Rebalance Our Investments? How Often? Part II

I wanted to publish this second part to what I started some time ago.  Unfortunately a couple of deaths in the family, Christmas, and the holidays all conspired to take my focus away from completing this.

Originally, I wanted to get this done as a means of recommending people rebalance their portfolios in the fall/November time frame.  As we can see, now, despite seasonality being in our favour, the markets are off the November highs.  It should go to make the point that seasonality is the probability of an event, not the certainty of it occurring.  Me, I will continue to play the probabilities, make corrections when proved wrong, and keep my losses to a minimum.

History says this year (2015) is normally the strongest in the four year U.S. election cycle.  Whether we have already pulled those gains forward into the end of last year, or no, remains to be seen.  That is, in fact, the reason we need to rebalance our investments by taking profits and readjusting our asset allocations back to "normal".

 Wishing you all the best for 2015.

Rebalance Our Investments? How Often? (Part I)

Sell In May
Few advisors will ever tell us to "Sell in May, and go away".  While I believe in the affects of seasonality, the argument has been made that abandoning the stock markets every May, may not be as reliable as some studies would indicate.  For one, the cost of getting in, and out, again, can amount to something large.

Part I
If not abandon, should we, at least, rebalance our portfolio?  How often should we rebalance, anyway?  In this, and the following post, I would like to examine these questions.  First, Part I presents a concept necessary to understanding Part II which I will post later.



Comments?

The January Effect

Volume?
In this video, Jim Cramer explains the rapid rise in market indexes this January.  He thinks it has largely been caused by fund managers trying to keep up with the market averages.  I would agree.  There has also been much said in the media about the amount of cash on the sidelines, and the return of retail investors to the markets.  Don't be fooled, my research still shows a declining average volume for the major markets, and mostly, less than average trading volumes.

The Coyote Affect
The media has made much of these "historic" advances.  Myself, when I see the markets disregard the drop we saw in U.S. GDP numbers on Wednesday, I begin to watch for the coyote affect (ala the Roadrunner Show, when the coyote suddenly finds himself walking on thin air with nowhere to go but down).

Seasonality
Cramer talks about the potential "buying panic" in technology stocks caused by good earnings reports.  What he doesn't say is the earnings estimates have been set relatively low, and the seasonality clock has already run out for technology stocks for the beginning of this year.  

Caution Required
Me, I use charts to tell me where the market is at, and what I am seeing at every level is a market that is largely over-bought, for all the reasons Cramer mentioned.  Unlike Cramer, I take my cue from the charts, and while the markets may continue higher from here, they are signalling a cautious approach in the short term.  He may think we are in for a brief pause, but only time, and the charts, will tell for sure.

What charts, if any, do you use?

September 2012 Returns

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September was not all that bad, this year, considering its history for being the worst month of the year.  It is a good illustration of how seasonality is based on probability, not certainty.  Having said that, I am still concerned about this market, particularly since we seem to be deviating from what I would consider to be normal seasonal patterns.  In itself, that wouldn't bother me so much, if it were not for the fact the major technical pattern called a head and shoulders, which I wrote about earlier this year, is still intact.  

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The momentum indicators I follow would indicate the market is heading lower.  If that turns out to be the case, the fact we did not make it above the previous high from last February is more bad news.  I would not be surprised to see the TSX drop below the 200-day moving average which is only some 150 points, or so, lower than the close of today's market.  We could get there in a single bad day!  

The returns shown above use the XIU ETF as a buy and sell signal.  The idea is to buy when XIU is above it's 200-day moving average, and sell when it is below.  Bad things can happen in the markets when they are below the 200-day moving average.  The real danger is, however, if we get down below the 11,000 mark.  A pattern such as this would indicate going back to the lows in the last Great Recession.  It will be interesting to watch - the markets normally finish the year stronger, but that was not the case is 2008, either.  If we do see these things begin to happen I will be looking for opportunities to short the market (using inverse ETF's) rather than looking for buying opportunities.

21 month return for TSX @ September 30, 2012 = -7.86 percent
Return for Basic Timing Model Using XIU =          11.97 percent
Return for Advanced Timing Model =                    -4.36 percent
Money for charity =                                            $0.00 

Are you expecting a year-end rally?

Buy Agriculture Now?

Yes, COW
I am not a financial professional, and cannot recommend equities for you to buy.  Having said that, I want to share my analysis with you.  I do this as a means of teaching others a (relatively) simple approach to arriving at price targets.  Why agriculture?  This is a seasonally strong period of the year for agriculture stocks.  Second, my calculations  indicate there is as much as a 24 percent upside to the Exchange Traded Fund (ETF) with the ticker symbol COW on the TSX as at Saturday, Sept. 22.  I will provide additional details of my calculations over the next few posts, but first, a little more about COW.

Diversification
iShares lists the top holdings in COW by weighting.  By adding the weightings, we can see the top 13 companies make up 81 percent of the fund.  These companies are headquartered in Canada, the U.S., Chile, Brazil, Japan, and Switzerland.  As in this case, ETF's give me the most diversification at the cheapest price.  I could go out and buy each of the 13 companies (or only the one's I like), but the cost of the commissions to do so quickly adds up.

Price
Prices of ETF's such as this one follow an index.  As such, there is no fund manager deciding which company to buy, and when.  iShares manages the fund so it reflects the holdings in the index it is tracking.  The price follows that of the index because institutional providers package up the stocks of companies in the index to sell to iShares when it is cheaper to do so, and buy them back again when they become cheaper than the stocks. As a result, the constant buying and selling of ETF units causes the price of the ETF to mirror the index of stocks.  Price is a function of earnings.  At any given point, we can show the price of a share of stock as being the amount of company earnings divided by the number of shares multiplied by some number.  In other words, Price = Earnings/Share Times X.  Calculate the future price based on future earnings for most of the companies in an ETF, and we can compute the target price of the ETF.

Technical Analysis
Technical Analysis only goes so far when it comes to individual stocks.  That is doubly true of stocks which have a limited trading volume.  A volatile market such as the one we find ourselves in currently compounds the problem even more.  A price of a widely held ETF of widely held stocks is much more predictable than a single company.  The fundamental analysis I am in the process of sharing with you shows me what to buy.  I then use technical analysis to determine when to buy what I have calculated as having a cheap valuation relative to the current price.

Questions?  Comments?


   

Don Vialoux On The TSX

Click Here To Play The Video

Don's research identifies the time period of Sept. 16 to Oct. 9 as a period of seasonal weakness.  He believes the technical indicators are now pointing to a correction.  This correction is, on average, 4.0 percent for the TSX index.  He expects markets to go higher after the U.S. election.  With the debate surrounding the fiscal cliff in the U.S., I expect volatility to be higher than usual, especially if trading volumes remain low.  I think they will get the job done to avoid the future tax increases from automatically kicking in, but it will come at a cost, further weakening people's faith in the system, and the markets.

Anyone have an opinion they wish to share?

August 2012 Returns

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Seasonality at this time of year still favours Energy, Gold, Agriculture and Natural Gas. Natural Gas is the only sector not participating, possibly due to the run up in June and July. North American equity markets continue to trend higher.  My time horizon remains short as we enter into the worst seasonal period of the year based on historical trends.

I had made a choice not to play gold, even though seasonality favours it at this time of year.  First, I would rather invest in gold companies rather than bullion, and a big enough decline in the market causes everything to drop at the same time.  At such times, even gold offers little protection.  Second, I wasn't crazy about the idea of holding a more highly volatile ETF given the high market volatility.  I am now thinking that was the wrong decision, but take comfort in not, potentially, putting funds at risk.  I am all about risk vs. reward, although in this case I underestimated the reward potential  Still, a dollar saved is a dollar I can use later.
  
20 month return for TSX @ August 31, 2012 = -10.94 percent
Return for Basic Timing Model Using XIU =        9.59 percent
Return for Advanced Timing Model =                -4.36 percent
Money for charity =                                        $0.00

Comments? Suggestions?

June 2012 Returns

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The behaviour of the banksters continues to be nothing short of appalling.  All of the largest economies are struggling.  Even so, June was positive for the markets.  Seasonally, the latter part of July is good for the gold and the energy markets.  I expect both to improve.  As for the broad markets, overall, I expect some good shorter term trading opportunities, but fail to see any real catalyst which could propel them to new heights.  The Elliott wave pattern of three waves followed by two in the opposite direction would suggest we will see a lower low than the May/June correction we just saw.

18 month return for TSX @ June 30, 2012 = -13.89 percent
Return for Basic Timing Model  using XIU = 9.03 percent
Return for Advanced Timing Model = -4.36  percent
Money for charity = $0.00

April 2012 Returns

Click On The Chart To Enlarge

We are pretty much past the favourable seasonality period for the markets until later, towards the end of the summer.  It seemed interesting to me, the number of talking heads in the media that were saying this year was no time to "sell in May, and go away".  Once again, this spring was going to be different.  It always gives me a pain in the butt when the very people who should represent our interests, put their own ahead of ours, instead.  The truth is, we shouldn't necessarily sell everything going into May, but taking some profits might be what a prudent person would do.

First, we generally had a good long run up in the markets since the beginning of the year.  Second, while people  felt protected by the Federal Reserve Bank's actions in the U.S., the latest effort to stimulate the markets is due to end.  Third, economic data has softened, including in China.  Fourth, Europe is, or soon will be, in a recession.  Still, the experts would have us believe that all is well, and the correction in the markets that normally begins this time of year won't likely happen.

If I sound bearish, it is because I am.  I said at the beginning of the year I would share my trades on this blog.  The reason I haven't done so is because I have hardly made any.  The markets went practically straight up at the beginning of the year, with little opportunity to get in during a pull-back, and the U.S. markets are just now beginning to look like they are breaking the uptrend, and could likely go lower for a while.  More on that during a couple of future blog posts.

16 month return for TSX @ April 30, 2012 = -8.07 percent
Return for Basic Timing Model using XIU = 5.61 percent
Return for Advanced Timing Model (my returns) = -4.36
Money for charity = $0.00

Have you taken any profits, going into the summer season?

Portfolio Diversification

Click Here To Play The Video

A Small World After All
I am not a professional, and cannot tell you how to balance your portfolio, but I do want to share a couple of things.  In the video, Dale Jackson refers to geographical diversification.  I seldom buy shares of companies outside of Canada because I want to avoid exchange fees and currency fluctuations.  For companies outside of Canada and the U.S., I would rather hold a basket of companies, rather than individual stocks, so I use Exchange Traded Funds (ETF's).

Cyclical Sector Solutions
The TSX is comprised mostly of Energy, Materials, and Financial companies.  These sectors are largely cyclical in nature (fluctuate according to economic growth).  Still, we find some of the very best companies in the whole world trading on our very own TSX.  For times when economics are not in favour of cyclical companies, I buy inverse ETF's (which make money when markets decline) and/or bond ETF's.

Seasonality
The sector allocations shown in this video are based on the make-up of the S&P500, and not the TSX.  The underlying assumption is that we are always fully invested all of the time, so we need to weight our portfolio similar to the market in order to get market-like performance.  Studies done by people like Brooke Thackray, or the Stock Traders Almanac would suggest there is a certain seasonality to the various sectors.  Different sectors tend to outperform during different times of the year.  I seldom have all of my money invested in the markets at the same time, and I use Technical Analysis to detect which sectors are outperforming (usually based on seasonality).  There is a certain rotation I normally follow, rather than just blindly throwing money at everything in the market.

Trade-Offs
Because I am an active investor,  being overly diversified tends to make more money for my advisor in fees and commissions, while lowering my own overall return.  In my experience, one size does not necessarily fit all.

How do you allocate your portfolio?

February 2012 Portfolio Update

For the iShares TSX60 ETF (XIU), I am showing the gains made by using the 200-day moving average as the buy/sell decision point.  It has been a little over a year, and already the benefits can be seen over a buy and hold approach.  Of course, those gains would be slightly less with commissions factored in.

No new trades in my portfolio (Model in the chart above) since Feb. 08.  I am being too cautious, but want to avoid any sudden drop the European situation might cause.  Also, the qualitative easing by the U.S. Federal Reserve will start to wear off at some point.

Seasonally, we are entering the time of year when the TSX is running on all cylinders as the Material, Financial, and Energy sectors tend to do well.

Two month return for TSX @ February 29, 2012 = 5.76 percent
Two month return for Basic Timing Model using XIU = 5.92 percent
Two month return for Advanced Timing Model (my returns) = -1.13 percent
Money for charity = $0.00


How about you?  Are you cautious in this market, or are you looking forward to good times ahead?

December 2011 Portfolio Update

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December began well for me as I successfully followed the TSX lower during the first half of the month, but gave back all I had made, and then some, when I had to stop out of the Materials ETF I was holding near the end of December.  Of course, I would have been fine, now, if I had just held on, but when a position unexpectedly goes against me, I have to sell in order to make sure a smaller loss doesn't turn into a larger one!


Materials and Financials are seasonally strong during January.  I want to get back into Materials as soon as the opportunity presents itself.      

The return I am showing for XIU (iShares TSX 60 ETF ) remains at the same level as July (when it crossed the 200-day moving average) since it continues to be at a price below its 200-day moving average. 

Twelve month return for TSX @ December 31, 2011 = -10.89 percent
Twelve month return for Basic Timing Model using XIU = -0.98 percent
Twelve month return for Advanced Timing Model (my returns) = -3.23 percent
Money for charity = $411.27


I would like to wish everyone a prosperous and Happy New Year!

Portfolio Update

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Excessive volatility has made it very difficult to establish any real trend in the markets.  I was wrong in betting against the materials sector in advance of its period of seasonal strength which normally starts in the middle of November.


The end of October begins the period of seasonal strength for the major stock markets. Materials, Information Technologies, and Agriculture tend to outperform other sectors between now and the end of the year.  All three have already rallied from their summer lows. Still, I am wary of the affect of politics and tax-loss selling on these markets as the end of the year approaches.     


The return I am showing for XIU (iShares TSX 60 ETF ) remains at the same level as July (when it crossed the 200-day moving average) since it continues to be at a price below its 200-day moving average. 


Ten month return for TSX @ October 31, 2011 = -8.68 percent
Ten month return for Basic Timing Model using XIU = -0.98 percent
Ten month return for Advanced Timing Model (my returns) = -1.45 percent
Money for charity = $411.27 


Are you expecting a year-end rally?

Position Size

80/20 Rule

Decisions, Decisions.
Size matters, or so I am told.  From "too big to fail", to sports like boxing, size is a factor.  The question is, how does size affect one's investment portfolio decisions?   For those who don't have a sell strategy (i.e.: Buy and Hold) diversification is the only hope, and what follows will be of little use.  Having a sell strategy provides me with a few more options.

Call Me Arrogant
First, I have heard it said that buying a whole position all at once is the dominion of the arrogant.  That may be true if we are not using technical analysis to time our entry points.  My method of determining when to buy has proven to me that what I call a buy signal is just that - the point in time when the odds are most in my favour.  Averaging into the market almost always reduces my returns, it does not improve them.  If I buy all at once, and I am only partially right, then I can begin to reduce the size of my position.  If I am completely wrong (read: losing money) then I sell everything I just bought.  I would rather be out the commission than lose capital.

Diversification
Next, we should talk about the size of a position.   I have seen academic studies that demonstrate even twenty stocks is not enough for any one portfolio.  (That study was probably commissioned, pardon the pun, by the financial services industry - cha ching!)  Note that a single broadly based Exchange Traded Fund (ETF) can contain well over the twenty stocks required to provide me with enough diversification.

Market Correlation
What I am saying is holding broadly based ETF's provides me with all of the diversification I need, thank you, even if I put my whole portfolio into one ETF!  "Wait!" the experts will say, "You need diversification between various regions of the world!"  Do you hear the cha ching in the background, again?  Since I have a sell strategy, if my investments in the TSX are under performing, when I do sell, nothing says I have to buy the TSX, next time around.  Understand that markets around the world are highly correlated, these days.  By that I mean when one market tanks, the others are likely to do so, also.  Maybe not at exactly the same time, but close enough.  

80/20 Rule
Having said all that, I believe in the 80/20 Rule.  Applied to investing, the rule tells us that 80 percent of our returns will come from 20 percent of our holdings.  Rather than watering down my returns by casting my money into everything in every market, I use seasonality, technical analysis, and fundamental analysis, to focus on the areas of the market that are working, and simply forget about everything else until the conditions change, again.

Returns
The major lesson the market has taught me is I don't have to have all of my money in the market all of the time.  I used to think I was wasting opportunities by not being all in!  Nothing could be further from the truth.  If I divide my portfolio into five, how much of a return do I need to make 20 percent, over all?  You get it, I still have to make 20 percent each time.  Each fifth of my portfolio that makes 20 percent contributes 4 percent to my overall results.  Do that five times, and at the end of the year I end up with 20 percent.  Or, I can make 10 percent on any one position (each time contributes 2 percent), and do that 10 times, and still end up with 20 percent per year.

Better Than Average
Do you get what I am saying?  I only need to have 20 or 40 percent of my portfolio in the market at any one time, and as long as it returns 10 percent in a month, or two, I can take two months of the year off, and still make a twenty percent return.  Not bad, when the average annual rate of return for the markets is around 8 or 9 percent! (Which, by the way, most active fund managers fail to do over the longer term, after expenses). 

Sleep Tight
I am not saying this is what you should do with your own portfolio.  I am not qualified to give that kind of advice.  I am saying, with practice, and experience, it is possible.  Consider the possibilities that not having everything in the stock market all of the time creates.  If nothing else, it helps me sleep better, especially in these crazy markets!

How do you decide how much to put into any one investment?

Portfolio Update

Click To Enlarge Chart

My July results find me caught back up to the market, or perhaps I should say the market caught up to me.  I enjoyed some success in the energy sector before the last week in July when everything reacted to the political games in the U.S..  As a result, the charts signalled at least a short term reversal, so I bought the inverse S&P 500 ETF.  The latter provided me with the largest amount of my profits. 

I have not given up on energy, as we have entered a seasonally strong period for it.  I am also watching gold, but hoping for a correction in order to find a good entry point.  Agriculture and natural gas are also beginning their strong seasonality. 

Apparently, we have had too much rain for natural gas to be of great interest, at least according to one analyst.  He suggested that natural gas is used to supplement electricity needs.  So, despite the heat waves we have seen over this summer, water reservoirs are filled sufficiently to provide enough hydro-electric power that we do not need large quantities of natural gas for power generation.  Huh, who knew!

If you are wondering about the reversal in XIU in my chart, it is because, as a market timing tool, we would not hold it below the 200 day moving average.  Since the 200 d. m.a. was still rising in July, selling XIU at it's latest cross downward through the 200 d. m. a. protected profits from earlier in the month.

Seven month return for TSX @ July 31, 2011 = -3.51 percent
Seven month return for Basic Timing Model using XIU = -0.98 percent
Seven month return for Advanced Timing Model (my returns) = -2.35 percent
Money for charity = $411.27

Anyone want to share their returns for the year?

Good Time To Buy Gold?



Click Here To Play The Video

Short Term Bearish; Longer Term Bullish
Shorter term, Thomas Winmill of Winmill & Co. is bearish on gold and thinks we could see a bit of a pull-back after the U.S. politics over the debt ceiling gets resolved.  Longer term, he believes as long as the government continues to issue dollars, gold will continue to go higher.  He thinks we could see a correction close to one hundred dollars in the price of gold.  Myself, I think it could even get as low as 1480 from here.  From there it could go lower by another hundred dollars, but that is unlikely since we have begun the period of seasonal strength for gold.  Gold companies have underperformed the increase in the price of gold lately, but if we get a correction in the gold price during the shorter term, I will be watching for the stocks of gold companies to correct.  After that, I will be looking for them to begin a new leg up as the price of gold goes higher.  At least, that is the way I am reading the charts.

April Portfolio Update



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 We now know the market peaked early in April (if not March).  Seasonally, the peak normally occurs early in May.  The current correction should not be much of a surprise given the long run up since late last summer.  Thinking the correction was already underway, I ended up getting caught in the short squeeze just prior to Easter as we saw the market make one last gasp.  Now that a deleveraging process is taking over, stocks are getting sold to pay for losses in commodities.

As the market normally comes back to touch it's 200-day moving average at least once a year, I would not be surprised to see that happen before this is done. 

The good news for me is, since the end of April, I am making gains as the market is giving them up, which means my results are not nearly as bad as what they were at the end of the month.  I was early, caught by the fact the market didn't reverse until after the end of the month.

Four month return for TSX @ Apr. 29, 2011 = 3.94 percent
Four month return for Basic Timing Model using XIU = 3.14 percent
Four month return for Advanced Timing Model (my returns) = -5.78 percent
Money for charity = $411.27

March Portfolio Update

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We saw a minor correction in the stock markets during the first couple of weeks in March.  While commodities are still down from the highs, they have not broken the upward trend.

My attempt to play technology stocks as they come down from their high has not paid off, yet. Seasonally, April/May is not the best time to own them, so that opportunity may still exist.  This also tends to be the case for Canadian financial companies. 

Meanwhile I would not bet against the energy and materials sectors at this time of year, although the energy sector does not look like a great buy to me since it has been without any real correction since late last summer.
 
Three month return for TSX @ Mar. 31, 2011 = 5.21 percent
Three month return for Basic Timing Model using XIU = 4.27 percent
Three month return for Advanced Timing Model (my returns) = -3.34 percent
Money for charity = $411.27

Investing Seasonality

Nasdaq Composite

I am not one to make my investment decisions purely on the basis of seasonality.  I do watch for seasonal trends.  One of the best ways of monitoring what's in season, and what isn't is to check http://www.equityclock.com/.  From the main page click on the Seasonality tab at the top.
We can see from the list of Primary Sectors that the Information Technology sector is normally strong from October 9 to January 17.  If we look at the chart for the Nasdaq Composite we can see the momentum has carried right into the end of February.  Missed it, right?

No, since I believe the markets are due for a correction anyway, what better way to play the decline than to choose the sector which has just recently peaked?  More bang for the buck, so to speak.  The easiest way to do so is with the Horizons' Nasdaq 100 Bear ETF.  The ticker symbol on the TSX is HQD.  Although I like to use these ETF's, I have to warn others who might want to that they use leverage.  In this case, for every single percent the Nasdaq 100 falls, this particular ETF will gain around 2 percent.  I say around 2 percent, because this type of ETF does not always track the underlying index perfectly.

In a very exaggerated example, think what would happen if the market rose by 25 percent in one day.  This would mean the ETF should drop 50 percent (2 times).  The next day, if the market dropped by 25 percent, the market would be around 94 percent of where it started.  The ETF, on the other hand, would lose 50 percent, then gain 25 percent (50 percent of 50 percent) and only be at the 75 percent level of where it started.

This is one trade where timing is everything.  Success will depend entirely on getting in and getting out at the right time.  With the help of seasonality, and technical analysis, it can be a very lucrative trade.  Still, if it goes wrong, the key is to recognize that fact, and just unwind the trade.  Any time a trade is costing me capital, I have to be doing it wrong!

Paying attention to market seasonality is one way we can identify setups for profitable trades.