Invest By Model

Top 20 Trades

We are selling the remaining position of one of our holdings that greatly disappointed me.  While I believe that the company will likely thrive again in the future and ultimately reach my original expectations of growing again and capitalizing on its strong brand, the sharp correction in the market allows us to move into a better long-term opportunity in my view.  The return to my updated target for our sell is about 38%, while my best guess is that our buy could return 66% over the next year. 

The company we are buying is one that I have followed closely now for six months.  It's not widely known, but it is one of the premier manufacturers of servers and related components.  I am impressed by their steady long-term growth, high inside ownership and very low valuation.  It has been successful due to its leading-edge energy efficiency focus as well as the total cost of ownership due to the way they pre-configure their product.  I am a bit concerned that we are doubling down on INTC to some degree here and will keep in mind our combined exposure. 

We are also trimming one of our Healthcare names.  You might recall that we added on 8/3 to the position, and it is up only slightly.  I would point out that the market is down sharply from then (and so is our new purchase).  Rather than focus on cost, I look at what I expect the stock to return in the future.  In this case, our expected return currently on the partial sale candidate is 39%, which is the lowest of any name in the model.

It's worth repeating that as a result of the sharp pullback in the market, I have continued to reassess each of our holdings and, in many cases, have adjusted targets lower.  While all of my targets may be too high or too low (they seem too high but are grounded in very reasonable assumptions), their relationships relative to one another are likely realistic. 

Finally, Market Rallies

Long overdue, the market soared Tuesday and retained its gains, closing near the highs of the week.  Here are how the models look as of 8/26:

 

Top 20 performed quite well during the week, rallying 6.63% compared to the S&P 500 rallying by 4.75%.  Just as the performance has been hurt previously by exposure to smaller companies, we got the benefit this week.  It is highly likely that we will always have exposure to some smaller, less well-known names (that's actually how you make a lot of money in stocks over the long-run), but we have had a lot.  Why?  Low valuations for many companies with cyclical exposure as well as the potential for mergers. 

I am disappointed with the performance in 2011 for this model.  We had a rotten January, which was understandable after such a great finish to 2010, but the past four months have been very challenging.   Last year, we got back on track after a rough summer and finished exceptionally well.  I hope to see some improvement, but I am not counting on such a large margin of outperformance.  While the low number of trades recently may create the appearance that I am not doing anything, let me assure you that I have been assessing each stock and trying to adapt my expectations to the changing conditions.  We have a few companies that shouldn't be in the portfolio, and I have lined up several potential replacements.  The high volatility of the market as well as some patience has kept me from acting so far, but we are getting closer to these "upgrades".

Conservative Growth/Balanced gained some ground too, improving 2.92% this week compared to the stock/bond index increasing 2.56%.  I am glad to see that we have not only preserved capital this year (up despite challenging conditions) but that we have so far beaten our benchmark despite some inferior positioning (too much stock, not enough bonds).  This strategy is benefiting from a shift to the types of stocks in which we invest (strong balance sheet, solid dividends).  Depending on how much conviction I have, I may look to reduce our overall equity exposure if we get a little more strength.

Sector Selector ETF gained slightly against the S&P 500, rallying by 4.86% compared to 4.75%.  We have been poorly positioned here, with high exposure to Financials.  Additionally, we have little exposure to the more conservative parts of the market, like Utilities or Consumer Staples.  Like CG/B, where we also have some flexibility regarding our overall market exposure, I may be looking next week to reduce exposure a bit.

Outlook

For the past few weeks, I have been struggling with a previously too optimistic forecast that had been based upon the market PE expanding slightly in 2011.  Instead, we are looking at PE ratios that are actually lower despite stable to improving interest rates.  The multiples are likely to work their way higher over time, but the near-term challenge is earnings.  If you have no clue, join the club.  My clients and other professional acquaintances, all of whom care about future earnings, are scratching their heads.  The sharp drop in the market reflects a potential slowdown and may even CAUSE one, according to some, due to sapping confidence.  I would argue that the worst cases I have heard (that EPS drop 20% next year) still leave stocks quite inexpensive.  The math?  1177 (the current price of the S&P 500) divided by $80 (a 20% decline, roughly) yields 14.7 PE.  Seems like a good deal to me, as the earnings yield (the inverse of the PE) is close to 7%, well above the long-term corporate bond rates (currently just below 5%, which is the lowest in 45 years.

I continue to suggest three potential paths ahead:

• All a Big Mistake  - Rally Quickly (35% chance)
• Absorb the Damage - Rally after spending a couple of months testing the lows (50% chance)
• Ugly - New Bear Market (15% chance)

This week, we got confirmation of a rally from Investors Business Daily.  I would never rely upon a single indicator, and I note the tendency for this one to give lots of false alarms, but, according to their methodology, Tuesday's high-volume advance signalled a better environment.  Let's hope that they are right.  Unfortunately, I am not so sure that the lights turned green.  My expectation is that we could rally a bit more (back towards the unchanged spot for 2011, which would be 1257), but we are subject to a pullback from there most likely before we get back on track (this is the second scenario).  This type of action would be similar to how late 1998 played out.  While I am giving scenario 1 a pretty decent chance, I have to admit that the odds aren't as good as I make them out to be.  So, let's keep our fingers crossed.

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Last Word

I am entertaining the idea of hosting a conference call for subscribers.  If this sounds like it would interest you, please drop me an email (alan@analystforhire.com)  and tell me.  Feel free to share any potential topics you would like me to address.

If you are on the East Coast, please be safe (advice from a Gulf Coast resident who has been there and done that).  For everyone else, have a great weekend and end to August.

Regards,

 

Alan Brochstein

www.InvestByModel.com

 

 

August Angst Accelerates

The markets sold off for the fourth consecutive week, though the lows from two weeks ago weren't violated.  Here is how the models look as of 8/19:

 

Top 20 had arough week.  While the S&P 500 declined 4.63%, the model lost 6.2%.  During the week, we had 5 stocks off more than 10%.  The damage  in August has been severe, with the S&P 500 declining almost 13%.  Worse, the Russell 2000, a benchmark for small stocks, has lost over 18%  Our poor performance is primarily related to exposure to smaller stocks.  Our speculative biotech stock, which is our smallest position by far, has led the way (-41%), but our natural gas producer has lost over 1/3 of its value (from spiked levels following a run-up due to a competitor being acquired) as gas prices have plunged.

I have been reducing my targets for almost all of the stocks in the model to account for likely lower future earnings than had been previously forecast.  Still, earnings are expected to grow, just at a slower rate.  Clearly, the overall market seems to be projecting a recession, which I continue to find unlikely (see market outlook below).  Still, it's important to understand the sensitivity of the portfolio to this type of shock.  Of our 20 stocks, 15 have more cash than debt.  Of the remainder, none have more than 40% net debt to capital.  Two of  the ones carrying debt are Large-Caps with very strong franchises that didn't lose money in the last downturn in a single quarter.  Only one company (the gas producer) concerns me.  I am rethinking this position, but I would note that we have very little Energy exposure. This company has several favorable attributes, including a major position in Eagle Ford shale that should boost its oil production, and I think that the company is a likely acquisition candidate.

Another overall favorable attribute is our valuation profile.  On a PE basis, any of our stocks are trading below 10X and most are trading below 15X.  The ones with higher multiples tend to have issues that suggest using a different metric (like excess cash on the balance sheet).  Our weighted average is 13X.  A metric that I prefer is Enterprise Value to EBITDA, and, on  a trailing basis (over the past four quarters), our weighted average is just 6.2X.  The final metric, and one that's useful for assessing downside, is the Price to Tangible Book Value.  Our weighted average is 1.5X, and not a single company has negative tangible equity.  4 of our stocks are trading below their accounting book value (including the natural gas company). 

I am disappointed that we have lagged the market somewhat this year.  We performed very poorly last summer as well, but we came out of it very strongly.  I believe that longer-term investors benefit from the inclusion of smaller companies that are less followed by Wall Street, but holding them in downturns can be very painful (although well-known big companies can be even more painful).  Our industry exposures have hurt us too - more defensive sectors like Utilities and Consumer Staples have performed much better than the overall market.  At this time, I am comfortable with our exposures, but I acknowledge that we have some risk to earnings if the economy actually contracts.  I am looking to replace our small biotech holding and potentially one or two other names.   I have several potential buys lined up, but the extreme volatility has left me a little reticient to pull the trigger.

Conservative Balanced/Growth lagged its benchmark just slightly and remains ahead of it in 2011.  I have had the model poorly positioned compared to our benchmark.  We have held close to the maximum of 75% stocks (compared to the 60% target), while we have held close to the minimum of 10% in bonds (40% target).  Fortunately, our stocks have performed better than average.  In August, only 2 of the 14 stocks have declined more than the S&P 500.

The metrics for this model reflect the conservative nature of its investment philosophy.  Here, we have fewer small companies.  The overall forward PE is just 10X.  The EV/EBITDA metric I discussed above is just 5.5X.  Our P/TB is slightly higher than Top 20 at 2.3X, with a range of 1.3X to 6.3X.  3 companies have more debt than cash, but the maximum is just 26% Net Debt to Capital.  Our weighted-average dividend yield is 2.9%, with 4 companies paying a dividend that exceeds a 4% yield. 

Sector Selector ETFgave up some more ground this week.  After ending July at essentially flat to the S&P 500 since the launch at the end of April, it has underperformed by a little over 1% this month.  The model has been poorly positioned for the downturn, with too much exposure to Financials as well as Emerging Markets.  Our exposures to Large-Cap Technology as well as the Mega-Cap part of the market have only slightly offset the poor performance from other parts of the portfolio.  When there are signs of stability in the market, I intend to increase our Small-Cap exposure further.  If the market continues to slide, I will likely need to reduce some of our other exposures.

Market Outlook

I shared my adjusted framework last week that assesses the odds of three scenarios over the next few months.  The most likely scenario, in my view, is that the next few months could be challenging, but this proves to be a correction.  A more optimistic scenario is that we rocket right out of here shortly.  The least likely scenario is that we are entering a new bear market.

Despite the crappy action this week, my views are unchanged.  The major reversal from the lows earlier this month after the FOMC announced new Fed policy (low rates for two years) took the S&P 500 from its intra-day lows 10% higher as of the peak on Wednesday.  The massive retreat Thursday didn't violate the lows and looks to be normal to me thus far.  If weakness persists early next week, I believe the technical situation may become worse.

This second correction of the bull market still leaves prices substantially higher than a year ago.  As I assess the current environment, I sense that fear of "another 2008" abounds.  Unfortunately, the playbook for how markets act after a major economic collapse like 2008 isn't very thick.  We can look back to the Great Depression, but the data and how the world works are very different these days.  So, we can't really look to history for a guide, though we do hear people trying to extrapolate from the 30s.

Fiscal policy is not as bad as folks make it seem.  It could be better, especially on the regulatory front.  Obama-care has created a barrier to hiring as well as the likely rolling off of reduced payroll tax contributions by employers.  Monetary policy is downright helpful.  So, what's the problem?  I have said all along that it takes a lot of time to work through a credit crunch, but we have made much progress.  There is concern, of course, about federal spending levels, but this has been going on for 30 years now.  We have an economy built on consumption, and consumer spending will be the long-term key to economic growth.  It is economic growth that will get us out of the government debt morass.  Unfortunately, consumer spending isn't helped by crashing stock markets, high gasoline prices or watching the morons in D.C. play chicken like they did earlier this month.

So, all of this is fine, but it doesn't explain what's really going on:  Fear of European bank contagion.  I have to admit that this is a very tough issue - no one knows.  The U.S. government was slow to act, but it did a very good job, like it or not politically, of averting the type of disaster that could have happened.  Europe doesn't have the political will or perhaps even the mechanisms to back-stop their banking system, and this is really the big risk right now.

Stocks climb a wall of worry, almost always.  Looking back, those who sold out of fear in 2008 or early 2009 ultimately proved foolish (unless they were the three people who were able to buy back in at lower prices).  Gold and Treasuries have entered BUBBLES.  I haven't used that term, and I don't use it lightly.  Stocks are now oversold and cheap.  Fear is rampant.  On the other hand, company insiders are buying hand over fist like rarely before.  Companies are flush with cash, and, those that aren't have certainly, for the most part, put their own houses in better order by extending their borrowings.  We aren't likely to have a massive margin call like we did in 2008.

So, I have no crystal ball.  Clearly, I missed this one, and badly.  By my forecast, we would be up 12% or so by now and not down almost 10% in late August in the S&P 500.  I know, though, that stocks don't march in a straight line.  I warned that we were ahead of pace in late April - the pendulum swings too far both ways.  At this point, I am not seeing what makes others so clearly fearful.  While I doubt we hit my +20% target for 2011, it's not out of the question (it would require a 33% rally).  At this point, I think we improve from here, though I have to admit tremendous uncertainty limits my conviction. 

You can count on me not to act like a lemming and follow the crowd.  You can count on me to understand what's going on with the companies in our model and to make my best effort to find the most attractive stocks that are consistent with the goals of the model.  You can count on me to keep my cool.  Top 20 and CG/B lost a lot in late 2008 - it's impossible to make money when almost all stocks are declining.  We held in better than the markets, though, in both cases.  This includes a disastrous mistake in Top 20 (Fannie Mae), which won't happen again.  I don't know when the markets will turn, but you can count on me to be positioned as best as I possibly can for that day. 

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My Own Analyst Update and Offer

I launched My Own Analyst, a private blog, almost six months ago.  If you are an active trader, you might find it of interest, especially in volatile times such as we are experiencing.  On the blog, I cover stocks in the models, stocks on my watchlist and other situations as they develop.  I also answer subscriber questions.  To learn more, please see the brochure.  If you sign up for a new (first-time) subscription in the next 10 days, I will give you access for the rest of August as well as a free month with your one-month paid subscription.  Please email me if you have any questions.

 

Regards,

 

Alan Brochstein, CFA

www.InvestByModel.com

Plunge and Recovery

In a week that will go down in history for its incredible volatility, prices ultimately didn't change too much, declining though. Here is how the models look as of 8/12:

 
Top 20 didn't fare particularly well despite very strong performance from one of our largest positions.  For the week, it fell 3.08%, while the S&P 500 declined 1.63%.  Our exposure to smaller companies has been costly over the past few weeks.

Conservative Growth/Balanced held in very well and outperformed its benchmark.  For the week, the model declined just slightly, increasing its year-to-date advantage to 2.32% from 2.12%.  Conservative stocks held in better than the market, helping us to overcome our lack of exposure to bonds, which were very strong.

Sector Selector ETF had another challenging week, with exposure to Financials and Emerging Markets hurting performance.  The model had been in line with the S&P 500 a week ago.

Outlook

As I mentioned last week, my bullish outlook from earlier this year now looks overly optimistic.  While I didn't officially yet change my year-end target for the S&P 500 down from 1500, I spent considerable time last weekend reviewing all of the stocks in the models, lowering most targets.  More important than a specific target for the S&P 500, I want to make sure that I get the general direction for the market right.  I shared my views earlier this week on My Own Analyst that I think that there is a 35% chance this is all a big mistake (i.e. we rally hard the rest of the year starting soon), a 50% chance that we come out of this higher down the road but struggle for the next two months or so) and a 15% chance that we are now in a new Bear Market.

While many like to question whether this is "2008 all over again", and it sure felt that way this week at times, I think a better working model would be 1987 or 1998.  These were very painful declines in the overall market that weren't followed by recession.  The 1987 analogy is tougher to understand, as it is less about the particular circumstances and more about the heart-wrenching declines and the "obvious" bearish conclusions that never played out with regard to the economy.  We just crashed in some ways earlier this week, though it hasn't been all in one day.  There is another common theme - machines or algorithms leading to a selling crescendo.  As far as 1998, which saw a similar type of decline from July into August (with the ultimate lows being set in September and then October), there was a global flavor as there is to this crisis.  Then, it was Thailand, the Asian Tigers and then Russia.  Oil crashed to $10 a barrel at that time.  Junk bonds were under pressure.  Sound a little familiar?  This proved to be a correction and not a bear market, but it was a very frightening time, with the obvious conclusion that we were headed into a recession.  That was true, but it was 3 years later.  This much I have learned in my almost 30 years of watching the markets closely:  When things are really great (like at the end of 2000), the market usually has priced it in, and when things are horrible (like late 2002 or early 2009), the market has usually priced it in.   The markets tend to be ahead of the news, not behind.  So, this leaves me curious as to what lies ahead (actual negative GDP growth, perhaps?) but also cognizant that these types of headlines (Europe, our own deficits) are reflected in current prices.

We have moved well beyond 2008.  Retail investors haven't embraced the market like they had in 2007 - valuations have generally remained very low.  The corporate sector has probably never been in better shape - cash hoardes, extended debt maturities (with very low rates locked in), etc.  Many don't understand this, but it wasn't just the fear of earnings that drove many stocks down in 2008-2009 - it was the risk of not being able to roll over debt and seeing the bondholders seize the company.  This is why GE, for instance, hit 6 and change.  The real challenge in 2008 was contagion, and those risks, while still here, seem so much lower today than they did with more leverage in the system still.

While a sluggish economy is certainly more prone to a shock than a resilient one, I am not exactly sure what the "shock" is right now.  Credit remains ample in its availability.  Energy prices are falling - the reverse of a shock.  It's true that our fiscal condition means the government can't continue to spend more aggressively than normal, but government is a small part of the economy.  The fact of the matter is that the Consumer is what really matters.  While confidence may decline due to to concerns about political leadership and a stall in economic improvement, it's likely to prove temporary.  The more thought I give to our circumstances, the less concerned I am.  I have expected and continue to expect that the recovery path will be long and steep.  If stocks were priced more expensively, I might be concerned. 

So, while I thought that stocks might become less cheap relative to future earnings this year, the opposite has occurred so far.  While I am reducing my outlook, it remains positive.  As far as the models, the extreme volatility creates opportunities, but, like 2008 and early 2009, I am somewhat hesitant to make adjustments to the models when the market is extremely volatile (since I have to put the trades in a day ahead of the actual prices at which we transact).  This week, we were able to make some minor adjustments, and I have several others I would like to do as the market calms down.

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Regards,

 

Alan Brochstein

www.InvestByModel.com

 

Trades in All Models

When markets are as volatile as they have been, it's very challenging to commit to trades in advance of the market being open.  With that said, the extreme volatility has created some opportunities for Top 20, while the decline in prices in general allows us to reposition the other two models. 

In Top 20, we are trimming one of our weaker names over the past few months that seems to be hanging in a bit better than other stocks due to short-covering.  On the other side, we are taking some of the cash raised a couple of weeks ago as well to buy two names that offer similar or better returns now.  One is extremely oversold as well.

In CG/B, we are moving our equity exposure back to its maximum of 75% by adding to one of our core holdings.  The stock trades at 8X trailing earnings, has no net debt and is valued at just 1.6X its tangible equity.  It also has a 3.4% dividend yield.  It's oversold and offers 58% to my target.  Even if my target is off by 20%, I find the stock to be very attractive for conservative investors.

In SSETF, we are using a little cash and the proceeds from a trim in one of our sector ETFs to add to our recently established Small-Cap position.

Trades in CG/B and SSETF

In Conservative Growth/Balanced, we are moving to the minimum on bonds by selling out one of our ETFs and investing just part of the proceeds in our other one.  The effect is to reduce interest-rate and credit risk.

In Sector Selector ETF, we are reducing two sectors, one of which as been a market performer and the other of which has been a relatively good performer over the past few months.  The proceeds are being deployed into Small-Caps, which have been hammered.  Given the strong balance sheets and the potential for M&A, smaller companies look attractive relative to the S&P 500.

Crash Without Flash

Once again, summer is proving to be challenging for stocks.  When the major indices went "red" for 2011, the floor fell from under, leading to one of the worst days and worst weeks since 2008.  We entered an official "correction", which, by my definition, is a decline of 10-20%.  The correction last summer was almost 20%.  The models were all down sharply, mainly with the market:

 

Top 20 fell about .8% more than the S&P 500.  Given the dramatically worse performance of smaller stocks compared to larger ones, I was somewhat relieved that we didn't lag even more.  While we were pounded on our biotech holding, it was fortunately our smallest position.  While the overall market fell over 7%, we actually had one stock rise and several fall just slightly.  Unfortunately, there were several double-digit decliners as well.  The model is down marginally year-to-date despite some very poor security selection, some of which has been addressed.  At this point, I am looking at a couple of names that have fallen sharply but are likely to perform well if the economy weakens.

Conservative Growth/Balanced tracked its benchmark of 60% stocks and 40% bonds, declining less than 4%.  The model retains a decent advantage over the index despite poor positioning with respect to its allocation to stocks near the maximum of 75% and bonds near the minimum at 12% .  At this point, I am not looking to cut exposure, but that may change shortly.  Our stocks did better than the market.  In fact, not a single name was down as much as the S&P 500, as our "conservative" stocks perhaps benefited from some rotation.

Sector Selector ETF,which had finally moved into the green (barely), was burdened by its exposure to Emerging Markets and to Financials.  The model has tracked the S&P 500 since the launch at the peak of the market in late April despite being constructed very incorrectly in hindsight. The exposure to Financials has been disastrous, though that error has been offset by large exposure to the largest stocks as well as to Technology.  I am likely to make some changes here, though perhaps not Monday, as I believe that we can likely reallocate from our better performing ETFs to some degree.

 

Lessons Learned

In Top 20, we had a big disaster this week (our biotech stock) and nearly averted another one (the stock we sold yesterday declined 20% today).  On the biotech stock, which was highly speculative in the first place, I should have eliminated the stock at a small loss a few months ago when it was clear to me that the story was being delayed.  The only redeeming aspect is that the position was small at the inception, and we never added to it as it declined.  The lessons, then, are to keep risky positions small (we did) but take the loss when the story isn't playing out as expected.

On the last-minute sale that averted another huge hit, I want to share some thinking as well.  This was a stock that the story changed, but I paid attention, fortunately.  One of the original reasons to buy the very cheap stock (relative to asset value and earnings potential) was new management.  The stock did very well after we bought it in early 2010.  Earlier this year, when the CEO suddenly departed, the stock plunged.  There is a sub-lesson here, because we were successful in not selling but rather buying more of the stock initially.  We were then able to cut the position dramatically in size after it rallied.  It wasn't an accident that we sold yesterday - I expected that the earnings today would likely be ugly, and I knew that there was probably nothing the new CEO (former CFO) could say that would make investors feel good.  The lesson?  Sell when the story changes, especially if the overall market environment or economic outlook is changing.  While I don't feel good at all about our overall experience, I am grateful that we were able to prudently extricate ourselves from a bad decision.  I would point also to ORN, which is now almost 50% below where we sold it late last year after yet another horrible earnings report.

I make mistakes - we all do.  My goal is to minimize our losses when that is the case.  It runs against human nature to admit we are wrong, and we thus tend to hold onto losers.  It's essential not to let the emotions rule in these cases.  Unfortunately, we have some other "mistakes" that I continue to work to rectify.  The massive volatility in the market may make it easier for me - it's not too hard to find potential replacements.

Outlook

Clearly, my expectations of 1500 on the S&P 500 by year-end are looking unlikely (it would require a 25% rally, which is even greater than the 21% rally into December from August last year).  Stranger things have happened, but it seems like a stretch.  It would be foolish of me to cling to that prediction at this point just because it was what I had been thinking.  With that said, I haven't yet formally revised it. 

Honestly, I struggle with my expectations.  As I shared with subscribers to My Own Analyst this week, Valuation is great, Fundamentals are tentatively ok, but Technicals are challenging.  My call for 1500 was based upon some slight valuation improvement (13 PE to 15 PE for the whole market), predicated on stable low bond yields and an ok but not great economy that allowed corporate earnings to grow about 7%.  The simple truth is that stocks could stay cheaper longer than I have been expecting.  The increase in merger activity this year reflects good valuations relative to borrowing costs, so I expect valuations will likely rise over time - just not as fast as I had expected perhaps.  Stocks proved to be a great value in late 2008, but they were an even greater one a few months later.  Valuation is helpful but not a guarantee in the short-term.

The economic outlook I have embraced is "muddle along", and I still think we are doing just that.  Following a major credit crunch, it's not surprising given all the deleveraging that we are struggling.  It has been the case, and it will likely remain the case, though the cynic in me thinks that our politicians will do whatever they can to improve appearances in about a year when the elections are heating up.  Still, and this is what has me worried, the tighter liquidity conditions (i.e. commercial paper demand dropping) can lead to even more challenges than our fragile economy can handle.  Weak stock prices beget weaker confidence and then weaker spending by consumers and businesses, creating a self-fulfilling prophesy (been there, done that, right?).  So, while I think the economy hasn't changed, I am actually less confident this summer than I was last summer about our ability to avoid dipping back into recession.  Usually, a double-dip is caused by rising interest rates (not the case these days), but this isn't a "usual" time.  Listening to dozens of calls this week and last, I know that I am not alone in my concerns.

So, that leaves me with the Technicals.  There was a lot of damage done this week, with our YTD gains wiped out.  The thing about Technicals is that they can change very quickly.  I imagine a potential recovery will not happen overnight, but a move back into the green in the next few months might beget more strength.  I am just not ready to try to predict that.  We saw how crazy the market can get last year (Flash Crash), and I can see how stocks become pieces of paper to discard rather than claims on the future profits of a corporation and become disconnected from reality.  At this point, we are in a correction.  I had suggested to clients that 1175 might be in the cards after we broke 1257 (where the market ended the year), and it took all of two days to get there.  I hope that these levels set today hold, but it's mere speculation at this point.  The intermediate-trend has turned negative, and I will be respectful of Technicals.

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The market won't be going down for the next two days, so have a nice weekend!

 

 

Alan Brochstein

www.InvestByModel.com

Out with the Old, In with the Old

We are rebalancing Top 20, selling a poor performer that has held in well of late and adding back a stock we had bought in January and sold recently before it fell sharply.  The company we are buying is extremely high quality, oversold technically, reasonably valued and a company in which I have long-term confidence.  The one we are selling, well, not so much.

We are also trimming the name we bought in May when we sold the stock we are buying back - it has done well and offers less return to my target.  We are adding also to two Large-Cap names that I find to be of extraordinary value.

The bottom line is that we are increasing quality and market-cap exposure.