October 29th, 2009

Managing Portfolios Today With Three Indicators

I don’t know how many of you are full-time traders, how many self-manage your portfolios on a part-time basis or how many visit here only periodically to get a different take on the market, something that you can take back to your financial advisers just to let them know you’re looking over their shoulder.

But I spend most of my day with my Fidelity trading platform (Active Trader) running on one screen and my charts or whatever else I might be working on, reading or playing (I’m a mediocre chess player) on another screen. Furthermore, as the day progresses, I have either Bloomberg or CNBC running muted over my desk so I can see how the market is doing and watch for any major news headlines. Periodically during the day, I calculate how closely my portfolio tracks, percentage wise, the S&P in the hope that it does better than the benchmark index (either gaining a greater percentage or losing less of a percentage).

The reason I tell you this is that I find that my portfolio rarely ever moving opposite the benchmark. They usually move in tandem, it’s only a matter of degree. So managing my portfolio is rather simple. It’s essentially a cash, or risk, management decision: how much do I want to have at risk given what I see happening in the market and only secondly in what types of assets it should be invested. In short, the portfolio management decision is essentially a market timing decision. I spend most of the time trying to figure out whether the direction of the market’s trend has changed (the answer I share with you).

As an aside, I went to an MTA (Market Technicians Assoc.) meeting last night and heard an excellent presentation by Frank Teixeira, of Wellington Funds and the manager of John Hancock’s new Technical Opportunities Fund that I’d like to share with you. One of his points that obviously resonated with me, is that more and more institutional investors are disappointed with Index funds or the notion that “there’s always a bull market somewhere” and it’s only a matter of finding it. They’re disappointed in “buy-and-hold” since the strategy since 1999, a long ten years, has led to returns only marginally above break even. Given the two market crashes since 2000, the objective now is managing risk and the tactic is to consider cash a safe default investment.

He also said that the world of investment alternatives has greatly expanded with the introduction of all sorts of etf’s and adr’s. There’s no way one person can become familiar with all industries, all commodities, all interest rate trends, all currencies around the world. But the worldwide search for investments can be narrowed by using technical analysis (studying trends) and looking at charts. Human behavior, as represented in price trends (charts), is the same around the world for all assets.

Having said that, the key to where the market will be next March can be found, I believe, in essentially three areas: 1) the foreign exchange value of the $US, 2) monetary policy as reflected in interest rates and 3) the US economy as reflected in the S&P 500 index. [The only thing that has a significant impact on our portfolios but we have no way of predicting or monitoring is what Congress does with income taxes.] Here are the relevant charts:

  • $US: If this were a stock chart you wouldn’t consider anything in the price action to indicate that a bottom has been reached and that a reversal pattern is being formed. If this were a stock, the only safe assumption would be that, at best, the downward trend remains in tact and, at worst, it will remain at current levels for a while (a couple of months) before turning back above 78.
  • 20+ Year Long-term Treasury Rates: When interest rates increase, bond prices fall and vice versa. If this were the a stock’s chart, I would sell or short it. Moving averages indicate that longer-term trends have turned down (how could they not have from the historically low current rates) and there’s higher interest rate (lower bond prices) since the chart depicts a possible head and shoulder pattern. [A caveat is warranted here. Treasury Bond ETFs are relatively new so there’s no history of how the ETF will perform over a wider range of interest rates.]
  • S&P 500: This is what we’re all interested in. If the neckline of the inverted head-and-shoulder that everyone now believes was the bottom is the mid-point of the move from bottom to top (a standard technical charting conventional rule), then the full extent of the bull market run could be to 1328. But the full move can be divided into two, separated by a period of consolidation. We could no be seeing the beginnings of that consolidation (given that volume supporting further upside is waning as indicated by OBV diverging from price).

Bottom line? We are in or very near a consolidation. It’s best to reduce exposure to risk by increasing cash relative to investments (I’m currently at 10% and plan to increase to 25% at the next opportunity). Looking at the above exchange and interest rate trends, I will look for investments that take advantage of those trends. But until the market indicates otherwise, the correction should be short with another leg up possible sometime in 2010. As Teixeira said, this first phase of the recovery has seen “a rising tide lifting all boats”; the next phase will see much more divergence among stocks, between the leaders, the average and the laggards.

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  • Anonymous

    enjoy your comments and blog. relatively new reader. re: 3 views:
    if rates go up (per TLT h&s) then dollar should go up as well (normally) that is if rates go up relative to other countries rates…
    and market has been clearly inverse dollar… thinking there will have to be some kind of quantum shift when rates do start going up… exactly what not sure… perhaps you have a theory or two…
    thanks.
    blackstone.

  • Joseph Meth

    Blackstone, welcome aboard and thank you for your kind remarks.

    I have to go with a notion that supports my underlying thesis: 1) initial short-term reaction could be negative (hence a 3-6 month correction in beginning of 2010) followed by 2) a continuation of the bull market lead by a new group of stocks … specifically the tech, big tech and other leaders of the 1997-2000 Tech Bubble as they attempt to pass their 1999-2000 highs …. fueled by economic growth in rest of world. This could lead to the next SPX target of 1350-1400.

    If you're looking for wishful dreaming, there it is. But it is a plan (or goal, take your pick).

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