Saturday, April 25, 2009

Returns for week ending 4/24/09

Model portfolio, hypothetical returns for past…
1 week: -2.8%
52 weeks: +19.8%

Value of $10,000 invested at inception in 2003: $52,908

S&P 500 Index, returns (with dividends) for past…
52 weeks: -36.0%

Comment regarding past few week's performance: The model portfolio has not participated in the market gains since the March bottom. This is disappointing of course, but not a complete surprise due to the nature of the current rally, rebounding sharply off of a historic market sell-off.

Market technicians have noted that this rally has been largely fueled by "short covering" as evidenced by the tepid trading volume. This means that the formerly "most heavily sold" stocks with the biggest 52-week losses are now seeing the greatest gains. In other words, the market's lagging sectors have been leading this rally. There is a saying that "even turkeys can try to fly in a windstorm."

It is important to note that the Strategic Growth Model is purposely designed to deliver non-correlated returns over time, and its short term performance will often not mirror the market trend. Of course, when market conditions are poor, this is a very good thing, as evidenced by the model portfolio's 52 week returns vs. the S&P 500 index. The Strategic Growth Model has continued to perform within its design thresholds, even making a new high water mark a few weeks ago.

As for the current rally, market internals currently indicate it is a bear rally and prone to failure. At some point market internals will become more robust and capital will favor growth stocks over the market laggards. At that time, I expect the Strategic Growth Model will again outperform the market as it detects the leading stocks in the ascendant sectors where growth capital is flowing.

In the meantime, the model's stock selection engine is finding very few growth stocks meeting its strict selection criteria. As a result the model portfolio is now holding more than 50% cash which will reduce the portfolio's risk as we await improved market conditions.

Trading Volume Separates Bull Markets from Bear Rallies

Is the current rally the beginning of a new Bull Market, or is it a "Bear Rally?"

Supply and Demand comprise the foundation of market pricing. Research shows that sustained rallies are usually accompanied with expanding volume, signaling increased demand for stocks.

"Volume tends to expand in the main direction of the trend. In a bull market, advances accompanied by increasing volume or declines on diminishing volume are taken to be bullish. Conversly, in a bear market, declines are accompanied by increasing volume and advances show diminishing volume. Volume should always be studied as a trend (relative to what has preceded)." -Richard Russell, The Dow Theory Today

Here is a link to an excellent study of trading volume by William Hester at Hussman Funds.

The chart shows that the current rally is truly historic in terms of percentage gain off the March bottom, but volume has not been expanding enough to instill confidence that this is more than a Bear Rally. To get the most meaning out of the chart, Hester's essay is required reading.

Here is the short course... The chart's blue dates represent the beginning of each bull market since 1940. The red dates represent this decade's bear-market rallies, including 4 during the 2000-2003 bear market and the rally that lasted from November of last year through January.

As Hester summarizes:

"... new bull markets, whether at their inception or soon after, have a history of recruiting noticeable improvements in volume. So far this rally lacks that important quality. Over the next few weeks stock market volume will be a metric to watch closely."

Saturday, April 18, 2009

Returns for week ending 4/17/09

Model portfolio, hypothetical returns for past…
1 week: -0.6%

Sunday, April 12, 2009

Has the Market Bottomed?

The market's recent 25% advance off the March lows meets the technical definition of a "bull" market rally. The Market has rallied 25% in 4 weeks! Such a huge move in such a short period is truly historic.

The only times we have ever seen the stock market surge close to this much in such a short time frame were: December 1929, June 1931, August 1932, May 1933, July 1938 and September 1982.

In September 1982 and in May 1933, the stock market was indeed embarking on a new bull phase. In the the other 4 instances, the stock market went on to make a lower low in the months ahead. So based on this very small sample, there is a 2/3 chance that the market will decline further before making its final bottom. A wise investor will take this possibility into account as he puts capital at risk.

The Strategic Growth Model doesn't depend on predictions regarding where the Market is going from here. Rather it aligns capital in accordance with prevailing market conditions.

Never 100% long nor 100% short, the SGM's ability to generate excess returns depends more on selecting stocks that are likely to outperform the general market, and then managing the portfolio's risk through hedging. The SGM's allocation model also aims to take a defensive stance when market conditions are especially poor. The SGM's combination of stock selection, risk management, and market timing has enabled the model portfolio to generate uncorrelated, excess returns over the past 5+ years.

Market Conditions are currently positive. The Market's intermediate-term trend is UP. During periods such as this, the model portfolio will scale its allocation between market neutral and net-50%-long. This range of allocations takes advantage of the model's statistical edge, hopefully enabling the portfolio to make a profit over the coming weeks.

Returns for week ending 4/10/09

Model portfolio, hypothetical returns for past…
1 week: -1.6%
26 weeks: +2.4%
52 weeks: +26.9%

Value of $10,000 invested at inception in 2003: $54,792

Saturday, April 4, 2009

Returns for week ending 4/3/09

Model portfolio, hypothetical returns for past…
1 week: +0.1%