Starting The New Year On The Defensive

When all was said and done in 2015, the majority of stock indexes were down for the year, and the bond market showed very little in the way of change, with the exception of the high yield bond market, which simply illustrated that there is risk in chasing yield without a plan.

What’s Happening Now

Three weeks ago, in our quarterly newsletter, I used the headline “If It Looks Like a Bear, Believe It.”  Stock markets worldwide seem to be confirming this thought, with almost all stock indexes down over 5% in the first four trading days of January.  According to Barron’s, this is the worst start in history for the Dow Jones Industrial Average.

I’ve been writing for several months about the internal erosion in markets, with large companies holding up (mostly from about 30 names), while mid-sized, small companies and international equities, falling off.  Fractured markets are not healthy markets.  Now, the gradual erosion, that started last May, is once again turning into intense selling.

The bottom line is, nearly 70% of all stocks are in downtrends, as measured either by point and figure sell signals or trading below their respective 200-day moving averages.  Risk is high, and increasing.  If the bull market that began in March 2009 is over, the S&P 500 from bottom to top went from 676 to 2130 (May of 2015).  This represents 1454 points.  Common technical retracements of such moves are 38% and 50%, as well as 62%.

Today, the S&P 500 closed at 1943.  If we are in the midst of a 38% retracement of the entire rally, the target is 1578.  If a 50% retracement takes place, that would go to 1403.  Those levels represent losses from the May 2015 peak of anywhere from -25% to -34%.  These are certainly possibilities in coming months, especially if the August lows at the 1865 level are taken out.

What about Election Year Tendencies?

I am a strong believer in probabilities and history, but I’ve also learned in my over 30 years of studying and learning about market history, that when markets do not do what they have historically done, it can often be a warning sign.  Though limited in sample size, years ending in 5 (1905, 1915, 1925, etc.), had never experienced a loss, until 2015.

In addition, of the four years in the Presidential Cycle, the pre-election year has over time, been by far the strongest.  Realize, then, that 2015 was a pre-election year, and stocks were flat to down.  Election years are the second best performers in the cycle, but remember, 2008 was an Election year, and stocks lost nearly -40%.  Given the combination of an overvalued stock market based on several metrics, more restrictive monetary policy from the Fed for the first time in 8 years, and the above noted deterioration in the majority of stocks, it’s likely that history is not going to be helpful in 2016 in regards to election/Presidential cycle tendencies.

We’ve Got Your Back

TABR’s tactical portfolios entered this week with significant cash positions on the equity side.  Keep in mind, every account, save for TABR’s Dividend Stock strategy, has bond allocations ranging from 30% in Aggressive accounts to 60% or more in Conservative accounts.  So, if you will follow the math, I will use our Moderate risk accounts as the example.

They have 45% allocated to our bond strategies.  Currently, we are almost completely out of high yield funds, as our model went negative in mid-November.  The majority of our bond money is currently in short term funds, and high quality, such as PIMCO Income.  Moderate accounts therefore have a maximum of 55% allocated to equities.

Imagine a $100,000 portfolio.  Our real estate model represents 5% ($5000) of this and is currently bullish.  The tactical portion of equity exposure is about $20,000.  Currently, six of the 10 risk models we use for the stock market are either neutral or bearish.  In coming days, we expect this to change to 7 or 8 being bearish.

In sum, we have much lower stock market exposure right now than traditional buy and hold, fully-invested portfolios, because the evidence and our process demands it.  There will be opportunities to grow in the future, where significant exposure is warranted, but now is not that time.

Is Anyone Making Any Money in This Environment?

The above question recently was posed in normal email communication that Steve Medland received from a client.  I thought the table below, from the data section of the Wall Street Journal website, might go a long way in simply answering that question.

The table represents the Lipper Mutual Fund indexes, which represent virtually all broad areas of the stock and bond markets.  The YTD column on the far right of the table represents the percentage change for all of 2015 in the various categories.  As one can see, only large and multi-cap growth funds were positive for the stock market, and those indexes were skewed by a handful of stocks, as I’ve been writing about.  In the bond market, the high quality sectors earned less than 1%, while high yield bond funds fell nearly -5%.

So, though we cannot know the composition of all investor’s portfolios, you can see that if one is properly diversified, the odds are you lost some money in 2015.  That is all part of the investing cycle, and not at all unusual.  The real key, in our view, is minimizing losses so they don’t derail the attainment of long term financial goals.  And, as much as we’d all like to make progress every year towards our goals, that simply is not realistic when investing in financial markets.  To stay on track, we always stick with our process, having the confidence that it will get us through, no matter what markets do.

Material of A Less Serious Nature

This one is called “True Friendship Among Golfing Buddies.”

A guy brings his best golf mate home, unannounced, for dinner at 6:30, after golf.  His wife screams her head off while his friend sits open mouthed and listens to the tirade.

“My bloody hair and makeup are not done, the house is a mess, the dishes aren’t done.  Can’t you see I’m still in my pajamas and I can’t be bothered with cooking tonight?  Why the heck did you bring him home unannounced you stupid idiot?”

“Because he’s thinking of getting married.”

Here’s hoping that 2016 ends better than it has started, but know that our discipline is always there, and it will be rewarded in the long run.

Sincerely,

Bob Kargenian, CMT
President

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Comparison of the TABR Model Portfolios to the Vanguard Total Stock Index Fund, the Vanguard Total International Stock Fund and the Vanguard Total Bond Index Fund is for illustrative purposes only and the volatility of the indices used for comparison may be materially different from the volatility of the TABR Model Portfolios due to varying degrees of diversification and/or other factors.

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