Monday, March 30, 2015

Medicine for a flat market

Despite some big swings both up and down, the market has very little to show for itself for 2015.  The S&P 500 fell 3.6% in January, rose 4% in February and is looking to be slightly negative in March. This market is threatening to post its first quarterly loss since Q4 2012 and this is only the 6th quarterly loss since the bull market began in 2009.

S&P 500 earnings are now forecast to be down on year over year comparisons.  The decline in earnings from large companies is due to an evaporation of earnings from the energy sector. Despite the woes from energy, other industry groups are showing only muted gains, according to S&P forecasts. Indeed the next three quarters are likely to show negative year over year earnings comparisons from the largest US companies.

Disappointing earnings are likely to limit gains for the market as we move into the second quarter of this year. It appears unlikely that the market is poised to get above its recent highs of 2100 on the S&P 500 index.

In the meantime, trading opportunities continue to brew amongst individual stocks. Many of these could eventually end up being solid long term investments. This would always be a chief hope for anything we invest in. But when the overall market has no traction, we might have to wait too long for these investments to come to fruition. If stocks continue to consolidate in a bandwidth, we want to take advantage of this condition and buy the lows and sell the highs. While we wait for the market to meander, profitable trading is the medicine that we need for assets to grow.

Please expect that our work will yield profitable trading. 

Thursday, March 19, 2015

Winning in a trading range

Yesterday’s Federal Reserve announcement ignited a stock market rally that sent the S&P 500 to a narrow gain for this year. The context of this announcement surprised investors because the Federal Reserve and Janet Yellen indicated the economy was actually weaker than the recent data suggested. A weaker economy means the Fed might delay the inevitable day when it must raise interest rates. Investors took heart that this day might occur later rather than sooner.

The stock market has been revealing a very consistent pattern this year. Last year, I wrote about the “Long Dry Road”, and I suggested the stock market would be flat and tethered to the dock for the foreseeable future. Essentially, this has been the case.

This condition is evident by the behavior of the market for 2015. In January, the S&P 500 fell 3.6%. It recovered 5.1% during a banner February. After enduring substantial volatility, the market rests virtually unchanged for this month of March. You can see from these swings that the market is solidly entrenched in a trading range.

A trading range can give an advantage to shrewd investors.  This trading range dictates buy at the low end and sell at the high end.  Each period of gains should be followed by a pullback and each decline should hasten a buying opportunity and the market should subsequently recover.

Pundits, the financial press, and people who want to sell a story might have you believe the market is bracing for a substantial decline this year. Often, you hear a 20% correction is imminent.  These predictions are based on flimsy supporting data. Furthermore, people advertising a market decline are not the same people that actually control the monolithic pool of money. For example, if you see or read a dire forecast, it is unlikely that the chief investment officer of an organization like CalPERS will be actually selling their equity holdings. CalPERS will remain invested while doomsayers carry on with their forecasts. If the guys in charge of all the stock don't sell, the market can't fall very much.        
Investors win by being cognizant of the investment climate in a trading range. The order of the day is to be discerning about which stocks to hold and which stocks to harvest profits. This quarter, we sold major holdings for our clients in Alibaba, Union Pacific, Apple, Cummins, and Raytheon. In these cases, we took the opportunity to sell, capture recent gains, and redeploy this money to new opportunities.

Tactics like this will be essential for portfolios to gain in this trading range.