The market rallied throughout the week, bouncing back from near-term oversold conditions. Here is how the two models look as of Friday:
Top 20 bounced back a bit, rallying 3.25% compared to 2.39% for the S&P 500. Some of the weakest names in the past few months led the way, including companies in the energy and materials sectors. So far this month, the model has outperformed the index by 0.10%
Conservative Growth/Balanced improved 1.03%, but this trailed the index of 60% stocks and 40% bonds by 0.43%. Only two stocks of the fourteen beat the market last week, and being underweight bonds a bit isn't helping. So far this month, the model has underperformed the index by 0.95%.
The market was pretty oversold on a short-term basis. It's not clear that the weak start to the year has fully played out, and I expect to see the flat-line (1848 was the year-end close) to serve as resistance. Again, I see support down near 1700 and view a negative return for Q1 as the most likely scenario. Bulls can look to the NASDAQ and the semiconductors as possible harbingers of improving market conditions.
At year-end, I asked for input regarding the direction of Invest By Model. I concluded, based on your feedback, that the most likely direction would be to migrate to Marketfy. I haven't really made much progress yet, but I want to update you on my thinking.
The demands on my time have soared due to my success with my cannabis-focused service, www.420investor.com, which has become essentially a full-time job. I continue to work overtime to handle my non-cannabis responsibilities, and I am most likely, after seven-plus years of operating alone, going to begin to build a larger organization, which will allow me to continue to offer this service. I appreciate your patience during this time. Here is a clip, by the way, of me on Bloomberg TV with Pimm Fox on 2/14:
We are trimming a technology name that has rallied since we bought it in December and now offers 37% to our one-year target. The new position size is more appropriate given that this return is below the average for the portfolio. We are using a little cash as well and adding to two of our names in the Consumer Staples sector. Alphabetically, the first name offers 47% to the one-year target and is moderately oversold. The second, which was our smallest position, offers 41% and is a bit more oversold.
The market extended January losses as the new month began but recovered as the week ended. Here is how the models looked at the end of the week:
Top 20 gave up a bit more ground this week, increasing by 0.16%, while the S&P 500 rose 0.9%. This was a most unusual week, as smaller stocks actually moved in the opposite direction from larger ones, with the Russell 2000 declining over 1%. There were no double-digit percentage winners or losers in the model.
Conservative Growth/Balanced was flat, while the index of 60% stocks and 40% bonds rose 0.51%. The cause for the weak performance was hard to pinpoint, though half the stocks declined. The worst performer dropped just 3%.
The S&P 500 posted a low of 1742 on 2/3. I had previously suggested that 1700 area is likely to be tested, with a risk to 1650 or so. As measured against the peak of 1851, the pullback, at its worst, represented a decline of 6%. This may have been enough, but I suspect not. Q1 is likely to remain negative, so there appears to be no urgency to deploy cash.
The technology stock we are selling has had a nice run following decent results. The stock offers only 20% or so to the target, which I have preliminary revised higher (and may raise a bit further). This is a former high-flyer that is showing signs of getting back on track. We had added to the position in November, and that purchase appreciated by 30% or so. Most of the proceeds are going into a retailer that offer about 50% to the one-year target.
Stocks gyrated during the week but modestly extended their losing ways, closing out January with a loss of almost 3.5%:
Top 20 had a rough week, declining 2.34% compared to a 0.41% decline in the S&P 500. We had four stocks decline 5% or more, while two jumped by 5% or more. Smaller stocks were definitely under pressure, with the Russell 2000 dropping about 1.2%. For the month, the model had three double-digit decliners, two of which were tied to poor earnings reports. Two of our technology holdings posted gains of approximately 5%.
Conservative Growth/Balanced dropped 1.89%, while the index of 60% stocks and 40% bonds gave up only 0.12%. The model endured two double-digit percentage losses during the week, both related to fundamental news. For the month, the underperformance was tied partially to allocation, with the slight overweight in stocks costing about 0.15% and the underweight in bonds, which returned almost 1.5%, contributing 0.2%. The balance was due to selection, as only one stock outperformed the S&P 500.
I had expected Q1 could get off to a rough start, and January was pretty nasty as far as beginnings to a new year go. The most troubling aspect of the market has been the relative weakness of the very largest companies. This is a sign of repositioning by big investors. My own take is that the near-term risk is to about 1700 - really not that big of a deal in the context of last year's big rally, but still painful to endure. A sell-off with higher interest rates would alarm me, but this is not the case, and I expect that this is a dip, albeit a protracted one, potentially, which should be bought. I will be looking to take exposure up in CG/B when appropriate.
The sale in CG/B is due to the technical of being overextended as well as offering the lowest return to my one-year target of any stock in the model (24%). I am happy to lighten up a bit, as we are slightly overweight our benchmark.
The double-top I highlighted last week now looks more ominous, as stocks fell sharply in the holiday-shortened week. Here is how the models look with a week to go in January:
Top 20 fell slightly less than the overall market, declining 2.51% compared to the 2.62% drop in the S&P 500. The three energy and gold stocks we own actually rallied, but we were slammed on the recent purchase we made in the retailer, where the CEO exited just two years into his tenure, with the stock dropping 12%. Of small consolation is the fact that the stock we sold to fund the purchase fell 8%. Years of experience tell me this initial hit might actually be a good thing in the long-run, as we can increase the position at a much better price. Another retailer in the model fell 8%, as this sector remains quite weak, with the overall Consumer Discretionary sector down 5% in January. As a reminder, this model is not managed for cash levels - it is always fully invested.
Conservative Growth/Balanced declined 1.79% compared to a 1.45% loss in the index, which is based on 60% stocks and 40% bonds. Part of this was due to being less exposed to bonds, which rallied on the week, part to being overweight stocks slightly and the balance to a few stocks that dragged down returns as well. The gold stock was the only one to rally, and the energy stock, unlike the two in Top 2o that rallied, fell in line with the market. We trimmed the investment manager that we had sold completely out of Top 20, but the remaining portion was our worst performer. Our equity weighting is currently 65%, slightly ahead of the the benchmark.
Trees don't grow to heaven, and markets don't rally ad infinitum. Last week, I pointed to a topping process that included a divergence of larger and more conservative stocks (i.e. the Dow Jones Industrial Average) underperforming. Through Friday, the S&P 500 has dropped 3.1%, which is 1.4% worse than the Russell 2000. The DJIA has declined 4.2%.
One of the primary concerns is the weakening in emerging markets, with the emerging markets index now down almost 8% YTD. The weak U.S. consumer in Q4 is worrying investors as well. I don't see these fundamental issues as too concerning. Rather, this appears to be just a correction of an extended market. My own projections are that we could pull back to 1700-1740, which, as measured against the all-time high double-top near 1850, would represent a 6-8% correction. This move is consistent with the path that I envisioned as the year began given that we enjoyed four consecutive positive quarterly returns for the market. Recall that I suggested range for the year of 1650-2000 in my year-end summary. 2014 will likely prove much more volatile than the prior year.
In CG/B, we are reallocating capital back towards two retailers we trimmed in recent months at higher levels - they now offer about 35% roughly to the one-year target. The sell, from the financial sector, offers only 23%.
In Top 20, we are trimming a November tax-loss selling buy that has rallied. It now offers just 35% to the one-year target, suggesting it is attractive but should be below the average position size after the recent rally. We are also selling a financial, the same one that is in CG/B, to buy a retailer that offers 37% to the target shared in the research.
Stocks rallied to their 12/31/13 high but then reversed. Here is how we looked mid-way through January:
Top 20 recovered some of its weak relative performance since the year began, posting a 0.27% gain as the S&P 500 pulled back 0.18%. The main factor was the better performance of smaller stocks relative to larger ones. Our sporting goods company had a negative pre-announcement yet was the second-best performer, rallying 5.5%. Our other leaders were 2013 laggards, with the restaurant stock up 6% and a few other laggards leading the way. On the downside, though, three stocks fell between 4.5-6.3%.
Conservative Growth/Balanced gave up some ground, declining 0.21% while the index of 60% stocks and 40% bonds rose very marginally, supported by bonds. We are at about 24% bonds, below the benchmark, and we were slammed on our retailer holdings.
No change in my views that I have shared more elaborately in recent weeks. The market has seen some rotation with the calendar flip, and one fundamental negative has been in retail, where Q4 was quite challenging. Technically, the market is starting to look a little tired, and the quick rejection of 1850, creating a double-top, is a bit alarming. Smaller stocks posted a new high, but larger ones, as measured by the OEX or the DJIA, did not, and this is a bit concerning. I expect that Q1 could be negative after four straight positive returns for the market. With that said, I am vigilant but do not see reason to be concerned that this would be anything more than a potential 5% or so pullback if it were to materialize.