Invest By Model

Trades in Top 20

We are exiting two technology names and trimming another, with the balance being deployed into two very oversold names, one of which was a recent purchase, and repurchasing a healthcare name that we sold earlier this year.  The large-cap stock we are selling offers 40% to the one-year target, while the smaller one yield 29% and the one we are trimming offers 40% as well but is a bit overbought.  The add offers 54% and is very oversold. The two new names offer 48% (the consumer discretionary name, which is extremely oversold) and 42% (the healthcare name, which is modestly oversold).

Market Churns as Options Expire

The market was pretty quiet considering that it was options expiration.  Here is how the models look as of 2/21:

Top 20 had a strong week, rallying 1.06% while the S&P 500 dropped 0.08%.  This leaves the model up 1.2% more than the market so far in February but still down 1.11% in 2014.  The major drivers of the performance this week were the general strength of smaller stocks but also the surge in Energy stocks.  We also had a retailer bounce back.  Four stocks improved by more than 3%, and only one stock fell by more than 3%.

Conservative Growth/Balanced basically tracked the market, declining by 0.07% while the index fell by 0.03%.  The performance in February has been weak, with the model up 0.96% compared to 1.95% for the 60% stock and 40% bond index.  So far in February, two stocks have increased by 5% or more, while two have declined by that much.  Most of the stocks have increased, but the median return is certainly below the S&P 500.

Outlook

I continue to expect the markets to churn in Q1.  It's possible that the lows were set earlier this quarter (though I see risk to 1700 and possibly 1650), and a break to new highs would lead me to be more bullish technically.  I have no change in my expectations that the market should achieve high-single digit returns in 2014.

Conservative Growth/Balanced Trade

We are adding to a poor performer of late, increasing the position size due to the stock being very oversold at this point and offering an above-average return (about 45% to our one-year target).

Market Rallies but Is Still Down YTD

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%.

Outlook

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.

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Update

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:

http://bloom.bg/1jjaDGB

Enjoy the long weekend!

 

Alan Brochstein, CFA

www.InvestByModel.com

 

 

Top 20 Trades

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.

Market Bounces

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%.

Outlook

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.

Have a great weekend!

 

Alan Brochstein, CFA

www.InvestByModel.com

Top 20 Trades

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 Endure Worst January Since 2009

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.

Outlook

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.

Have a "super" rest of the weekend!

 

Alan Brochstein, CFA

www.InvestByModel.com