Half Way There

January 31, 2015

If you take ” Play till May ” seriously, as I do,  you are forced to keep a double set of  ” performance measurement” books…

Annual – January 1, to December 31….and

Annual -November 1, to October 31.  With January in the books, we are halfway to May with SPY  down 2.96% since November 1.

If you are an average investor,  and would heed the advice of  Warren Buffett ( Berkshire Hathaway ) and John Bogle ( Vanguard ), don’t let SPY’s negative performance ( since November ) throw you because even the very best analysts  have an ongoing  problem keeping pace with SPY’s results.  No need to read further.  Just keep investing in SPY through the ups and downs… and your reward ( down the road ) could be significant.

For those of you still reading,  you are entering my domain,…. the domain of pride and hubris, risking your savings to challenge the ” Buy and Hold ” results of SPY,  (  An ETF  basket of stocks  representing the USA’s largest capitalization equities ) .

In previous posts, I have argued my belief that it  doesn’t take much expertise or work to beat SPY ” Buy and Hold ” via trend trading.  And, back testing to the year 2000 has shown that this is true with SPY being involved in only six trades  ( five of them winners )   The one trading  loss was for 5.82%.  My methodology for trend trading SPY is explained in previous posts.

The latest such trade dates to December 31, 2011.  It has been an open trade for 774 days and has resulted in a gain of 280% while SPY  ” Buy and Hold ” has gained 91.3% for the same period.   Do I have your attention ?

Are you part of that trade ?  I’m not, although I intend to get in sync with it at my first opportunity to do so,  ( a buy signal at a month end following a sell signal at a previous month end).  It seems to me that the only way to gain from this situation is to assume the investment climate for equities is benign until the SELL signal appears at some month end down the road.  If the December 30, 2011 trade sets the trading climate…it says nothing about the  trading weather.

The trading  weather… head windy and tail windy for SPY, is  based on a whole lot of factors.   SPY contains equities that benefit from low oil prices and equities that suffer from low oil prices. SPY contains equities that benefit from a strong dollar and those that suffer from a strong dollar. SPY contains equities that benefit from low interest rates and equities which see low interest rates as a problem. Lately, there has been an unusual amount  of pushing and pulling inside SPY,  giving rise to the notion that this is a market for individual stocks, not  Indexes,  and could best be described as a stock picker’s market.

I have been selecting equities  I believe will  benefit from a strong dollar, low interest rates and low oil prices.  And, so far, I must be doing something right because my equity portfolio  ( based on ” smart ” criteria and current conditions )  is ahead 5.4% since November 1, while SPY is down 2.96%.

But I’m not taking any bows because stock picking is only half the battle.  Knowing when to sell is just as important.  Just ask Cinderella about her late exit from the ball !  And, maybe that is one of the virtues of trend trading SPY.  It may be like watching grass grow but it doesn’t require the daily attention of 25 different equities, each with its own daily story.   Under the circumstances , to reduce the specific risk of holding individual equities I’m working on trigger strategies to follow when considering the sale of an individual equity.

In terms of selling everything on a SELL signal , in addition to the trend trading SELL signal, I’ve decided that knowing when the market is priced  too exuberantly could be a very good DEW line against a Bear attack ( not necessarily Russian ) .  And, what I am focusing on is the divergence between equity yields and bond yields.   Recently,  the equity / bond yield divergence is widening…. an indication that investors are still afraid of equities and are buying more bonds irrespective of the lower yields bonds offer.  To me, this is a good sign because it  means there are a lot of dollars in bonds still waiting to be convinced its safe to buy equities.  Once the divergence narrows to the point where it seems the market is saying its just as safe to buy equities as bonds,  I’ll be checking my canary very carefully and very often.

As for selling an individual equity….my primary warning sign is when the equity  begins to slip relative to SPY’s (November till now ) performance.  Your portfolio  can’t outperform SPY if your portfolio is chock full of equities which are lagging SPY.  This means staying on top of strength relative to SPY and then finding answers for a negative divergence  which could quite possibly result in a sale.  More work, more small losses  and more commissions to erode the overall result.  The positive offset to this is the internal growth of unrealized profits in your portfolio and how that result compares to the unrealized profit in your SPY holding.The equities currently in my portfolio are  SWHC, GLW, CVS, LUV, BX, NOC, UNH, ANTM, JBLU, DIS, HXL, DLTR, ORLY, DAL, AAPL, ALL, ALK, GD, TWX, RTN,, UA, TASR, NTES, PCYC, NOVO….all purchased since November 1, all outperforming SPY since November 1..

I am treating SPY as a bond substitute, writing Puts in exchange for a premium and an opportunity to take delivery of SPY  at prices ranging from $199 to $190 instead of the $205 I would have paid to purchase SPY with no premium to me  ( 7 % to 10% per annum ).

Hope this gets you thinking about your portfolio and how it compares to SPY from November 1 and from January 1. …Richard Maurice Gore




Leave a Reply