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ETF Rotation by Asset Class, With Asset Class Timing
& Fidelity Select Rotational Strategies
Executive Summary
9 / 1 /2016
How to use: Rules of the Road
The man who has done his
level best... is a success,
even though the world may
write him down a failure.
B. C. Forbes
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Table of Contents
Table of Contents ....................................................................................................................................... 2
Current Temperature: ................................................................................................................................... 3
Changes This Month: ............................................................................................................................. 4
Big Picture: .................................................................................................................................................... 5
Sentiment: ............................................................................................................................................... 11
Survey’s .............................................................................................................................................. 12
Fidelity Select ............................................................................................................................................ 16
Perceived Risk: ......................................................................................................................................... 17
Asset Class Timing: .................................................................................................................................. 18
ASSET CLASS BREAKDOWN: ............................................................................................................... 19
Equities - U.S. Markets ........................................................................................................................ 20
Equities – Developed Non-U.S........................................................................................................... 21
Real Estate: ........................................................................................................................................... 22
Emerging Markets ................................................................................................................................ 23
Commodities: ........................................................................................................................................ 24
Precious Metals .................................................................................................................................... 25
Bonds ..................................................................................................................................................... 26
Account Summary: ................................................................................................................................... 27
REQUISITE DISCLAIMER: ................................................................................................................... 28
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Current Temperature:
Current Temperature’s Permanent Location is <Here> and will be updated with
additions and deletions, today.
From the studies that this report is based upon, we utilized the top 2 and the top 4
ranked ETFs in each asset class. Those ETFs are then held until they are replaced by
another in the rankings or an exit signal occurs in that asset class. A Microsoft Excel
spreadsheet is located in the Member area giving the portfolios by month (going back to
2003) utilizing the top 2 ETFs in each asset class while that asset class is in buy mode.
This spreadsheet also lists performance of the strategy and compares it to SPY on a year
to date basis. The data is updated continually by Google Financial.
A separate tab on the spreadsheet covers the Fidelity Select Rotational performance as
well. This however, updates over night.
Caution: Do not read very much into the short term gyrations as we are looking
for longer term, not short term or very short term performance. The short and
very short term are the traders realm, ours is longer term; investors realm by
definition.
Download Microsoft Excel Spreadsheet [Monthly Portfolios]: Here!
Non-Members who are receiving this free for the summer and would like a copy of that
spreadsheet please email [email protected] asking for the portfolios by month
spreadsheet.
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Changes This Month:
There are no changes in our primary or secondary timing models this month. Any
changes to the portfolios however, will be listed below, in the asset class and respective
fund and ETF rankings.
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Big Picture:
Before moving on, let me state that our positions are dictated by our rules. We
utilize a rules based, trend following, investment plan. It is the Plan that makes
sense and earns money over time and not predictions of what will or might
happen in the future. It is our philosophy that no one knows what tomorrow
holds, no one, lucky guesses here and there aside. With that in mind let’s look at
the weight of the evidence in front of us.
One if the big bearish arguments against this bull market has been the slow pace or
relatively slow pace of economic activity and growth. Wall Street however, closely
follows a barometer called the Citi U.S. Economic Surprise Index. The measure is
different from others in that it depends less on what the actual data readings are and
more on how they compare with expectations.
Periods when the index rises into positive territory often are positive for stocks. Over the
past decade, the S&P-500 was higher 79 percent of the time with a median gain of 5.2
percent six months after periods when the surprise index rose above zero, according to
Burt White, chief investment officer at LPL Financial.
The following chart, courtesy of Yardeni Research, the surprise index plotted with the
S&P:
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Yardini Research Maintains what they call their Fundamental indicator which is
Average of Consumer Comfort Index and Boom-Bust Barometer, which is CRB raw
industrials spot price index divided by initial unemployment claims, four-week moving
average. Source: Bloomberg, Commodity Research Bureau, Department of Labor, and
Standard & Poor’s Corporation. The plot versus the S&P 500:
The patterns are the same with both reaching new highs recently. I interpret the
previous two plots as neutral, perhaps a little friendly, but certainly not bearish.
Q2 Earnings Review (Again courtesy: Yardeni Research)
We at YRI have updated all of our chart publications that track S&P 500
revenues, earnings, and margins with Q2 data. S&P compiles both revenues and
reported (unadjusted GAAP) earnings for the S&P 500. The latter peaked at a
record high of $27.47 per share during Q3-2014. It then fell 31.9% through Q4-
2015. That five-quarter earnings recession coincided with the collapse in oil
prices and in the S&P 500 Energy sector’s earnings.
Reported earnings rebounded 24.7% during the first two quarters of this year
as the price of a barrel of Brent crude oil rose 33% during the first half of this
year, suggesting that the Energy-led earnings recession is over. That’s
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confirmed by S&P 500 revenues, which was negative on a year-over-year basis
from Q1-2015 through Q4-2015, falling by as much as 3.8% y/y during Q2-2015.
During Q1 and Q2 of this year, this growth rate was 0.3% and 1.1%. So far, I
can’t find too many devils in the details.
August in Reveiw: Looking at the month that was, for this I will use the S&P 500 this
month. I like to switch it up a bit.
For the month the total stock market advanced measly .053%. The S&P 500 didn't have
a single 1% move in August for the first time since August 1995.
Month by month look for the year!
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There is more to our work than just the U.S. Equity markets. Now let’s take a quick look
at the asset class performance over the past week, month and Year to date:
All asset classes declined on the last day of the month as well as the previous 5 (our
rolling week). I use 21 trading days, which approximates a month’s worth of trading
very well. For this rolling month we have three of the eight classes above lower. The big
decline coming in the Gold miners down 16.13% but still up 110% on the year.
The other two declines were minor and both remain up on the year. The only asset class
down on the year are the developed Non-U.S. equities but they are essentially flat.
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MARKET SECTORS:
Our daily output in the trading notes each evening, below 8/31/16. First S&P Sectors or
SPDRs:
Six of the fourteen SPDRs above are up double digit percentages on the year. This
compares to 6.2% for the S&P 500 . You cannot outperform the benchmark by owning
the benchmark, in fact if you own the benchmark you are underperforming by
definition. (benchmark minus costs). Seven of the 14 are still rated overweight (OW) by
our relative strength analysis. Nine are showing signs of accumulation as well. [See
definitions below]
Broadening out our sectors I use the Morningstar Legacy Sector assignments. There are
31 sectors of which 29 are higher year to date (versus 26 last month) led by; Metals and
Mining, Energy, -Conglomerates- Electronics--Manufacturing- and -Consumer
Durables-
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THE MARKET STATE COLUMN SHOWS THREE CATEGORIES: OW = OVERWEIGHT, UW =
UNDERWEIGHT AND MP = MARKET PERFORM. THIS ANALYSIS IS BASED UPON A SIX
MONTH RELATIVE STRENGTH. SPDTI IS VICTOR SPERANDEO’S DIVERSIFIED TRENDS
INDICATOR, A MONTHLY CALCULATION. THE ABOVE WOULD SHOW AUGUST AS THE
CURRENT MONTH AND JULU AS THE PREVIOUS MONTH. THAT WILL CHANGE TOMORROW
WITH SEPTEMBER DATA, CHECK THE NOTES.
There is an old cliché, which basically states, that anything less than your chosen time
frame is merely noise. What in essence that means is; if you make decisions based on end
of day data then the hourly, half hourly, 5 minute etc intra-day movements is nothing
more than noise, and should be treated as such and ignored. If your decisions are based
on weekly data then the daily data is noise within your time frame.
The Studies used as the basis for this monthly letter are based on monthly data points,
with secondary looks based upon weekly data. That means that the daily data points are
noise within our bigger picture.
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Utilizing monthly data allowed us to stay in during the 2011 market correction and early
2016 correction. Corrections are not only normal, they are healthy; scaring out the weak
longs and rewarding the strong longs. The big monies are made sitting through
corrections.
The requirement for us to exit is a close below the bull/bear line. We have punctured it
twice this year, but have not closed below it.
The question is simply; is this market consolidating prior to breaking out to new highs,
or being distributed prior to breaking down? Of course no one knows for sure, as this is
the risk we assume as investors. It is also why we get paid.
Sentiment:
When the sentiment becomes extreme one needs to be cautious of an important
reversal. The reason is quite simple, at least to me. One does not usually state
their bias unless or until, they have already made their investment adjustments.
Their buying power / selling pressure has already been spent and is not about
to influence market direction going forward. Why give away your hand
(opinion) and create competition for executing your strategy?
The key I believe to using sentiment are the extreme readings. If the readings are not
extreme the indicator is neutral, of no apparent use at that time.
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I continue to find the Lipper fund flow report fascinating, you should too! The public
continues to exit this market and even more astounding is that money has been going
into bonds even with extremely low yields. Perhaps they feel very low yields are
preferable to losing in the high priced equity markets.
Lipper Analytics Money flow for last week (8/25 last available at publication time)
$6.4b outflow from equity funds/ETFs this wk. Negative 28 of past 34 wks
$2.7b inflow to taxable bond funds. Positive 26 of past 34 wks
Survey’s
Investors Intelligence
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With bulls over 50% and bears under 30 this measurement is becoming somewhat
negative. However, taking the two together suggests perhaps a week or two pullback
within a defined up trend.
Even after the strong advance, longer term measures of sentiment continue to show skepticism among investors. Together, this is a set up for higher equity prices in the months ahead. There are reasons however, to be on the alert for a retracement of recent gains in August. The SPX consistently reacts negatively as it approaches each "round number" milestone (like 2200) for the first time. The seasonal chart below (courtesy of LPL Financial) was in last month’s letter. I repeat it here to show that September is often the best month of the year to buy. Look just beyond the box on the chart:
The AAII (American Association of Individual Investors) Bull/Bear survey gives us a
look at the public’s view, versus the so called professionals surveyed by Investors
Intelligence and Bank of America Merrill Lynch.
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I think the above chart is one of those anomalies where the individual investor for the
most part has missed this bull market and is there for hoping for a new bear market to
justify and to give them that missed opportunity. Not a very big change from last month.
I read it as neutral.
Symmetry: A look at a longer term balance between bull and bear phases where down
legs are matched by equivalent up leg movements. Utilizing SPY for the picture:
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If we experience symmetrical moves by flipping the box on the vertical, the ultimate
objective would be SPY 240/250 or S&P 500 2,400 – 2,500. That kind of a move if it
happens from here represents an approximate an additional 15% gain from these levels.
Interestingly I am now beginning to see others reach the same objective utilizing
different methodologies.
As Trend Followers we can also express the trend as a regression channel for ease of
viewing from the 2009 low:
The trend is still very much intact! A perfect channel for 7 years now!
I believe it was Bernard Baruch who stated something to the effect of; I always left the
first and the last 20% of a move to others. I was perfectly happy with the middle 60%.
That is what we are attempting to accomplish here, gaining the middle 60% of a move.
“It never was my thinking that made the big money for me.
It always was my sitting. Got that? My sitting tight!”
Jesse Livermore.
Questions are certainly welcome; I know these are confusing times to manage ones
money from a longer term perspective.
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Fidelity Select
The Fidelity Select Funds Rankings will appear under four time frames. The time frame
differences have been discussed and presented in previous letters, as well as in the study.
If you are a new member and I have failed to email the study, just ask for it, and I will
forwarded it ASAP. The monthly data is kept on a Google spreadsheet, embedded in the
member area HERE!
The studies are based upon the 6 month time frame. I believe it was James
O'Shaughnessy in What Works on Wall Street, stated that the six month time frame
seemed to work best.
The Fidelity Select Performance is also included in the Real Time Performance
alongside the real time ETF performance data on site. HERE! Middle Tab! The data
however, updates overnight and not during the day as with ETFs.
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Perceived Risk:
The following calculations represent the distance the current asset class index price at the
end of the month is from the bull/bear line or go to cash signal. While never exact, since
it requires a month end close, it is a good way to gauge the risk of entering an already long
asset class, today. N/A simply means our methodology is not in this asset class; hence the
risk is not applicable.
Remember; multiply the percent risk below by the percent of portfolio committed to
that asset class. Example: 20% Asset Class Market Risk times’ 20% commitment equals
a 4% overall risk to the portfolio. Want to reduce the risk further, reduce your position
size or hedge:
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Asset Class Timing:
All asset classes are on a secondary buy signal, remember though it is the primary signal
that we gauge our performance upon, the secondary signal is for very aggressive investors
only and they should take pilot positions at that.
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ASSET CLASS BREAKDOWN:
I show the top four ETFs, as measured by relative strength over the last six months, for
each asset class below, even if that asset class is listed as in cash. The full list for each asset
class is on the Excel spreadsheet. You may own more or less depending upon your account
size and risk profile.
In addition, the Excel spreadsheet contains the average volume over the last couple of
months. If you are operating in size, or if the spreads are too wide, simply move down the
list to the next ETF.
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Equities - U.S. Markets:
Primary remains on a buy signal. The buy signal has been in effect since November
of 2009. Below is a picture of the top four, for each of the last three months for comparison
purposes. Depending upon the number of ETFs you hold in each asset class, Sell the ones
dropping from the list and replace them with the new. If there are no changes then no
exits are warranted.
Sell XLB and Buy XOP, XBI remains long.
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Equities – Developed Non-U.S.:
Equities of Developed markets non-US had been long since November 30, 2009, until the
end of September 2015, we remain in cash with this asset class. No positions are
warranted even though the top four are shown below.
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Real Estate:
Real Estate remains on a primary buy signal. The buy signal has been in effect since
October 30, 2010. A secondary buy signal occurred in March, matching the primary.
If you are doing the top 2 replace IYR with REM.
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Emerging Markets:
Primary signal has been in cash since September of 2011. No positions are warranted;
the top four in rankings are still shown.
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Commodities:
Primary signal still in Cash, from September 30, 2011. A secondary buy signal was
issued 4/24, for aggressive investors only.
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Precious Metals:
Precious Metals remain on a primary (April 2016) and a secondary buy signal. The
secondary buy signal occurred at end of January 2016.
No Changes in the Top 4.
Combining Commodities and Precious Metals into one asset class makes perfect sense
for some and not others.
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Bonds
Treasuries remain on a Primary Buy signal, and have been since January of 2015, the
secondary signal joined in on the long side in January 2016. Corporate bonds received a
primary buy signal last month; a secondary buy signal was issued on 3/20/2016:
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Account Summary:
Utilizing equal dollar amounts in each of the six equity asset classes results in an equity
commitment of 50% (3 long and 3 cash), and 50% cash position. The cash position should
be invested in income producing assets (see Treasuries above) or redistributed amongst
the 3 longs, again depending upon the individual account and you know them best.
See you September 9, 2016 with our methods weekly update.
Current Temperature Spreadsheet and Charts
Bill Zimmer
PrudentTrader.com
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REQUISITE DISCLAIMER:
The Prudent Trader research newsletter and web site is intended for educational and informational use only. The Prudent Trader is not intended as investment advice, nor as an offer or solicitation of an offer to sell or buy any security, nor as an endorsement, recommendation or sponsorship of any company, security or fund. The Prudent Trader employees and affiliates have no fiduciary relationship with subscribers. The Prudent Trader and its principals are not a Registered Investment Advisor (RIA) and have no direct client accounts. Historical returns data has been compiled using price data provided by exchanges and not from actual accounts, and should therefore be considered to be hypothetical. The information herein is provided "as is" without warranty of any kind. Prudent Trader its affiliates and employees are not liable for its usefulness, timeliness, accuracy or suitability, and we specifically disclaim all other warranties, expressed or implied, including but not limited to implied warranties or fitness for any particular purpose. In addition, no representation or warranty, expressed or implied is made as to the effectiveness of its research or investment models or to its accuracy, completeness or correctness, and we assume no responsibility for typographical errors, inaccuracies or other errors which may occur. The user assumes all risk, and neither Prudent Trader, nor any of its affiliates or employees shall have any liability for any loss sustained by anyone who has used the information contained herein . The information contained herein is confidential to subscribers only. Its unauthorized use, release, reproduction or redistribution, in whole or in part, by photocopying, email, entry into a data retrieval system, or by any other means is strictly prohibited. The Prudent Trader is protected by all applicable U.S. and international copyright laws