Invest By Model

Trade in CGB

I am trimming a single position, which will increase our cash position slightly.  We remain almost fully invested (75% maximum in stocks).  While I like the stock and believe it offers 31% upside over the next year, it is slightly overbought now.  Quite simply, in a portfolio geared towards capital preservation, there is no need for this to be the largest position.  After the trade, its weight in the portfolio will be slightly below average, which makes sense as the overall weighted average expected price return is 39%.  The price return from our purchase in October exceeds 20% and annualizes to more than 50%.

(Note - I haven't sent notification yet, but the trade is reflected in the model.  I may have trades in other models and will look to send a single notification should that be the case).

Models Mark Time as Market Hangs In

It was a pretty quiet week, as the market contended with a ferocious rally that is probably a little ahead of itself.  All of the models rose slightly, with performance very close to the market's gains:

Top 20 overcame the headwinds of softness in smaller stocks relative to larger ones, thanks in large part to the performance of a single stock (CHS).  For those who recall, we have had a lot of success over the past 18 months with this one, but I pulled the trigger a bit early weeks before a disappointing Q3 earnings report in November.  Well, the only thing I did wrong in retrospect was not buying more!  The stock rallied sharply, and we are now carrying a 21% gain, most from this week. Outside of the action there, it was pretty quiet.  For the week, the model gained  0.46%, which was just slightly more than the S&P 500's 0.37% return.  While we had a fantastic January, February has been even better, with a 8.88% return, 4.59% better than the market.  As I mentioned last week, I have several growth stocks I am rigorously reviewing for potential inclusion in the portfolio.

Conservative Growth/Balanced continues to face a small headwind due to its mandate of being conservative!  We are making up for it by allocating a maximum amount to stocks (75% compared to a neutral weighting of 60%), but it can be a challenge.  For this week, the model returned just 0.10%, lagging its benchmark by 0.19%.  For the month, the model is slightly ahead of the benchmark, while it is 2.23% ahead YTD.  Chico's helped us here too, but a few stocks were down more than 3%.  

Sector Selector ETF matched the S&P 500, leaving it still ahead in February by over 1% and for the YTD by more than 5%.  Since our April 2011 launch, it is marginally ahead of the S&P 500.  This week, relative weakness in smaller stocks hurt us.  While we have reduced our exposure there slightly, the three ETFs in that category comprise our largest holding.  On the other hand, both of our most recent additions have performed very well right out of the gate.  In fact, these two ETFs are up 3% since we bought the one last week and almost 6% for the one we started buying at the end of January.

Market Outlook

I have no update - I remain very bullish.  With that said, the market, which is off to its best start in many years, is a little "overbought".  This doesn't mean it will correct, but it could stall.  I have been suggesting this near-term caution for a few weeks now, and the overall market has slowed its pace but has continued to rally marginally.  The S&P 500 returned 4.9% in January, but is up "only" 2.5% this month, with most of that gain coming in the first three days following a surprisingly strong employment report. Be prepared for it, but don't expect a pullback.  

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• Equity Flows Could Reverse - Seeking Alpha
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Have a nice weekend!

 

Alan Brochstein, CFA

www.InvestByModel.com

 

Top 20 Trades

We are shifting from two stocks that have been big disappointments but that have rallied back sharply since we added to the position.  The trades will leave us with more average exposure for both of the names.  On the flip side, we are adding to two names that are in the same sectors.  Here is how I am looking at the trades:

• Tech Buy:  40% to target
• Tech Sell:  42% to target

• Energy Buy:  70% to target
• Energy Sell:  38% to target

While the tech names have similar projected returns, the position sizes before the trade were quite different.  After the trade, the add is still a bit smaller than the trim.  I am somewhat cautious that it is overbought or I might be more aggressive.  Note also that I am aware that the stock we are adding to was one that we trimmed at a slightly lower price, but what we bought at the time has done quite well subsequently.

On the energy names, the add will now be one of our biggest names, in line with its high projected return.  The name is very oversold.

Another Solid Week for All 3 Models

We don't have the best looking models - I'll leave that for the beautiful model on the cover of Sports Illustrated's Swimsuit edition, but ours are looking mighty good halfway through the first quarter of the year:

 

Before I go on, let me thank the vast majority of you who have continued to express their confidence in what I do.  We hit a rough patch in the back half of 2011, but we have recovered and then some.  Those of you who have followed me for all or most of the past almost four years since we launched Invest By Model know that I focus on the long-term.  Until last year, we had experienced no more than a single bad quarter per year (relative to the market), so it was very disappointing to give up a big lead from late April and end up with a small loss in Top 20.  I have no crystal ball, but I feel like we are in the type of market where stock-picking can really pay off, so I am hopeful that this great start is only the beginning.  We are almost back to the peak value from April - with dividends, the S&P 500 is slightly higher now.

Top 20 soared this week, advancing 4.2%, which was 2.7% more than the S&P 500.  For the month, we are 4.48% ahead of the market, and our YTD advantage is now 6.77% (15.33% vs. 8.56%).  What worked for us this week?  First, smaller stocks did do better than larger ones, but this only explains part.  We had one stock, which had been problematic but in which I have maintained confidence, surge about 24%.  It's back to about where it started the year.  Our recently added Energy stock also had a good week, though it remains below our initial buy price.  We had several other very strong stocks.  One that I will call out is a Technology stock that enjoyed a multi-year breakout.  This stock remains extremely undervalued in my view.  As I look at our holdings, I don't see any stocks that need to be sold due to unattractive valuation.  On the other hand, I have several new ideas I am contemplating adding.

Conservative Growth/Balanced improved 1.35% this week, which was about .5% better than the 60/40 blend of stocks and bonds.  Our advantage in February is about 0.6%, and the YTD return of 7.7% is 2.4% better than its benchmark.  Bonds were flat for the week, so that had no impact on the model.  Our overweight in stocks (near our 75% maximum exposure) helped.  Our two Retailers were the standouts.  

Sector Selector ETF advanced 1.75%, which beat the S&P 500 by about 0.3%.  It is now ahead of the market by more than 1% in February.  So far in 2012, it is beating the market by about 5.1% (up 13.7%).  For those paying attention, what worked the best this week is one of our most recent additions.  We have added a 10% position roughly in the past couple of weeks to this sector of the market.  Our Emerging markets and Small-Cap exposures helped, while Financials, one of our largest positions, tracked the market.  SSETF is trading above the launch value in late April despite a very rough summer.  

Market Outlook

The S&P 500 closed at its highest level since 2008 today, taking out the highs from 2011.  While I am somewhat cautious in the very short-term due to the market being overbought, I am not expecting much of a pullback.  I am keeping it brief tonight:  I am still expecting a move to 1600 or so - an all-time high on the S&P 500.

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Final Thought

Why do stocks go up?  In the very long-run, stocks track earnings, because earnings ultimately convert to dividends, but, in the short-run, sentiment plays a great role.  One of the great advantages I enjoy as an author on Seeking Alpha, a model portfolio provider and a consultant to money managers is that I get a pretty broad view of what others are thinking through feedback.  For instance, we lost many subscribers to Top 20 as performance fell in absolute terms (sadly, this is what happens - people hide under their desks apparently when the market is tough).  As badly as I feel for those who react, it serves as a valuable contrarian input for me.

So, what is sentiment saying these days?  Ask me, and I think most investors are negative on stocks.  I was at a dinner party and seated with perfect strangers.  When I was asked what I do, I responded, and the others at the table couldn't change the conversation quickly enough!  Now, I don't go solely on my own observations.  There is concrete proof that the mass market hates stocks - the data is in mutual fund flows.  People pulled out money hand over fist over the past year, but the tide is turning.  Just recently, the flows have reversed - very bullish. 

Now, some will point to sentiment surveys as being negative - too much bullishness.  My response:  Don't ask the pros, ask the Joes.  Joe investor is not even in the game!  I have been talking about strong technicals, compelling valuations and challenging (but perhaps improving) fundamentals.  Folks, it's all lining up.

Regards,

 

Alan Brochstein

www.InvestByModel.com

ETF Model Trade

We are adding a new name to Sector Selector ETF model portfolio.  Rather than discuss it on the blog, I am pleased to announce an enhanced research piece I intend to use for this model going forward.

We are funding the trade by selling the same ETF we have been trimming, a sector fund that is leading the way this year and is somewhat overbought.  We are also kicking in some cash we raised recently.  While the market is overbought a bit, I don't anticipate a sharp retreat in the near future.

You might infer that I am concerned about inflation perhaps given the recent trades, and it's only mildly so.  I recently shared some comments regarding my view that the Fed may be staying too easy too long, and certainly evidence would help boost this ETF.  I don't sense this will happen in the near-term.  Instead, the trade in both this ETF as well as our most recent one is based less on fundamental changes than on revaluation.  

CGB Trade

We had trimmed this name a few weeks ago.  Despite a solid Q4 report and overall strength in the sector, the stock has pulled back.  We had some extra cash, and this looks like a smart way to deploy it.

Models Retreat Slightly

After five straight weeks up, the market finally paused this week.  Here are how the models look as of tonight:

Top 20 gave up 0.77%, lagging the S&P 500 by 0.66%.  Lagging Small-Cap stocks were the primary driver, though one of our recent buys had a rough week and offset the stellar jump from the stock we sold on Thursday.  The Russell 2000, which is representative of smaller stocks, pulled back over 2%, while the S&P 500 was down just slightly.  So far this month, the model is up over 4%, which is 1.66% better than the S&P 500.

Conservative Growth/Balanced retreated 1%, lagging its benchmark of stocks and bonds by almost 1%.  This week, bonds bounced back a bit, hurting our relative performance slightly due to the fact that we have such low exposure currently, but the real issue was some weakness among our stocks.  We had two Healthcare companies retreat somewhat after reporting earnings.  The model is slightly ahead of its benchmark so far in February, rallying 1.39%.

Sector Selector ETF declined 1.05%, lagging the overall market by 0.93% as Small-Caps and Emerging Markets corrected somewhat.  Despite the tough week, the model is up 3.15% in February and 11.7% so far in 2012, 4.7% ahead of the S&P 500.

Market Outlook

Those who reviewed my comments from last week know that this week played out as I expected.  I had closed my outlook with a slightly cautious tone:

As my conviction builds longer-term, I have to share some near-term caution, as the market has rallied five straight weeks and is a little overbought.  This doesn't mean a big pull-back is ahead, but I wouldn't be surprised to see a small dip

Until today, when the market saw some low-volume profit-taking finally, the market had continued its advance, extending to new highs throughout the week.  Today's small retreat wiped out the gains of the previous four days and left the market down just slightly.  In my view, it's just what the doctor ordered.  After all, if we are going to have a "down week", falling 1/10 of a percent is about as good as it gets.  

I remain optimistic about the market for the balance of the year.  When the rally began in October, it seemed like a long-shot that four months later we would be knocking on the door of post-2009 highs.  As I mentioned last week, certain parts of the market have already cleared their previous highs.  It seems as though the fundamentals, while still offering several challenges, aren't as scary as many had previously expected.  To me, valuations remain quite low, and the technicals are clearly good.  This is a stealth rally, of sorts, one that doesn't appear to be inspiring individuals yet.  Last week, I discussed how the Facebook IPO could be a major catalyst for higher investor participation.  Its my observation that individuals tend to jump into the market only after it has already rallied.  I guess it depends on where one considers the starting point, but, unless you want to look only at the correction lows of October, the market is only starting to take off.  We are still below the 52-week highs and up only 2% over the past year.  Improving sentiment will likely be the story later this quarter.

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Have a nice week!

 

 

Alan Brochstein, CFA

www.InvestByModel.com

 

 

SSETF Trade

The sector we are trimming has been on a tear, with big stocks pushing against key resistance levels and the sector somewhat overbought.  We are trimming our substantial exposure modestly and redeploying a portion to a sector that has lagged so far in 2012 as well as raising cash marginally.

Top 20 Trade

I was very patient with the stock we are selling.  After it spiked following an acquisition announced at year-end (days after we had added), the stock consolidated.  With its recent strong earnings release, the stock has moved up almost 50% in two months, leaving it somewhat overbought.  With the CFO checking out, I think its appropriate to move on too.  While I am raising my target due to higher earnings and a more aggressive valuation assumption, the return to the new target is still only 25%.

The buy is out of favor, as the near-term prospects are dimmed by a dispute with a service provider.  The situation is fluid, as the company with which it is engaged in a battle is trying to take over a competitor.  If the deal goes through, it will likely add to the near-term challenges, though the stock appears to reflect a strong likelihood the deal does close. To my target, the return is over 40%.  Longer-term, the company we are buying, which is down sharply from its 52-week high, is an extremely important company in terms of delivering healthcare services.  Known for its bricks and mortar stores, which have been improved, the company has several not-so-well-known initiatives that I believe will drive growth for years to come.

Trades for All Models

In SSETF, we are taking off some of our largest exposure, which has performed well, to add to a sector that is lagging a bit.  I use a momentum indicator, and our sell is 1.25 units overbought, while the buy is only 0.5 units overbought.  This is really just a rebalancing - the sell is up 12% YTD, while the buy is up just 5%.

In CG/B, we are trimming our largest position.  It is a little overbought.  More importantly, though, I have an automatic rule consistent with the capital-preservation mandate for the model that forces me to trim when it gets above 7.5% of the entire model (it's 8% before the trade).  The stock is up 21% YTD - I don't mind booking some profits, and this sale reverses an addition we made four weeks ago that has increased 18%.  While I am very bullish, the market may be a little ahead of itself.  We have a few other positions that are close to levels where I may raise cash in coming days.  Even after this sale, we are very close to the maximum exposure to stocks of 75%, now at 73% roughly.

In Top 20, we are trimming this same name, making it average in size in order to add to another exisiting position.  The buy is very oversold and offers 57% to my one-year target (the sell offers 35%).