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Plan Comes Together 11-20-15

Written by Lance Roberts | Nov 20, 2015

Plan Comes Together

Last weekend I wrote:

“The expected correction began in earnest this past week. While there is no guarantee, with the market still overbought on a short basis, it seems most reasonable that a correction back to previous support levels (2040-2060) will likely find “buyers” betting on the traditional year-end rally. This also aligns with the more traditional pre- or post-Thanksgiving correction. 

That target range was broken on Friday as stocks closed sharply lower on very weak retail sales reports. With the markets NOW oversold, it will be critically important that support at 2020 is not broken. The next critical level of support is the short-term moving average (dashed blue line) at 2010, and then 1990 at previous support levels from early this year. It will be important for the market to hold these current levels of support without violating it over the next few trading days in order to set up a more tradeable short-term rally.

Be sure and read Tuesday’s “Technically Speaking” blog post for updates to this analysis and the potential for entering a trading opportunity. “

Then, as I stated, I updated that analysis last Tuesday stating:

“As we progress through the last two months of the year, historical tendencies suggest a bias to the upside. This is particularly the case given the weakness this past summer which has left many mutual and hedge funds trailing their benchmarks. The need to play “catch-up” will likely create a push into larger capitalization stocks as portfolios are “window dressed” for year end reporting.

This traditional ‘Santa Claus’ rally, however, does not guarantee the resumption of the ongoing “bull market” into 2016. The chart below lays out my expectation for the market through the end of the year.



With the markets currently oversold on a very short-term basis, the current probability is a rally into the ‘Thanksgiving’ holiday next week and potentially into the first week of December. As opposed to my rudimentary projections, the push higher will likely be a ‘choppy’ advance rather than a straight line.

In early December, I would expect the markets to once again pull back from an overbought condition as mutual funds distribute capital gains, dividends, and interest for the year. Such a pullback would once again reset the market for the traditional ‘Santa Claus’ rally as fund managers ‘window dress’ portfolios for their end-of-year reporting.

This is only an expectation based on seasonal tendencies of the market. As I have stated repeatedly, the current setup is opportunistic for very short-term, nimble and disciplined traders. However, for long-term investors looking to managing risk and preserve capital, the current market environment is no longer friendly and is beginning to border on hostile.

As John Hussman recently noted:

‘When investors are inclined to speculate, they tend to be indiscriminate about it, so strongly speculative markets demonstrate a clear uniformity across a broad range of individual stocks, industries, sectors, and risk-sensitive securities, including debt of varying creditworthiness. In contrast, as risk-aversion sets in, the first evidence appears as divergence in these market internals. Put simply, overvaluation reflects compressed risk premiums and is reliably associated with poor long-term returns. Over shorter horizons, investor risk-preferences determine whether speculation will continue or collapse, and the condition of market internals acts as the hinge that distinguishes those two outcomes.’

Excessive market valuations, weak internal measures, and a deteriorating backdrop has historically been a “wicked brew” for investor outcomes.

While markets can certainly remain ‘irrational longer than you can remain solvent,’ the secret to ‘solvency’ is understanding ‘when’ to make an investment ‘bet.’ A professional gambler only goes ‘all-in’ when he ‘knows’ he has a winning hand. He also knows when to ‘fold’ and minimize his losses. For long-term investors, the risk to ‘solvency’ greatly exceeds the ‘reward’ currently.

For short-term traders, the opportunity to speculate in the market has improved enough to increase equity risk exposure temporarily. However, gains will likely be limited and risk of failure is high.”

The model in the Sector Analysis section below has been updated to reflect the addition of equity risk to portfolios in the short-term. With the market once again approaching “overbought conditions,” as shown in the chart above, I will wait for the post-Thanksgiving correction to increase the “weighting factor” in the 401k-plan manager. 


Fading Affect Bias

PLEASE DON’T confuse “short-term” opportunities with “long-term” views. 

What I have repeatedly stated above, is that in the VERY short-term there is a “trading opportunity” available for investors. However, on a longer-term basis, there is little “reward” relative to the “risk” you undertake.

For many investors, the biggest problem comes from what is known as a “fading affect bias.” This is a psychological phenomenon where the human brain tends to forget past “pain.”

In many ways, this “bias” is a good thing. For example, if women remembered every vivid detail of the “pain” involved during childbirth, there would very likely be far fewer births which would not be a good thing for the human race.

James Osborne recently penned a piece on this topic as it relates to investing.

For one, the fading affect bias (and its cousin, optimism bias) promotes gambling and speculation. Imagine you speculate on a high-flying small cap biotech and it gets wiped out. If you sufficiently held on to the pain of that past loss, you might be discouraged from such foolishness again in the future. But when your biases kick in, you could be tempted to minimize the pain of that experience and allow yourself to be distracted by pleasant memories of your occasional winning gamble. And so you’re at the table again, looking for the next big payout.

But the real danger for most long-term investors is minimizing past bear markets. In the moment, bear markets can be terrifying. When the bear comes, there is always some major economic or geopolitical event pushing stocks into a tailspin. Even the ‘little’ hiccups we’ve seen in the past few years had real roots. Was Russia really invading the Ukraine? Was the ebola virus really in the US already? Is it all over for China’s economic growth? These stories and the accompanying down days in the markets can raise our blood pressure and make our mental palms sweaty. We worry – how bad can this get?”

Here is the point. Forgetting about how you felt during the last bear market, or two, will leave you vulnerable to missing the change from a “bull market trend” to a “bearish” one. It is during that “trend reversal” that the long-term damage is done to portfolios.


The Real Value Of Cash

This brings to mind a call I had on the radio show last night discussing his advisor’s reluctance to hold cash. 

The argument against holding cash goes this way:

“If you hold cash you lose value over time to inflations.”

This is a true statement if you hold cash for an EXTREMELY long period. However, holding cash when market valuations are high and forward expected returns are low, as they are today, has been a measure of preserving purchasing power over time.

As I discussed previously:

“I have written previously that historically it is relatively unimportant that the markets are making new highs. The reality is that new highs represent about 5% of the markets action while the other 95% of the advance was making up previous losses. ‘Getting back to even’ is not a long-term investing strategy.”


In a market environment that is extremely overvalued, the projection of long-term forward returns is exceedingly low as shown in the chart below. This, of course, does not mean that markets just trade sideways, but in rather large swings between exhilarating rises and spirit-crushing declines. This is an extremely important concept in understanding the “real value of cash.”


Source: Streettalklive.com

The chart below shows the inflation-adjusted return of $100 invested in the S&P 500 (using data provided by Dr. Robert Shiller). The chart also shows Dr. Shiller’s CAPE ratio. However, I have capped the CAPE ratio at 23x earnings which has historically been the peak of secular bull markets in the past. Lastly, I calculated a simple cash/stock switching model which buys stocks at a CAPE ratio of 6x or less and moves to cash at a ratio of 23x.

I have adjusted the value of holding cash for the annual inflation rate which is why during the sharp rise in inflation in the 1970’s there is a downward slope in the value of cash. However, while the value of cash is adjusted for purchasing power in terms of acquiring goods or services in the future, the impact of inflation on cash as an asset with respect to reinvestment may be different since asset prices are negatively impacted by spiking inflation. In such an event, cash gains purchasing power parity in the future if assets prices fall more than inflation rises.


While no individual could effectively manage money this way, the importance of “cash” as an asset class is revealed. While the cash did lose relative purchasing power, due to inflation, the benefits of having capital to invest at low valuations produced substantial outperformance over waiting for previously destroyed investment capital to recover.

While we can debate over methodologies, allocations, etc., the point here is that “time frames” are crucial in the discussion of cash as an asset class. If an individual is “literally” burying cash in their backyard, then the discussion of the loss of purchasing power is appropriate.

However, if the holding of cash is a “tactical” holding to avoid short-term destruction of capital, then the protection afforded outweighs the loss of purchasing power in the distant future.

Of course, since Wall Street does not make fees on investors holding cash, maybe there is another reason they are so adamant that you remain invested all the time.

Just something to think about.

Portfolio Management Instructions

Repeating instructions from last week, it is time to take some action if you have not done so already.

1) Trim positions that are big winners in your portfolio back to their original portfolio weightings. (ie. Take profits)  

2) Positions that performed with the market should also be reduced back to original portfolio weights.

3) Move trailing stop losses up to new levels.

4) Review your portfolio allocation relative to your risk tolerance. If you are aggressively weighted in equities at this point of the market cycle, you may want to try and recall how you felt during 2008. Raise cash levels and increase fixed income accordingly to reduce relative market exposure.

How you personally manage your investments is up to you. I am only suggesting a few guidelines to rebalance portfolio risk accordingly. Therefore, use this information at your own discretion.

Have a great Thanksgiving holiday. 

lance sig

Lance Roberts

Lance Roberts is a General Partner of STA Wealth Management. He is also the host of “Street Talk with Lance Roberts”, Chief Editor of “The X-Factor” Investment Newsletter and author of “The Daily Exchange” blog Follow Lance on Facebook, Twitter and Linked-In

Sector Analysis

Short-Term Trade Is On

As I discussed last week, the correction earlier this month retested support last Friday and created the environment necessary for a short-term trading opportunity. The increase to equity exposure, while modest, has performed nicely over the past week.

From last week:

“With the correction over this past week, there is now a potential for a short-term rally through the end of the year.  As you will notice in the SAMPLE model below cash was reduced to 29% of the portfolio. This is for a SHORT-TERM trading opportunity only. If you a longer-term investor it is advisable to wait for a clearer bull-market confirmation to be made.

It is completely OKAY if your current allocation to cash is different based on your personal risk tolerance.”




Again, this is a short-term trading increase to equity exposure, not a long-term allocation shift. There are many reasons currently, to suspect that the current rally will fail as we move into 2016, however, for now the market is optimistically biased.  Some of these longer-term risks include:

  • Tightening of monetary policy
  • Massive overhead resistance
  • Excessive valuations
  • Weak internals not supporting the advance.
  • Small caps lagging
  • Transports weak
  • Money flows tepid
  • Junk bond decline
  • Commodity declines
  • Weak economic data trends
  • Etc.

This is a very different backdrop than what was seen following previous “dips” during bull market rallies. The current backdrop is more akin to periods where major bull markets were slowly grinding to their inevitable end.

However, topping processes can take very long periods to form completely. In the meantime, there will be tradeable opportunities to manage portfolios for gains while still minimizing the inherent risk. Now is currently one of those opportunities.


Working With A Model Allocation 

Let’s review the model.

NOTE: The following is for example purposes ONLY. It is in no way a suggestion, recommendation, or implication as to any portfolio allocation model currently in use. It is simply an illustration of how to overweight or underweight a model allocation structure. 

Again, this is just for educational purposes, and I am not making any specific recommendations. This is simply a guide to assist you in thinking about your own personal position, how much risk you are willing to take and what your expectations are. From that starting point design a base allocation model and weight it accordingly. The closer you want to track the S&P 500 Index, the less fixed income, real estate and cash your portfolio should have. For a more conservative allocation reduce allocations to equities.”

Got it? Okay.


S.A.R.M. Current

The Sector Allocation Rotation Model (SARM) is an example of a basic well-diversified portfolio. The purpose of the model is to look “beneath the hood” of a portfolio to see what parts of the engine are driving returns versus detracting from it. From this analysis, we can then determine where to overweight sectors that are leading performance, reduce in areas lagging, and eliminate those areas that are dragging.

The Sector Allocation Rotation Model continues to deteriorate suggesting that markets are significantly weaker than they appear.


Over the last several weeks, I have suggested waiting for a correction to the 2040-2060 level to be reached, combined with an oversold condition for entering short-term trading positions.

It is still recommended to take profits in fixed income as rates had reached their target levels. That advice has worked out well over the last couple of weeks and provides some additional cash reserves to the portfolio to add fixed income if rates tick up into the end of the year. However, while Bond are currently underperforming, we may be close to having another opportunity to take advantage of a bond trade in the near future. 

The same advice for bonds applies to UTILITIES and REITS, which have also performed very well as of late. However, that outperformance is beginning to fade. It is still a good time to lock in profits. 

 Staples and Financial stocks continue to exhibit weakness relative to the overall market, and now Discretionary has faltered signaling that retail spending make be weaker than currently anticipated.

The new model allocation for the “year-end trading opportunity” remains as below. With the market a bit overbought currently, I will wait for small corrections to make any additional adjustments. Check the Tuesday update on the blog for any additions to this analysis.

  • Hold materials
  • Hold industrials
  • Hold energy
  • Hold technology
  • Hold utilities
  • Hold staples
  • Potentially Reduce discretionary
  • Potentially Reduce healthcare
  • Potentially Reduce financials
  • Potentially Reduce reits
  • Potentially Reduce bonds


As you can see, there are not DRASTIC movements being made. Just incremental changes to reducing overall portfolio volatility risks. However, if the expected bounce fails at resistance, then further reductions will be required in accordance with the risk reduction modeling. 

Remember, as investors, our job is not to try and capture every single relative point gain of the market as it rises. While we certainly want to participate in the rise, our JOB is to protect our capital against substantial losses in the future. A methodology that regularly harvests gains, reduces risk and keeps the portfolio focused on longer-term goals will lead to a more successful outcome.

See you after Thanksgiving.


401-k Plan Manager

Allocation Model


Correction Has Arrived

As I have repeated over the last couple of weeks, the markets have moved into the “seasonally strong” time of the year. Therefore, after months of cleaning up portfolios, reducing risk and rebalancing allocations accordingly, portfolios should be in fairly healthy shape.


I want to reiterate, if you are closer to retirement OR are more risk IN-tolerant, using rallies to reduce further risk in portfolios, and raise cash, is completely acceptable. 

As noted in the chart above, the markets have registered a short-term buy signal as we enter the last couple of months of the year. This is consistent with historical tendancies.

The recent advance has cleared short-term resistance and put the market back onto a short-term buy signal. Use any small corrections in the market to rebalance portfolios and move towards the target allocation upgrade shown below. 

Any correction in the next week or two should be sufficient enough to raise allocations in equities for the rest of the year. Beyond that is unclear currently, so we will allow the markets to dictate what moves we make next.

Make sure an monitor the daily blogs for updates to this view and potential allocation changes. 

Continue to review your current portfolio holdings and make adjustments as needed. 

“1) HARVEST: Reduce “winners” back to original portfolio weights.  This does NOT mean sell the whole position. You pluck the tomatoes off the vine, not yank the whole vine out of the ground.

2) WEED: Sell losers and laggards and remove them garden. If you do not sell losers and laggards, they reduce the performance of the portfolio over time by absorbing “nutrients” that could be used for more productive plants. The first rule of thumb in investing “sell losers short.” So, why are you still hanging onto the weeds?

3) FERTILIZE AND WATER: Add savings on a regular basis.A garden cannot grow if the soil is depleted of nutrients or lost to erosion. Likewise, a portfolio cannot grow if capital is not contributed regularly to replace capital lost due to erosion and loss. If you think you will NOT EVER LOSE money investing in the markets…then STOP investing immediately.

4) WATCH THE WEATHER: Pay attention to markets.  A garden can quickly be destroyed by a winter freeze or a drought. Not paying attention to the major market trends can have devastating effects on your portfolio if you fail to see the turn for the worse. As with a garden, it has never been harmful to put protections in place for expected bad weather that didn’t occur. Likewise, a portfolio protected against “risk” in the short-term, never harmed investors in the long-term.”

If you need help after reading the alert; don’t hesitate to contact me. email


Current 401-k Allocation Model

30% Cash + All Future Contributions

Primary concern is the protection of investment capital. Examples: Stable Value, Money Market, Retirement Reserves

35% Fixed Income (Bonds)

Bond Funds reflect the direction of interest rates. Examples: Short Duration, Total Return and Real Return Funds

30% Equity (Stocks)

The vast majority of stock funds track an index. Therefore, select ONE fund from each category.

Keep It Simple.

  • 15% Equity Income, Balanced or Conservative Allocation
  • 15% Large Cap Growth (S&P 500 Index)
  • 0% International Large Cap Value 
  • 0% Mid-Cap Growth 
Common 401K Plan Holdings By Class


  • Stable Value
  • Money Market
  • Retirement Savings Trust
  • Fidelity MIP Fund
  • G-Fund
  • Short Term Bond

Fixed Income

  • Pimco Total Return
  • Pimco Real Return
  • Pimco Investment Grade Bond
  • Vanguard Intermediate Bond
  • Vanguard Total Bond Market
  • Babson Bond Fund
  • Lord Abbett Income
  • Fidelity Corporate Bond
  • Western Asset Mortgage Backed Bond
  • Blackrock Total Return
  • Blackrock Intermediate Bond
  • American Funds Bond Fund Of America
  • Dodge & Cox Income Fund
  • Doubleline Total Return
  • F-Fund


  • American Founds Capital World G&l
  • Vanguard Total International Index
  • Blackrock Global Allocation Fund
  • Fidelity International Growth Fund
  • Dodge & Cox International
  • Invesco International Core Equity
  • Goldman Sachs International Growth Opp.


Large Cap

  • Vanguard Total Stock Market
  • Vanguard S&P 500 Index
  • Vanguard Capital Opportunities
  • Vanguard PrimeCap
  • Vanguard Growth Index
  • Fidelity Magellan
  • Fidelity Large Cap Growth
  • Fidelity Blue Chip
  • Fidelity Capital Appreciation
  • Dodge & Cox Stock
  • Hartford Capital Appreciation
  • American Funds AMCAP
  • American Funds Growth Fund Of America
  • Oakmark Growth Fund
  • C-Fund (Common Assets)
  • ALL TARGET DATE FUNDS 2020 or Later

Balanced Funds

  • Vanguard Balanced Index
  • Vanguard Wellington Fund
  • Vanguard Windsor Fund
  • Vanguard Asset Allocation
  • Fidelity Balanced Fund
  • Fidelity Equity Income
  • Fidelity Growth & Income
  • American Funds Balanced
  • American Funds Income Fund
  • ALL TARGET DATE FUNDS 2020 or Sooner

Small/Mid Cap

  • Vanguard Mid Cap Growth
  • Fidelity Mid Cap Growth
  • Artisan Mid Cap
  • Goldman Sachs Growth Opportunities
  • Harbor Mid Cap Growth
  • Goldman Sachs Small/Mid Cap Opp.
  • Fidelity Low Price Stock Fund
  • Columbia Acorn US
  • Federated Kaufman Small Cap
  • Invesco Small Cap

The above represents a selection of some of the most common funds found in 401k plans. If you do not see your SPECIFIC fund listed simply choose one that closely resembles the examples herein. All funds perform relatively similarly within their respective fund classes.

I will modify this list over time as the asset allocation model changes to reflect international holdings, emerging markets, commodities , etc. as the model changes to reflect the addition of those holdings.

Email me if you need further assistance.

Disclaimer: All content in this newsletter, and on Streettalklive.com, is solely the view and opinion of Lance Roberts. Mr. Roberts is a member of STA Wealth Management; however, STA Wealth Management does not directly subscribe to, endorse or utilize the analysis provided in this newsletter or on Streettalklive.com in developing investment objectives or portfolios for its clients. At times, the positions of Mr. Roberts will be contrary to the positions that STA Wealth Management recommends and implements for its clients’ accounts. All information provided is strictly for informational and educational purposes and should not be construed to be a solicitation to buy or sell any securities.

It is highly recommended that you read the full website disclaimer and utilize any information provided on this site at your own risk. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level, be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and applicable laws, the content may no longer be reflective of current opinions or positions of Mr. Roberts. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his or her individual situation, he or she is encouraged to consult with the professional advisor of his or her choosing.

Lance Roberts

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of “Street Talk with Lance Roberts”, Chief Editor of “The X-Factor” Investment Newsletter and the Streettalklive daily blog. Follow Lance on Facebook, Twitter and Linked-In
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