Market Wrap - week ending 7/19/2013

Below is a client email alert that was sent earlier today ...

Hello everyone.   A quick update on your Resnn portfolio …

CURRENT MARKET EXPOSURE: 110%

CASH POSITION: 0%

Margin / Leverage use: 10%

For those of you who have opted out of margin use, your account is fully invested (100%) in the market.

This week the market continued its’ strong resilience and as a result (on Monday) we moved all margin accounts onto margin, albeit only 10%.  As I have mentioned in the past, using leverage can have very powerful results for your account (both good and bad), so we use it very cautiously and are quick to exit margin at the first sign of trouble.   Remember that our primary purpose is to protect your capital, so the use of leverage is something that we are very careful to apply.

For the week, the S&P 500 climbed 0.7%, and the Nasdaq slipped 0.3%.  All in all, most of the week was spent consolidating the recent run up in prices … more settling down.  After such a sharp upward movement, I am very happy to see more calming action, vs. what we usually see after a strong run up … which is an equally strong decline in price.  This ‘quieting down’ shows that investors are interested in keeping their money invested in the  market for the time being. 

This is further evident by observing the disproportionate rise in price of smaller company stocks vs. the safer “blue chips”.  The Russell 2000 advanced 1.59% this week.  When ‘small caps’ move ahead of the rest of the market as they have for a few weeks now, it usually signifies investor’s appetite for riskier investments.  Smaller companies are much more prone to wild movements and news driven events, so seeing this sector outperform the larger companies can be a bullish indicator in its’ self, signifying a healthy market and higher prices to come.

Another bullish indicator this week is the markets’ continued resilience of news.  This week there were a slew of technology company disappointing earnings releases (Microsoft, Google, Dell and Intel to name a few) that beat down the individual company stock’s price but in a more finicky market could have dropped the entire market and did not.  All week long, various representatives of the Federal Reserve distributed conflicting information about the eventual slow down of its’ bond purchasing program which should have caused the market to get spooked and drop, none of which occurred. 

One item that continues to concern me and bears watching is the sharp rise in oil prices.  Today WTI crude oil closed at an almost all time high at $109.00 a barrel.  On July 1^st the price was $96.00.  Most of this rise in price is due to panic set in by the instability in Egypt and any stability there could send it right back to the $90s in a hurry.  Yet, in the mean time, this ultimately is going to result in much higher gas prices which will dramatically impact the economy … and potentially the market. 

The economy is driven almost entirely by consumer spending (approximately 70%) and when gas prices (and other essential purchases) rise, people ultimately spend less on non essential items.  The price of gas has a huge impact on the overall health of our economy and something that concerns me for the latter part of this year.  It will be interesting to watch how this plays out, but it certainly is something I’m not excited to be watching.

For now all of our data point to rising prices ahead, and we are positioned nicely if that occurs.  As you know, our model is entirely data driven.  The decision to be invested in the market is driven by the strength (or lack therefore) of the underlying stocks that we analyze.  As you know, my personal feelings and interpretations have no bearing on the decision process.  Although I mention a number of hypotheticals and news items in these weekly emails, it is only the reaction of the market to these various issues that we care about.  What looks like bad news to you or me really means nothing if the market sloughs it off and keeps rising and that is what our analysis is geared to discover … removing the opinion and emotion and just using the price strength or weakness to identify whether it is safe to be invested at any moment.

For now, the uptrend continues and we hold on for the ride.

May you have a peaceful weekend.

Market Wrap - week ending 7/12/2013

Below is a client email alert that was sent earlier today ...

Hello everyone.   A quick update on your Resnn portfolio …

CURRENT MARKET EXPOSURE: 100%

CASH POSITION: 0%

Margin / Leverage use: 0%

This week the market continued its’ strong resilience and rebuilding effort.  As noted in last week’s post, freshly off an almost 8% correction lasting most of June, the first two weeks of July have been almost entirely positive … a straight up recovery.  Although the S&P500 and Dow Jones have yet to make new highs, the Nasdaq made a new high Thursday and continued its’ upward trajectory today again.  This is exactly the kind of action you want to see after a correction, a strong unrelenting uptrend eliminating the previous price correction quickly.

This is the third time this year that the market has shaken off its’ weakness and gone on to move to new highs, and although the latest correction (in June) is the most aggressive of the three possibly showing a tired uptrend, the sheer fact that we were able to move into new high ground and stay there for a day implies we are off to a good start.  The fuel this time again seems related to the Federal Reserve’s continual monetary purchase program, fueled this week with Bernanke’s statements on Wednesday being interpreted euphorically.

Another strong indicator of the market’s strength is its’ ability to ignore bad news.  A market looking for trouble as an excuse to go down might have found it in the news today, if the bears were in charge.  The University of Michigan’s consumer sentiment survey was weaker than expected, though only narrowly so. The producer price index showed more inflation than the Street estimated, though energy appeared to be the chief culprit.  Fitch Ratings downgraded France on concerns about a lack of

growth and rising government debt, but when has the Street ever been much concerned with France?  Yes, all of the above items are relatively light on the worry scale.

But a fussier market might have grabbed one or more and run to the sidelines.

As I alluded to in last week’s post as the market continued stabilizing and was further confirmed with our data analysis, we entered the market earlier this week and positioned our client portfolio’s fully into the market with a fairly even split between the S&P500, Nasdaq and Russell 2000.  We are now 100% invested in the market, using no leverage as of yet.

For now, the previous uptrend continues and we hold on for the ride.

May you have a peaceful weekend

Market Wrap - week ending 7/5/2013

Below is a client email alert that was sent earlier today ...

A quick update on your Resnn portfolio …

CURRENT MARKET EXPOSURE: 0%

CASH POSITION: 100%

Happy July 4^th to everyone … Holiday weeks are tough in the stock market because most institutional traders are taking time off, volume is light and as a result it is very easy for a large player to manipulate the market.  Many major moves start during light volume weeks, and time will tell if this is one of those times.

The market continued its’ stable ‘basing’ or rebuilding after its’ most recent decline.  Since late May the S&P500 dropped over 7.5% and has since stabilized and recovered roughly half of that loss to date. 

As you know, we moved to cash early in the decline, since moving to cash our portfolio has fallen only 2.4% vs. the S&P losing 7.5%.

We are still in a ‘wait and see’ mode, protecting your investment in a cash position.  Although the market continues to act healthy and is ‘calming down’, there are still warning signs that we are monitoring. 

One of which is the market’s reaction to the Egyptian regime change, which so far is completely non-existent.  The price of oil has jumped which ultimately will hurt our economy if it doesn’t fall back down, but for now … the market doesn’t seem to care.  Watching the market slough off such potentially bad news is a very strong sign, when the bulls ignore bad (or uncertain) new items and keep buying … it sends a strong signal to the bears.

Assuming there are no negative jolts in the market early next week, it would not surprise me if we will carefully re-enter.  For now, we continue to wait and watch on the sidelines focusing on protection over growth.

Hope your weekend is peaceful,

Market Wrap - week ending 6/28/2013

Below is a client email alert that was sent earlier today ...

A quick update on your Resnn portfolio …

CURRENT MARKET EXPOSURE: 0%

CASH POSITION: 100%

Last week’s aggressive continuation of the drop in prices that started in late May finally found a short-term bottom on Monday of this week.  From Tuesday on, the market has risen and more importantly … ‘calmed down’. 

As I mentioned in our last message (from last week), panic had set in and when that occurs the market tends to drop very quickly and aggressively.  Usually during these panic ‘sessions’ the best thing to do is to sit on the side lines and wait for the masses to calm down. 

Trying to guess the bottom is a fool’s activity, and in fact in the trading world, a famous saying is “don’t try to catch a falling knife”.  Instead of trying to guess the bottom, we prefer to protect our investment and watch the action to see if the selling is subsiding and a calm is starting to occur. 

This week we started to see that calming effect as the selling finally subsided on Monday and we had a nice rise Tuesday, Wednesday and Thursday.  The week has been fairly productive in this regard.

We are still fully in cash at this point, the market’s decline from late May is very much intact at this point and although the market action is looking better this week, more time needs to occur before we will be willing to risk assets. 

As I have mentioned previously, when markets decline, waiting and watching the first few rally attempts is very telling as to the future direction of the market, and this week’s rally attempt has been productive but not convincing as of yet.  In fact, the data we analyze is still pointing to more downside.

For now, we wait and watch on the sidelines focusing on protection vs. growth.

Hope your weekend is peaceful

Protection

Below is a client email alert that was sent earlier today ...

Good afternoon.  In light of today’s market action, I wanted to send you a quick note allay any concerns you may have.  I will write a brief note below, but wanted to let you know that we are fully in cash and have been for roughly a week now.  So if the market continues to tumble, take comfort in knowing that your money is safe.

I don’t know how closely you follow the stock market’s daily action, but I'm certain you will hear about it on the news tonight.    Today’s market action was abysmal closing with roughly a 2.5% loss for the day, combined with yesterday’s 1.2%+ loss.

When market’s fall, they fall fast because fear is a greater emotion than greed … and fear creates panic … which is what we are seeing today.

What is most interesting today is how there literally is no safe place (besides cash) for your investing dollars. 

intermediate term bonds are down around 1.8% for the week (1% loss today alone)

International Markets are all down between 2% and 4% as well (china -2.77%, Germany -3.28%, France -3.66%, Hong Kong -2.88%, Italy -3.09%

Gold even made a 2.5 year low … down over 5%

As you know, on June 5^th I sent an email (written below) that we were taking defensive action and slowly moving out of the market.  This process has continued and we were fully out of the market, 100% in the safety of cash on 6/13/13 (exactly one week ago).

In my previous email I wrote about the importance of the next rally attempt to identify the strength or lack thereof in the market’s internals.  The key question a rebound rally attempts to answer is … are people looking at this short term dip as a buying opportunity (buying stocks cheaper than they were a week ago), OR are they staying out of the market and not buying anything (implying a much more aggressive drop is forthcoming).  In this case, we have had two relatively pathetic rally attempts in June, culminating obviously in what we see today.

In any case, as always I am watching our investments very closely and letting the market data guide our decision process.  If things settle down, we could be back in the market as early as next week, but we will only do so if the market is truly flashing healthy signals.  As you know, I only two rules at Resnn … 1) Always, always, always minimize risk, preserving your investment is the most important and 2) let’s make money. 

Protection of your investments will always be my number one priority.

Please feel free to call me to discuss any financial matters … my door is always open.

Hope you have a wonderful weekend … sleep well knowing that we have your investment safe.

Defensive Action

Below is a client email alert that was sent earlier today ...

I wanted to send you a quick ‘status’ update just in case you have not logged into your Resnn account recently.  In light of the market’s recent weakness, we have been taking a very cautious, defensive approach.  Early last week we exited margin (for our clients that choose to use margin), and we moved 25% of all our accounts to a cash position (leaving 75% invested in the market).  Today we increased our cash holding to 45% cash (55% invested in the market).

Raising cash in light of the volatility we are seeing is exactly what the model is designed to do.  Protecting our original investment is paramount to trying to profit in volatile markets, and this is exactly what we are doing … protection is key.

The market is due for a bounce (up) and the strength of that bounce will be very telling as to which way we go next.  I am watching our client portfolios very closely and letting the data lead the decision process.  The model is acting as it should, focusing on protection at this point.

If you have any questions, please feel free to call or email me, otherwise … I just wanted to let you know that we have moved from a profit motive to a protective one.

I will send you more updates as the market gives us more clues as to the longer term direction of the market.

A Letter To The Editor, March 2013...

The February 2013 issue of Financial Advisor magazine included an article entitled: “Avoiding the Next Train Wreck.” which discussed trend following techniques in a poor light (click the above link if you wish to read the original article).  I wrote a letter to the editor which was published in the March 2013 issue.

Financial Advisor, March 2013

I felt a reply was needed as there is much confusion on trend following and how it can be used to reduce risk in an investing strategy.  The full text is written below, OR just click the URL to be redirected to Financial Advisor's home page to read the article there.

www.fa-mag.com/disservice-done

The February 2012 issue of FA included an article entitled: “Avoiding the Next Train Wreck.”.  While I found portions of the article quite insightful, I walked away feeling that Financial Advisor did a disservice to its readers by publishing the article.

For full disclosure, our firm, Resnn Investments LLC, uses trend following techniques in our client’s portfolios and have been quite successful (for our clients) as a result. In fact, I am personally so convinced of our strategies’ long-term performance that I have invested literally all of my 401(k), IRAs and taxable accounts in the exact strategies our client’ portfolios are invested in. I am a firm believer in trend following and am not afraid to put my money where my mouth is as a result.

I have greatly enjoyed the author’s articles in the past and hope he keeps writing them, as I have always found them to be informative and educational, but this article had many portions that were misguided. In the beginning of the article, he admits his lack of knowledge on the topic. and his inexperience in technical analysis and trend following were apparent.

Trend following is not “market timing,” and comparing the two is like comparing value investing to distressed asset investing. They have similarities in that both strategies focus on undervalued securities/assets, but that is really where the similarity ends. The entire style, valuation techniques, liquidity concerns and purchase implementation are completely different, and in fact, taking the same approach from one style to the other would potentially have disastrous results.

I can only assume that as a result of this lack of knowledge, the article came across with a very skeptical tone on the use of trend following techniques in a portfolio, and borderline implying misleading activity on the part of trend following money managers. As a fiduciary, we all are expected to put our clients’ interests first and hold ourselves to a higher standard. There are, unfortunately, bad apples in every bushel, but to imply that trend following techniques are hocus-pocus or that advisors that employ TF techniques do not take their fiduciary responsibility seriously is simply inappropriate.

Many of the “buyer beware” comments expressed in the article are quite good to consider when performing due diligence on an investment, although they have nothing to do with trend following strategies specifically. They would apply to any investment, regardless of the style. I would hope that an advisor who is shopping for a new investment style for his or her client would “read the fine print” on performance results, know the assets under management, investigate the firm and key personnel, and have a strong understanding of how the strategy works. I also would hope that these standard due-diligence practices are all quite obvious to a discerning advisor.

Trend following is a risk-management strategy that, when used correctly, can be quite effective in producing alpha. Most important though, its focus is (as the author identified) on protecting a portfolio from strong declines, reducing the correlation with a traditional buy-and-hold style. In fact, our flagship fund, “The One,” only lost 1.89 percent in 2008 vs. the S&P 500 losing over 38 percent, a sizable difference for sure!

Making light of this “one-time fluke” as he implies is just improper, considering it has taken over five years for the S&P 500 to just get back to break even after the tremendous decline of 2008 (which it still hasn’t done). So while a buy-and-hold strategy has been steadily chugging along to get a client back to $0.00, a trend following strategy missed the large drop and since then has been taking part in the gains. In our case, we have returned 153 percent from January 2008 vs. almost breaking even. So, by controlling risk, you outperform over time. It is an odd concept to wrestle with, that taking a defensive role actually creates more alpha, but clearly at our firm it works.

In my opinion, of utmost importance to a fiduciary should be capital preservation, over and above market-beating performance in up years. Risk control is why all of our clients hire us; they expect that we will be there in volatile times to protect their investment from decline. 2008 wasn’t a fluke. Sharp declines happen every few years, whether they be 20 percent or over 90 percent (such as after the dotcom bubble), and our role is very clear in these cases.

There is so much distrust and dissatisfaction out there in the investing world and most of it has been created by our industry’s greed and laziness. Our focus needs to be on repairing that distrust with the public, and we do that by not only providing a quality service at a reasonable price, but also by not bad mouthing hard-working people that are helping our industry by protecting their clients and growing their net worth over time. We can look at each other as competition, or we can look at each other as having a common goal toward helping the mainstream public achieve their financial goals and protecting their assets during times of turmoil. We all have the same goal here, and as a result, we should work together to further our industry and repair the damage that has taken so long to create. There is so much retail money sitting out of the market as a result of this greed, and all of us working together to create value for our customers will over time result in these clients to trust the industry again.

Our industry is constantly evolving, and being on top of emerging technologies and available options (not that trend following is emerging, it has been around since the early 1900s) that can help our clients is an important part of this magazine’s purpose. As a result, I hope it will present ideas factually and with no bias so that the audience can make an informed decision as to how a particular strategy or technology can fit into their current infrastructure. This article fell short of that, in my opinion.

Oh and by the way, October 1987, two weeks before the big crash our strategy was in cash. We moved fully to cash on October 8, eight trading days before the dramatic decline. The signs WERE there and a well-developed system would have identified it and prevented the dramatic losses that most retail investors experienced. You say balderdash; I saw happy customers.

Randall Mauro, RIA
Resnn Investments, LLC
Denver, Colo.