stopped out of our holdings week before last. We are going to continue to monitor the space due to its extreme oversold condition and relative value and will re-enter our positions when stability starts to take hold. 

We also sold Financials due to the financial risk from a recessionary impact on the outstanding corporate debt which currently exists. The Fed’s rate cut also impacts the bank’s Net Interest Margins, which makes them less attractive. Industrials and Materials have too much exposure to the “virus risk” for now.

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Week before last, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. Remain out of these sectors for now. However, given that Central Banks are going “all in” on stimulus, we may look for a trade in these sectors short-term.

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunity only. 

Current Position: None

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – We have decided to consolidate our long-term “core” holding into IVV only. We sold RSP and VYM and added to IVV. The reason for doing this is the disparity of performance between the 3-holdings. Since we want an “exact hedge” for our portfolio, IVV is the best match for a short-S&P 500 ETF.

Current Position: IVV

Gold (GLD) – This past week, Gold sold off as the Fed introduced liquidity giving the bulls hope and removing the “fear” factor in stocks. There was also a massive “margin call” that led to a liquidation event. Gold is VERY oversold currently. Add positions to portfolios with a stop $140. We sold our GDX position due to the fact mining is people-intensive and is located in countries most susceptible to the virus. 

Current Position: IAU (GOLD)

Bonds (TLT) –

Bonds also broke out to new highs as the correction ensued. Last Friday, we took profits in our 20-year bond position (TLT) to reduce our duration slightly, raise cash, and take in some profits. Bonds are extremely overbought now, so be cautious, we are maintaining the rest of our exposures for now, but we did rebalance our duration by selling 1/2 of IEF and adding to BIL. 

Current Positions: DBLTX, SHY, IEF, PTIAX, BIL

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

Thank goodness. The market finally responded to the Fed on Friday. 

Please read “Trading The Bounce” above as it details our plan on how we are going to trade this liquidity rally. 

As noted last week:

“Staying true to our discipline and strategy is difficult when you have this type of volatility. We question everything, every day. Are we in the right place? Do we have too much risk? Are we missing something? 

The ghosts of 2000, and 2008, stalk us both, and we are overly protective of YOUR money. We do not take our jobs lightly.”

We took some further actions to increase cash, further rebalance risks this past week. We are now using this rally to add hedges, and reduce equities until the current “sell signals” reverse. As noted, this is most likely a “bear market” rally that will fail. 

However, if it is the beginning of a new “bull market,” then we will simply remove hedges and add to our equity longs. 

Be assured we are watching your portfolios very closely. However, if you have ANY questions, comments, or concerns, please don’t hesitate to email me.

Portfolio Actions Taken Last Week

  • New clients: Only adding new positions as needed.
  • Dynamic Model: Sold VOOG, and hedged portfolio. Currently unhedged. 
  • Equity Model: Sold IEF and added to BIL to shorten bond portfolio duration. Sold RSP and VYM, and added slightly to IVV to rebalance our CORE holdings for more effective hedges. 
  • ETF Model: Same as Equity Model.

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


 

Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

 

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

 

Playing Defense: We Don’t Know What Happens Next


  • Playing Defense: We Don’t Know What Happens Next
  • MacroView: Fed Emergency Cut Exposes “Recession” Risks
  • Financial Planning Corner: Tips For A Volatile Market
  • Sector & Market Analysis
  • 401k Plan Manager

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Catch Up On What You Missed Last Week


Playing Defense: We Don’t Know What Happens Next

Last week, we discussed Navigating What Happens Next,” and set out to answer 3-important questions:

  1. Is the correction over?
  2. Is this a buying opportunity?
  3. Has the decade long bull market ended?

We also included a set of “rules to follow,” based on our analysis. (For your review, you will find them posted again at the bottom)

Importantly, while we have adhered to our investment process and discipline, to protect capital while participating in the markets, the volatility over the last couple of weeks has been unnerving to say the least. The chart below shows the daily percentage swings.

With markets swinging wildly by 2-3% daily, it has been more nauseating than the 418-foot drop of the Kingda Ka roller coaster in Jackson, NJ. While it seems like last week was another “horrible” week for the market, it actually ended slightly above where we ended last week.

It’s important to keep some perspective with respect to your portfolio management, particularly when volatility surges. Emotions are the biggest risk to your investments, and capital, over time. 

We Really Don’t Know

While we laid out a fairly detailed game plan last week, looking a daily, weekly, and monthly indicators, the reality is that we don’t know with any certainty what happens next, particularly when you have an exogenous situation like “COVID-19.”

However, we agree with Carl Swenlin that you can’t rule out a “bear market” has now started, like we saw in 2018, and the highs of the year are in.

Even though it is not officially a bear market, I think we should begin to interpret charts and indicators in the context of a bear market template.”

We agree, particularly within the scope of the comments made by my colleague Doug Kass on Friday morning:

The proximate cause for the precipitous drop in yields is the spread of the coronavirus which is delivering a body blow to global economic growth (which will come to a standstill in the months ahead).

In all likelihood, world GDP growth will likely be flat over the next few months – to unnaturally low levels of activity. To be sure some segments of the economy (in this reset) will not recoup sales and will have a permanent loss, i.e., hotels, travel, etc.

However, other segments of the economy – like technology – will likely recoup almost all the growth delayed by the coronavirus shock.

The next few months will be challenging from an economic standpoint and volatile from a stock market perspective. Moreover, evolving market structure issues will introduce more uncertainty – and likely deliver a continuation of the extreme volatility seen since mid-February.”

We agree with Doug’s view and have spent the last month moving OUT of areas like Basic Materials (XLB), Industrials (XLI), Discretionary (XLY), Energy (XLE), Transports (XTN), and Financials (XLF).

While financials don’t have as much direct “virus” related risk, the risk to major banks is two-fold:

  1. The collapse in “net interest margins” as the Fed cuts rates; and
  2. Potential for a wave of corporate-debt defaults coming from the economic slowdown/recession, particularly in the Energy sector.

The second point was noted by Mish Shedlock on Friday:

“There is a credit implosion coming up. A lot of leveraged drillers and crude suppliers dependent on prices above $50/bbl are going to facing credit defaults.

This will lead to a deflationary outcome. But you can blame the Fed.

Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.”

Collapsing yields, oil prices, and “emergency rate cuts,” are signs which suggest something has “broken” in the economy. These ramifications are not inconsequential. My friend Eric Hickman, of Kessler Investment Advisors, sent me an excellent note on Friday:

“Unsurprisingly, I think that the Coronavirus is the catalyst to tip the U.S. into a recession. We all know that recessions are not good for stocks, but by how much, and which ones? 

The last two recessions hit all sectors of the S&P 500 significantly. Even so-called “defensive sectors” like consumer staples and healthcare got hit by at least a third of their value (33%). We are just two weeks, and 11% away from an all-time high in the S&P 500. There is plenty of downside left.”

He is right. 

What we know, with almost absolute certainty, is that we will be in an economic recession within the next couple of quarters. We also know that earnings estimates are still way too elevated to account for the disruption coming from the COVID-19.

What we DON’T KNOW is where the ultimate bottom for the market is. All we can do is navigate the volatility to the best of our ability and recalibrate portfolio risk to adjust for downside risk without sacrificing the portfolio’s ability to quickly adjust for a massive “bazooka-style” monetary intervention from global Central Banks if needed. 

This is why, over the last 6-weeks, we have been getting more “defensive” by increasing our CASH holdings to 15% of the portfolio, with our 40% in bonds doing the majority of the heavy lifting in mitigating the risk in our remaining equity holdings. 

Regardless, of the hedges and cash, the portfolio management process over the last two weeks has not been pretty and has frayed our nerves. (Despite our best efforts, we are still subject to human emotions). However, for the year, the Sector Rotation model is down 1.7% versus 9% for the S&P 500.

That is volatility we can live with.

Back To Selling Rallies

At market extremes you are trading nothing but psychology. So…is it time to sell panic? Or is the hysteria just beginning?  What’s your time frame? What’s your pain threshold? Volatility has exploded as liquidity has vanished. Bid/offer spreads are wide but not deep. Credit spreads are widening. Here are some stats from the past week:

  • The 10 year UST yield has dropped from ~1.6% to ~0.8% in just 12 trading sessions.
  • Gold is up ~$100,
  • WTI is down ~$12 (a 4 year low,)
  • S&P is down ~500 points, and
  • The US Dollar Index has tumbled from a 2 year high to a 1 year low.
  • The CNN Fear/Greed barometer is at 5.Victor Adair, Polar Futures Group

I have been in this business for a long-time and have rarely seen moves this extreme in a two-week period. For the average investor, it is nearly impossible to stomach. It is times like these, which we have repeatedly warned about, that “buy and hold” strategies become “How Do I Get Out?”

Last week, we discussed the risk with our RIAPro Subscribers (30-Day Risk-Free Trial):

“With the markets extremely extended to the downside so a reflexive rally is likely. However, SPY will trigger a sell signal in the lower panel suggesting that any initial rally will fail and retest of support is likely.”

That is exactly what happened this past week. While we will likely get another reflexive rally in the next week or so, any advance will be one of your better opportunities to raise cash, and reduce overall equity risk, for the time being. 

The “equity exposure” in our portfolio models is driven by a series of “weekly signals” which we use to control risk. Importantly, it requires a “confirmation” of the indicators to adjust risk exposure in portfolios accordingly. 

On Friday, the markets confirmed that risk exposure in portfolios should be reduced lower for now. Fortunately, we have been reducing risk over the last 6-weeks, as noted above, but the signals have now confirmed our previous actions were correct. If the market breaks the 2-year moving average, we will need to substantially reduce risk further. 

As I said above, I am reprinting our rules from last week to use on any rally into the “sell zone” over the next week.

These are the same rules we use to reduce the risk in our portfolio management process, with the exception of #7.

  1. Move slowly. There is no rush in making dramatic changes. Doing anything in a moment of “panic” tends to be the wrong thing.
  2. If you are over-weight equities, DO NOT try and fully adjust your portfolio to your target allocation in one move. Again, after big declines, individuals feel like they “must” do something. Think logically above where you want to be and use the rally to adjust to that level.
  3. Begin by selling laggards and losers. These positions were dragging on performance as the market rose and they led on the way down.
  4. Add to sectors, or positions, that are performing with, or outperforming the broader market if you need risk exposure.
  5. Move “stop-loss” levels up to recent lows for each position. Managing a portfolio without “stop-loss” levels is like driving with your eyes closed.
  6. Be prepared to sell into the rally and reduce overall portfolio risk. There are a lot of positions you are going to sell at a loss simply because you overpaid for them to begin with. Selling at a loss DOES NOT make you a loser. It just means you made a mistake. Sell it, and move on with managing your portfolio. Not every trade will always be a winner. But keeping a loser will make you a loser of both capital and opportunity. 
  7. If none of this makes any sense to you – please consider hiring someone to manage your portfolio for you. It will be worth the additional expense over the long term.

In the short-term, there is no need to take on exceptional risk. It is time to take precautionary measures and tighten up stops, add non-correlated assets, raise cash levels, and hedge risk opportunistically on any rally.

As noted last week, this just our approach to controlling risk.

The only unacceptable method of managing risk at this juncture is not having a method to begin with.


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet 


Performance Analysis


Technical Composite


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Everything was crushed again this past week, so the difference between leading and lagging sectors is which sector fell faster or slower than the S&P 500 index itself. 

Improving – Discretionary (XLY), Real Estate (XLRE), and Staples (XLP)

Last week, we rebalanced our weightings in Real Estate and Staples, as these sectors are now improving in terms of relative performance. After getting very beaten up, we are looking not only for the “risk hedge” of non-virus related sectors but an eventual outperformance of the groups. 

We sold our entire stake in Discretionary due to potential earnings impacts from a slowdown in consumption, to supply chain problems, and inventory issues.

Current Positions: Target Weight XLU, XLRE

Outperforming – Technology (XLK), Communications (XLC), and Utilities (XLU)

The correction this past week found support at the 200-dma and we used that opportunity to bring our weightings in all three sectors back to target weights for now. These have “anti-virus” properties, so we are looking for the “risk hedge” relative to the broader market. 

Current Positions: Target weight XLK, XLC, XLU

Weakening – Healthcare (XLV)

We did bring our healthcare positioning back to portfolio weight as the sector will ultimately benefit from a “cure” for the “coronavirus.” Also, with Bernie Sanders now lagging Joe Biden on the Democratic ticket, this removes some of the risk of “nationalized healthcare” from the sector. 

Current Position: Target weight (XLV)

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

We had started to buy a little energy exposure previously, but closed out of the positions as we were stopped out of our holdings for now. We are going to continue to monitor the space due to its extreme oversold condition and relative value, and will re-enter our positions when stability starts to take hold. 

We also sold Financials due to the financial risk from a recessionary impact on the outstanding corporate debt which currently exists. The Fed’s rate cut also impacts the banks Net Interest Margins which makes them less attractive. 

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Early last week we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. Remain out of these sectors for now. 

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain.

Current Position: None

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. We are currently maintaining our core positions unhedged for now. However, on a rally back to short-term resistance we will add hedges to the core. 

Current Position: RSP, VYM, IVV, VOOG

Gold (GLD) – This past week, Gold continued its surge higher as stocks plunged lower. Gold is extremely overbought, so be patient for now and move stops up to the recent breakout levels.  We sold our GDX position due to the fact mining is people-intensive and is located in countries most susceptible to the virus. 

Current Position: IAU (GOLD)

Bonds (TLT) –

Bonds also broke out to new highs as the correction ensued. On Friday, we took profits in our 20-year bond position (TLT) to reduce our duration slightly, raise cash, and take in some profits. Bonds are extremely overbought now, so be cautious, we are maintaining the rest of our exposures for now but will look to hedge if we begin to see a reversal in rates. 

Current Positions: DBLTX, SHY, IEF, PTIAX

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

It’s been a brutal couple of weeks. 

This is when portfolio management gets extremely difficult. It is when we have the biggest urge to give in to our emotions. It is when Mike and I lose the most sleep. 

Staying true to our discipline and strategy is difficult in times like these. We question everything, every day. Are we in the right place? Do we have too much risk? Are we missing something? 

The ghosts of 2000, and 2008, stalk us both, and we are overly protective of YOUR money. We do not take our jobs lightly. 

Again this past week, we made some additional changes to the portfolio composition to reduce risk away from the “COVID-19” virus. This rebalancing of risk lowered overall equity exposure, and continued to shift away from risk. 

As noted last week, we use WEEKLY signals in order to manage equity exposures and make portfolio adjustments. Therefore, signals are ONLY VALID after the close of business on Friday. Yesterday, we now have a CONFIRMED sell signal to reduce portfolio exposures to 75% of our target allocations.

Fortunately, we are already there, and the hedges in our portfolios, along with bonds, are doing their jobs. We took some further actions to increase cash, and take some profits, and sell some of our laggards. 

Be assured we are watching your portfolios very closely. However, if you have ANY questions, comments, or concerns, please don’t hesitate to email me.

Portfolio Actions Taken Last Week

  • New clients: Only adding new positions as needed.
  • Dynamic Model: Sold all energy holdings RDS/A, AMLP. 
  • Equity Model: Sold all energy holdings RDS/A, AMLP, and XOM. We were too early on the trade and got stopped out. We will watch for a bottom to re-enter the positions. Sold DOV, VMC, JPM to reduce exposure to Fed rate cuts and virus areas. 
  • ETF Model: Sold XLB, XLI, AMLP, and XLF

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

 

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Market Crash & Navigating What Happens Next 02-28-20


  • Market Crash & Navigating What Happens Next
  • MacroView: The Ghosts Of 2018
  • Financial Planning Corner: Why Dave Ramsey Is Wrong On Life Insurance
  • Sector & Market Analysis
  • 401k Plan Manager

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Catch Up On What You Missed Last Week


Market Crash & Navigating What Happens Next

Just last week, we discussed with our RIAPRO subscribers (Try for 30-days RISK FREE) the risk of the market not paying attention to the virus. To wit:

“With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming.’ But the belief is currently ‘more stimulus’ will offset the ‘virus.’

This is probably a wrong guess.

Extensions to this degree rarely last long without a correction. Maintain exposures, but tighten up stop-losses.”

Unfortunately, it escalated more rapidly than even we anticipated.

It only took the S&P 500 six days to fall from an all-time high into correction levels, marking the broad index’s fastest drop of that magnitude outside of a one-day crash. Friday’s losses built on this week’s massive losses. The Dow and S&P 500 have fallen 14% and 13%, respectively, week to date. The two indexes were on pace for their biggest one-week loss since the 2008 financial crisis. The Nasdaq has lost 12.3% this week.” – CNBC

If that headline doesn’t startle you, you are also probably lacking a pulse.

However, it was two Monday’s ago, CNBC was cheering the market’s record highs and dismissing the impact of the virus as “it was just people getting sick in China.” We disagreed, which is why over the last several weeks, we have been detailing our warnings.

The correction this past week has been in the making for a while. It is why we have discussed carrying extra cash, adjusting our bond positioning, and rebalancing portfolio risks weekly for the past couple of months. Just as a reminder, this is what we wrote last week:

  • We have been concerned about the potential for a correction for the last three weeks.
  • We previously took profits near the market peak in January.
  • However, we did extend the duration of our bond portfolio a bit, and changed some of the underlying mixes of bonds, to prepare for a correction.
  • We are using this correction to rebalance some of our equity risks as well.
  • The bull market is still intact, so it is not time to be bearish in terms of positioning, just yet.
  • We are maintaining our hedges for now until we get a better understanding of where the markets are headed next.

While those actions did not entirely shield our portfolios for such a steep and swift correction, it did limit the damage to a great degree. 

This now gives us an opportunity to use the correction as an opportunity to “buy assets” which are now oversold and have a much improved “risk vs reward” profile. 

This is the advantage of “risk management” versus a “buy and hold” strategy. You can’t “buy cheap” if you don’t have any cash to “buy” with. 

I want to use the rest the article this week to quickly review the market after the brutal selloff this past week. Here are the questions we want to answer:

  1. Is the correction over?
  2. Is this a buying opportunity?
  3. Has the decade long bull market ended?

Let’s review some charts, and I will answer these questions at the end.

Daily

On a daily basis, the market is back to a level of oversold (top panel) rarely seen from a historical perspective. Furthermore, the rapid decline this week took the markets 5-standard deviations below the 50-dma. 

To put this into some perspective, prices tend to exist within a 2-standard deviation range above and below the 50-dma. The top or bottom of that range constitutes 95.45% of ALL POSSIBLE price movements within a given period. 

A 5-standard deviation event equates to 99.9999% of all potential price movement in a given direction. 

This is the equivalent of taking a rubber band and stretching it to its absolute maximum. 

Importantly, like a rubber band, this suggests the market “snap back” could be fairly substantial, and should be used to reduce equity risk, raise cash, and add hedges.

If we rework the analysis a bit, we can see in both the top and bottom panels the more extreme oversold condition. Assuming a short-term bottom was put in on Friday, a reflexive “counter-trend” rally will likely see the markets retrace back 38.2% to 50% of the previous decline.

Given the beating that many investors took over the past week, it is highly likely any short-term rallies will be met with more selling as investors try and “get out” of the market.

Weekly

On a weekly basis, the rising “bull trend support” from the 2016 lows is clear. That trend also coincides with our longer-term moving average which drives our allocation models.

Importantly, the market decline this past week DID NOT violate that trend currently, which suggests maintaining our allocation to equity risk in portfolios currently. However, the two longer-term sell signals, bottom panels, are close to registering a “risk reduction” change to our portfolios. (This will reduce our model from 100% to 75%) 

With the market currently very oversold, individuals are quick to assume this is 2018 all over again. However, the technical backdrop from where the signals are being triggered is more akin to 2015-2016 (yellow highlights). Such suggests that a rally will likely give way to another decline before the final bottom is in place.

Monthly

This chart has ONE purpose, to tell us when a “bear market” has officially started. 

On a monthly basis, the bulls remain in control. The decline in the market this past week wiped out all the “Fed Repo” gains from last October. 

However, there are some VERY important points of concern that we will likely see play out over the rest of 2020.

The most important WARNING is the negative divergence in relative strength (top panel).  This negative divergence was seen at every important market correction event over the last 25-years. 

As we have noted previously: 

“The market had triggered a ‘buy’ signal in October of last year as the Fed ‘repo’ operations went into overdrive. These monthly signals are ‘important,’ but it won’t take a tremendous decline to reverse those signals.

It’s okay to remain optimistic short-term, just don’t be complacent.”

As shown in the bottom two panels, both of the monthly “buy” signals are very close to reversing. It will take a breakout to “all-time highs” at this point to keep those signals from triggering. This lends support to our thesis of how the rest of 2020 will play out.

Let’s Answer Those Important Questions

Is the correction over?

Given the extreme 5-standard deviation below the 50-dma, combined with the massive short-term oversold condition discussed above, it is very likely we have seen the bulk of the correction on a short-term basis. 

This is NOT an absolute statement, promise, or guarantee. It is the best guess. If there is a major outbreak of the virus in the U.S., or the Fed fails to act, or a myriad of other factors, another wave of selling could easily be sparked. 

Is this a buying opportunity?

For longer-term investors, people close to, or in, retirement, or for individuals who don’t pay close attention to the markets or their investments, this is NOT a buying opportunity. 

While we have, and will, likely add some “trading rentals” to our portfolio for a reflexive bounce, they will be sold appropriately, risk reduced, and hedges added accordingly. 

Let me be clear.

There is currently EVERY indication given the speed and magnitude of the decline, that any short-term reflexive bounce will likely fail. Such a failure will lead to a retest of the recent lows, or worse, the beginning of a bear market brought on by a recession.

Please read that last sentence again. 

Has the decade long bull market ended?

As noted in the last chart above, the bull market that began in 2009 has NOT ended as of yet. This keeps our portfolios primarily long-biased at the current time. 

With that said, our primary concern is that the impact on the global supply chain in China, South Korea, and Japan will have much more severe economic impacts than currently anticipated which will likely push the U.S. economy towards a recession later this year. (This is something the collapsing yield curve is already suggesting.)

Importantly, the global supply chain is an exogenous risk that monetary interventions can NOT alleviate. (Supplying liquidity to financial markets does not fix plants being closed, people slowing consumption, transportation being halted, etc.)

As noted in the monthly chart above, it is entirely possible that by mid-summer we could well be dealing with a recessionary economic environment, slower earnings growth, and rising unemployment. Such will cause markets to reprice current valuations leading to the onset of a bear market.

The purpose of the analysis above is to provide you with the information to make educated guesses about the “probabilities” versus the “possibilities” of what could occur in the markets over the months ahead.

It is absolutely “possible” the markets could find a reason to rally back to all-time highs and continue the bullish trend. (For us, such would be the easiest and best outcome.)

However, the analysis currently suggests the risks currently outweigh potential reward and a deeper correction is the most “probable” at this juncture.

Don’t take that statement lightly.

I am suggesting reducing risk opportunistically, and being pragmatic about your portfolio, and your money. 

Here are our rules that we will be following on the next rally.

  1. Move slowly. There is no rush in making dramatic changes. Doing anything in a moment of “panic” tends to be the wrong thing.
  2. If you are over-weight equities, DO NOT try and fully adjust your portfolio to your target allocation in one move. Again, after big declines, individuals feel like they “must” do something. Think logically above where you want to be and use the rally to adjust to that level.
  3. Begin by selling laggards and losers. These positions were dragging on performance as the market rose and they led on the way down.
  4. Add to sectors, or positions, that are performing with, or outperforming the broader market if you need risk exposure.
  5. Move “stop-loss” levels up to recent lows for each position. Managing a portfolio without “stop-loss” levels is like driving with your eyes closed.
  6. Be prepared to sell into the rally and reduce overall portfolio risk. There are a lot of positions you are going to sell at a loss simply because you overpaid for them to begin with. Selling at a loss DOES NOT make you a loser. It just means you made a mistake. Sell it, and move on with managing your portfolio. Not every trade will always be a winner. But keeping a loser will make you a loser of both capital and opportunity. 
  7. If none of this makes any sense to you – please consider hiring someone to manage your portfolio for you. It will be worth the additional expense over the long term.

While we remain optimistic about the markets currently, we are also taking precautionary steps of tightening up stops, adding non-correlated assets, raising some cash, and looking to hedge risk opportunistically on any rally.

Everyone approaches money management differently. This is just our approach to the process of controlling risk.

We hope you find something useful in it.


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


NOT A RIAPro SUBSCRIBER YET? 

This is what our RIAPRO.NET subscribers are reading right now!

  • Sector & Market Analysis
  • Technical Gauges
  • Sector Rotation Analysis
  • Portfolio Positioning
  • Sector & Market Recommendations
  • Client Portfolio Updates
  • Live 401k Plan Manager


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

 

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Market Crash & Navigating What Happens Next


  • Market Crash & Navigating What Happens Next
  • MacroView: The Ghosts Of 2018
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Market Crash & Navigating What Happens Next

Just last week, we discussed with our RIAPRO subscribers (Try for 30-days RISK FREE) the risk of the market not paying attention to the virus. To wit:

“With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming.’ But the belief is currently ‘more stimulus’ will offset the ‘virus.’

This is probably a wrong guess.

Extensions to this degree rarely last long without a correction. Maintain exposures, but tighten up stop-losses.”

Unfortunately, it escalated more rapidly than even we anticipated.

It only took the S&P 500 six days to fall from an all-time high into correction levels, marking the broad index’s fastest drop of that magnitude outside of a one-day crash. Friday’s losses built on this week’s massive losses. The Dow and S&P 500 have fallen 14% and 13%, respectively, week to date. The two indexes were on pace for their biggest one-week loss since the 2008 financial crisis. The Nasdaq has lost 12.3% this week.” – CNBC

If that headline doesn’t startle you, you are also probably lacking a pulse.

However, it was two Monday’s ago, CNBC was cheering the market’s record highs and dismissing the impact of the virus as “it was just people getting sick in China.” We disagreed, which is why over the last several weeks, we have been detailing our warnings.

The correction this past week has been in the making for a while. It is why we have discussed carrying extra cash, adjusting our bond positioning, and rebalancing portfolio risks weekly for the past couple of months. Just as a reminder, this is what we wrote last week:

  • We have been concerned about the potential for a correction for the last three weeks.
  • We previously took profits near the market peak in January.
  • However, we did extend the duration of our bond portfolio a bit, and changed some of the underlying mixes of bonds, to prepare for a correction.
  • We are using this correction to rebalance some of our equity risks as well.
  • The bull market is still intact, so it is not time to be bearish in terms of positioning, just yet.
  • We are maintaining our hedges for now until we get a better understanding of where the markets are headed next.

While those actions did not entirely shield our portfolios for such a steep and swift correction, it did limit the damage to a great degree. 

This now gives us an opportunity to use the correction as an opportunity to “buy assets” which are now oversold and have a much improved “risk vs reward” profile. 

This is the advantage of “risk management” versus a “buy and hold” strategy. You can’t “buy cheap” if you don’t have any cash to “buy” with. 

I want to use the rest the article this week to quickly review the market after the brutal selloff this past week. Here are the questions we want to answer:

  1. Is the correction over?
  2. Is this a buying opportunity?
  3. Has the decade long bull market ended?

Let’s review some charts, and I will answer these questions at the end.

Daily

On a daily basis, the market is back to a level of oversold (top panel) rarely seen from a historical perspective. Furthermore, the rapid decline this week took the markets 5-standard deviations below the 50-dma. 

To put this into some perspective, prices tend to exist within a 2-standard deviation range above and below the 50-dma. The top or bottom of that range constitutes 95.45% of ALL POSSIBLE price movements within a given period. 

A 5-standard deviation event equates to 99.9999% of all potential price movement in a given direction. 

This is the equivalent of taking a rubber band and stretching it to its absolute maximum. 

Importantly, like a rubber band, this suggests the market “snap back” could be fairly substantial, and should be used to reduce equity risk, raise cash, and add hedges.

If we rework the analysis a bit, we can see in both the top and bottom panels the more extreme oversold condition. Assuming a short-term bottom was put in on Friday, a reflexive “counter-trend” rally will likely see the markets retrace back 38.2% to 50% of the previous decline.

Given the beating that many investors took over the past week, it is highly likely any short-term rallies will be met with more selling as investors try and “get out” of the market.

Weekly

On a weekly basis, the rising “bull trend support” from the 2016 lows is clear. That trend also coincides with our longer-term moving average which drives our allocation models.

Importantly, the market decline this past week DID NOT violate that trend currently, which suggests maintaining our allocation to equity risk in portfolios currently. However, the two longer-term sell signals, bottom panels, are close to registering a “risk reduction” change to our portfolios. (This will reduce our model from 100% to 75%) 

With the market currently very oversold, individuals are quick to assume this is 2018 all over again. However, the technical backdrop from where the signals are being triggered is more akin to 2015-2016 (yellow highlights). Such suggests that a rally will likely give way to another decline before the final bottom is in place.

Monthly

This chart has ONE purpose, to tell us when a “bear market” has officially started. 

On a monthly basis, the bulls remain in control. The decline in the market this past week wiped out all the “Fed Repo” gains from last October. 

However, there are some VERY important points of concern that we will likely see play out over the rest of 2020.

The most important WARNING is the negative divergence in relative strength (top panel).  This negative divergence was seen at every important market correction event over the last 25-years. 

As we have noted previously: 

“The market had triggered a ‘buy’ signal in October of last year as the Fed ‘repo’ operations went into overdrive. These monthly signals are ‘important,’ but it won’t take a tremendous decline to reverse those signals.

It’s okay to remain optimistic short-term, just don’t be complacent.”

As shown in the bottom two panels, both of the monthly “buy” signals are very close to reversing. It will take a breakout to “all-time highs” at this point to keep those signals from triggering. This lends support to our thesis of how the rest of 2020 will play out.

Let’s Answer Those Important Questions

Is the correction over?

Given the extreme 5-standard deviation below the 50-dma, combined with the massive short-term oversold condition discussed above, it is very likely we have seen the bulk of the correction on a short-term basis. 

This is NOT an absolute statement, promise, or guarantee. It is the best guess. If there is a major outbreak of the virus in the U.S., or the Fed fails to act, or a myriad of other factors, another wave of selling could easily be sparked. 

Is this a buying opportunity?

For longer-term investors, people close to, or in, retirement, or for individuals who don’t pay close attention to the markets or their investments, this is NOT a buying opportunity. 

While we have, and will, likely add some “trading rentals” to our portfolio for a reflexive bounce, they will be sold appropriately, risk reduced, and hedges added accordingly. 

Let me be clear.

There is currently EVERY indication given the speed and magnitude of the decline, that any short-term reflexive bounce will likely fail. Such a failure will lead to a retest of the recent lows, or worse, the beginning of a bear market brought on by a recession.

Please read that last sentence again. 

Has the decade long bull market ended?

As noted in the last chart above, the bull market that began in 2009 has NOT ended as of yet. This keeps our portfolios primarily long-biased at the current time. 

With that said, our primary concern is that the impact on the global supply chain in China, South Korea, and Japan will have much more severe economic impacts than currently anticipated which will likely push the U.S. economy towards a recession later this year. (This is something the collapsing yield curve is already suggesting.)

Importantly, the global supply chain is an exogenous risk that monetary interventions can NOT alleviate. (Supplying liquidity to financial markets does not fix plants being closed, people slowing consumption, transportation being halted, etc.)

As noted in the monthly chart above, it is entirely possible that by mid-summer we could well be dealing with a recessionary economic environment, slower earnings growth, and rising unemployment. Such will cause markets to reprice current valuations leading to the onset of a bear market.

The purpose of the analysis above is to provide you with the information to make educated guesses about the “probabilities” versus the “possibilities” of what could occur in the markets over the months ahead.

It is absolutely “possible” the markets could find a reason to rally back to all-time highs and continue the bullish trend. (For us, such would be the easiest and best outcome.)

However, the analysis currently suggests the risks currently outweigh potential reward and a deeper correction is the most “probable” at this juncture.

Don’t take that statement lightly.

I am suggesting reducing risk opportunistically, and being pragmatic about your portfolio, and your money. 

Here are our rules that we will be following on the next rally.

  1. Move slowly. There is no rush in making dramatic changes. Doing anything in a moment of “panic” tends to be the wrong thing.
  2. If you are over-weight equities, DO NOT try and fully adjust your portfolio to your target allocation in one move. Again, after big declines, individuals feel like they “must” do something. Think logically above where you want to be and use the rally to adjust to that level.
  3. Begin by selling laggards and losers. These positions were dragging on performance as the market rose and they led on the way down.
  4. Add to sectors, or positions, that are performing with, or outperforming the broader market if you need risk exposure.
  5. Move “stop-loss” levels up to recent lows for each position. Managing a portfolio without “stop-loss” levels is like driving with your eyes closed.
  6. Be prepared to sell into the rally and reduce overall portfolio risk. There are a lot of positions you are going to sell at a loss simply because you overpaid for them to begin with. Selling at a loss DOES NOT make you a loser. It just means you made a mistake. Sell it, and move on with managing your portfolio. Not every trade will always be a winner. But keeping a loser will make you a loser of both capital and opportunity. 
  7. If none of this makes any sense to you – please consider hiring someone to manage your portfolio for you. It will be worth the additional expense over the long term.

While we remain optimistic about the markets currently, we are also taking precautionary steps of tightening up stops, adding non-correlated assets, raising some cash, and looking to hedge risk opportunistically on any rally.

Everyone approaches money management differently. This is just our approach to the process of controlling risk.

We hope you find something useful in it.


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Everything was crushed this past week, so the difference between leading and lagging sectors is which sector fell faster or slower than the S&P 500 index itself. 

Improving – Discretionary (XLY), Real Estate (XLRE), and Utilities (XLU)

As noted previously, we reduced exposure to Utilities, Real Estate, and Discretionary due to their extreme overbought condition.

This past week, the correction alleviated much of that condition so we are now looking for opportunistic adds to our portfolio. However, since these sectors are interest rate sensitive, with yields extremely compressed, we will enter positions as needed very cautiously.

Current Positions: Reduced XLY, XLU, XLRE

Outperforming – Technology (XLK), Communications (XLC)

We previously recommended taking profits in Technology, which has not only been leading the market but has gotten extremely overbought. The correction this past week found support at the 200-dma and the sector is extremely oversold. We will look for a reasonable opportunity to add to our technology and communication sectors as they are less prone to the coronavirus impact. 

Current Positions: Target weight XLK, Reduced XLC

Weakening – Healthcare (XLV)

We noted previously we had added to our healthcare positioning slightly. The correction to this sector this past week was brutal but we are looking to add more to our holdings as healthcare will ultimately benefit from healthcare needs from the impact of the virus. 

Current Position: Target weight (XLV)

Lagging – Industrials (XLI), Financials (XLF), Staples (XLP), Materials (XLB), and Energy (XLE)

All of these sectors are back to oversold. We are looking for a counter-trend bounce to sell Industrials and Materials which are most susceptible to supply chain disruptions. We are starting to buy a little energy exposure this past week and are going to continue to add to that space due to its extreme oversold condition and relative value. We will also SELL Financials due to the financial risk from a recessionary impact on the outstanding corporate debt which currently exists.

Current Position: Reduced weight XLY, XLP, Full weight AMLP, 1/2 weight XLF, XLB and XLI

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Early last week we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. Remain out of these sectors for now. 

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain, not to mention the rising U.S. dollar, all exposures were sold early this past week. 

Current Position: None

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. We are currently maintaining our core positions unhedged for now. However, on a rally back to short-term resistance we will add hedges to the core. 

Current Position: RSP, VYM, IVV, VOOG

Gold (GLD) – This past week, Gold continued its surge higher as stock markets fell into a correction. Gold is extremely overbought, so be patient for now and move stops up to the recent breakout levels.  We sold our GDX position due to the fact mining is people-intensive and is located in countries most susceptible to the virus. 

Current Position: IAU (GOLD)

Bonds (TLT) –

Bonds also broke out to new highs as the correction ensued. On Friday, we took profits in our 20-year bond position (TLT) to reduce our duration slightly, raise cash, and take in some profits. Bonds are extremely overbought now, so be cautious, we are maintaining the rest of our exposures for now but will look to hedge if we begin to see a reversal in rates. 

Current Positions: DBLTX, SHY, IEF, PTIAX

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

Wow.

As noted last week:

Over the last couple of weeks, we have made some minor changes to the portfolio which change very little in terms of the overall makeup. While this rebalancing of risk did not dramatically increase equity exposure, we are very aware of our positioning and risk and will take action accordingly.

We are being deliberately slow in on-boarding client portfolios into our models, and are monitoring risks very closely. We are not in a rush to make any drastic moves in either direction, and prefer to wait for the market to “tell us” what we need to do.

We have taken profits, moved up stop-loss levels, and have hedged our risks. We will take action when necessary.”

Here is the problem. 

We use WEEKLY signals in order to manage equity exposures and make portfolio adjustments. Therefore, signals are ONLY VALID after the close of business on Friday. 

This keeps portfolio turnover lower and reduces the “whipsaw” effect of one or two-day declines. However, weekly signals become ineffective when you have a 14% decline within a single week. 

Fortunately, we had already hedged our portfolios to some degree, and had taken some actions to increase cash, take some profits, and add some “rental trades” for a reflexive rally. Those “rentals” will be sold and replaced with hedges as necessary.

Be assured we are watching your portfolios very closely. However, if you have ANY questions, comments, or concerns, please don’t hesitate to email me.

Portfolio Actions Taken Last Week

  • New clients: Slowing adding exposure as needed.
  • Dynamic Model: Added to VOOG last week, sold our short-position to take in the profit. We also begin building some positions in RDS/A, AMLP and will be adding to XOM which are now 5-standard deviations oversold. We will sell some positions on a reflexive rally and reinstate our hedges. 
  • Equity Model: Sold TLT, GDX, DEM, EFV, and SLYV to raise cash. Added a small “rental” of VOOG and started building exposure in RDS/A. 
  • ETF Model: Sold TLT, DEM, EFV and SLYV.  Added a small “rental” of VOOG and added exposure in AMLP.  We will start building exposure to XLE shortly, and will be selling XLB, XLI, and XLF on a rally. 

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

 

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Did The Market Just Get Infected? 02-22-20


  • Did The Market Just Get Infected?
  • MacroView: Japan, The Fed, & The Limits Of QE
  • Financial Planning Corner: Part 2: Dave Ramsey Is Wrong About Life Insurance
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Did The Market Just Get Infected?

Just last week, we were asking the opposite question, as traders were believing that the market had immunity to the risks from the “coronavirus.”

This was a point we discussed with our RIAPRO subscribers (Try for 30-days RISK FREE) in Monday’s technical market update.

“As noted last week: ‘With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming.’ But the belief is currently ‘more stimulus’ will offset the ‘virus.’

This is probably a wrong guess.

Extensions to this degree rarely last long without a correction. Maintain exposures, but tighten up stop-losses.”

That correction came hard, and fast on Thursday and Friday.

For the week, the market declined, but it was the “5-Horseman Of The Rally” (Apple, Microsoft, Google, Facebook, Amazon) which led the way lower. This is the first time we have seen a real rotation out of the “momentum chase” into fixed income and was a point we discussed in Thursday’s RIAPRO Intermarket Analysis Report. To wit:

“Stocks and bonds play an interesting ‘risk on/risk off’ relationship over time. As shown above while stocks are extremely outperforming bonds currently, the relationship is now suppressed to levels where a reversion would be expected. This suggests that we will likely see a a correction in equity prices, and a rise in bond prices (yields lower), in the near future.”

Currently, this is just a correction within the ongoing bullish trend, however, there are things occurring that do not rule out the possibility of a larger correction in the short-term.

Carl Swenlin from Decision Point (h/t G. O’Brien) came to a similar conclusion.

“Yesterday (Thursday) SPY penetrated the bottom of a short-term rising wedge, but couldn’t make it stick. Today was a different story, but the support line drawn across the January top impeded excessive downward progress. The VIX didn’t quite reach the bottom Bollinger Band, but it is possible that we will see continued weak price action similar to the short January decline if the VIX breaks through the band. Being so close to the band, the VIX is also oversold, so it is also possible that we’ll see a bounce.”

“The intermediate-term market trend is UP and the condition is SOMEWHAT OVERBOUGHT. The negative divergences spell trouble, and all four indicators are below their signal line and falling.

The market has been so resilient that it is hard to think that anything more than a minor pullback is possible. A critical breakdown below the January top hasn’t happened yet, but that could be the first move on Monday. Indicators in the short- and intermediate-term are falling, and negative divergences are abundant, so I think that next week will be negative. That may just be the beginning.”

We agree with that assessment. Remember, it never just starts raining; clouds gather, skies darken, wind speeds pick up, and barometric pressures decline. When you have a consensus of the evidence, you typically carry an umbrella.

Evidence is clearly mounting, and one of the bigger concerns to the market, and particularly to the commodity space, is the surge in the U.S. dollar. This past Monday, we wrote:

“As noted previously, the dollar has rallied back to that all important previous resistance line. IF the dollar can break back above that level, and hold, then commodities, and oil, will likely struggle.”

That is exactly what happened over the last two weeks and the dollar has strengthened that rally as concerns over the ‘coronavirus’ persist. With the dollar testing previous highs, a break above that resistance could result in a sharp move higher for the dollar.

The rising dollar is not bullish for Oil, commodities or international exposures. The ‘sell’ signal has began to reverse. Pay attention.”

This surge in the dollar is also responsible for the sharp drop in bond yields as money is flooding into USD denominated assets due to the coming global impact from the coronavirus.

This is a substantial risk to the markets over the rest of this year which has not been factored into asset prices as of yet.

Furthermore, the main driver behind stock prices since last October has been the flood of liquidity from the Federal Reserve. However, that push of liquidity has quietly gone subsided over the last few weeks.

This was well telegraphed by the Fed previously but was reasserted this past week as the Fed noted it was in no rush to cut rates and would continue reducing “repo operations,” both into, and following, April.

Given the “bull thesis” has been “liquidity trumps all other risks,” with the Fed funds rate at 1.5% currently, and liquidity flows being reduced, “risks” now have a stronger hand. When you combine reduced liquidity with a surging U.S. Dollar, and collapsing yields, investors should reassess their positioning accordingly.

As my friend Victor Adair from Polar Futures Group stated on Friday:

“The EURUSD jumped sharply (after falling steadily YTD) and the spooz took another leg down. Could there have been a European institutional account positioned in US stocks which suddenly decided, like the Jeremy Irons character in the Margin Call movie, that they didn’t “hear the music” anymore, and decide to sell? If they had owned US stocks without hedging their FX risk the temptation to hit the SELL button given the recent huge rallies in both US stocks and the US Dollar would have been huge! I think the S&P 500 can continue lower.”

Positioning Review & Update

We have been concerned about the potential for a correction for the last three weeks. Given that we previously took profits near the market peak in January, there was not a tremendous amount of work we needed to do on the equity side of the ledger.

However, this past Monday we did extend the duration of our bond portfolio a bit, and changed some of the underlying mixes of bonds, to prepare for a correction. With the sharp yield spike over the last couple of days, those positioning changes worked well to reduce volatility.

We are using this correction to rebalance some of our equity risks as well. The bull market is still intact, so it is not time to be bearish in terms of positioning, just yet. However, we are maintaining our hedges for now until we get a better understanding of where the markets are headed next.

Currently, there are several levels of support short-term. The market bounced off initial support at the 38.2% retracement level at the end of the day on Friday. However, we suspect we will likely see more follow-through next week, particularly if the dollar continues to strengthen. Downside risk currently resides at 3250, but a break below that level will suggest a much bigger correction is underway.

Longer-term, given the unrecognized impact of the virus on the economy, we expect a bigger decline down the road. As Doug Kass noted on Thursday:

“Caution is warranted. What we have all learned of the virus is that it is easily transmitted. It is asymptomatic, well established and it is spreading. As I have also noted its spreading has been under reported and, unlike other market headwinds, the liquidity provided by central bankers will have NO impact on the damage inflicted by the virus’ contagion.

Among other issues, global travel will be decimated and this will have unusual ‘knock on’ effects. Tourists, especially Chinese ones, spend lots of money. This will be a GLOBAL problem as China was to be a source of big growth for this sector. Retailers of EVERYTHING are going to miss budgets and economies like Japan and South Korea are going to be devastated by the impact.

In Japan, this will come after a massive (and ill timed) tax increase. Tech will play the role of major (not minor) collateral damage as long held supply chains are damaged/crushed.

Most investors, focused on price action, have little idea what could hit them.”

We are keenly aware of the risk, and while we are not “selling heavily and moving to cash” currently, it doesn’t mean we won’t.

We are paying attention to what the market is saying, and following directions accordingly.

Are you?



The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

  • REGISTER NOW: RIGHT-LANE RETIREMENT WORKSHOP
  • When: February 29th, 9-11 am (Social Security, Medicare, Income planning, Investing & More)
  • Where: Courtyard Houston Katy Mills, 25402 Katy Mills Parkway, Katy, TX, 77494

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


NOT A RIAPro SUBSCRIBER YET? 

This is what our RIAPRO.NET subscribers are reading right now!

  • Sector & Market Analysis
  • Technical Gauges
  • Sector Rotation Analysis
  • Portfolio Positioning
  • Sector & Market Recommendations
  • Client Portfolio Updates
  • Live 401k Plan Manager


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

RIA PRO: Did The Market Just Get Infected?


  • Did The Market Just Get Infected?
  • MacroView: Japan, The Fed, & The Limits Of QE
  • Financial Planning Corner: Part 2: Dave Ramsey Is Wrong About Life Insurance
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Did The Market Just Get Infected?

Just last week, we were asking the opposite question, as traders were believing that the market had immunity to the risks from the “coronavirus.”

This was a point we discussed with our RIAPRO subscribers (Try for 30-days RISK FREE) in Monday’s technical market update.

“As noted last week: ‘With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming.’ But the belief is currently ‘more stimulus’ will offset the ‘virus.’

This is probably a wrong guess.

Extensions to this degree rarely last long without a correction. Maintain exposures, but tighten up stop-losses.”

That correction came hard, and fast on Thursday and Friday.

For the week, the market declined, but it was the “5-Horseman Of The Rally” (Apple, Microsoft, Google, Facebook, Amazon) which led the way lower. This is the first time we have seen a real rotation out of the “momentum chase” into fixed income and was a point we discussed in Thursday’s RIAPRO Intermarket Analysis Report. To wit:

“Stocks and bonds play an interesting ‘risk on/risk off’ relationship over time. As shown above while stocks are extremely outperforming bonds currently, the relationship is now suppressed to levels where a reversion would be expected. This suggests that we will likely see a a correction in equity prices, and a rise in bond prices (yields lower), in the near future.”

Currently, this is just a correction within the ongoing bullish trend, however, there are things occurring that do not rule out the possibility of a larger correction in the short-term.

Carl Swenlin from Decision Point (h/t G. O’Brien) came to a similar conclusion.

“Yesterday (Thursday) SPY penetrated the bottom of a short-term rising wedge, but couldn’t make it stick. Today was a different story, but the support line drawn across the January top impeded excessive downward progress. The VIX didn’t quite reach the bottom Bollinger Band, but it is possible that we will see continued weak price action similar to the short January decline if the VIX breaks through the band. Being so close to the band, the VIX is also oversold, so it is also possible that we’ll see a bounce.”

“The intermediate-term market trend is UP and the condition is SOMEWHAT OVERBOUGHT. The negative divergences spell trouble., and all four indicators are below their signal line and falling.

The market has so resilient that it is hard to think that anything more than a minor pullback is possible. A critical breakdown below the January top hasn’t happened yet, but that could be the first move on Monday. Indicators in the short- and intermediate-term are falling, and negative divergences are abundant, so I think that next week will be negative. That may just be the beginning.”

We agree with that assessment. Remember, it never just starts raining; clouds gather, skies darken, wind speeds pick up, and barometric pressures decline. When you have a consensus of the evidence, you typically carry an umbrella.

Evidence is clearly mounting, and one of the bigger concerns to the market, and particularly to the commodity space, is the surge in the U.S. dollar. This past Monday, we wrote:

“As noted previously, the dollar has rallied back to that all important previous resistance line. IF the dollar can break back above that level, and hold, then commodities, and oil, will likely struggle.”

That is exactly what happened over the last two weeks and the dollar has strengthened that rally as concerns over the ‘coronavirus’ persist. With the dollar testing previous highs, a break above that resistance could result in a sharp move higher for the dollar.

The rising dollar is not bullish for Oil, commodities or international exposures. The ‘sell’ signal has began to reverse. Pay attention.”

This surge in the dollar is also responsible for the sharp drop in bond yields as money is flooding into USD denominated assets due to the coming global impact from the coronavirus.

This is a substantial risk to the markets over the rest of this year which has not been factored into asset prices as of yet.

Furthermore, the main driver behind stock prices since last October has been the flood of liquidity from the Federal Reserve. However, that push of liquidity has quietly gone subsided over the last few weeks.

This was well telegraphed by the Fed previously but was reasserted this past week as the Fed noted it was in no rush to cut rates and would continue reducing “repo operations,” both into, and following, April.

Given the “bull thesis” has been “liquidity trumps all other risks,” with the Fed funds rate at 1.5% currently, and liquidity flows being reduced, “risks” now have a stronger hand. When you combine reduced liquidity with a surging U.S. Dollar, and collapsing yields, investors should reassess their positioning accordingly.

As my friend Victor Adair from Polar Futures Group stated on Friday:

“The EURUSD jumped sharply (after falling steadily YTD) and the spooz took another leg down. Could there have been a European institutional account positioned in US stocks which suddenly decided, like the Jeremy Irons character in the Margin Call movie, that they didn’t “hear the music” anymore, and decide to sell? If they had owned US stocks without hedging their FX risk the temptation to hit the SELL button given the recent huge rallies in both US stocks and the US Dollar would have been huge! I think the S&P 500 can continue lower.”

Positioning Review & Update

We have been concerned about the potential for a correction for the last three weeks. Given that we previously took profits near the market peak in January, there was not a tremendous amount of work we needed to do on the equity side of the ledger.

However, this past Monday we did extend the duration of our bond portfolio a bit, and changed some of the underlying mixes of bonds, to prepare for a correction. With the sharp yield spike over the last couple of days, those positioning changes worked well to reduce volatility.

We are using this correction to rebalance some of our equity risks as well. The bull market is still intact, so it is not time to be bearish in terms of positioning, just yet. However, we are maintaining our hedges for now until we get a better understanding of where the markets are headed next.

Currently, there are several levels of support short-term. The market bounced off initial support at the 38.2% retracement level at the end of the day on Friday. However, we suspect we will likely see more follow-through next week, particularly if the dollar continues to strengthen. Downside risk currently resides at 3250, but a break below that level will suggest a much bigger correction is underway.

Longer-term, given the unrecognized impact of the virus on the economy, we expect a bigger decline down the road. As Doug Kass noted on Thursday:

“Caution is warranted. What we have all learned of the virus is that it is easily transmitted. It is asymptomatic, well established and it is spreading. As I have also noted its spreading has been under reported and, unlike other market headwinds, the liquidity provided by central bankers will have NO impact on the damage inflicted by the virus’ contagion.

Among other issues, global travel will be decimated and this will have unusual ‘knock on’ effects. Tourists, especially Chinese ones, spend lots of money. This will be a GLOBAL problem as China was to be a source of big growth for this sector. Retailers of EVERYTHING are going to miss budgets and economies like Japan and South Korea are going to be devastated by the impact.

In Japan, this will come after a massive (and ill timed) tax increase. Tech will play the role of major (not minor) collateral damage as long held supply chains are damaged/crushed.

Most investors, focused on price action, have little idea what could hit them.”

We are keenly aware of the risk, and while we are not “selling heavily and moving to cash” currently, it doesn’t mean we won’t.

We are paying attention to what the market is saying, and following directions accordingly.

Are you?



The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

  • REGISTER NOW: RIGHT-LANE RETIREMENT WORKSHOP
  • When: February 29th, 9-11 am (Social Security, Medicare, Income planning, Investing & More)
  • Where: Courtyard Houston Katy Mills, 25402 Katy Mills Parkway, Katy, TX, 77494

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Improving – Discretionary (XLY), Real Estate (XLRE), and Utilities (XLU)

As noted previously, we reduced exposure to Utilities, Real Estate, and Discretionary due to their extreme overbought condition. Unfortunately, that overbought extension has not been alleviated enough at this time to add back to our holdings. We started to see a bit of correction in Discretionary this past week, but the plunge in yields pushed Real Estate and Utilities further into orbit. We will see a correction in yield-related positions in the next couple of weeks.

Current Positions: Reduced XLY, XLU, XLRE

Outperforming – Technology (XLK), Communications (XLC)

We previously recommended taking profits in Technology, which has not only been leading the market but has gotten extremely overbought. The correction in the markets last week hit the Technology sector the hardest, but Communications fell also. Hold positions for now, and be patient and let this correction play itself out before adding exposure.

Current Positions: Target weight XLK, Reduced XLC

Weakening – Healthcare (XLV)

We noted previously we had added to our healthcare positioning slightly. No changes are required currently, but the current correction is pulling some of the overbought conditions out of the sector. We will re-evaluate our holdings next week.

Current Position: Target weight (XLV)

Lagging – Industrials (XLI), Financials (XLF), Staples (XLP), Materials (XLB), and Energy (XLE)

On Thursday and Friday, we finally begin to see the early signs of the correction we have been talking about over the last couple of weeks. The correction did little so far to work off the extreme overbought and extended conditions. However, it is a start and we will wait and see what happens from here.

If we get sectors back to oversold, and markets are holding the bullish trendline support, we will recommend adding exposure to these areas. For now, be patient.

Current Position: Reduced weight XLY, XLP, Full weight AMLP, 1/2 weight XLF, XLB and XLI

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Despite the rally in the broader markets, Small- and Mid-caps continue to underperform currently. Both markets sold off on Friday, with Small-cap stocks breaking below support at the 50-dma. Mid-caps look stronger but failed at recent highs establishing a short-term double top. Neither small or mid-caps are oversold currently, so there is more risk to the downside particularly if we begin to see further economic impacts from the corona-virus.

Current Position: KGGIX, SLYV

Emerging, International (EEM) & Total International Markets (EFA)

Emerging and International Markets, look a lot like small-caps above. Both had gotten extremely overbought and needed to correct. That correction broke support and their respective 50-dma. With neither market oversold currently, and the dollar getting stronger, we are likely going to close our of our positions on any bounce next week that fails to move above the 50-dma.

Current Position: EFV, DEM

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. We are currently maintaining our core positions unhedged for now. If we see deterioration in the broader markets, we will begin to add short-positions to hedge our long-term core holdings.

Current Position: RSP, VYM, IVV

Gold (GLD) – Over the last few weeks, we have been discussing that gold has been consolidating near recent highs. This past week, Gold broke out and surged higher as stock markets fell into a correction. Gold is extremely overbought, so be patient for now and move stops up to the recent breakout levels.

Current Position: GDX (Gold Miners), IAU (GOLD)

Bonds (TLT) –

Bonds also broke out to new highs on Friday as the dollar rallied as money rotated into bonds for “safety” as the market weakened. After previously recommending adding to bonds, hold current positions for now. Bonds are extremely overbought now, so be cautious, we added a small portion of TLT to portfolios last week, and added PTIAX to rebalance weighting and extend our current duration.

Current Positions: DBLTX, SHY, IEF, Added TLT & PTIAX

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

Finally, the market cracked last week and gave us a little room to operate. It is too early to become too “negative,” as the market is still convinced the Fed will intervene sooner, or later, with liquidity to offset the risk of the coronavirus. Despite the “sell-off” on Friday, investors don’t want to “miss out” on the liquidity party when it happens, so we will likely see the “buy the dip” crowd show up next week.

Over the last couple of weeks, we have made some minor changes to the portfolio which change very little in terms of the overall makeup. While this rebalancing of risk did not dramatically increase equity exposure, we are very aware of our positioning and risk and will take action accordingly.

We are being deliberately slow in on-boarding client portfolios into our models, and are monitoring risks very closely. We are not in a rush to make any drastic moves in either direction, and prefer to wait for the market to “tell us” what we need to do.

We taken profits, moved up stop-loss levels, and have hedged our risks. We will take action when necessary.

Be assured we are watching your portfolios very closely. However, if you have ANY questions, comments, or concerns, please don’t hesitate to email me.

Portfolio Actions Taken Last Week

  • New clients: Slowing adding exposure as needed.
  • Dynamic Model: Added 1/2 position in VOOG on Friday, as we continue to build out our “core” equity positioning in the portfolio. We still remain hedged with the Short-S&P 500 position to balance risk while trying to build out the overall model.
  • Equity Model: Sold 1/2 of DBLTX and added an equal amount of PTIAX to rebalance our bond exposure in portfolios to further hedge downside risk.
  • ETF Model: Sold 1/2 of DBLTX and added an equal amount of PTIAX to rebalance our bond exposure in portfolios to further hedge downside risk.

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Market Believes It Has Immunity To Risks 02-15-20


  • Market Believes It Has Immunity To Risk
  • MacroView: Debt, Deficits & The Path To MMT
  • Financial Planning Corner: Why Dave Ramsey Is Wrong About Life Insurance
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Market Believes It Has Immunity To Risks

As noted last week, the spread of the coronavirus has had little impact on the markets so far.

“”The market bounced firmly off the 50-dma and rallied back to new highs on Thursday. While Friday saw a bit of retracement, which isn’t surprising given the torrid move early in the week, the ‘virus correction’ was recovered. Importantly, sharp early-week rally kept ‘sell’ signal from triggering,

Chart Updated Through Friday

In review, we previously took some profits out of portfolios as we were expecting between a 3-5% correction to allow for a better entry point to add equity exposure. While the “virus correction” did encompass a correction of 3%, it was too shallow to reverse the rather extreme extension of the market.

The continued rally this past week has fully reversed the corrective process and returned the markets to 3-standard deviations above the 200-dma. Furthermore, all daily, weekly, and monthly conditions have returned to more extreme overbought levels as well.

This was a point we discussed with our RIAPRO subscribers (Try for 30-days RISK FREE) in Thursday’s technical market update. To wit:

  • On a weekly basis, the market backdrop remains bullish with a weekly buy signal still intact.
  • However, that buy signal is extremely extended and has started to reverse with the market extremely overbought on a weekly basis.
  • This is an ideal setup for a bigger correction so some caution is advised.
  • With the market trading above 2-standard deviations, and testing the third, of the intermediate term moving average, some caution is suggested in adding additional exposure. A correction is likely over the next month which will provide a better opportunity. Remain patient for now.

It is here that investors tend to go astray.

In the short-term, the market dynamics are indeed bullish which suggests that investors remain invested at the current time.

However, on a long-term basis, the picture becomes much more concerning.

  • As noted above, this chart is not about short-term trading but the long-term management of risks in portfolios. This is a quarterly chart of the market going back to 1920.
  • Note the market has, only on a few rare occasions, been as overbought as it is currently. The recent advance has pushed the market into 3-standard deviations above the 3-year moving average. In every single case, the reversion was not kind to investors.
  • Secondly, in the bottom panel, the market has never been this overbought and extended in history.
  • As an investor it is important to keep some perspective about where we are in the current cycle, there is every bit of evidence that a major mean reverting event will occur. Timing is always the issue which is why use daily and weekly measures to manage risk.
  • Don’t get lost in the mainstream media. This is a very important chart.

Nothing Out Of Kilter

This past week Ed Yardeni via Yardeni Research, made a good point:

“The markets must figure that the coronavirus outbreak will be contained soon and go into remission, as did SARS, MERS, and Ebola. If that doesn’t happen, then there will be a vaccine that will make us feel better. It won’t be a miracle cure coming from a drug company. Rather, it will be injections of more liquidity into the global financial markets by the major central banks.

On Tuesday, Fed Chair Jerome Powell implied that the Fed is on standby to do just that. In his testimony on monetary policy to Congress, he said, ‘Some of the uncertainties around trade have diminished recently, but risks to the outlook remain. In particular, we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.’”

Not surprisingly, the “ringing of Pavlov’s bell” once again sent investors scurrying to take on risk.

Interestingly, however, was that during Powell’s testimony to the Senate Banking Committee this past week, he said:

“There is nothing about this economy that is out of kilter or imbalanced.”

Okay, I’ll bite.

“Mr. Powell, if there is nothing out of kilter or imbalanced in the economy, then why are you flooding the system with a greater level of ’emergency’ measures than seen during the ‘financial crisis.'”

It is at this point that I feel like Mr. Lorensax from “Ferris Bueller’s Day Off.”

“Anyone…Anyone…”

  • Side Note: The irony of that particular clip, is that Mr. Lorensax is asking his class about the “The Smoot-Hawley Act,” which was intended to raise revenue via tariffs and lift the U.S. out of the “Great Depression.” Just as with Trump’s recent “tariff” and “trade war,” neither worked as intended.

There is clearly something amiss within the financial complex. However, investors have been trained to disregard the “risk” under the assumption the Federal Reserve has everything under control.

Currently, it certainly seems to be the case as markets hover near all-time highs even as earnings, and corporate profit, growth has weakened. If the coronavirus impacts the global supply chain harder than is currently anticipated, which is likely, the deviation between prices and earnings will become tougher to justify.

Scott Minerd, the CIO of Guggenheim Investments, had a salient point:

Yet as a major economic problem looms on the horizon, the cognitive disconnect between current asset prices and reality feels like the market equivalent of “peace for our time.” The average BBB bond yields just 2.9 percent. A recent 10-year BB-rated healthcare bond came to market at 3.5 percent and subsequently was increased in size from $1 billion to $1.7 billion due to excess demand.

For those investors who perceive the disconnect between risk assets which are priced for a rosy outcome and the reality of the looming risks to growth and earnings, any attempt to reduce risk leads to underperformance. It is a mind-numbing exercise for investors who see the cognitive dissonance. The frantic race to accumulate securities has cast price discovery to the side.

I have never in my career seen anything as crazy as what’s going on right now, this will eventually end badly.

Of course, it will.

The only problem, as he notes, is that between now and then, there is a demand for performance regardless of the underlying risk. Or rather, there is a widely adopted belief the markets can never have a decline again as witnessed by an email I received last week:

“Why do you think there will ever be a correction when the central banks are never going to let credit contract. I see no corrections. Ever. When the US enters a recession, the reality is it will be the biggest buy signal yet. There is literally nowhere to go but up in this market.”

The lessons taught by previous bear markets are always forgotten during enduring bull markets which seem without end. The relearning of those lessons are always painful.

The Path Ahead

The path ahead for stocks is much less certain than in late 2018 when we were coming off deeply depressed sentiment levels, and the Fed was rapidly reversing monetary policy from “tightening” to “easing.”

With equities now more than 30% higher than they were then, the Fed mostly on hold in terms of rate cuts, and “repo” operations starting to slow, it certainly seems that expectations for substantially higher market values may be a bit optimistic.

Furthermore, as noted above, earnings expectations declined for the entirety of 2019, as shown in the chart below. However, the impact of the “coronavirus” has not been adopted into these reduced estimates as of yet. These estimates WILL fall, and likely markedly so, which as stated above, is going to make justifying record asset prices more problematic.

Conversely, if by some miracle, the economy does show actual improvement, it could result in yields rising on the long-end of the curve, which would also make stocks less attractive.

This is the problem of overpaying for value. The current environment is so richly priced there is little opportunity for investors to extract additional gains from risk-based investments.

There is one true axiom of the market which is always forgotten.

“Investors buy the most at the top, and the least at the bottom.”

If you feel you must chase the markets currently, then at least do it with a set of guidelines to follow in case things turn against you. We printed these a couple of weeks ago but felt there are worth mentioning again.

  1. Move slowly. There is no rush in adding equity exposure to your portfolio. Use pullbacks to previous support levels to make adjustments.
  2. If you are heavily UNDER-weight equities, DO NOT try and fully adjust your portfolio to your target allocation in one move. This could be disastrous if the market reverses sharply in the short term. Again, move slowly.
  3. Begin by selling laggards and losers. These positions are dragging on performance as the market rises and tends to lead when markets fall. Like “weeds choking a garden,” pull them.
  4. Add to sectors, or positions, that are performing with, or outperforming the broader market.
  5. Move “stop-loss” levels up to current breakout levels for each position. Managing a portfolio without “stop-loss” levels is like driving with your eyes closed.
  6. While the technical trends are intact, risk considerably outweighs the reward. If you are not comfortable with potentially having to sell at a LOSS what you just bought, then wait for a larger correction to add exposure more safely. There is no harm in waiting for the “fat pitch” as the current market setup is not one.
  7. If none of this makes any sense to you – please consider hiring someone to manage your portfolio for you. It will be worth the additional expense over the long term.

While we remain optimistic about the markets currently, we are also taking precautionary steps of tightening up stops, adding non-correlated assets, raising some cash, and looking to hedge risk opportunistically.

Just because it isn’t raining right now, doesn’t mean it won’t. Nobody has ever gotten hurt by keeping an umbrella handy.



The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

  • REGISTER NOW: RIGHT-LANE RETIREMENT WORKSHOP
  • When: February 29th, 9-11 am (Social Security, Medicare, Income planning, Investing & More)
  • Where: Courtyard Houston Katy Mills, 25402 Katy Mills Parkway, Katy, TX, 77494

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


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THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

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Catch Up On What You Missed Last Week


Market Believes It Has Immunity To Risks

As noted last week, the spread of the coronavirus has had little impact on the markets so far.

“”The market bounced firmly off the 50-dma and rallied back to new highs on Thursday. While Friday saw a bit of retracement, which isn’t surprising given the torrid move early in the week, the ‘virus correction’ was recovered. Importantly, sharp early-week rally kept ‘sell’ signal from triggering,

Chart Updated Through Friday

In review, we previously took some profits out of portfolios as we were expecting between a 3-5% correction to allow for a better entry point to add equity exposure. While the “virus correction” did encompass a correction of 3%, it was too shallow to reverse the rather extreme extension of the market.

The continued rally this past week has fully reversed the corrective process and returned the markets to 3-standard deviations above the 200-dma. Furthermore, all daily, weekly, and monthly conditions have returned to more extreme overbought levels as well.

This was a point we discussed with our RIAPRO subscribers (Try for 30-days RISK FREE) in Thursday’s technical market update. To wit:

  • On a weekly basis, the market backdrop remains bullish with a weekly buy signal still intact.
  • However, that buy signal is extremely extended and has started to reverse with the market extremely overbought on a weekly basis.
  • This is an ideal setup for a bigger correction so some caution is advised.
  • With the market trading above 2-standard deviations, and testing the third, of the intermediate term moving average, some caution is suggested in adding additional exposure. A correction is likely over the next month which will provide a better opportunity. Remain patient for now.

It is here that investors tend to go astray.

In the short-term, the market dynamics are indeed bullish which suggests that investors remain invested at the current time.

However, on a long-term basis, the picture becomes much more concerning.

  • As noted above, this chart is not about short-term trading but the long-term management of risks in portfolios. This is a quarterly chart of the market going back to 1920.
  • Note the market has, only on a few rare occasions, been as overbought as it is currently. The recent advance has pushed the market into 3-standard deviations above the 3-year moving average. In every single case, the reversion was not kind to investors.
  • Secondly, in the bottom panel, the market has never been this overbought and extended in history.
  • As an investor it is important to keep some perspective about where we are in the current cycle, there is every bit of evidence that a major mean reverting event will occur. Timing is always the issue which is why use daily and weekly measures to manage risk.
  • Don’t get lost in the mainstream media. This is a very important chart.

Nothing Out Of Kilter

This past week Ed Yardeni via Yardeni Research, made a good point:

“The markets must figure that the coronavirus outbreak will be contained soon and go into remission, as did SARS, MERS, and Ebola. If that doesn’t happen, then there will be a vaccine that will make us feel better. It won’t be a miracle cure coming from a drug company. Rather, it will be injections of more liquidity into the global financial markets by the major central banks.

On Tuesday, Fed Chair Jerome Powell implied that the Fed is on standby to do just that. In his testimony on monetary policy to Congress, he said, ‘Some of the uncertainties around trade have diminished recently, but risks to the outlook remain. In particular, we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.’”

Not surprisingly, the “ringing of Pavlov’s bell” once again sent investors scurrying to take on risk.

Interestingly, however, was that during Powell’s testimony to the Senate Banking Committee this past week, he said:

“There is nothing about this economy that is out of kilter or imbalanced.”

Okay, I’ll bite.

“Mr. Powell, if there is nothing out of kilter or imbalanced in the economy, then why are you flooding the system with a greater level of ’emergency’ measures than seen during the ‘financial crisis.'”

It is at this point that I feel like Mr. Lorensax from “Ferris Bueller’s Day Off.”

“Anyone…Anyone…”

  • Side Note: The irony of that particular clip, is that Mr. Lorensax is asking his class about the “The Smoot-Hawley Act,” which was intended to raise revenue via tariffs and lift the U.S. out of the “Great Depression.” Just as with Trump’s recent “tariff” and “trade war,” neither worked as intended.

There is clearly something amiss within the financial complex. However, investors have been trained to disregard the “risk” under the assumption the Federal Reserve has everything under control.

Currently, it certainly seems to be the case as markets hover near all-time highs even as earnings, and corporate profit, growth has weakened. If the coronavirus impacts the global supply chain harder than is currently anticipated, which is likely, the deviation between prices and earnings will become tougher to justify.

Scott Minerd, the CIO of Guggenheim Investments, had a salient point:

Yet as a major economic problem looms on the horizon, the cognitive disconnect between current asset prices and reality feels like the market equivalent of “peace for our time.” The average BBB bond yields just 2.9 percent. A recent 10-year BB-rated healthcare bond came to market at 3.5 percent and subsequently was increased in size from $1 billion to $1.7 billion due to excess demand.

For those investors who perceive the disconnect between risk assets which are priced for a rosy outcome and the reality of the looming risks to growth and earnings, any attempt to reduce risk leads to underperformance. It is a mind-numbing exercise for investors who see the cognitive dissonance. The frantic race to accumulate securities has cast price discovery to the side.

I have never in my career seen anything as crazy as what’s going on right now, this will eventually end badly.

Of course, it will.

The only problem, as he notes, is that between now and then, there is a demand for performance regardless of the underlying risk. Or rather, there is a widely adopted belief the markets can never have a decline again as witnessed by an email I received last week:

“Why do you think there will ever be a correction when the central banks are never going to let credit contract. I see no corrections. Ever. When the US enters a recession, the reality is it will be the biggest buy signal yet. There is literally nowhere to go but up in this market.”

The lessons taught by previous bear markets are always forgotten during enduring bull markets which seem without end. The relearning of those lessons are always painful.

The Path Ahead

The path ahead for stocks is much less certain than in late 2018 when we were coming off deeply depressed sentiment levels, and the Fed was rapidly reversing monetary policy from “tightening” to “easing.”

With equities now more than 30% higher than they were then, the Fed mostly on hold in terms of rate cuts, and “repo” operations starting to slow, it certainly seems that expectations for substantially higher market values may be a bit optimistic.

Furthermore, as noted above, earnings expectations declined for the entirety of 2019, as shown in the chart below. However, the impact of the “coronavirus” has not been adopted into these reduced estimates as of yet. These estimates WILL fall, and likely markedly so, which as stated above, is going to make justifying record asset prices more problematic.

Conversely, if by some miracle, the economy does show actual improvement, it could result in yields rising on the long-end of the curve, which would also make stocks less attractive.

This is the problem of overpaying for value. The current environment is so richly priced there is little opportunity for investors to extract additional gains from risk-based investments.

There is one true axiom of the market which is always forgotten.

“Investors buy the most at the top, and the least at the bottom.”

If you feel you must chase the markets currently, then at least do it with a set of guidelines to follow in case things turn against you. We printed these a couple of weeks ago but felt there are worth mentioning again.

  1. Move slowly. There is no rush in adding equity exposure to your portfolio. Use pullbacks to previous support levels to make adjustments.
  2. If you are heavily UNDER-weight equities, DO NOT try and fully adjust your portfolio to your target allocation in one move. This could be disastrous if the market reverses sharply in the short term. Again, move slowly.
  3. Begin by selling laggards and losers. These positions are dragging on performance as the market rises and tends to lead when markets fall. Like “weeds choking a garden,” pull them.
  4. Add to sectors, or positions, that are performing with, or outperforming the broader market.
  5. Move “stop-loss” levels up to current breakout levels for each position. Managing a portfolio without “stop-loss” levels is like driving with your eyes closed.
  6. While the technical trends are intact, risk considerably outweighs the reward. If you are not comfortable with potentially having to sell at a LOSS what you just bought, then wait for a larger correction to add exposure more safely. There is no harm in waiting for the “fat pitch” as the current market setup is not one.
  7. If none of this makes any sense to you – please consider hiring someone to manage your portfolio for you. It will be worth the additional expense over the long term.

While we remain optimistic about the markets currently, we are also taking precautionary steps of tightening up stops, adding non-correlated assets, raising some cash, and looking to hedge risk opportunistically.

Just because it isn’t raining right now, doesn’t mean it won’t. Nobody has ever gotten hurt by keeping an umbrella handy.



The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

  • REGISTER NOW: RIGHT-LANE RETIREMENT WORKSHOP
  • When: February 29th, 9-11 am (Social Security, Medicare, Income planning, Investing & More)
  • Where: Courtyard Houston Katy Mills, 25402 Katy Mills Parkway, Katy, TX, 77494

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Improving – Discretionary (XLY) and Utilities (XLU)

As noted previously, we reduced exposure to Utilities and Discretionary due to their extreme overbought condition. Unfortunately, that overbought extension has not been alleviated enough at this time to add back to our holdings. We will likely see a correction in the next couple of weeks to re-evaluate our positioning.

Current Positions: Reduced XLY, XLU

Outperforming – Technology (XLK), Communications (XLC)

We previously recommended taking profits in Technology, which has not only been leading the market but has gotten extremely overbought. The rally in markets last week only further extended those overbought conditions in both Technology and Communications. Hold positions for now, and be patient for a correction to add additional exposure.

Current Positions: Target weight XLK, Reduced XLC

Weakening – Financials (XLF), Healthcare (XLV)

We noted previously added a position in Financials to our portfolios, which we will look to build into over the few weeks. We also had previously added to our healthcare slightly. Both positions ran back to overbought and need more of a correction before considering adding to them.

Current Position: 1/2 Weight (XLF), Target weight (XLV)

Lagging – Industrials (XLI), Real Estate (XLRE), Staples (XLP), Materials (XLB), and Energy (XLE)

With the Fed continuing to pump money into the financial markets, bond yields continue to drop which is supportive for interest rate sectors like Real Estate and Utilities. We previously reduced our holdings to these sectors and we need a correction to work off some of the excesses before adding back to our holdings. Both XLRE and XLU are EXTREMELY extended currently.

Industrials rallied back to new highs without working off the overbought condition. With industrials at 3-standard deviations above the long-term mean, be patient adding additional exposures.

Materials tested and failed previous highs and are testing those highs again. With the sector very overbought there is a risk of a reversal, particularly with the sector very close to registering a “sell signal.”

Energy is deeply oversold and due for a rally. We added to our position of AMLP previously, however, we are maintaining tight stops.

Staples remains in a strong uptrend and has not provided an entry point to add exposure safely.

Current Position: Reduced weight XLY, XLP, XLRE, Full weight AMLP, 1/2 weight XLB and XLI

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Despite the rally in the broader markets, Small- and Mid-caps continue to underperform currently. Both markets rallied last week but have failed to set new highs. Small caps did recover their 50-dma, while mid-caps are currently testing previous highs. Overbought conditions are rather extreme in both.

Current Position: KGGIX, SLYV

Emerging, International (EEM) & Total International Markets (EFA)

Emerging and International Markets, look a lot like small-caps above. Both had gotten extremely overbought and needed to correct. That correction broke supports and the subsequent rally failed to set new highs. Both markets have climbed back above their respective 50-dma, but are testing that support line. We remain long our holdings currently, but are closely evaluating our positioning.

Current Position: EFV, DEM

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. We are currently maintaining our core positions unhedged for now. If we see deterioration in the broader markets, we will begin to add short-positions to hedge our long-term core holdings.

Current Position: RSP, VYM, IVV

Gold (GLD) – Over the last few weeks, gold has been consolidating near recent highs. Gold remains overbought but continues to hold important support. We are at full weight in the positions, however, if this consolidation continues, supports hold, and the overbought condition recedes, we will consider over-weighting our holdings.

Current Position: GDX (Gold Miners), IAU (GOLD)

Bonds (TLT) –

Bonds rallied back towards previous highs on Friday as money rotated into bonds for “safety” as the market weakened. After previously recommending adding to bonds, hold current positions for now and take profits next week to rebalance risks accordingly. Bonds are extremely overbought now, so be cautious, we added a small portion of TLT to portfolios last week to extend our current duration.

Current Positions: DBLTX, SHY, IEF, Added TLT

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

The market rallied this past week on continued expectations that the Fed will intervene sooner, or later, with liquidity to offset the risk of the coronavirus. As such, investors don’t want to “miss out” on the liquidity party when it happens, so they are front-running the event.

This past week, we made a couple of very minor changes to the portfolio which change very little in terms of the overall make up.

Importantly, this rebalancing of risk did not dramatically increase equity exposure. This is because, as noted above, the longer-term technical outlook remains “cautious.”

Yes, we realize we are very late-cycle, we also know that with the Fed, and global Central Banks, still intervening, we must give deference to the “bullish bias.” At the moment, that bias clearly remains, and functioned as we discussed last week.

If you have any questions, please don’t hesitate to email me.

There we no additional portfolio actions this past week.

  • New clients: Slowing adding exposure as needed.
  • Dynamic Model: Added LVS, and a Short-S&P 500 hedge to balance risk while trying to build out the overall model.
  • Equity Model: Sold SLYV to make room to add LVS. Also added TLT to our bond portfolio to lengthen duration a little bit. Given the portfolio is fully allocated to the market positions now have to be shifted to make changes.
  • ETF Model: Add a starting position of TLT to our bond portfolio to lengthen the duration of our current bond mix.

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Market Vaccine For Virus Is More Fed’s “NotQE” 02-08-20


  • Market Vaccine For Virus Is More Fed
  • Trust The Process
  • MacroView: The Next Minsky Moment Is Inevitable
  • Financial Planning Corner: 5-Things You Need To Know About HSA’s
  • Sector & Market Analysis
  • 401k Plan Manager

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Catch Up On What You Missed Last Week


Market Vaccine For Virus Is More Fed 

Last week, I asked the question of whether the “correction was over?” To wit:

“On a very short-term basis, there is a potential for a reflexive bounce. If your ‘investment duration,’ or rather your ‘investment holding period’ is very short, there may be a ‘trading’ opportunity for you.”

Well, that bounce came hard and fast during the first half of the week, as the S&P 500 rebounded off the 50-dma to set new highs on Thursday. 

The Good News

As noted, the market bounced firmly off the 50-dma and rallied back to new highs on Thursday. While Friday saw a bit of retracement, which isn’t surprising given the torrid move early in the week, the “virus correction” was recovered. Importantly, the “buy signal,” in the lower panel, was close to registering a “sell signal.” The sharp early-week rally kept that signal from triggering, which would have confirmed the “sell signal” in the top panel. Historically, when both “sell signals” are triggered, deeper corrections have tended to follow.

The Not-So-Good News

Previously, we discussed that we had taken profits out of portfolios as we were expecting between a 3-5% correction to allow for a better entry point to add equity exposure. While the “virus correction” did encompass a correction of 3%, it was too shallow to reverse the rather extreme extension of the market. The rally this past week has reversed the corrective process, and returned the markets to 3-standard deviations above the 200-dma. Furthermore, all daily, weekly, and monthly conditions have returned to more extreme overbought levels as well.

Of course, the reason for the rally was more liquidity from the Federal Reserve. 

While the economic impact from the virus is likely to be substantial, as discussed previously, traders looked past economic realities. They focused instead on more liquidity being pumped into the markets by both the Fed, and the PBOC (Peoples Bank of China).

“The PBOC decided that instead of unwinding the large liquidity provision, they would double-down on it… and that they did in size. The last four weeks have seen China supply over CNY2 trillion (net!) into its financial system – something we have never seen anything like before…” – Zerohedge

But, as I stated, it wasn’t just the PBOC, but also the Federal Reserve dumping tremendous amounts of liquidity into the markets which only had one place to go….equities.

While the Fed continues to deny current liquidity interventions are indeed “QE,” they have been clearly concerned about the potential of global instability impacting the U.S. In their most recent report to Congress, the “coronavirus” made its appearance as the latest threat to the global economic instability. 

Do NOT dismiss that last sentence lightly. 

Since last October, the Fed has been injecting the financial system with massive quantities of liquidity to fix “short-term funding needs.” Each time they have tried to slow the rates of funding, the market has declined, so they extended the facility. Initially, the facility was for October tax payments. Then it was extended for the “year-end” turn. Then it was extended for April “tax payments.” The “coronavirus” will be the next reason to extend the program into June.

Just in case you missed our previous report on this issue, the importance is that this type of funding has not occurred to such a magnitude outside of a financial crisis.

The question you should be asking is: “exactly what is going on?”

Dollar Rally

Currently, the flood of liquidity has been pulling foreign capital back into U.S. Dollars. While the U.S. dollar had previously started to breakdown heading into year-end, which gave a boost to commodities and oil. Unfortunately, that breakdown has been reversed.

We did this analysis for our RIAPRO Subscribers (Risk-Free Trial For 30-Days) this past week, which warned them of the potential for a continued dollar rally. The importance of this rally is that a stronger U.S. Dollar is not friendly to commodities, international, and emerging market exposure.

While there has been a good bit of excitement over the last couple of weeks of improving economic data points, it will likely be short-lived. Given these data points are both “sentiment surveys” and “lagging” in nature, what they captured was the uptick in commodities seen at the end of 2019 as the dollar weakened on “trade deal” hopes.

What has yet to be captured is the subsequent reversion in the major, economically sensitive, components. While the markets have rallied on news of more liquidity, the impact from the “coronavirus” has only yet started to be felt economically. Even if the virus was cured today, the economic impact will continue to be felt over the rest of this year. 

Importantly, the impact on China will be substantially greater, which will undermine any potential positive to the U.S. from the “trade deal.” That impact will result not only in the form of weaker economic growth in China, but globally as well due to the interlinked supply chains. This is going to manifest itself in weaker earnings and corporate profits, which will continue to make elevated asset prices harder to justify. 

As shown in the long-term chart below, despite the short-term correction, which is barely noticeable, the market remains extremely extended, overbought, and pushing into the top of its long-term trading range. 

Furthermore, the put/call ratio, which warned of the previous correction is once again pushing extreme levels rarely seen from a historical perspective.

The rally this past week serves as a stern reminder that market participants are trained to respond to “Pavlov’s Bell.” 

For the time being, investors have gotten away with overpaying for value, ignoring risk, and chasing yield. Eventually, the party ends, and it always ends in the most brutal of fashions.

This is why it’s important to have a process and adhere to it.

Trust The Process

We have had quite a few emails from readers over the past week asking why we were “buying” into our RIAPRO portfolios this past week(You can register for a 30-day RISK-FREE trial if you want to view our current portfolios.)

The short answer is: 

“Because that is what our process required us to do.” 

To understand the process, we have to go back. 

A few weeks ago, Shawn Langlois at MarketWatch picked up our article discussing why we were selling positions in our portfolio. To wit:

“Specifically, Roberts raised cash by selling off shares of Apple, Microsoft, United Healthcare, Johnson & Johnson, and Micron, and scaling back overweight holdings in various ETF sector plays, such as the Technology Select Sector SPDR, and the Health Care Select Sector.

While at the time, it seemed like a wrong move, a couple of weeks later, the market sold off. The benefit was the extra cash, and reduced exposure, help limit the downside draw to about 1/3rd of the market decline. 

Then, last week, things changed:

“With bond yields plummeting this past week, our bond exposures have gotten extremely stretched. The sell-off in the market, combined with the ‘risk off’ rotation to bonds, sets the market up for a reflexive bounce. The duration and magnitude of that bounce will be critical as to our next steps in positioning.” 

Chart updated through Friday

As noted, the market had gotten oversold on a short-term basis, which brought the risk/reward measures back into better alignment. This is where our process required we add equity exposure back into portfolios. 

  • In the ETF Model, we added Financials (XLF) and increased our stake in HealthCare (XLV) with both of those sectors having gotten oversold and bouncing off their respective 50-dma’s.
  • In the EQUITY Model, we added JP Morgan (JPM) and Pfizer (PFE) while increasing our stakes in Abbvie (ABBV), United Healthcare (UNH), and Alerian MLP (AMLP). 

Importantly, this rebalancing of risk did not dramatically increase our equity exposure. This is because, as noted above, the longer-term technical outlook remains “cautious.”

Yes, we realize we are very late-cycle, we also know that with the Fed, and global Central Banks, still intervening, we must give deference to the “bullish bias.” At the moment, the bullish bias remains, and functioned as we predicted last week.

“The ‘bullish bias’ is not dead as of yet, and investors will be quick to try and ‘write off’ the impact of the ‘virus.’ After a decade of ‘macro-events’ not stopping the bullish charge, the belief the market is ‘bulletproof’ has become so deeply ingrained into investor mentality it won’t be dislodged until it is far too late to matter.”

We have no certainty about when, or what will trigger the next bear market. 

What we do know is that such an event will likely be far more brutal than most realize due to years of excess risk-taking, leverage, and demographics. 

However, this is what our process is designed to handle:

  • The portfolio is managed for risk by adjusting the level of equity exposure relative to market dynamics, return outlooks, and technical deviations from long-term means.
  • The allocation is managed for risk by balancing positions for relative performance to our benchmark.
  • The positions are managed for risk by:
    • Employing trailing stop-losses
    • Regularly rebalancing positions back to target weights (taking profits)
    • Cutting laggards which aren’t performing as expected
    • Monitoring relative performance and participation

Importantly, notice that everything the process covers is the management against the “risk” of loss. 

If we manage against the risk of capital loss, we can safely participate with markets as they rise. When something eventually does goes wrong, the process will systematically close out positions, protecting our investment capital, until that process is complete. Then the process reverses to rebuild exposure when risk/reward dynamics are greatly improved. 

As long as the process is followed, risk can be controlled. Where the majority of investors go wrong, is by not having a process.

“Hoping” markets will continue higher indefinitely, is not a process.

As we concluded last week:

“We won’t know for sure until after the fact. This is why we manage risk in the short-term. Managing risk allows us to navigate the ‘twists and turns’ of the market without careening off the cliff.”



The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

  • REGISTER NOW:  RIGHT-LANE RETIREMENT WORKSHOP
  • When: February 29th 9-11am  (Social Security, Medicare, Income planning, Investing & More)
  • Where: Courtyard Houston Katy Mills, 25402 Katy Mills Parkway, Katy, TX, 77494

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


MISSING THE REST OF THE NEWSLETTER?

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THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”


  • Market Vaccine For Virus Is More Fed
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Catch Up On What You Missed Last Week


Market Vaccine For Virus Is More Fed 

Last week, I asked the question of whether the “correction was over?” To wit:

“On a very short-term basis, there is a potential for a reflexive bounce. If your ‘investment duration,’ or rather your ‘investment holding period’ is very short, there may be a ‘trading’ opportunity for you.”

Well, that bounce came hard and fast during the first half of the week, as the S&P 500 rebounded off the 50-dma to set new highs on Thursday. 

The Good News

As noted, the market bounced firmly off the 50-dma and rallied back to new highs on Thursday. While Friday saw a bit of retracement, which isn’t surprising given the torrid move early in the week, the “virus correction” was recovered. Importantly, the “buy signal,” in the lower panel, was close to registering a “sell signal.” The sharp early-week rally kept that signal from triggering, which would have confirmed the “sell signal” in the top panel. Historically, when both “sell signals” are triggered, deeper corrections have tended to follow.

The Not-So-Good News

Previously, we discussed that we had taken profits out of portfolios as we were expecting between a 3-5% correction to allow for a better entry point to add equity exposure. While the “virus correction” did encompass a correction of 3%, it was too shallow to reverse the rather extreme extension of the market. The rally this past week has reversed the corrective process, and returned the markets to 3-standard deviations above the 200-dma. Furthermore, all daily, weekly, and monthly conditions have returned to more extreme overbought levels as well.

Of course, the reason for the rally was more liquidity from the Federal Reserve. 

While the economic impact from the virus is likely to be substantial, as discussed previously, traders looked past economic realities. They focused instead on more liquidity being pumped into the markets by both the Fed, and the PBOC (Peoples Bank of China).

“The PBOC decided that instead of unwinding the large liquidity provision, they would double-down on it… and that they did in size. The last four weeks have seen China supply over CNY2 trillion (net!) into its financial system – something we have never seen anything like before…” – Zerohedge

But, as I stated, it wasn’t just the PBOC, but also the Federal Reserve dumping tremendous amounts of liquidity into the markets which only had one place to go….equities.

While the Fed continues to deny current liquidity interventions are indeed “QE,” they have been clearly concerned about the potential of global instability impacting the U.S. In their most recent report to Congress, the “coronavirus” made its appearance as the latest threat to the global economic instability. 

Do NOT dismiss that last sentence lightly. 

Since last October, the Fed has been injecting the financial system with massive quantities of liquidity to fix “short-term funding needs.” Each time they have tried to slow the rates of funding, the market has declined, so they extended the facility. Initially, the facility was for October tax payments. Then it was extended for the “year-end” turn. Then it was extended for April “tax payments.” The “coronavirus” will be the next reason to extend the program into June.

Just in case you missed our previous report on this issue, the importance is that this type of funding has not occurred to such a magnitude outside of a financial crisis.

The question you should be asking is: “exactly what is going on?”

Dollar Rally

Currently, the flood of liquidity has been pulling foreign capital back into U.S. Dollars. While the U.S. dollar had previously started to breakdown heading into year-end, which gave a boost to commodities and oil. Unfortunately, that breakdown has been reversed.

We did this analysis for our RIAPRO Subscribers (Risk-Free Trial For 30-Days) this past week, which warned them of the potential for a continued dollar rally. The importance of this rally is that a stronger U.S. Dollar is not friendly to commodities, international, and emerging market exposure.

While there has been a good bit of excitement over the last couple of weeks of improving economic data points, it will likely be short-lived. Given these data points are both “sentiment surveys” and “lagging” in nature, what they captured was the uptick in commodities seen at the end of 2019 as the dollar weakened on “trade deal” hopes.

What has yet to be captured is the subsequent reversion in the major, economically sensitive, components. While the markets have rallied on news of more liquidity, the impact from the “coronavirus” has only yet started to be felt economically. Even if the virus was cured today, the economic impact will continue to be felt over the rest of this year. 

Importantly, the impact on China will be substantially greater, which will undermine any potential positive to the U.S. from the “trade deal.” That impact will result not only in the form of weaker economic growth in China, but globally as well due to the interlinked supply chains. This is going to manifest itself in weaker earnings and corporate profits, which will continue to make elevated asset prices harder to justify. 

As shown in the long-term chart below, despite the short-term correction, which is barely noticeable, the market remains extremely extended, overbought, and pushing into the top of its long-term trading range. 

Furthermore, the put/call ratio, which warned of the previous correction is once again pushing extreme levels rarely seen from a historical perspective.

The rally this past week serves as a stern reminder that market participants are trained to respond to “Pavlov’s Bell.” 

For the time being, investors have gotten away with overpaying for value, ignoring risk, and chasing yield. Eventually, the party ends, and it always ends in the most brutal of fashions.

This is why it’s important to have a process and adhere to it.

Trust The Process

We have had quite a few emails from readers over the past week asking why we were “buying” into our RIAPRO portfolios this past week(You can register for a 30-day RISK-FREE trial if you want to view our current portfolios.)

The short answer is: 

“Because that is what our process required us to do.” 

To understand the process, we have to go back. 

A few weeks ago, Shawn Langlois at MarketWatch picked up our article discussing why we were selling positions in our portfolio. To wit:

“Specifically, Roberts raised cash by selling off shares of Apple, Microsoft, United Healthcare, Johnson & Johnson, and Micron, and scaling back overweight holdings in various ETF sector plays, such as the Technology Select Sector SPDR, and the Health Care Select Sector.

While at the time, it seemed like a wrong move, a couple of weeks later, the market sold off. The benefit was the extra cash, and reduced exposure, help limit the downside draw to about 1/3rd of the market decline. 

Then, last week, things changed:

“With bond yields plummeting this past week, our bond exposures have gotten extremely stretched. The sell-off in the market, combined with the ‘risk off’ rotation to bonds, sets the market up for a reflexive bounce. The duration and magnitude of that bounce will be critical as to our next steps in positioning.” 

Chart updated through Friday

As noted, the market had gotten oversold on a short-term basis, which brought the risk/reward measures back into better alignment. This is where our process required we add equity exposure back into portfolios. 

  • In the ETF Model, we added Financials (XLF) and increased our stake in HealthCare (XLV) with both of those sectors having gotten oversold and bouncing off their respective 50-dma’s.
  • In the EQUITY Model, we added JP Morgan (JPM) and Pfizer (PFE) while increasing our stakes in Abbvie (ABBV), United Healthcare (UNH), and Alerian MLP (AMLP). 

Importantly, this rebalancing of risk did not dramatically increase our equity exposure. This is because, as noted above, the longer-term technical outlook remains “cautious.”

Yes, we realize we are very late-cycle, we also know that with the Fed, and global Central Banks, still intervening, we must give deference to the “bullish bias.” At the moment, the bullish bias remains, and functioned as we predicted last week.

“The ‘bullish bias’ is not dead as of yet, and investors will be quick to try and ‘write off’ the impact of the ‘virus.’ After a decade of ‘macro-events’ not stopping the bullish charge, the belief the market is ‘bulletproof’ has become so deeply ingrained into investor mentality it won’t be dislodged until it is far too late to matter.”

We have no certainty about when, or what will trigger the next bear market. 

What we do know is that such an event will likely be far more brutal than most realize due to years of excess risk-taking, leverage, and demographics. 

However, this is what our process is designed to handle:

  • The portfolio is managed for risk by adjusting the level of equity exposure relative to market dynamics, return outlooks, and technical deviations from long-term means.
  • The allocation is managed for risk by balancing positions for relative performance to our benchmark.
  • The positions are managed for risk by:
    • Employing trailing stop-losses
    • Regularly rebalancing positions back to target weights (taking profits)
    • Cutting laggards which aren’t performing as expected
    • Monitoring relative performance and participation

Importantly, notice that everything the process covers is the management against the “risk” of loss. 

If we manage against the risk of capital loss, we can safely participate with markets as they rise. When something eventually does goes wrong, the process will systematically close out positions, protecting our investment capital, until that process is complete. Then the process reverses to rebuild exposure when risk/reward dynamics are greatly improved. 

As long as the process is followed, risk can be controlled. Where the majority of investors go wrong, is by not having a process.

“Hoping” markets will continue higher indefinitely, is not a process.

As we concluded last week:

“We won’t know for sure until after the fact. This is why we manage risk in the short-term. Managing risk allows us to navigate the ‘twists and turns’ of the market without careening off the cliff.”



The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

  • REGISTER NOW:  RIGHT-LANE RETIREMENT WORKSHOP
  • When: February 29th 9-11am  (Social Security, Medicare, Income planning, Investing & More)
  • Where: Courtyard Houston Katy Mills, 25402 Katy Mills Parkway, Katy, TX, 77494

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite 


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Improving – Discretionary (XLY) and Utilities (XLU)

As noted previously, we reduced exposure to Utilities and Discretionary due to their extreme overbought condition. The brief correction was cut short, and the rally was so quick, it failed to reduce any of the previous overbought, extended, or deviated conditions. We will likely see a correction in the next couple of weeks to re-evaluate our positioning.

Current Positions: Underweight XLY, XLU

Outperforming – Technology (XLK), Healthcare (XLV),  Communications (XLC)

We previously recommended taking profits in Technology and Healthcare, which have not only been leading the market but have gotten extremely overbought. Last week, Healthcare pulled back enough to allow us to reweight the position in portfolios. The rally in markets last week, reversed those conditions so we will remain pat on adding new positions for now.

Current Positions:  Target weight XLK, XLV, Underweight XLC

Weakening – Financials (XLF)

We noted previously that Financials have been running hard on Fed rate cuts and more QE and that the sector was extremely overbought and due for a correction. That correction allowed us to add a position to our portfolios, which we will look to build into over the next couple of weeks. 

Current Position: 1/2 Weight (XLF)

Lagging – Industrials (XLI), Real Estate (XLRE), Staples (XLP), Materials (XLB), and Energy (XLE)

With the Fed and the PBOC liquifying markets last week, everything rallied sharply. However, the technical damage in the lagging sectors still exists, so we are monitoring closely. 

Industrials tested and failed at previous highs and remains on a sell-signal suggesting a retest of the 50-dma is likely. 

Materials tested and failed previous highs and IS testing the 50-dma. It must hold next week, but the sector remains on a sell-signal.

Energy is deeply oversold and due for a rally. We added to our position of AMLP last week. 

Staples remains in a strong uptrend and has not provided an entry point to add exposure safely. 

Real Estate is testing previous highs and is back to overbought. There isn’t a clear opportunity to add to our holdings just yet. Be patient.

Current Position: Reduced weight XLY, XLP, XLRE, Full weight AMLP, 1/2 weight XLB and XLI

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Despite the rally in the broader markets, Small- and Mid-caps continue to underperform currently. Both markets rallied last week and then failed without setting new highs. Unfortunately, small caps broke below the 50-dma, while mid-caps are currently testing that important support. We are close to being stopped out on our positions currently.

Current Position: KGGIX, SLYV

Emerging, International (EEM) & Total International Markets (EFA)

Emerging and International Markets, look just like small and mid-caps above. Both had gotten extremely overbought and needed to correct. That correction broke supports and the subsequent rally failed to set new highs. Emerging markets have now broken the 50-dma again, and International is testing that critical support. If we don’t see improvement next week, we are likely to be stopped out of our holdings. 

Current Position: EFV, DEM

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. We are currently maintaining our core positions unhedged for now. If we see deterioration in the broader markets, we will begin to add short-positions to hedge our long-term core holdings.

Current Position: RSP, VYM, IVV

Gold (GLD) – Over the last few weeks, gold has been consolidating near recent highs. Gold remains overbought, but continues to hold important support. We are at full weight in the positions, however, if this consolidation continues, supports hold, and the overbought condition recedes, we will consider over-weighting our holdings.

Current Position: GDX (Gold Miners), IAU (Gold)

Bonds (TLT) – 

Bonds rallied back towards previous highs on Friday as money rotated into bonds for “safety” as the market weakened. After previously recommending adding to bonds, hold current positions for now and take profits next week to rebalance risks accordingly. Bonds are extremely overbought now.

Current Positions: DBLTX, SHY, IEF

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

Last week, the markets got oversold on a short-term basis to allow us to add some positions to portfolios. 

Please Read TRUST THE PROCESS in the main body of this week’s missive.

As noted, the market had gotten oversold on a short-term basis, which brought the risk/reward measures back into better alignment. This is where our process required we add equity exposure back into portfolios. 

  • In the ETF Model we added Financials (XLF) and increased our stake in HealthCare (XLV) with both of those sectors having gotten oversold and bouncing off their respective 50-dma’s.
  • In the EQUITY Model we added JP Morgan (JPM) and Pfizer (PFE) while increasing our stakes in Abbvie (ABBV), United Healthcare (UNH), and Alerian MLP (AMLP). 

Importantly, this rebalancing of risk did not dramatically increase our equity exposure. This is because, as noted above, the longer-term technical outlook remains “cautious.”

Yes, we realize we are very late-cycle, we also know that with the Fed, and global Central Banks, still intervening, we must give deference to the “bullish bias.” At the moment, that bias clearly remains, and functioned as we predicted last week.

If you have any questions, please don’t hesitate to email me.

There we no additional portfolio actions this past week.

  • New clients: Slowing adding exposure as needed.
  • Dynamic Model: Bought positions in JPM, PRE, AMLP, UNH, ABBV. Reduced market hedge by 1/2.
  • Equity Model: Bought positions in JPM & PFE, added to existing holdings of AMLP, UNH, ABBV.
  • ETF Model: Added 1/2 position XLF, add to existing position XLV.

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Market Correction Goes Viral, Is It Time To Buy? 02-01-20


  • Market Correction Goes Viral
  • Portfolio Position Review
  • MacroView: Fed’s View Of Valuations May Be Misguided
  • Financial Planning Corner: What You May Have In Common With Kobe Bryant
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Market Correction Goes Viral

Over the last few weeks, the message from the newsletter has been repetitive:

“The markets are overbought, overextended, overly complacent. A correction is coming so reduce and rebalance portfolio risks.” 

Despite those issues, the markets continued to push higher leaving readers with the assumption the “warnings” were wrong. 

As noted last week, there have only been a few points over the previous 25-years where investors were so extremely lopsided in their positioning.  We have shown many charts of investors being “all in” to equities over the last three weeks, but here is the latest Fund Manager’s Survey, which shows cash balances at 6-year lows.

The importance of these measures is not meant to be a “timing” signal to buy or sell positions. These measures are more valuable when thought about as an “accelerator” in a car. When markets are rising, investors press down on the accelerator, taking on more equity risk. As long as the road is straight, and visibility is good, it seems there are no consequences for driving at high speeds. However, if the road suddenly turns, or a hazard presents itself, bad outcomes happen very quickly. 

The same is true for the markets. As markets are rising, investors ignore the warning signs, and the flashing yellow lights, under the assumption, there is no risk ahead. This is why we discussed taking profits a couple of weeks ago, which was simply how we “eased our foot off the gas” as signs were warning of a “sharp curve ahead.” 

I apologize for the analogy, but the message is important. The reason that investors do so poorly over time is the inability to manage risk. Risk is never a function of how much money you make when markets are rising; it is a measure of “your ability to survive the crash.” 

This past week, the road took a sharp right as the “Coronavirus” begin to impact overly optimistic views of a global reflation. While media headlines have run rampant with commentary suggesting investors shouldn’t worry about the virus, we wrote on Thursday, this time is different than 2003. To wit:

“Following a nearly 50% decline in asset prices, a mean-reversion in valuations, and an economic recession ending, the impact of the SARS virus was negligible given the bulk of the ‘risk’ was already removed from asset prices and economic growth. Today’s economic environment could not be more opposed.”

With global growth already slow, and the U.S. dragging its feet along at roughly 2% annual growth, there isn’t much room to absorb the impact of an event that potentially curtails consumption. Here was the important point in our recent article:

China itself is a much more crucial player in the global economy than it was at the time of SARS, or severe acute respiratory syndrome, in 2003. It occupies a central place in many supply chains used by other manufacturing countries—including pharmaceuticals, with China home to 13 percent of facilities that make ingredients for U.S. drugs—and is a voracious buyer of raw materials and other commodities, including oil, natural gas, and soybeans. That means that any economic hiccups for China this year—coming on the heels of its worst economic performance in 30 years—will have a bigger impact on the rest of the world than during past crises.

That is particularly true given the epicenter of the outbreak: Wuhan, which is now under effective quarantine, is a riverine and rail transportation hub that is a key node in shipping bulky commodities between China’s coast and its interior.”

Importantly, as percentage of global GDP, China is 4x the size it was in 2003. 

Don’t dismiss the risk of a viral contagion on an already weak global economy, at a time when asset prices are grossly deviated from actual profits, and GAAP earnings.

Is The Correction Over?

Since taking profits out of our portfolios, this leads us to the obvious question of whether or not the “Coronavirus Correction” is over?

From an investment standpoint, this is a fairly tricky question which brings up what we term in our practice as an “equity risk duration match.” 

On a very short-term basis, there is a potential for a reflexive bounce. If your “investment duration,” or rather your “investment holding period” is very short, there may be a “trading” opportunity for you. However, if your “duration” is a longer time-frame, like ours, then the short-term oversold bounce is likely an opportunity to “reduce risk” further into. 

As they say, “a picture is worth a thousand words.” 

We did this analysis for our RIAPRO Subscribers (Risk-Free Trial For 30-Days) this past week, which warned them of the potential for a deeper decline this week. 



Daily – Short-Term

The market finally reversed some of the extreme 3-standard deviation extension (shaded areas) above the 200-dma, which we have discussed over the last couple of weeks. Such extensions, like stretching a rubber band too far, ALWAYS snap back eventually. We just never know what the catalyst will be that sparks the reversion.  

With a “sell signal” clearly triggered (lower panel), it suggests, on a short-term basis, we are likely to see a “tradeable bounce.” However, until the signal reverses, any short-term bounce should probably be “sold into.” 

Make no mistake, there is currently downside risk below the 50-dma to both the 38.2% and 50% Fibonacci retracement levels. From recent peaks, such a correction would entail a 5-8% decline, which is well within the normal range of a market correction within an ongoing bullish trend. 

Weekly – Intermediate-Term

On a weekly basis the picture changes a bit. The bullish “buy” signal is still intact but is threatening a reversal which one more “down week” will likely accomplish. Furthermore, the market is NOT oversold as of yet, suggesting there is indeed downside risk currently, notwithstanding a short-term bounce. The best buying opportunities are when the weekly signal is oversold. 

With the weekly “buy” signals still intact, such suggests the “correction” remains contained at the moment. However, these signals are valid only at the end of the week, so if there is further deterioration next week, there is a risk of a deeper correction developing. Previous corrections from such extended levels have ranged from 10%, to nearly 20%.

Monthly – Intermediate To Long-Term

On a long-term view, the market remains contained at the top of its bullish trend from the 2009 lows. Previous corrections have consistently tested both the mid- and lower bounds of the range. Don’t dismiss the statement above lightly. A test of the lower band of the range would wipe out 100% of the gains from 2019.

The market remains at risk of triggering a monthly sell signal (lower panel,) which has previously resulted in more severe bear markets and corrections going back 25-years. 

Monthly data is very slow to move and is only valid at months end. This data is not useful for trading markets but is useful for risk mitigation and understanding when a “bear market” has genuinely begun. 

Quarterly – Long-Term

As with the monthly data above, quarterly data is also not useful for trading portfolios. However, it provides a much deeper understanding of portfolio risk in the years ahead. 

Currently, the market is extremely overbought (top panel,) and extremely extended (lower panel,) which has not previously been beneficial to investor returns over the following few years.

Importantly, what this data suggests is that betting on a “buy and hold” strategy over the coming decade is likely to leave you fairly disappointed. Risk is elevated and given the extreme long-term deviations on a variety of levels, an eventual “reversion to the mean” will be a more brutal event than what we have seen previously.

Portfolio Positioning

As noted above, after previously reducing exposure “slightly” to equities, we are now starting to actively scan for opportunities for a “risk rotation” in the market.

For quite some time, we have been portfolio weight to overweight in defensive areas of the market like Utilities, Real Estate and Staples as well as Treasury bonds. Those areas are now extremely extended. We will look to take profits out of these sectors and rebalance weights in Technology, Financials, Healthcare, and Communications, which we reduced previously.

This rebalancing of risk will not dramatically increase our equity exposure; as noted above, the longer-term technical outlook remains cautious. We are very late-cycle in the current market, but with the Fed still intervening, we must give deference to the “bullish bias,” which remains at the moment. In other words, it is not time to be “bearish” yet, but “cautious” is likely a better attitude to have.

With bond yields plummeting this past week, our bond exposures have gotten extremely stretched. The sell-off in the market, combined with the “risk off” rotation to bonds, sets the market up for a reflexive bounce. The duration and magnitude of that bounce will be critical as to our next steps in positioning. 

A reflexive bounce that fails at the bottom of the trendline from the October lows (red dashed line) will be fairly negative, and suggest lower lows are coming. With February typically a “weak month” anyway, there is a high likelihood of this event occurring, especially if the virus is not contained soon. 

If the bounce holds the 50-dma, and reclaims the bullish trendline, then a run back towards the previous highs is likely. This is will likely coincide with a containment of the virus, or help from the Fed in terms of “guidance” combined with an extension of “Repo” funding past April. 

Our reduced positioning has helped shelter our portfolios this month, as portfolio drag was about 1/3rd of the overall market. We can now use our stored cash to take advantage of some trading opportunities that have presented themselves.

The “bullish bias” is not dead as of yet, and investors will be quick to try and “write off” the impact of the “virus.” After a decade of “macro-events” not stopping the bullish charge, the belief the market is “bulletproof” has become so deeply ingrained into investor mentality it won’t be dislodged until it is far too late to matter.

Is this “the” event that triggers the next “bear market” and “recession?” 

Maybe. Maybe not.

We won’t know for sure until after the fact. But this is why we manage risk in the short-term, so that we can navigate the “twists and turns” of the market without careening off the cliff.



The Macro View

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

REGISTER NOW for our most popular workshop: THE RIGHT LANE RETIREMENT CLASS

  • The Westin, Austin at the Domain- 11301 Domain Drive, Austin, TX 78758
  • February 8th from 9-11am.

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Richard Rosso, CFP®, CIMA®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


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THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

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Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

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Catch Up On What You Missed Last Week


Market Correction Goes Viral

Over the last few weeks, the message from the newsletter has been repetitive:

“The markets are overbought, overextended, overly complacent. A correction is coming so reduce and rebalance portfolio risks.” 

Despite those issues, the markets continued to push higher leaving readers with the assumption the “warnings” were wrong. 

As noted last week, there have only been a few points over the previous 25-years where investors were so extremely lopsided in their positioning.  We have shown many charts of investors being “all in” to equities over the last three weeks, but here is the latest Fund Manager’s Survey, which shows cash balances at 6-year lows.

The importance of these measures is not meant to be a “timing” signal to buy or sell positions. These measures are more valuable when thought about as an “accelerator” in a car. When markets are rising, investors press down on the accelerator, taking on more equity risk. As long as the road is straight, and visibility is good, it seems there are no consequences for driving at high speeds. However, if the road suddenly turns, or a hazard presents itself, bad outcomes happen very quickly. 

The same is true for the markets. As markets are rising, investors ignore the warning signs, and the flashing yellow lights, under the assumption, there is no risk ahead. This is why we discussed taking profits a couple of weeks ago, which was simply how we “eased our foot off the gas” as signs were warning of a “sharp curve ahead.” 

I apologize for the analogy, but the message is important. The reason that investors do so poorly over time is the inability to manage risk. Risk is never a function of how much money you make when markets are rising; it is a measure of “your ability to survive the crash.” 

This past week, the road took a sharp right as the “Coronavirus” begin to impact overly optimistic views of a global reflation. While media headlines have run rampant with commentary suggesting investors shouldn’t worry about the virus, we wrote on Thursday, this time is different than 2003. To wit:

“Following a nearly 50% decline in asset prices, a mean-reversion in valuations, and an economic recession ending, the impact of the SARS virus was negligible given the bulk of the ‘risk’ was already removed from asset prices and economic growth. Today’s economic environment could not be more opposed.”

With global growth already slow, and the U.S. dragging its feet along at roughly 2% annual growth, there isn’t much room to absorb the impact of an event that potentially curtails consumption. Here was the important point in our recent article:

China itself is a much more crucial player in the global economy than it was at the time of SARS, or severe acute respiratory syndrome, in 2003. It occupies a central place in many supply chains used by other manufacturing countries—including pharmaceuticals, with China home to 13 percent of facilities that make ingredients for U.S. drugs—and is a voracious buyer of raw materials and other commodities, including oil, natural gas, and soybeans. That means that any economic hiccups for China this year—coming on the heels of its worst economic performance in 30 years—will have a bigger impact on the rest of the world than during past crises.

That is particularly true given the epicenter of the outbreak: Wuhan, which is now under effective quarantine, is a riverine and rail transportation hub that is a key node in shipping bulky commodities between China’s coast and its interior.”

Importantly, as percentage of global GDP, China is 4x the size it was in 2003. 

Don’t dismiss the risk of a viral contagion on an already weak global economy, at a time when asset prices are grossly deviated from actual profits, and GAAP earnings.

Is The Correction Over?

Since taking profits out of our portfolios, this leads us to the obvious question of whether or not the “Coronavirus Correction” is over?

From an investment standpoint, this is a fairly tricky question which brings up what we term in our practice as an “equity risk duration match.” 

On a very short-term basis, there is a potential for a reflexive bounce. If your “investment duration,” or rather your “investment holding period” is very short, there may be a “trading” opportunity for you. However, if your “duration” is a longer time-frame, like ours, then the short-term oversold bounce is likely an opportunity to “reduce risk” further into. 

As they say, “a picture is worth a thousand words.” 

We did this analysis for our RIAPRO Subscribers (Risk-Free Trial For 30-Days) this past week, which warned them of the potential for a deeper decline this week. 



Daily – Short-Term

The market finally reversed some of the extreme 3-standard deviation extension (shaded areas) above the 200-dma, which we have discussed over the last couple of weeks. Such extensions, like stretching a rubber band too far, ALWAYS snap back eventually. We just never know what the catalyst will be that sparks the reversion.  

With a “sell signal” clearly triggered (lower panel), it suggests, on a short-term basis, we are likely to see a “tradeable bounce.” However, until the signal reverses, any short-term bounce should probably be “sold into.” 

Make no mistake, there is currently downside risk below the 50-dma to both the 38.2% and 50% Fibonacci retracement levels. From recent peaks, such a correction would entail a 5-8% decline, which is well within the normal range of a market correction within an ongoing bullish trend. 

Weekly – Intermediate-Term

On a weekly basis the picture changes a bit. The bullish “buy” signal is still intact but is threatening a reversal which one more “down week” will likely accomplish. Furthermore, the market is NOT oversold as of yet, suggesting there is indeed downside risk currently, notwithstanding a short-term bounce. The best buying opportunities are when the weekly signal is oversold. 

With the weekly “buy” signals still intact, such suggests the “correction” remains contained at the moment. However, these signals are valid only at the end of the week, so if there is further deterioration next week, there is a risk of a deeper correction developing. Previous corrections from such extended levels have ranged from 10%, to nearly 20%.

Monthly – Intermediate To Long-Term

On a long-term view, the market remains contained at the top of its bullish trend from the 2009 lows. Previous corrections have consistently tested both the mid- and lower bounds of the range. Don’t dismiss the statement above lightly. A test of the lower band of the range would wipe out 100% of the gains from 2019.

The market remains at risk of triggering a monthly sell signal (lower panel,) which has previously resulted in more severe bear markets and corrections going back 25-years. 

Monthly data is very slow to move and is only valid at months end. This data is not useful for trading markets but is useful for risk mitigation and understanding when a “bear market” has genuinely begun. 

Quarterly – Long-Term

As with the monthly data above, quarterly data is also not useful for trading portfolios. However, it provides a much deeper understanding of portfolio risk in the years ahead. 

Currently, the market is extremely overbought (top panel,) and extremely extended (lower panel,) which has not previously been beneficial to investor returns over the following few years.

Importantly, what this data suggests is that betting on a “buy and hold” strategy over the coming decade is likely to leave you fairly disappointed. Risk is elevated and given the extreme long-term deviations on a variety of levels, an eventual “reversion to the mean” will be a more brutal event than what we have seen previously.

Portfolio Positioning

As noted above, after previously reducing exposure “slightly” to equities, we are now starting to actively scan for opportunities for a “risk rotation” in the market.

For quite some time, we have been portfolio weight to overweight in defensive areas of the market like Utilities, Real Estate and Staples as well as Treasury bonds. Those areas are now extremely extended. We will look to take profits out of these sectors and rebalance weights in Technology, Financials, Healthcare, and Communications, which we reduced previously.

This rebalancing of risk will not dramatically increase our equity exposure; as noted above, the longer-term technical outlook remains cautious. We are very late-cycle in the current market, but with the Fed still intervening, we must give deference to the “bullish bias,” which remains at the moment. In other words, it is not time to be “bearish” yet, but “cautious” is likely a better attitude to have.

With bond yields plummeting this past week, our bond exposures have gotten extremely stretched. The sell-off in the market, combined with the “risk off” rotation to bonds, sets the market up for a reflexive bounce. The duration and magnitude of that bounce will be critical as to our next steps in positioning. 

A reflexive bounce that fails at the bottom of the trendline from the October lows (red dashed line) will be fairly negative, and suggest lower lows are coming. With February typically a “weak month” anyway, there is a high likelihood of this event occurring, especially if the virus is not contained soon. 

If the bounce holds the 50-dma, and reclaims the bullish trendline, then a run back towards the previous highs is likely. This is will likely coincide with a containment of the virus, or help from the Fed in terms of “guidance” combined with an extension of “Repo” funding past April. 

Our reduced positioning has helped shelter our portfolios this month, as portfolio drag was about 1/3rd of the overall market. We can now use our stored cash to take advantage of some trading opportunities that have presented themselves.

The “bullish bias” is not dead as of yet, and investors will be quick to try and “write off” the impact of the “virus.” After a decade of “macro-events” not stopping the bullish charge, the belief the market is “bulletproof” has become so deeply ingrained into investor mentality it won’t be dislodged until it is far too late to matter.

Is this “the” event that triggers the next “bear market” and “recession?” 

Maybe. Maybe not.

We won’t know for sure until after the fact. But this is why we manage risk in the short-term, so that we can navigate the “twists and turns” of the market without careening off the cliff.



The Macro View

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

REGISTER NOW for our most popular workshop: THE RIGHT LANE RETIREMENT CLASS

  • The Westin, Austin at the Domain- 11301 Domain Drive, Austin, TX 78758
  • February 8th from 9-11am.

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Richard Rosso, CFP®, CIMA®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite 


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Improving – Communications (XLC)

As recommended three weeks ago, we reduced our weighting in XLC slightly to take in some profits. That action worked out well with the rout to the sector on Friday. With the sector short-term oversold and sitting on the 50-dma, we will look to reweight our position in the portfolio accordingly. 

Current Positions: Underweight XLC

Outperforming – Technology (XLK), Healthcare (XLV)

We previously recommended taking profits in Technology and Healthcare, which have not only been leading the market but have gotten extremely overbought. On Friday, both sectors we swept up in the “Coronavirus” sell off and are now getting to levels where we are looking to re-weight our holdings accordingly. Healthcare is back to oversold, so we are looking to add to our holdings opportunistically.

Current Positions:  Reduced from overweight to target weight XLK, XLV

Weakening – Financials (XLF)

We noted previously that Financials have been running hard on Fed rate cuts and more QE and that the sector was extremely overbought and due for a correction. That correction/consolidation started two weeks and continued this week. We recommended taking profits previously, but now the sector is  back to oversold and we are looking at a potential entry for adding holdings. 

Current Position: No Position

Lagging – Industrials (XLI), Real Estate (XLRE), Staples (XLP), Discretionary (XLY), Materials (XLB), Energy (XLE), and Utilities (XLU)

Note: LAGGING Sectors are all showing signs of relative improvement to the S&P 500 suggesting a rotation from LEADING to LAGGING may be underway.

Industrials, sold on with the potential global impact from the “Coronavirus,” and has registered a sell signal. We have been running a 1/2 weight position in portfolios but may have a setup to add to our holdings if the sector stabilizes on support. We are going to wait for this correction to play out before adding to our current position.

Energy has been pummeled over the last couple of weeks and we are close to being stopped out on our two small holdings.  Economic weakness seems to be gaining traction, and we may have to step aside and wait out the sector for a while longer. 

Staples continues to consolidate and hold above its 50-dma. Since taking profits previously, we are just maintaining our stop loss on the sector currently. The sector remains very overbought and there isn’t a good entry point available just yet. We are likely going to take some additional profits next week. 

Discretionary, we reduced our position slightly to take in profits. The sector held up better on Friday due to AMZN but outside of that the sector was very weak. The sector has been holding support at the 50-dma and with the overbought condition now reversed we may be able to add back to our position.

XLRE has been rallying as of late and relative strength is improving. With rates falling, REIT’s remain a solid defensive sector. With bonds extremely overbought short-term, we are going to take profits out of the sector for now and rotate to an offensive position for a potential rate reversal short-term. 

Current Position: Target weight XLY, XLP, XLRE, 1/2 weight AMLP, XLB and XLI

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Small- and Mid-caps broke down this past week on “virus” concerns and the impact to the economy. Both markets are now extremely oversold, so we are looking for the markets to stabilize to see if there is an entry opportunity to add to our holdings. As I discussed last week, the extreme overbought suggested a pullback was likely. That occurred this week. With the 50-dma failed to hold as support which puts our position at risk currently. 

Current Position: KGGIX, SLYV

Emerging, International (EEM) & Total International Markets (EFA)

Emerging and International Markets, like small and mid-caps above, had gotten extremely overbought and needed to correct. The “coronavirus” quickly took the “wind out of the sales” of international exposure with supports unilaterally taken out this past week. My suspicion is that any good news on the “virus” will lead to a sharp reflexive rally in these markets at which point we will likely close them out entirely. 

Current Position: EFV, DEM

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. However, as we have noted over the past couple of months, the S&P was extremely extended and a pullback was likely. With that correction underway, we are watching the markets closely to see if supports and bullish trends hold. 

Current Position: RSP, VYM, IVV

Gold (GLD) – As noted three weeks ago, Gold was holding support at the $140 level and registered a buy signal. GDX has also held support and turned higher with a triggered buy signal. Over the last few weeks, gold has broken out to highs and rallied further this past week and global fears swelled. That is a prime backdrop for gold to do well. We previously took our holdings back to full-weights after taking profits earlier this year. 

Current Position: GDX (Gold Miners), IAU (Gold)

Bonds (TLT) – 

Bonds rallied back towards previous highs on Friday as money rotated into bonds for “safety” as the market weakened. As noted previously: “There is a consolidation with rising bottoms occurring currently, which suggests we may see further weakness in the market with a “risk off” rotation into bonds.” That rotation occurred on Friday.

After previously recommending adding to bonds, hold current positions for now and take profits next week to rebalance risks accordingly. Bonds are extremely overbought now.

Current Positions: DBLTX, SHY, IEF

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

In case you haven’t taken the opportunity to watch the Market Outlook presentation with Michael Lebowitz and me, here is the link. CLICK HERE TO WATCH.  Much of what is happening currently was discussed in that video, particularly in terms of our expectations for a pick up in volatility.

There was no change to portfolios last week as the outbreak of the “Coronavirus” was the catalyst that triggered the “overbought, extended and bullish” levels to reverse. On a very short-term basis those extremes have been reduced but not eliminated. However, there is an opportunity for us to rebalance portfolios accordingly. This strategy is directly from what we wrote to you last Friday:

“The market did correct on Friday, which will either be a ‘one-day blip,’ or something that may mature into a bigger correction we can add money to. We just need some of the overbought condition to be removed to add money more reasonably into portfolios on a risk/reward basis.”

After previously taking actions to slightly reduce portfolio risk, and raise cash, we have the luxury to wait a bit for a better entry point. 

Last week, we addressed the issue of the process of onboarding new accounts. As noted last week:

“When a new client portfolio arrives, Mike and I have two choices: 1) Sell everything and buy everything in our model, OR 2) sell some, buy what is reasonable, and then be patient to build out the rest of the portfolio. 

The problem with option 2) is that if the market goes into a melt-up phase, as we saw starting in October, the opportunity to safely add money to portfolios is not available. In hindsight, yes, we should have bought all of our overbought positions, which then went to extremely overbought. However, this is not a prudent, or sophisticated manner, in which to manage portfolio risk.”

The reason we do it this way is to avoid buying into risk. With the correction in process, we can now look to add exposure on a more reasonable “risk/reward” basis. It takes longer to get portfolios into models this way, but over the long-term it tends to provide a better framework with which to build upon. 

If you have any questions, please don’t hesitate to email me.

There we no additional portfolio actions this past week.

  • New clients: See note above.
  • Dynamic Model: No actions required
  • Equity Model: No actions required
  • ETF Model: No actions required

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Market Advance Stalls As Liquidity Begins To Slow 01-25-20


  • Market Advance Stalls
  • Portfolio Position Review
  • MacroView: Elites View World Through “Market Colored” Glasses
  • Financial Planning Corner: 2-Things Advisors Shouldn’t Do
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Market Advance Stalls

As noted last week, there have only been a few points over the previous 25-years where the market has been so overbought, extended, and bullishly optimistic. To wit:

“This is particularly the case given how extreme positioning by both institutions and individual investors has become. With investor cash and bearish positions, at extreme lows, with prices extremely extended, a reversion to the mean is likely and could lean toward to the 10% range.”

Importantly, this was the repeated message over the last few weeks as the Federal Reserve’s “repo” operations continue to fuel the market’s non-stop advance. As Howard Marks once quipped:

“Being right, but early, is the same as being wrong.” 

Clearly, we were early in reducing some of our long-equity exposure in portfolios two weeks ago, but we tend to lean toward the adage; “you never go broke taking profits.” We remain comfortable with our positioning, given the imbalance of risk and reward currently.

Friday, the market had its first real sell-off since early December. As shown in the chart below, the only other times were in early October before the Fed launched its current “Not QE” program. To put this into some context, since 1970, the market has averaged two 1% declines per month or about every 9-trading days. Since October 2nd, 2018, there have been ZERO days consisting of a 1% decline. Assuming historical averages apply, there should have been nine such events of a 1% decline, or more, by now.

While the media was quick to blame the “coronavirus” in China as the cause for concern, the reality is the markets just needed a reason to sell. As shown in the chart below, the market is so extremely extended, the sell-off barely failed to register. 

There are two critical points to take away from the chart above:

  1. Notice both the overbought/sold indicator (top) and price momentum (bottom) are pegged at market extremes. The previous peak in both indicators was in January 2018.
  2. More importantly, from the 2016 low to the “blow-off” January 2018 high, the market had a 50% Fibonacci retracement. A similar correction from the December 2018 lows to the recent high would correspond with the January 2018 highs.

In other words, a somewhat typical 15% correction from such an extended, overbought, and bullish position would wipe out 100% of the 2019 gains. 

Don’t Fight The Fed

I know, I know. 

Such a correction can’t happen because the Fed is expanding its balance sheet. That is true, except the balance sheet expansion is beginning to slow. As recently noted by BMO (courtesy of Zerohedge):

“BMO expects the monthly sizes of $60 billion, or $30 billion post assumed taper, would be composed of both bills and short coupons, ‘helping to reduce expected pressure in the bill market.'”

BMO is correct in its analysis; the Fed will convert its short-term bill purchases into longer-term notes to maintain the balance sheet at a higher level. However, maintaining the size of the balance sheet, and expanding it are two entirely different things. Moreover, the market has already been incorporating this reduction in liquidity in their positioning as noted by sharply falling bond yields.

As we discuss weekly with our RIAPRO subscribers (30-day Risk-Free Trial), the 10-year Treasury broke out of its downtrend last week and was signaling a “risk-off” market event. Last Monday we wrote:

Bond prices rallied last week, again, and are testing downtrend resistance. For now bonds remain in a bearish channel, suggesting higher yields (lower prices) are still likely short-term. I suspect we are going to get some economic turmoil sooner, rather than later, which will lead to a correction in the equity markets and an uptick in bond prices.”



As noted above, with stocks extremely extended, all participants needed was an excuse to “sell.” With a “risk-off” event materializing, the rotation from “risk” to “safety” was completed. The sharp push higher in the stock/bond ratio also suggested a correction was forthcoming.

If we are correct, the Fed will begin to taper their purchases and move to stabilize its balance sheet, which will leave the market “starved for liquidity.” If economic and earnings growth remains weak, such will lead to concerns over current valuations, making that 10-15% correction more likely. 

While we certainly have no intention of “Fighting the Fed,” do not dismiss changes to the balance sheet given its close correlation to the rise in equity prices as discussed last week. (Note the decline in the balance sheet which foretold of this week’s sell-off)

On Oct. 11, the central bank announced it would begin purchasing $60 billion of Treasury bills a month to keep control over short-term rates. The magnitude of the purchases resembles the quantitative easing program the Fed conducted during and after the financial crisis.”

“The increase in the Fed’s balance sheet has been in near lockstep with the stock market’s climb. The balance sheet has expanded 10% since October, while the S&P 500 shot up 12%, including notching its best fourth quarter since 2013.” – CNBC

Given the extreme extension of the markets currently, it is quite likely we will see some more corrective action over the next week.

In other words, it may not be the time to “buy the dip,” just yet. 

Economic Warnings

There is currently much hope that the economy is about to emerge from its sluggish growth over the past couple of quarters to support lofty earnings expectations and, potentially, a rise in corporate profitability. As noted previously, the last time the S&P 500 was this deviated from a period of “flat” corporate profit growth was from 1995-1999.

There are a few indicators which, by their very nature, should be signaling a surge in economic activity if there was indeed going to be one. Copper, energy prices, commodities in general, and the Baltic Dry index, should all be rising if economic activity is indeed beginning to recover. 

Not surprisingly, as the “trade deal” was agreed to, we DID see a pickup in commodity prices, which was reflected in the stronger economic reports as of late. However, while the media is crowing that “reflation is on the horizon,” the commodity complex is suggesting that whatever bump there was from the “trade deal,” is now over.

If economic data doesn’t significantly improve, the risk to further corporate profit weakness is of concern. It also puts extremely optimistic projections for S&P earnings through 2020 and 2021 at risk. (Estimates for 2020 have already collapsed, and 2021 is lower than initial 2020 estimates.)

Pay attention to the amount of risk in your portfolio. It will matter more than you think and always at the worst possible time.

Portfolio Positioning

After previously reducing exposure “slightly” to equities, we did not make any further changes to portfolios over the last few days. Given we have shortened our duration in our bond holdings and raised cash levels to roughly 10% of the portfolio, we can afford at the moment to allow our existing long positions to ride the market higher. 

This positioning paid off well on Friday, as portfolio drag was about 1/3rd of the market overall. Rate-sensitive holdings (bonds/reits) performed as rates fell, and defensive positions held their ground. 

As we move into next week, the market is still going to be “betting on the Fed” until ultimately “beaten into submission,” so we will use rallies to rebalance equity risk as needed, but also add to our fixed income exposure. 

With respect to bonds, make sure you are focusing on “credit quality,” rather than “chasing yield.” As shown in the chart below, and as discussed this past week, when the recession hits, you want to be in Treasuries, and literally nothing else. 

While that is hard to believe, just remember its happened twice before.



The Macro View

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

REGISTER NOW for our most popular workshop: THE RIGHT LANE RETIREMENT CLASS

  • The Westin, Austin at the Domain- 11301 Domain Drive, Austin, TX 78758
  • February 8th from 9-11am.

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Richard Rosso, CFP®, CIMA®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


MISSING THE REST OF THE NEWSLETTER?

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THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

RIA PRO: Market Advance Stalls As Liquidity Begins To Slow


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Catch Up On What You Missed Last Week


Market Advance Stalls

As noted last week, there have only been a few points over the previous 25-years where the market has been so overbought, extended, and bullishly optimistic. To wit:

“This is particularly the case given how extreme positioning by both institutions and individual investors has become. With investor cash and bearish positions, at extreme lows, with prices extremely extended, a reversion to the mean is likely and could lean toward to the 10% range.”

Importantly, this was the repeated message over the last few weeks as the Federal Reserve’s “repo” operations continue to fuel the market’s non-stop advance. As Howard Marks once quipped:

“Being right, but early, is the same as being wrong.” 

Clearly, we were early in reducing some of our long-equity exposure in portfolios two weeks ago, but we tend to lean toward the adage; “you never go broke taking profits.” We remain comfortable with our positioning, given the imbalance of risk and reward currently.

Friday, the market had its first real sell-off since early December. As shown in the chart below, the only other times were in early October before the Fed launched its current “Not QE” program. To put this into some context, since 1970, the market has averaged two 1% declines per month or about every 9-trading days. Since October 2nd, 2018, there have been ZERO days consisting of a 1% decline. Assuming historical averages apply, there should have been nine such events of a 1% decline, or more, by now.

While the media was quick to blame the “coronavirus” in China as the cause for concern, the reality is the markets just needed a reason to sell. As shown in the chart below, the market is so extremely extended, the sell-off barely failed to register. 

There are two critical points to take away from the chart above:

  1. Notice both the overbought/sold indicator (top) and price momentum (bottom) are pegged at market extremes. The previous peak in both indicators was in January 2018.
  2. More importantly, from the 2016 low to the “blow-off” January 2018 high, the market had a 50% Fibonacci retracement. A similar correction from the December 2018 lows to the recent high would correspond with the January 2018 highs.

In other words, a somewhat typical 15% correction from such an extended, overbought, and bullish position would wipe out 100% of the 2019 gains. 

Don’t Fight The Fed

I know, I know. 

Such a correction can’t happen because the Fed is expanding its balance sheet. That is true, except the balance sheet expansion is beginning to slow. As recently noted by BMO (courtesy of Zerohedge):

“BMO expects the monthly sizes of $60 billion, or $30 billion post assumed taper, would be composed of both bills and short coupons, ‘helping to reduce expected pressure in the bill market.'”

BMO is correct in its analysis; the Fed will convert its short-term bill purchases into longer-term notes to maintain the balance sheet at a higher level. However, maintaining the size of the balance sheet, and expanding it are two entirely different things. Moreover, the market has already been incorporating this reduction in liquidity in their positioning as noted by sharply falling bond yields.

As we discuss weekly with our RIAPRO subscribers (30-day Risk-Free Trial), the 10-year Treasury broke out of its downtrend last week and was signaling a “risk-off” market event. Last Monday we wrote:

Bond prices rallied last week, again, and are testing downtrend resistance. For now bonds remain in a bearish channel, suggesting higher yields (lower prices) are still likely short-term. I suspect we are going to get some economic turmoil sooner, rather than later, which will lead to a correction in the equity markets and an uptick in bond prices.”



As noted above, with stocks extremely extended, all participants needed was an excuse to “sell.” With a “risk-off” event materializing, the rotation from “risk” to “safety” was completed. The sharp push higher in the stock/bond ratio also suggested a correction was forthcoming.

If we are correct, the Fed will begin to taper their purchases and move to stabilize its balance sheet, which will leave the market “starved for liquidity.” If economic and earnings growth remains weak, such will lead to concerns over current valuations, making that 10-15% correction more likely. 

While we certainly have no intention of “Fighting the Fed,” do not dismiss changes to the balance sheet given its close correlation to the rise in equity prices as discussed last week. (Note the decline in the balance sheet which foretold of this week’s sell-off)

On Oct. 11, the central bank announced it would begin purchasing $60 billion of Treasury bills a month to keep control over short-term rates. The magnitude of the purchases resembles the quantitative easing program the Fed conducted during and after the financial crisis.”

“The increase in the Fed’s balance sheet has been in near lockstep with the stock market’s climb. The balance sheet has expanded 10% since October, while the S&P 500 shot up 12%, including notching its best fourth quarter since 2013.” – CNBC

Given the extreme extension of the markets currently, it is quite likely we will see some more corrective action over the next week.

In other words, it may not be the time to “buy the dip,” just yet. 

Economic Warnings

There is currently much hope that the economy is about to emerge from its sluggish growth over the past couple of quarters to support lofty earnings expectations and, potentially, a rise in corporate profitability. As noted previously, the last time the S&P 500 was this deviated from a period of “flat” corporate profit growth was from 1995-1999.

There are a few indicators which, by their very nature, should be signaling a surge in economic activity if there was indeed going to be one. Copper, energy prices, commodities in general, and the Baltic Dry index, should all be rising if economic activity is indeed beginning to recover. 

Not surprisingly, as the “trade deal” was agreed to, we DID see a pickup in commodity prices, which was reflected in the stronger economic reports as of late. However, while the media is crowing that “reflation is on the horizon,” the commodity complex is suggesting that whatever bump there was from the “trade deal,” is now over.

If economic data doesn’t significantly improve, the risk to further corporate profit weakness is of concern. It also puts extremely optimistic projections for S&P earnings through 2020 and 2021 at risk. (Estimates for 2020 have already collapsed, and 2021 is lower than initial 2020 estimates.)

Pay attention to the amount of risk in your portfolio. It will matter more than you think and always at the worst possible time.

Portfolio Positioning

After previously reducing exposure “slightly” to equities, we did not make any further changes to portfolios over the last few days. Given we have shortened our duration in our bond holdings and raised cash levels to roughly 10% of the portfolio, we can afford at the moment to allow our existing long positions to ride the market higher. 

This positioning paid off well on Friday, as portfolio drag was about 1/3rd of the market overall. Rate-sensitive holdings (bonds/reits) performed as rates fell, and defensive positions held their ground. 

As we move into next week, the market is still going to be “betting on the Fed” until ultimately “beaten into submission,” so we will use rallies to rebalance equity risk as needed, but also add to our fixed income exposure. 

With respect to bonds, make sure you are focusing on “credit quality,” rather than “chasing yield.” As shown in the chart below, and as discussed this past week, when the recession hits, you want to be in Treasuries, and literally nothing else. 

While that is hard to believe, just remember its happened twice before.



The Macro View

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

REGISTER NOW for our most popular workshop: THE RIGHT LANE RETIREMENT CLASS

  • The Westin, Austin at the Domain- 11301 Domain Drive, Austin, TX 78758
  • February 8th from 9-11am.

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Richard Rosso, CFP®, CIMA®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite 


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Improving – Energy (XLE), Communications (XLC)

The improvement in Energy stalled again this week, as oil prices continued to fall suggesting that economic weakness may be gaining traction. With oil prices failing the 200-dma, as expected, we saw further deterioration across the energy complex. Remain underweight for now.

As recommended two weeks ago, we reduced our weighting in XLC slightly to take in some profits. That action worked out well with the rout to the sector on Friday.

Current Positions: 1/2 weight AMLP, Underweight XLC

Outperforming – Technology (XLK), Healthcare (XLV)

We previously recommended taking profits in Technology and Healthcare, which have not only been leading the market but have gotten extremely overbought. On Friday, both sectors started to correct, and Healthcare is heading back to oversold, so we may get another opportunity to add back to our holdings.

Current Positions:  Reduced from overweight to target weight XLK, XLV

Weakening – Financials (XLF)

We noted previously that Financials have been running hard on Fed rate cuts and more QE and that the sector was extremely overbought and due for a correction. That correction/consolidation started two weeks and continued this week. We recommended taking profits previously, but now the sector is getting back to oversold and is setting up for a potential entry point. The 50-dma needs to hold as support as a short-term sell signal has been registered.

Current Position: No Position

Lagging – Industrials (XLI), Real Estate (XLRE), Staples (XLP), Discretionary (XLY), Materials (XLB), and Utilities (XLU)

Note: LAGGING Sectors are all showing signs of relative improvement to the S&P 500 suggesting a rotation from LEADING to LAGGING may be underway.

Industrials, have been improving performance on a relative basis to the S&P 500 this past week and held up during Friday’s sell off. The sector is working off its overbought condition but is close to triggering a short-term sell signal. We are going to wait for this correction to play out before adding to our current position.

Staples continues to consolidate and hold above its 50-dma. Since taking profits previously, we are just maintaining our stop loss on the sector currently. The sector remains very overbought and there isn’t a good entry point available just yet.

Discretionary, after finally breaking out to new highs, has gotten very extended in the short-term. We reduced our position slightly to take in profits. That was a good move as the sector corrected sharply on Friday. We remain optimistic on the sector for now, but need the overbought condition to be corrected with violating our stop-loss. 

XLRE has been rallying as of late and relative strength is improving. With rates falling, REIT’s remain a solid defensive sector. We will look to add to our holdings if we get a bit of risk rotation next week to give us a bit of a pullback in Real Estate. 

Current Position: Target weight XLY, XLP, XLRE, 1/2 weight XLB and XLI

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Small- and Mid-caps broke out to new highs last week, but as I discussed, the extreme overbought suggested a pullback was likely. That occurred this week. With the 50-dma not too far away it is critical the market holds and doesn’t violate out stops. We are holding that position for now, but are tightening up our stops.

Current Position: KGGIX, SLYV

Emerging, International (EEM) & Total International Markets (EFA)

Emerging and International Markets, like small and mid-caps above, had gotten extremely overbought and needed to correct. With support close by, it will be important that international stocks work off the overbought condition without violating our stop levels. 

Current Position: EFV, DEM

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. However, with the S&P extremely extended a pullback was likely. Currently, there is nothing to worry about, however, we are watching the market closely. 

Current Position: RSP, VYM, IVV

Gold (GLD) – As noted two weeks ago, Gold was holding support at the $140 level and registered a buy signal. GDX has also held support and turned higher with a triggered buy signal. Over the last two weeks, gold has broken out to highs, but stalled at those levels. We previously took our holdings back to full-weights after taking profits earlier this year. However, we are tightening up our stop levels.

Current Position: GDX (Gold Miners), IAU (Gold)

Bonds (TLT) – 

Bonds rallied back above the 50-dma on Friday as money rotated into bonds for “safety” as the market weakened on Friday. As noted last week: “There is a consolidation with rising bottoms occurring currently, which suggests we may see further weakness in the market with a “risk off” rotation into bonds.” That rotation occurred on Friday.

After previously recommending adding to bonds, hold current positions for now. 

Current Positions: DBLTX, SHY, IEF

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

In case you haven’t taken the opportunity to watch the Market Outlook presentation with Michael Lebowitz and myself, here is the link. CLICK HERE TO WATCH:

There was no change to portfolios last week as the extremely overbought conditions prohibited us from adding to equity risk currently. 

As noted in the main missive this week, the market did correct on Friday, which will either be a “one-day blip,” or something that may mature into a bigger correction we can add money to. We just need some of the overbought condition to be removed to add money more reasonably into portfolios on a risk/reward basis. 

After previously taking actions to slightly reduce portfolio risk, and raise cash, we have the luxury to wait a bit for a better entry point. 

Let me address accounts that are in the ON-BOARDING process. 

When a new client portfolio arrives, Mike and I have two choices: 1) Sell everything and buy everything in our model, OR 2) sell some, buy what is reasonable, and then be patient to build out the rest of the portfolio. 

The problem with option 2) is that if the market goes into a melt-up phase, as we saw starting in October, the opportunity to safely add money to portfolios is not available. In hindsight, yes, we should have bought all of our overbought positions, which then went to extremely overbought. However, this is not a prudent, or sophisticated manner, in which to manage portfolio risk.

IF this current corrective process continues and brings our positions back to a near-term oversold condition without violating stop-levels or triggering sell signals, we will build out on-boarding models accordingly. 

If you have any questions, please don’t hesitate to email me.

There we no additional portfolio actions this past week.

  • New clients: See note above.
  • Dynamic Model: No actions required
  • Equity Model: No actions required
  • ETF Model: No actions required

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Market Continues “Euphoric” Advance As 3500 Becomes Next Target 01-18-20


  • Market Continues Euphoric Advance
  • Portfolio Position Review
  • MacroView: 2020 Market Outlook (Video)
  • Financial Planning Corner: By The Numbers For 2020
  • Sector & Market Analysis
  • 401k Plan Manager

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Catch Up On What You Missed Last Week


Market Continues Euphoric Advance

In last week’s missive, I discussed a couple of charts which suggested the markets are pushing limits which have previously resulted in fairly brutal reversions. This week, the market pushed those deviations even further as the S&P 500 has now pushed into 3-standard deviation territory above the 200-WEEK moving average.

There have only been a few points over the last 25-years where such deviations from the long-term mean were prevalent. In every case, the extensions were met by a decline, sometimes mild, sometimes much more extreme. 

The defining difference between whether those declines were mild, or more extreme, was dependent on the trend of financial conditions. In 1999, 2007, and 2015, as shown in the chart below, financial conditions were being tightened, which led to more brutal contractions as liquidity was removed from the financial system. 

Currently, the risk of a more “substantial decline,” is somewhat mitigated due to extremely easy financial conditions. However, such doesn’t mean a 5-10% correction is impossible, as such is well within market norms in any given year. 

This is particularly the case given how extreme positioning by both institutions and individual investors has become. With investor cash and bearish positions at extreme lows, with prices extremely extended, a reversion to the mean is likely and could lean toward to the 10% range.

One of the other big concerns remains the concentration of positions driving markets higher. Lawrence Fuller analyzed this particular extreme in the market. (H/T G. O’Brien)

“One similarity between the Four Horseman of 2000 and the mega-caps of 2020 is their tremendous influence on the overall market, as can be seen below by their cumulative weightings. The weighting of today’s top five names is now 17.3%. I’m not suggesting that history is going to repeat itself, but often it rhymes.

If you lived and invested through the 1990s, as I did, then you’ll understand what I am talking about when I say that the dot-com boom was a sentiment-driven rally. I’m starting to see the same explanation for the current rally, as there really haven’t been any concrete fundamental developments to explain or validate it. The momentum stocks are rising in price day after day on hopes and expectations, and Wall Street analysts are happy hop on board for the ride, as usual.”

Lawrence is correct. There has not been a fundamental improvement to support the rise in the market currently. As shown in the chart below, S&P just released its 2021 estimates for the S&P 500, which is estimated to come in at $171/share. 

What you should notice is that estimates for 2021 are now $3 LOWER than where estimates for the end of 2020 stood in April 2019. Importantly, between April 2019 and present, as earnings estimates were continually ratcheted lower, the S&P 500 index rose by 17.5%

While Apple, which we own, is the “cheapest” of the “4-horseman” currently, it is only “cheap” because of rather aggressive share repurchases. Here are some interesting stats:

In the 5-years from 2015:

  • Earnings per share (EPS) grew by just $2.69 per share or $0.53 per share annually.
  • Sales only grew by $26.45 billion or $5.29 billion/year.
  • Shares outstanding, however, declined by 1.13 billion

However, during that same 5-year period, Apple’s share price has risen by 210%.  

The only reason Apple “appears” to be cheap is because of the massive infusion of capital used to reduce the number of shares outstanding. As a business, it is a great company, but it is a fully mature company, which is struggling to grow revenues. With a P/E of 27 and price-to-sales (P/S) ratio of 5.36, investors are grossly overpaying for the earnings growth and will likely be disappointed with future return prospects. 

So why do we still own Apple? Because “fundamentals don’t matter” currently as the momentum chase, fueled by the Fed’s ongoing liquidity interventions, has led to a “runaway train.” But, understanding that eventually fundamentals will matter, is why we have taken profits out of our position twice since January 2019.

Just remember, “price is what you pay, value is what you get.” 



Next Stop, 3500

As noted last week, in July of 2019, we laid out our prognostication the S&P 500 could reach 3300 amid a market melt-up though the end of the year. On Friday, the S&P 500 closed at 3329, with the Dow pushing toward 29,350.

With the Federal Reserve continuing to pump liquidity into the market currently, we are raising our 2020 estimate for the S&P to 3500 as “the mania” goes mainstream. There is absolutely NO FUNDAMENTAL basis for raising the target; it is ONLY a function of the momentum chase.

This urgency to take on “risk,” as investors pile into “passive indexes” under a “no market risk” assumption, can be seen in the extreme lows of the put/call ratio.

With the Federal Reserve’s ongoing “Not QE,”  it is entirely possible the markets could continue their upward momentum towards S&P 3500, and Dow 30,000. Clearly, the “cat is out of the bag” if CNBC even realizes it’s the Fed:

“On Oct. 11, the central bank announced it would begin purchasing $60 billion of Treasury bills a month to keep control over short-term rates. The magnitude of the purchases resembles the quantitative easing program the Fed conducted during and after the financial crisis.”

“The increase in the Fed’s balance sheet has been in near lockstep with the stock market’s climb. The balance sheet has expanded 10% since October, while the S&P 500 shot up 12%, including notching its best fourth quarter since 2013.”

With the Federal Reserve continuing to “ease” financial conditions, there is little to derail higher asset prices in the short-term. However, we continue to see cracks in the “economic armor,” like Friday’s plunge in “job openings,” continued deterioration in earnings estimates, weaker growth rates in employment, and negative revisions to data, like wages, which suggest the market is well ahead of the economy. (Last week, negative revisions wiped out all the wage growth for the bottom 80% of workers.)

But, as I said, “fundamentals” don’t matter currently. As CNBC noted:

“The problem front and center is how investors are looking past the continuous earnings rout, betting on a snapback as soon as the first quarter of 2020. S&P 500 earnings are expected to drop by 0.3% in the fourth quarter of 2019, marking the first back-to-back quarterly decline since 2016, according to Refinitiv.”

While “fundamentals” may not seem to matter much currently, eventually, they will.

Portfolio Positioning

After reducing exposure “slightly” to equities, as noted last week, we did not make any further changes to portfolios over the last few days. Given we have shortened our duration in our bond holdings, raised cash levels to roughly 10% of the portfolio, we can afford at the moment to allow our existing long positions to ride the market higher. 

In case you missed last week’s note, or are a new reader, here were the previous changes:

In the Equity Portfolios, we slightly reduced our weightings in some of our more extended holdings such as Apple (AAPL,) Microsoft (MSFT), United Healthcare (UNH), Johnson & Johnson (JNJ), and Micron (MU.)

In the ETF Sector Rotation Portfolio, we slightly reduced our overweight positions in Technology (XLK), Healthcare (XLV), Mortgage Real Estate (REM), Communications (XLC), Discretionary (XLY) back to portfolio weightings for now. 

The Dynamic Portfolio was allocated to a market neutral position by shorting the S&P index itself.

The reason we continue to derisk portfolios is that we have seen this “game” before. This was a point we made to our RIAPRO.NET Subcribers (Try RISK FREE for 30-Days) last week:

“The belief the markets can no longer have a correction is fueling an equity chase in companies with the poorest underlying fundamentals. The last time that we saw asset prices surge by 20%, or more, in a single month, particularly in companies with no revenue, negative valuations, and poor business models, was in 1999. The chart of Qualcom (QCOM) in late 1999 is a good example.”

“Unfortunately, for investors in QCOM, by the end of 2000, that 95% gain had been reversed to a 10% loss. But QCOM was not alone, the only difference is the vast majority of other companies like Global Crossing, Enron, Worldcom, Lucent Technologies, Sun Micro, and many others, no longer exist in their original forms, if at all. 

Another good example is Cisco Systems (CSCO). If you had bought it at the turn of the century, you would still be down 10% in your position 20-years later.”

“Today, we are seeing the same chase in companies which exhibit similar characteristics to what we saw in 1999:

  • Poor business models with little, or no, ‘protective moat.’
  • Little or no earnings
  • Excessively high or negative valuations
  • Prices are bid up on “hope” these companies will mature into valuations in the future.

Sure, companies from Tesla (TSLA) to Zoom Video (ZM) might just be the next Amazon (AMZN) of the “dot.com” mania to survive and prosper. However, the odds are highly stacked against that being the case.”

Being more conservative may “cost” you in the short-term. However, in the longer-term, where it matters for your money, it is highly likely we will eventually see some, most, or all of the gains of this past decade reversed. 

While that is hard to believe, just remember its happened twice before.



The Macro View

Michael Lebowitz and I discuss our outlook and reasoning

https://youtu.be/P5dPlJS9wuI

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

REGISTER NOW for our most popular workshop: THE RIGHT LANE RETIREMENT CLASS

  • The Westin, Austin at the Domain- 11301 Domain Drive, Austin, TX 78758
  • February 8th from 9-11am.

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®, ChFC®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


MISSING THE REST OF THE NEWSLETTER?

This is what our RIAPRO.NET subscribers are reading right now!

  • Sector & Market Analysis
  • Technical Gauges
  • Sector Rotation Analysis
  • Portfolio Positioning
  • Sector & Market Recommendations
  • Client Portfolio Updates
  • Live 401k Plan Manager


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

RIA PRO: Market Continues “Euphoric” Advance As 3500 Becomes Next Target


  • Market Continues Euphoric Advance
  • Portfolio Position Review
  • MacroView: 2020 Market Outlook (Video)
  • Financial Planning Corner: By The Numbers For 2020
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Market Continues Euphoric Advance

In last week’s missive, I discussed a couple of charts which suggested the markets are pushing limits which have previously resulted in fairly brutal reversions. This week, the market pushed those deviations even further as the S&P 500 has now pushed into 3-standard deviation territory above the 200-WEEK moving average.

There have only been a few points over the last 25-years where such deviations from the long-term mean were prevalent. In every case, the extensions were met by a decline, sometimes mild, sometimes much more extreme. 

The defining difference between whether those declines were mild, or more extreme, was dependent on the trend of financial conditions. In 1999, 2007, and 2015, as shown in the chart below, financial conditions were being tightened, which led to more brutal contractions as liquidity was removed from the financial system. 

Currently, the risk of a more “substantial decline,” is somewhat mitigated due to extremely easy financial conditions. However, such doesn’t mean a 5-10% correction is impossible, as such is well within market norms in any given year. 

This is particularly the case given how extreme positioning by both institutions and individual investors has become. With investor cash and bearish positions at extreme lows, with prices extremely extended, a reversion to the mean is likely and could lean toward to the 10% range.

One of the other big concerns remains the concentration of positions driving markets higher. Lawrence Fuller analyzed this particular extreme in the market. (H/T G. O’Brien)

“One similarity between the Four Horseman of 2000 and the mega-caps of 2020 is their tremendous influence on the overall market, as can be seen below by their cumulative weightings. The weighting of today’s top five names is now 17.3%. I’m not suggesting that history is going to repeat itself, but often it rhymes.

If you lived and invested through the 1990s, as I did, then you’ll understand what I am talking about when I say that the dot-com boom was a sentiment-driven rally. I’m starting to see the same explanation for the current rally, as there really haven’t been any concrete fundamental developments to explain or validate it. The momentum stocks are rising in price day after day on hopes and expectations, and Wall Street analysts are happy hop on board for the ride, as usual.”

Lawrence is correct. There has not been a fundamental improvement to support the rise in the market currently. As shown in the chart below, S&P just released its 2021 estimates for the S&P 500, which is estimated to come in at $171/share. 

What you should notice is that estimates for 2021 are now $3 LOWER than where estimates for the end of 2020 stood in April 2019. Importantly, between April 2019 and present, as earnings estimates were continually ratcheted lower, the S&P 500 index rose by 17.5%

While Apple, which we own, is the “cheapest” of the “4-horseman” currently, it is only “cheap” because of rather aggressive share repurchases. Here are some interesting stats:

In the 5-years from 2015:

  • Earnings per share (EPS) grew by just $2.69 per share or $0.53 per share annually.
  • Sales only grew by $26.45 billion or $5.29 billion/year.
  • Shares outstanding, however, declined by 1.13 billion

However, during that same 5-year period, Apple’s share price has risen by 210%.  

The only reason Apple “appears” to be cheap is because of the massive infusion of capital used to reduce the number of shares outstanding. As a business, it is a great company, but it is a fully mature company, which is struggling to grow revenues. With a P/E of 27 and price-to-sales (P/S) ratio of 5.36, investors are grossly overpaying for the earnings growth and will likely be disappointed with future return prospects. 

So why do we still own Apple? Because “fundamentals don’t matter” currently as the momentum chase, fueled by the Fed’s ongoing liquidity interventions, has led to a “runaway train.” But, understanding that eventually fundamentals will matter, is why we have taken profits out of our position twice since January 2019.

Just remember, “price is what you pay, value is what you get.” 



Next Stop, 3500

As noted last week, in July of 2019, we laid out our prognostication the S&P 500 could reach 3300 amid a market melt-up though the end of the year. On Friday, the S&P 500 closed at 3329, with the Dow pushing toward 29,350.

With the Federal Reserve continuing to pump liquidity into the market currently, we are raising our 2020 estimate for the S&P to 3500 as “the mania” goes mainstream. There is absolutely NO FUNDAMENTAL basis for raising the target; it is ONLY a function of the momentum chase.

This urgency to take on “risk,” as investors pile into “passive indexes” under a “no market risk” assumption, can be seen in the extreme lows of the put/call ratio.

With the Federal Reserve’s ongoing “Not QE,”  it is entirely possible the markets could continue their upward momentum towards S&P 3500, and Dow 30,000. Clearly, the “cat is out of the bag” if CNBC even realizes it’s the Fed:

“On Oct. 11, the central bank announced it would begin purchasing $60 billion of Treasury bills a month to keep control over short-term rates. The magnitude of the purchases resembles the quantitative easing program the Fed conducted during and after the financial crisis.”

“The increase in the Fed’s balance sheet has been in near lockstep with the stock market’s climb. The balance sheet has expanded 10% since October, while the S&P 500 shot up 12%, including notching its best fourth quarter since 2013.”

With the Federal Reserve continuing to “ease” financial conditions, there is little to derail higher asset prices in the short-term. However, we continue to see cracks in the “economic armor,” like Friday’s plunge in “job openings,” continued deterioration in earnings estimates, weaker growth rates in employment, and negative revisions to data, like wages, which suggest the market is well ahead of the economy. (Last week, negative revisions wiped out all the wage growth for the bottom 80% of workers.)

But, as I said, “fundamentals” don’t matter currently. As CNBC noted:

“The problem front and center is how investors are looking past the continuous earnings rout, betting on a snapback as soon as the first quarter of 2020. S&P 500 earnings are expected to drop by 0.3% in the fourth quarter of 2019, marking the first back-to-back quarterly decline since 2016, according to Refinitiv.”

While “fundamentals” may not seem to matter much currently, eventually, they will.

Portfolio Positioning

After reducing exposure “slightly” to equities, as noted last week, we did not make any further changes to portfolios over the last few days. Given we have shortened our duration in our bond holdings, raised cash levels to roughly 10% of the portfolio, we can afford at the moment to allow our existing long positions to ride the market higher. 

In case you missed last week’s note, or are a new reader, here were the previous changes:

In the Equity Portfolios, we slightly reduced our weightings in some of our more extended holdings such as Apple (AAPL,) Microsoft (MSFT), United Healthcare (UNH), Johnson & Johnson (JNJ), and Micron (MU.)

In the ETF Sector Rotation Portfolio, we slightly reduced our overweight positions in Technology (XLK), Healthcare (XLV), Mortgage Real Estate (REM), Communications (XLC), Discretionary (XLY) back to portfolio weightings for now. 

The Dynamic Portfolio was allocated to a market neutral position by shorting the S&P index itself.

The reason we continue to derisk portfolios is that we have seen this “game” before. This was a point we made to our RIAPRO.NET Subcribers (Try RISK FREE for 30-Days) last week:

“The belief the markets can no longer have a correction is fueling an equity chase in companies with the poorest underlying fundamentals. The last time that we saw asset prices surge by 20%, or more, in a single month, particularly in companies with no revenue, negative valuations, and poor business models, was in 1999. The chart of Qualcom (QCOM) in late 1999 is a good example.”

“Unfortunately, for investors in QCOM, by the end of 2000, that 95% gain had been reversed to a 10% loss. But QCOM was not alone, the only difference is the vast majority of other companies like Global Crossing, Enron, Worldcom, Lucent Technologies, Sun Micro, and many others, no longer exist in their original forms, if at all. 

Another good example is Cisco Systems (CSCO). If you had bought it at the turn of the century, you would still be down 10% in your position 20-years later.”

“Today, we are seeing the same chase in companies which exhibit similar characteristics to what we saw in 1999:

  • Poor business models with little, or no, ‘protective moat.’
  • Little or no earnings
  • Excessively high or negative valuations
  • Prices are bid up on “hope” these companies will mature into valuations in the future.

Sure, companies from Tesla (TSLA) to Zoom Video (ZM) might just be the next Amazon (AMZN) of the “dot.com” mania to survive and prosper. However, the odds are highly stacked against that being the case.”

Being more conservative may “cost” you in the short-term. However, in the longer-term, where it matters for your money, it is highly likely we will eventually see some, most, or all of the gains of this past decade reversed. 

While that is hard to believe, just remember its happened twice before.



The Macro View

Michael Lebowitz and I discuss our outlook and reasoning

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

REGISTER NOW for our most popular workshop: THE RIGHT LANE RETIREMENT CLASS

  • The Westin, Austin at the Domain- 11301 Domain Drive, Austin, TX 78758
  • February 8th from 9-11am.

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®, ChFC®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite 


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Improving – Energy (XLE), Communications (XLC)

The improvement in Energy stalled again this week, as oil prices continued to struggle. With oil prices testing the 200-dma, it is critical oil turns up next week, otherwise we will see further deterioration in energy stocks. 

As recommended last week, we reduced our weighting in XLC slightly on Friday just to take in some profits. With the entire sector extremely extended, take profits if you haven’t done so already and hold the balance for now.

Current Positions: 1/2 weight AMLP, Underweight XLC

Outperforming – Technology (XLK), Healthcare (XLV)

We previously recommended taking profits in Technology and Healthcare, which have not only been leading the market but have gotten extremely overbought. After taking profits in portfolios, we remain long the balance and are looking for our next opportunity. 

Current Positions:  Reduced from overweight to target weight XLK, XLV

Weakening – Financials (XLF)

We noted previously that Financials have been running hard on Fed rate cuts and more QE and that the sector was extremely overbought and due for a correction. That correction/consolidation started last week and continued this week. We recommended taking profits previously, and that remains good advice again this week with the sector still very overbought. However, the consolidation also dropped Financials from leading to weakening this past week. 

Current Position: No Position

Lagging – Industrials (XLI), Real Estate (XLRE), Staples (XLP), Discretionary (XLY), Materials (XLB), and Utilities (XLU)

Industrials, which perform better when the Fed is active with QE, has broken out to new highs, but is still consolidating at a high level and has begin to underperform on a relative basis to the S&P 500. That underperformance dropped it into the lagging category this past week.  Given the sector is extremely overbought, we will wait for this correction to play out  before adding to our current position.

After a run to new highs, Staples continues to consolidate and hold above its 50-dma. Since taking profits previously, we are just maintaining our stop loss on the sector currently. 

Discretionary, after finally breaking out to new highs, has gotten very extended in the short-term. We reduced our position slightly to take in profits. We remain optimistic on the sector for now. However, the sector is extremely overbought so a correction is needed that doesn’t violate support at the 50-dma to add back to our exposure.

XLRE has been rallying as of late and relative strength is improving. We remain weighted in the sector for now but may increase our weighting if the recent strength is confirmed. 

Current Position: Target weight XLY, XLP, XLRE, 1/2 weight XLB and XLI

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Small- and Mid-caps broke out to new highs this past week as the rotation to risk gained momentum. The relative performance remains flat as the focus has returned to chasing the largest of large-cap names. As noted two weeks ago, we added to our small-cap holdings with a small-cap value ETF. We are holding that position for now, but are tightening up our stops.

Current Position: KGGIX, SLYV

Emerging, International (EEM) & Total International Markets (EFA)

Emerging and International Markets, rallied recently on news of a “trade deal” and finally clearly broke above important resistance. However, like small and mid-caps above, international stocks relative performance remains muted but is improving. As discussed two weeks ago, we added positions in both emerging market and international value  positions, however, we are tightening up our stops to protect our capital investment. 

Current Position: EFV, DEM

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. Currently, the short-term bullish trend is positive, and our core positions are providing the “base” around which we overweight/underweight our allocations based on our outlook.

Be aware that all of our core positions are EXTREMELY overbought. A short-term correction or consolidation is likely before a further advance can be made.

Current Position: RSP, VYM, IVV

Gold (GLD) – As noted two weeks ago, Gold was holding support at the $140 level and registered a buy signal. GDX has also held support and turned higher with a triggered buy signal. Over the last two weeks, gold has broken out to highs, but stalled at those levels. We previously took our holdings back to full-weights after taking profits earlier this year. However, we are tightening up our stop levels.

Current Position: GDX (Gold Miners), IAU (Gold)

Bonds (TLT) – 

Bonds rallied back above the 50-dma on Friday as money rotated into bonds for “safety” as the market weakened on Friday. There is a consolidation with rising bottoms occurring currently, which suggests we may see further weakness in the market with a “risk off” rotation into bonds.

Add to bonds here with a stop at $136 for TLT as a benchmark. 

Current Positions: DBLTX, SHY, IEF

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

If you are a client of RIA Advisors, please take the opportunity to watch the Market Outlook presentation that Michael Lebowitz and I prepared last week. CLICK HERE TO WATCH:

“As we noted in last weekend’s newsletter, we recently took profits in our various portfolio strategies to raise cash slightly, and reduce excess portfolio risk. Given our portfolios are already hedged with early exposures to value positioning, gold, and short-duration Treasuries, there currently isn’t a need to become overly defensive given the ongoing, liquidity fueled, momentum of the markets. 

Currently, the bullish exuberance, extreme complacency, and technical deviations are issuing warning signs which investors should NOT readily dismiss. These are the issues we cover in the following video presentation:

  1. The “risks” to the current “bullish view,” 
  2. Why we reduced risk in portfolios
  3. The importance of valuations
  4. The Fed’s ongoing liquidity programs.
  5. Future expected returns, and more.”

As noted in the main missive this week, the market is extremely extended, overbought, and complacent. As such, market corrections occur regularly in this type of environment regardless of the underlying bullish thesis.

We previously took actions to slightly reduce portfolio risk, and raise cash. While this may lead to some short-term underperformance in portfolios, you will appreciate the reduced volatility if a correction occurs over the next 3-4 weeks as expected. 

There we no additional portfolio actions this past week.

  • New clients: We are holding off onboarding new client assets until we see some corrective action or consolidation in the market.
  • Dynamic Model: No actions required
  • Equity Model: No actions required
  • ETF Model: No actions required

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation simplified, it allows for better control of the allocation, and closer tracking to the benchmark objective over time. (If you want to make it more complicated, you can, however, statistics show simply adding more funds does not increase performance to any significant degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

This Is Nuts & Why We Reduced Risk On Friday 01-11-20


  • This Is Nuts
  • Portfolio Position Review
  • MacroView: Has The Fed Trapped Itself?
  • Financial Planning Corner: By The Numbers For 2020
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Market Review & Update

When you sit down with your portfolio management team, and the first comment made is “this is nuts,” it’s probably time to think about your overall portfolio risk. On Friday, that was how the investment committee both started and ended – “this is nuts.” 

We have been discussing the overbought, extended, and complacent market over the last couple of weeks, but on Friday, I tweeted out a couple of charts that illustrated the excess. 

The first chart was comparing the Nasdaq to the S&P 500 index. Both are banded by 2-standard deviations bands of the 200-WEEK moving average. there are a couple of things which should jump out immediately:

  1. The near-vertical price acceleration in the markets has been a historical hallmark of late-stage cycle advances, also known as a “melt up” phase.
  2. When markets get more than 2-standard deviations above their long-term moving average, reversions to the mean have tended to follow shortly after that. 

Currently, both of those conditions exist in the chart above. However, if it were only price acceleration, we would just be mildly concerned. However, investor complacency has also reached more extreme levels with PUT/CALL ratio now hitting historically high levels. (The put/call ratio is the ratio of “put options” being bought on the S&P 500 (theoretically to hedge risk) versus the number of “call” options purchased to “lever up” risk.)

Lastly, all of our indicators from momentum to relative strength are all suggesting risk substantially outweighs reward currently. 

While none of this means the market will “crash,” it does suggest the risk/reward ratio is not in favor of the bulls short-term. 

However, we are mindful that in the short-term, the market is currently obsessed with the Fed’s monetary interventions (the topic of this week’s MacroView), which are supportive of the markets currently. However, as my friend and colleague Doug Kass summed noted this week:

“It is growing increasingly clear to me that global stock markets are in the process of making a speculative move (driven by global liquidity) that may even compare to the advances that culminated in the seminal market tops in the Fall of 1987 and in the Spring of 2000.

As today’s trading day comes to a close, it is apparent that, like the 1997 Long Boom paradigm expressed in a column in Wired Magazine during the dot.com bubble –– the current market is similarly viewed as in its own, new liquidity-based paradigm.

No longer is the market hostage to the real economy or sales and profit growth – stuff I have spent four decades analyzing. Instead, liquidity is seen as an overriding influence, actually it has become the sine quo non.

As such, historical valuations become increasingly irrelevant, and price momentum is the lodestar.

He is right. 

Currently, almost every single valuation metric is at historic extremes, yet investors continue to take on increasing levels of risk due to nothing more than “F.O.M.O – Fear Of Missing Out.” 

As Doug goes on to note:

“We live in unusual times – in which central bankers have adopted policy unlike any point in history. Near-zero interest rates around the world have become commonplace and are accepted with little thought given to the adverse consequences. Forgetting history, central bankers seem to have no idea that they have created another monster again – just as they did in 1999.

Meanwhile, corporate profits are lower (year over year), and the rate of global GDP growth remains below the historic trendline – as it takes more and more debt to deliver a unit of production.

The climb in stocks will likely end badly as it is not supported by the fundamental (social, economic, political and geopolitical) backdrop and, increasingly, classical valuation metrics have moved to the highest percentiles in history (enterprise value/EBIT, price to sales, market capitalizations to GDP, etc.)

Yes, “this is nuts,” which is why we took profits out of portfolios on Friday.



Portfolio Positioning

On Friday, we began the orderly process of reducing exposure in our portfolios to take in profits, reduce portfolio risk, and raise cash levels. 

In the Equity Portfolios, we reduced our weightings in some of our more extended holdings such as Apple (AAPL,) Microsoft (MSFT), United Healthcare (UNH), Johnson & Johnson (JNJ), and Micron (MU.)

In the ETF Sector Rotation Portfolio, we reduced our overweight positions in Technology (XLK), Healthcare (XLV), Mortgage Real Estate (REM), Communications (XLC), Discretionary (XLY) back to portfolio weightings for now. 

The Dynamic Portfolio was allocated to a market neutral position by shorting the S&P index itself.

Let me state clearly, we did not “sell everything” and go to cash. We simply reduced our holdings to raise cash, and capture some of the gains we made in 2019. When the market corrects we will use our cash holdings to either add back to our current positions, or add new ones.

One of the areas we have been discussing recently is the opportunity that may be presenting itself in the Energy sector. With oil prices rising, and valuations better than other areas of the market, there are some trading opportunities starting to appear.

While our portfolios are designed to have longer-term holding periods, we understand that things do not always go as planned. This is why we enter positions on a trading basis only, which are short-term until both the position, and the overall thesis, starts to mature.

Last week, we presented some technical analysis on three major energy ETF’s and seven individual companies which may be presenting a trading opportunity in the near future. You can view all of our portfolio models, which are live accounts, at RIA PRO. (Try the service for 30-days RISK FREE)

But from a broad perspective, the Energy sector is showing some signs of life. The break above the 200-dma, as well as the downtrend from previous highs, gives the sector a much more bullish tone currently. However, there are still many issues that overhang the energy market in the longer-term from cash flows, to leverage, to economic demand, which will likely keep energy markets fairly range-bound through 2020 and beyond.

The complete analysis we presented to RIAPRO clients last week is presented here.

3300 To 3500, And Back Again

In July of 2019, we laid out our prognostication the S&P 500 could reach 3300 amid a market melt-up though the end of the year. On Friday, the market touched 3280, which, as they say, is “close enough for Jazz.”

However, with the Federal Reserve having “turned on the liquidity taps,” it is entirely possible the markets could continue their upward momentum towards 3500.

The potential “fly in the ointment” is if the economic, employment, and profit data fail to recover as anticipated. With 2020 earnings estimates already cut markedly heading into the year, further downward revisions will likely begin to weigh on investor sentiment. 

Friday’s employment report was weak and exposed the anomaly caused by the autoworkers strike in the blockbuster November report. CEO and CFO confidence remain very suppressed currently, and if their views don’t start to improve markedly in the short-term we are likely to start seeing much weaker employment reports. 

While the markets could certainly see a push higher in the short-term from the Fed’s ongoing liquidity injections, the gains for 2020 could very well be front-loaded for investors. 

Taking profits and reducing risks now may lead to a short-term underperformance in portfolios, but you will likely appreciate the reduced volatility if, and when, the current optimism fades.



The Macro View

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

REGISTER NOW for our most popular workshop: THE RIGHT LANE RETIREMENT CLASS

  • The Westin, Austin at the Domain- 11301 Domain Drive, Austin, TX 78758
  • February 8th from 9-11am.

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®, ChFC®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


MISSING THE REST OF THE NEWSLETTER?

This is what our RIAPRO.NET subscribers are reading right now!

  • Sector & Market Analysis
  • Technical Gauges
  • Sector Rotation Analysis
  • Portfolio Positioning
  • Sector & Market Recommendations
  • Client Portfolio Updates
  • Live 401k Plan Manager


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

RIA PRO: This Is Nuts & Why We Reduced Risk On Friday


  • This Is Nuts
  • Portfolio Position Review
  • MacroView: Has The Fed Trapped Itself?
  • Financial Planning Corner: By The Numbers For 2020
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Market Review & Update

When you sit down with your portfolio management team, and the first comment made is “this is nuts,” it’s probably time to think about your overall portfolio risk. On Friday, that was how the investment committee both started and ended – “this is nuts.” 

We have been discussing the overbought, extended, and complacent market over the last couple of weeks, but on Friday, I tweeted out a couple of charts that illustrated the excess. 

The first chart was comparing the Nasdaq to the S&P 500 index. Both are banded by 2-standard deviations bands of the 200-WEEK moving average. there are a couple of things which should jump out immediately:

  1. The near-vertical price acceleration in the markets has been a historical hallmark of late-stage cycle advances, also known as a “melt up” phase.
  2. When markets get more than 2-standard deviations above their long-term moving average, reversions to the mean have tended to follow shortly after that. 

Currently, both of those conditions exist in the chart above. However, if it were only price acceleration, we would just be mildly concerned. However, investor complacency has also reached more extreme levels with PUT/CALL ratio now hitting historically high levels. (The put/call ratio is the ratio of “put options” being bought on the S&P 500 (theoretically to hedge risk) versus the number of “call” options purchased to “lever up” risk.)

Lastly, all of our indicators from momentum to relative strength are all suggesting risk substantially outweighs reward currently. 

While none of this means the market will “crash,” it does suggest the risk/reward ratio is not in favor of the bulls short-term. 

However, we are mindful that in the short-term, the market is currently obsessed with the Fed’s monetary interventions (the topic of this week’s MacroView), which are supportive of the markets currently. However, as my friend and colleague Doug Kass summed noted this week:

“It is growing increasingly clear to me that global stock markets are in the process of making a speculative move (driven by global liquidity) that may even compare to the advances that culminated in the seminal market tops in the Fall of 1987 and in the Spring of 2000.

As today’s trading day comes to a close, it is apparent that, like the 1997 Long Boom paradigm expressed in a column in Wired Magazine during the dot.com bubble –– the current market is similarly viewed as in its own, new liquidity-based paradigm.

No longer is the market hostage to the real economy or sales and profit growth – stuff I have spent four decades analyzing. Instead, liquidity is seen as an overriding influence, actually it has become the sine quo non.

As such, historical valuations become increasingly irrelevant, and price momentum is the lodestar.

He is right. 

Currently, almost every single valuation metric is at historic extremes, yet investors continue to take on increasing levels of risk due to nothing more than “F.O.M.O – Fear Of Missing Out.” 

As Doug goes on to note:

“We live in unusual times – in which central bankers have adopted policy unlike any point in history. Near-zero interest rates around the world have become commonplace and are accepted with little thought given to the adverse consequences. Forgetting history, central bankers seem to have no idea that they have created another monster again – just as they did in 1999.

Meanwhile, corporate profits are lower (year over year), and the rate of global GDP growth remains below the historic trendline – as it takes more and more debt to deliver a unit of production.

The climb in stocks will likely end badly as it is not supported by the fundamental (social, economic, political and geopolitical) backdrop and, increasingly, classical valuation metrics have moved to the highest percentiles in history (enterprise value/EBIT, price to sales, market capitalizations to GDP, etc.)

Yes, “this is nuts,” which is why we took profits out of portfolios on Friday.



Portfolio Positioning

On Friday, we began the orderly process of reducing exposure in our portfolios to take in profits, reduce portfolio risk, and raise cash levels. 

In the Equity Portfolios, we reduced our weightings in some of our more extended holdings such as Apple (AAPL,) Microsoft (MSFT), United Healthcare (UNH), Johnson & Johnson (JNJ), and Micron (MU.)

In the ETF Sector Rotation Portfolio, we reduced our overweight positions in Technology (XLK), Healthcare (XLV), Mortgage Real Estate (REM), Communications (XLC), Discretionary (XLY) back to portfolio weightings for now. 

The Dynamic Portfolio was allocated to a market neutral position by shorting the S&P index itself.

Let me state clearly, we did not “sell everything” and go to cash. We simply reduced our holdings to raise cash, and capture some of the gains we made in 2019. When the market corrects we will use our cash holdings to either add back to our current positions, or add new ones.

One of the areas we have been discussing recently is the opportunity that may be presenting itself in the Energy sector. With oil prices rising, and valuations better than other areas of the market, there are some trading opportunities starting to appear.

While our portfolios are designed to have longer-term holding periods, we understand that things do not always go as planned. This is why we enter positions on a trading basis only, which are short-term until both the position, and the overall thesis, starts to mature.

Last week, we presented some technical analysis on three major energy ETF’s and seven individual companies which may be presenting a trading opportunity in the near future. You can view all of our portfolio models, which are live accounts, at RIA PRO. (Try the service for 30-days RISK FREE)

But from a broad perspective, the Energy sector is showing some signs of life. The break above the 200-dma, as well as the downtrend from previous highs, gives the sector a much more bullish tone currently. However, there are still many issues that overhang the energy market in the longer-term from cash flows, to leverage, to economic demand, which will likely keep energy markets fairly range-bound through 2020 and beyond.

The complete analysis we presented to RIAPRO clients last week is presented here.

3300 To 3500, And Back Again

In July of 2019, we laid out our prognostication the S&P 500 could reach 3300 amid a market melt-up though the end of the year. On Friday, the market touched 3280, which, as they say, is “close enough for Jazz.”

However, with the Federal Reserve having “turned on the liquidity taps,” it is entirely possible the markets could continue their upward momentum towards 3500.

The potential “fly in the ointment” is if the economic, employment, and profit data fail to recover as anticipated. With 2020 earnings estimates already cut markedly heading into the year, further downward revisions will likely begin to weigh on investor sentiment. 

Friday’s employment report was weak and exposed the anomaly caused by the autoworkers strike in the blockbuster November report. CEO and CFO confidence remain very suppressed currently, and if their views don’t start to improve markedly in the short-term we are likely to start seeing much weaker employment reports. 

While the markets could certainly see a push higher in the short-term from the Fed’s ongoing liquidity injections, the gains for 2020 could very well be front-loaded for investors. 

Taking profits and reducing risks now may lead to a short-term underperformance in portfolios, but you will likely appreciate the reduced volatility if, and when, the current optimism fades.



The Macro View

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

REGISTER NOW for our most popular workshop: THE RIGHT LANE RETIREMENT CLASS

  • The Westin, Austin at the Domain- 11301 Domain Drive, Austin, TX 78758
  • February 8th from 9-11am.

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®, ChFC®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Improving – Energy (XLE), Communications (XLC)

The improvement in Energy stalled this past week as the Iran hostilities came and went literally in a matter of hours. While the sector has cleared the downtrend channel and the 200-dma it remains overbought short-term, but is beginning to correct that condition. We are looking for an entry point near the 200-dma if it holds.

As recommended last week, we reduced our weighting in XLC slightly on Friday just to take in some profits. Our thesis of a push in the sector due to the holiday shopping season came to fruition, but now the entire sector is just extremely extended.  

Current Positions: 1/2 weight AMLP, Underweight XLC

Outperforming – Technology (XLK), Healthcare (XLV), Financials (XLF)

We noted previously that Financials have been running hard on Fed rate cuts and more QE and that the sector was extremely overbought and due for a correction. That correction/consolidation started last week and continued this week. We recommended taking profits previously, and that remains good advice again this week with the sector still very overbought.

We also recommended last week to take profits in Technology and Healthcare, which have not only been leading the market but have gotten extremely overbought. On Friday, we took profits in both sectors and reduced our weights back to target portfolio weight.

Current Positions:  Reduced from overweight to target weight XLK, XLV

Weakening – Industrials (XLI)

Industrials, which perform better when the Fed is active with QE, has broken out to new highs, but is still consolidating at a high level and has begin to underperform on a relative basis to the S&P 500. Given the sector is extremely overbought, we will wait for this correction to play out  before adding to our current position.

Current Position: 1/2 weight XLI

Lagging – Real Estate (XLRE), Staples (XLP), Discretionary (XLY), Materials (XLB), and Utilities (XLU)

After a run to new highs, Staples continues to consolidate and hold above its 50-dma. Since taking profits previously, we are just maintaining our stop loss on the sector currently. 

Discretionary, after finally breaking out to new highs, has gotten very extended in the short-term. We reduced our position slightly to take in profits. We remain optimistic on the sector for now. However, the sector is extremely overbought so a correction is needed that doesn’t violate support at the 50-dma to add back to our exposure.

XLRE has been weak as of late as interest rates have been on the rise. We remain weighted in the sector for now but may increasing sizing opportunistically if we see weakness begin to form in the leading sectors of the market.

Current Position: Target weight XLY, XLP, XLRE, 1/2 weight XLB

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Small- and Mid-caps broke out of the previous ranges as the rotation to risk occurred, but over the last couple of weeks, the relative performance has fallen flat as the focus has returned to chasing the largest of large-cap names. As noted two weeks ago, we added to our small-cap holdings with a small-cap value ETF, and the pullback we expected is in progress. We are holding that position for now, but are tightening up our stops.

Current Position: KGGIX, SLYV

Emerging, International (EEM) & Total International Markets (EFA)

Emerging and International Markets, rallied recently on news of a “trade deal” and finally clearly broke above important resistance. However, like small and mid-caps above, international stocks relative performance has also stalled. As discussed two weeks ago, we added positions in both emerging market and international value  positions, however, we are tightening up our stops to protect our capital investment. 

Current Position: EFV, DEM

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. Currently, the short-term bullish trend is positive, and our core positions are providing the “base” around which we overweight/underweight our allocations based on our outlook.

Be aware that all of our core positions are EXTREMELY overbought. A short-term correction or consolidation is likely before a further advance can be made.

Current Position: RSP, VYM, IVV

Gold (GLD) – As noted two weeks ago, Gold was holding support at the $140 level and registered a buy signal. GDX has also held support and turned higher with a triggered buy signal. Over the last two weeks, gold has broken out to highs, however, miners have turned lower as the “value” rotation shifted back to momentum. We previously took our holdings back to full-weights after taking profits earlier this year. However, we are tightening up our stop levels.

Current Position: GDX (Gold Miners), IAU (Gold)

Bonds (TLT) – 

Bonds rallied back above the 50-dma on Friday as money rotated into bonds for “safety” as the market weakened on Friday. There is a consolidation with rising bottoms occurring currently, which suggests we may see further weakness in the market with a “risk off” rotation into bonds.

Add to bonds here with a stop at $136 for TLT as a benchmark. 

Current Positions: DBLTX, SHY, IEF

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

Next week, Michael Lebowitz is coming to town, and we are hosting very small group events to discuss our portfolio and investing outlook for 2020. We are recording the presentation, and will share it with you next week in this newsletter as our MacroView.

Over the last several months, we have discussed adding “value” to the portfolio, increased our “gold” holdings, and continue to run shorter-duration in our bond portfolios. One of the big macro-themes we are studying is a weaker U.S. Dollar relative to the rest of the world, which could significantly shift our focus from “stocks” to commodities and other assets that benefit from a weaker currency. 

Please read our previous “MacroView” which discussed our view in this regard.

As noted in the main missive this week, the market is extremely extended, overbought, and complacent. As such, market corrections occur regular in this type of environment regardless of the underlying bullish thesis.

As such, on Friday, we took actions to slightly reduce portfolio risk, and raise cash. While this may lead to some short-term underperformance in portfolios, you will appreciate the reduced volatility if a correction occurs over the next 3-4 weeks as expected. 

Therefore, here are our portfolio actions we have taken:

  • New clients: We are holding off onboarding new client assets until we see some corrective action or consolidation in the market.
  • Dynamic Model:  We previously started building the “core equity” of the portfolio. We have now taken the model to “market neutral” by adding an equal weight of a short S&P 500 index.
  • Equity Model: We reduced our holdings in AAPL, MSFT, AGNC, CVS, HCA, JNJ, MU, and UNH. We remain long these positions, but they were extremely overbought so we reduced our position slightly to take in profits.
  • ETF Model: We reduced our holdings in REM, XLC, XLK, XLV, and XLY. Again, these sectors were overweight their target weightings in the model so we have reduced those holdings back to target weight to capture gains and reduce portfolio risk.

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Market Flat In 2020 As Iran Trips Up Traders 01-04-20


  • Market Review & Update
  • MacroView: Is This A Repeat Of 2018?
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Market Review & Update

The first trading day of the year started with a “bang” with the S&P 500 rising more than 20 points. However, the gain was abbreviated on Friday as news shook the market the U.S. had taken out a top Iranian commander in Baghdad. But concerns over potential Iranian conflict quickly abated as the markets returned their focus to the Federal Reserve, and the continued pump of monetary liquidity into the markets. A point noted in our MacroView below.

While the pump of liquidity continues to push asset prices higher, earnings continue to fall. Economic growth remains weak, and despite hopes for a “revival,” it has yet to be seen. Ultimately, stocks are a reflection of economic activity, and, as I predicted in May of last year, estimates were far too high relative to economic growth. Since then, earnings have continued to decline toward our original estimate. In fact, in just the last month, estimates for the end of 2020 fell by almost $2 per share. This is occurring at a time where investors are piling into stocks regardless of price or valuation. Such is just the “Pavlovian” response to more monetary stimulus.



This was a point made by Tom McClellan this past week:

“The efforts of the Federal Reserve to inject extra liquidity into the banking system over the past 2-months have helped to fuel the year-end (2019) rally. Questions remain about how long the Fed may choose to keep up that effort, and whether the Fed has enough ink in the printing presses to overcome other market forces.”

“The indicator in this chart depicts the net position of the ‘commercial’ traders of Fed Fund futures, expressed as a percentage of total open interest. The fun part comes when we realize that the movements of that indicator get repeated roughly 110 trading days later in stock prices.

Over the past 100 or so trading days, we have seen a big move in the commercial traders’ net position, moving from net long the Fed Funds futures to net short in a big way. It is the biggest such move we have seen in a few years; its implication is that there is a big down move coming for stock prices.”

Given the more extreme extension of stocks currently, Tom’s suggestion of a correction is likely particularly if the Fed decides to slow their monetary inputs. 

As shown in the chart below, the market is currently trading 3-standard deviations above the 200-dma, which is somewhat of a rarity until just the last couple of years. Since the beginning of 2018, there have been three occurrences, with the previous two leading to short-term corrections. 

There is an important difference between the previous two incidents and today as the Fed was reducing monetary liquidity instead of increasing it. 

Portfolio Positioning

As we kick off the “New Trading Year,” we remain long our current portfolio exposures in both the Equity and ETF Portfolios. We have also started building a new “Dynamic Portfolio,” which is a “go anywhere, do anything” portfolio of our “best ideas.” 

You can view all of our portfolio models, which are live accounts, at RIA PRO. (You can try out the service for 30-days FREE)

As we head into 2020, our major theme is the potential decline of the U.S. Dollar, relative to other currencies, which has a profound impact on many other sectors of the market. Those areas include:

  • International markets
  • Emerging markets
  • Oil 
  • Gold
  • Commodities
  • Energy
  • Interest Rates

These are themes we have been discussing with RIA PRO subscribers, and building into our portfolios, over the last few months. 

We also continue to suspect the yield curve will steepen as we head further into the year. Higher rates will result from flows out of the U.S. dollar into foreign-denominated assets initially, BUT, higher rates will then trigger much weaker economic growth domestically. With weaker growth, comes weaker earnings and lower stock prices. 

Again, we are focused on the U.S. Dollar as foreign speculative positioning has reached extremes. Reversals in positioning have not been kind to stock prices but bode well for alternative asset classes which can hedge long equity risk. 

Lastly, we are also looking for a return of value relative to growth. As shown in the chart below, the deviation in performance has reached historic extremes. 

The last time that “value” underperformed “growth” by such a large degree was heading into the “dot.com” crisis. At that time Warren Buffett was being ridiculed for underperforming the S&P 500 by such a large degree. 

He was vindicated for his “value” approach shortly thereafter. 

Interestingly, here we are once again, and this was the headline of an article that came across my desk on Friday:

“One of the most reliable rules of American investing over the last 50 years may have finally been broken. Warren Buffett’s Berkshire Hathaway is not the sure bet it once was.” – Motley Fool

Of course, a major reason for that underperformance is the $128 Billion in CASH that Buffett is holding on his balance sheet. Of course, for a value investor like Buffett, it is hard to invest cash into a market where there is little to no value, and forward 10-year returns are expected to be low.

In other words, when the media starts dismissing Warren Buffett, maybe its time to start considering the “why” he is sitting on so much cash. 

Importantly, it is for this reason that we are beginning to add “value” plays to our portfolio in small bits until we see the rotation begin to gain traction. In the meantime, this is a great time to review the trading rules needed to be a better investor as we head into 2020.

Remember, our job as investors is pretty simple – protect our investment capital from short-term destruction so that we can play the long-term investment game.



The Macro View

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®, ChFC®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


MISSING THE REST OF THE NEWSLETTER?

This is what our RIAPRO.NET subscribers are reading right now!

  • Sector & Market Analysis
  • Technical Gauges
  • Sector Rotation Analysis
  • Portfolio Positioning
  • Sector & Market Recommendations
  • Client Portfolio Updates
  • Live 401k Plan Manager


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

RIA PRO: Market Flat In 2020 As Iran Trips Up Traders


  • Market Review & Update
  • MacroView: Is This A Repeat Of 2018?
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Market Review & Update

The first trading day of the year started with a “bang” with the S&P 500 rising more than 20 points. However, the gain was abbreviated on Friday as news shook the market the U.S. had taken out a top Iranian commander in Baghdad. But concerns over potential Iranian conflict quickly abated as the markets returned their focus to the Federal Reserve, and the continued pump of monetary liquidity into the markets. A point noted in our MacroView below.

While the pump of liquidity continues to push asset prices higher, earnings continue to fall. Economic growth remains weak, and despite hopes for a “revival,” it has yet to be seen. Ultimately, stocks are a reflection of economic activity, and, as I predicted in May of last year, estimates were far too high relative to economic growth. Since then, earnings have continued to decline toward our original estimate. In fact, in just the last month, estimates for the end of 2020 fell by almost $2 per share. This is occurring at a time where investors are piling into stocks regardless of price or valuation. Such is just the “Pavlovian” response to more monetary stimulus.



This was a point made by Tom McClellan this past week:

“The efforts of the Federal Reserve to inject extra liquidity into the banking system over the past 2-months have helped to fuel the year-end (2019) rally. Questions remain about how long the Fed may choose to keep up that effort, and whether the Fed has enough ink in the printing presses to overcome other market forces.”

“The indicator in this chart depicts the net position of the ‘commercial’ traders of Fed Fund futures, expressed as a percentage of total open interest. The fun part comes when we realize that the movements of that indicator get repeated roughly 110 trading days later in stock prices.

Over the past 100 or so trading days, we have seen a big move in the commercial traders’ net position, moving from net long the Fed Funds futures to net short in a big way. It is the biggest such move we have seen in a few years; its implication is that there is a big down move coming for stock prices.”

Given the more extreme extension of stocks currently, Tom’s suggestion of a correction is likely particularly if the Fed decides to slow their monetary inputs. 

As shown in the chart below, the market is currently trading 3-standard deviations above the 200-dma, which is somewhat of a rarity until just the last couple of years. Since the beginning of 2018, there have been three occurrences, with the previous two leading to short-term corrections. 

There is an important difference between the previous two incidents and today as the Fed was reducing monetary liquidity instead of increasing it. 

Portfolio Positioning

As we kick off the “New Trading Year,” we remain long our current portfolio exposures in both the Equity and ETF Portfolios. We have also started building a new “Dynamic Portfolio,” which is a “go anywhere, do anything” portfolio of our “best ideas.” 

You can view all of our portfolio models, which are live accounts, at RIA PRO. (You can try out the service for 30-days FREE)

As we head into 2020, our major theme is the potential decline of the U.S. Dollar, relative to other currencies, which has a profound impact on many other sectors of the market. Those areas include:

  • International markets
  • Emerging markets
  • Oil 
  • Gold
  • Commodities
  • Energy
  • Interest Rates

These are themes we have been discussing with RIA PRO subscribers, and building into our portfolios, over the last few months. 

We also continue to suspect the yield curve will steepen as we head further into the year. Higher rates will result from flows out of the U.S. dollar into foreign-denominated assets initially, BUT, higher rates will then trigger much weaker economic growth domestically. With weaker growth, comes weaker earnings and lower stock prices. 

Again, we are focused on the U.S. Dollar as foreign speculative positioning has reached extremes. Reversals in positioning have not been kind to stock prices but bode well for alternative asset classes which can hedge long equity risk. 

Lastly, we are also looking for a return of value relative to growth. As shown in the chart below, the deviation in performance has reached historic extremes. 

The last time that “value” underperformed “growth” by such a large degree was heading into the “dot.com” crisis. At that time Warren Buffett was being ridiculed for underperforming the S&P 500 by such a large degree. 

He was vindicated for his “value” approach shortly thereafter. 

Interestingly, here we are once again, and this was the headline of an article that came across my desk on Friday:

“One of the most reliable rules of American investing over the last 50 years may have finally been broken. Warren Buffett’s Berkshire Hathaway is not the sure bet it once was.” – Motley Fool

Of course, a major reason for that underperformance is the $128 Billion in CASH that Buffett is holding on his balance sheet. Of course, for a value investor like Buffett, it is hard to invest cash into a market where there is little to no value, and forward 10-year returns are expected to be low.

In other words, when the media starts dismissing Warren Buffett, maybe its time to start considering the “why” he is sitting on so much cash. 

Importantly, it is for this reason that we are beginning to add “value” plays to our portfolio in small bits until we see the rotation begin to gain traction. In the meantime, this is a great time to review the trading rules needed to be a better investor as we head into 2020.

Remember, our job as investors is pretty simple – protect our investment capital from short-term destruction so that we can play the long-term investment game.



The Macro View

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®, ChFC®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet

Will return next week. I need one full week of trading data to run the analysis for the New Year.


Performance Analysis

Will return next week. I need one full week of trading data to run the analysis for the New Year.


Technical Composite


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Improving – Energy (XLE), Communications (XLC)

The improvement in Energy accelerated on Friday as news swirled that the U.S. had taken out a top Iran military commander combined with a larger than expected crude oil draw. The sector has cleared the downtrend channel and the 200-dma but is VERY overbought short-term.

As noted last previously, if you want to add exposure to energy be patient for a bit of a correction, or if you want to buy here, do so with a stop loss at the 200-dma. We recently added 1/2 position in AMLP to portfolios and will begin to add XLE opportunistically now that it has broken above the 200-dma. 

We remain at full weight on XLC, and our thesis of a push in the sector due to the holiday shopping season came to fruition. The sector is now extremely extended, so take profits and rebalance risk accordingly but hold onto the sector for now. 

Current Positions: 1/2 weight AMLP, Full weight XLC

Outperforming – Technology (XLK), Healthcare (XLV), Financials (XLF)

We noted previously that Financials have been running hard on Fed rate cuts and more QE and that the sector was extremely overbought and due for a correction. That correction started on Friday, which is why we recommended taking profits previously. There is still more room for a correction to occur, so take profits if you haven’t and remain cautious for now.

Technology and Healthcare have been the leaders as of late. Healthcare made a sharp recovery from weakening to leading relative to the overall market, and the sector is now grossly overbought and extended. As recommended, we took profits in XLV reducing it from overweight to portfolio weight. Like everything else, XLK is extremely overbought so wait for a correction to add exposure.

Current Positions:  Full weight XLK, XLV

Weakening – Industrials (XLI)

Industrials, which perform better when the Fed is active with QE, has broken out to new highs, but is still consolidating at a high level and has begin to underperform on a relative basis to the S&P 500. Given the sector is extremely overbought, we will look to add, but will wait for this correction to play out first.

Current Position: 1/2 weight XLI

Lagging – Real Estate (XLRE), Staples (XLP), Discretionary (XLY), Materials (XLB), and Utilities (XLU)

After a run to new highs, Staples took a sharp correction on Friday as profit-taking following the “Iran incident.” Momentum remains strong, but the sector remains overbought currently. Watch the support at the 50-dma as a sign to take further profits.

Discretionary remains a laggard but finally broken out to the upside as Amazon finally came to life. With consumer spending, and economic growth, remaining stable for now, we remain optimistic on the sector for now. However, the sector is extremely overbought so a correction is needed that doesn’t violate support at the 50-dma to add further exposure. Take profits if needed.

XLRE has been weak as of late as interest rates have been on the rise, however, as noted above, the incident with Iran sent money into US Treasuries for safety on Friday. This gave a nice bump to the REIT sector confirming support at the 200-dma, as well as a confirmed break above the 50-dma. With a “buy signal” back in play, positions can be added to portfolios for a potential test of old highs. However, stops need to be moved up to the 200-dma. 

Current Position: Target weight XLY, XLP, XLRE, 1/2 weight XLB

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Small- and Mid-caps broke out of the previous ranges as the rotation to risk continues. However, over the past week, the relative outperformance slowed as money has gone back to chasing the largest of large-cap names. As noted two weeks ago, we added to our small-cap holdings with a small-cap value ETF, and the pullback we expected is in progress. We will look to add to our holdings provided we aren’t stopped out. 

Current Position: KGGIX, Added SLYV

Emerging, International (EEM) & Total International Markets (EFA)

Emerging and International Markets, rallied recently on news of a “trade deal” and finally clearly broke above important resistance. However, the rising international tensions with Iran cause a pullback in both these markets from very extended levels. As discussed two weeks ago, we added positions in both emerging market and international value  positions. We will look to add further provided we are not stopped out. 

Current Position: Added EFV and DEM

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. Currently, the short-term bullish trend is positive, and our core positions are providing the “base” around which we overweight/underweight our allocations based on our outlook.

Be aware that all of our core positions are EXTREMELY overbought. A short-term correction or consolidation is likely before a further advance can be made.

Current Position: RSP, VYM, IVV

Gold (GLD) – As noted two weeks ago, Gold was holding support at the $140 level and registered a buy signal. GDX has also held support and turned higher with a triggered buy signal. Over the last two weeks, gold and miners have turned in nice performances and are pushing back to both old highs and very overbought conditions. We previously took our holdings back to full-weights after taking profits earlier this year, and we will look to do the same again if needed.

Current Position: GDX (Gold Miners), IAU (Gold)

Bonds (TLT) – 

Bonds rallied back above the 50-dma on Friday as money rotated into bonds for “safety” as tensions rose with Iran. Bonds remain under pressure currently as the Fed continues with its liquidity support, but the rally on Friday suggests there is something more going on with the overall market. We remain long our current bond holdings and recommend no changes at this time. 

Current Positions: DBLTX, SHY, IEF

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

With the “New Year” and “New Decade” ahead of us, there are many things that we can expect to be different versus the last decade. Those expectations are:

  • Lower annualized returns (due to valuations)
  • More volatility
  • Higher risk of a mean-reverting event
  • Increased potential for a recession
  • Weaker earnings growth
  • Investment opportunities outside of the stock market.

This is by no means a bearish outlook, it is just what happens following a decade of above-average returns. As such, we simply must understand this fact and begin to prepare for what the next decade may bring. 

This is why over the last several months, we have discussed adding “value” to the portfolio, increased our “gold” holdings, and continue to run shorter-duration in our bond portfolios. One of the big macro-themes we are studying is a weaker U.S. Dollar relative to the rest of the world, which could significantly shift our focus from “stocks” to commodities and other assets which perform better against a weaker currency. 

Please read our “MacroView” this week which discusses more of our view in this regard.

We also launched a new “Dynamic Portfolio” this past week, which we will be building opportunistically over the next few months. This model is a “go anywhere, do anything” portfolio tyhat can own a variety of asset types, both long and short.

In the meantime, the markets remain extremely overbought, and risk of a correction is elevated. Therefore, we are most likely not taking any actions into the next week until we see how the market responds to the Iran situation. 

  • New clients: We are holding off onboarding new client assets until we see some corrective action or consolidation in the market.
  • Equity Model: Last week, we sold BA and WELL for tax-loss harvesting purposes to offset capital gains. No other action taken.
  • ETF Model: No actions taken.

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)

If you need help after reading the alert; do not hesitate to contact me.

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See below for an example of a comparative model.


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.