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Seasonality Triggered: Sell In May In Effect At Republic Wealth Advisors

Seasonality Triggered: Sell In May In Effect At Republic Wealth Advisors

Seasonality recent history fared well, what seasonality is, a brief history, and what clients need to do moving forward.

As the market adage goes, “Sell in May and Go Away”.  For the past week, we have been monitoring our technical indicators for signals that the favorable market season for equities was coming to a close.  With yesterday’s waterfall drop in major equity asset classes, that drop triggered our seasonality technical indicators.  This change in our seasonality indicator led us to reposition to more conservative positions in our investment portfolios for now.  

Seasonality From November 2016 To Present

Looking back to last fall, our buy indicator for seasonality came after the conclusion of the Fall Presidential election.  The election conclusion brought some certainty to the markets about our political landscape.  Since entering our seasonality position (IVV – S&P 500 or alternative) on November 11th, that position gained over 9% through Tuesday’s close – not a bad gain for six months work.  

Major market indexes including the Dow and the S&P 500 have been trading sideways since topping in early March although they have been scratching back to record highs in the last week.  Conversely the tech dominated NASDAQ has continued to trade higher on the strength of technology leaders posting strong earnings such as Apple, Microsoft, Amazon, Facebook, and Google.   Late news on Monday about the Trump / Comey controversy caused investors to sell during Tuesday’s session.  Nothing changed economically, but the market is sensing the Trump agenda for tax and healthcare reform are in jeopardy with fractures in the Republican Party.

Seasonality Overview

As a refresher, the seasonality pattern started after World War II and has continued into the present.  With seasonality, most market gains in the equity markets occur from late October and into late spring.  Just like the weather can vary from year to year, seasonality in the equity markets vary from year to year and there are years when it rewards an investor to stay fully invested through the unfavorable period.  But over a multi-year period there is no denying the research that major market advances do not occur in the summer months.  

In fact, research from Stock Trader’s Almanac reflect that from 1950 to early 2016, there was no reward for investors being invested in the equity market during the unfavorable months.  Additionally, most bear markets end in the unfavorable months of May through October with October being the “bear killer” month.  

A Short History Of “Sell In May”

Here’s a brief history of the strategy from Stock Trader's Almanac®…

Sell in May is an old British saw, soundly based on inherent behavioral finance patterns and the collective cultural behavior of the investment community, but it did not truly become a tradable investment strategy until after WWII…

Prior to about 1950, farming was a major portion of the U.S. economy and from 1901-1950, August was the best performing month of the year, up 36 times in 49 years (market closed in August 1914 due to World War I) with an average gain of 2.3%. July was the second best month, up 31 of 50 with an average gain of 1.5%. June was fourth best, averaging 0.9%. Why, you may ask? Simply: planting, sowing, reaping and harvesting. As crops were planted and then brought to market and sold, cash began to move and so did the stock market. 

Agriculture’s share of GDP began to shrink post World War II as industrialization created a growing middle class that moved to the suburbs where hard-earned salaries would be spent filling new homes with all the modern conveniences we all take for granted now. Farming became more efficient and fewer and fewer people worked on the farm. 

Suddenly, summer was less about the hard work of harvesting crops and more about vacations and relaxing.  As the economy evolved and peoples’ lives changed, the market evolved.  June and August went from being top performing months to bottom performing months.  August went from #1 to #10 in 1950-2016 with an average DJIA loss of 0.2%.  June went from #4 to #11 (–0.3% average loss).  The shift in DJIA’s seasonal pattern is clear in the following chart. “Sell in May” is a post WWII pattern, prior to then it would have been “Buy in May”.

Image from The Stock Trader's Almanac®

As you can see from the chart, the black line representing 1901-1949 shows that equity market continued to rise throughout the summer.  Conversely on the blue line, from 1950-2016, there is no market gains from late April to late October (aka the “Bear Killer” month).  

What This Means For Our Clients

If you’re invested with Republic Wealth Advisors, you don’t need to do anything.  Our team of portfolio managers has or is in the process of adjusting allocations to more conservative positions as appropriate.  We will continue to monitor the markets and make adjustments as things play out in the next few weeks and months.

Our goal is for you to concentrate on what you do best in work, retirement, or your other projects, not worry about the ever-shifting financial markets.  

Please feel free to reach-out if you have any questions about your individual situation. 

 


 

IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.

 

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Seasonality Update: Entering the Historically Strongest 6 Months

Seasonality Update: Entering the Historically Strongest 6 Months

Dozens of investing strategies compete in the stock market. It’s one of the features that make a market: investors invest differently. However, some strategies have performed better than others for decades running.

You may be familiar with the adage ‘Sell in May and Go Away’ which we have discussed in many past instances and believe to be a viable investment strategy.  Seasonal investing is a strategy that seeks to capitalize on the market historically performing better from November to April in most years. 

Seasonal Stock Investing: An Overview

Seasonal stock investing has historically outperformed traditional buy-and-hold investing over time. One seasonal investing proponent is the Stock Traders’ Almanac. According to The Stock Traders Almanac

“After decades of historical research, we discovered that most market gains occur during the months November through April. Investing in the Dow Jones Industrial Average between November 1st and April 30th each year and then switching into fixed income for the other six months has produced reliable returns with reduced risk since 1950.

Thus far we have failed to find a similar trading strategy that even comes close over the past six decades. And to top it off, the strategy has only been improving since we first discovered it in 1986.”

Stock Trader's Almanac Strategy Historic Results

The Stock Trader’s Almanac: Best 6 Months Strategy – Image Courtesy of The Stock Trader’s Almanac

The numbers are pretty compelling. Starting in 1950, a hypothetical $10,000 account invested in the Dow Jones Industrial stocks would have a total return of $1,210,096 in 2015 – assuming no withdrawals. However, had you invested with the modified Best 6 Months strategy – i.e. the ‘Sell in May’ strategy – the total return would be $1,692,679 or 39.9% better! 

Of course, every year is different. Sometimes the ‘Best 6 Months’ strategy underperforms the broader market. Still, the ‘Sell in May’ strategy tends to outperform the broader market while limiting risk over time.

Republic Wealth Advisors on Seasonality

At Republic, seasonal investing is a tenant that we believe has added value for our client portfolios compared to traditional buy and hold investing.  Over the past few years, we have explored seasonal investing on this blog. As recently as last September, we discussed how selling in May helped returns in 2015. 

Republic Wealth’s strategy does not follow ‘Sell in May’ by selling exactly on May 1st.  We use other indicators to fine-tune our seasonal “buy” and “sell” signals. This year, the election is throwing a wrench at seasonality. The stock market is not showing a clear upward direction like we would normally expect on November 1. Our research and real-world experience tell us the seasonal buy signal alone isn’t enough. Instead, our approach utilizes seasonality, technical analysis, and fundamental considerations to enter and exit the market. 

As the market awaits the US election results, we are also awaiting a more clear entry signal to follow our seasonality “buy” signal for this year. When we see alignment in the signals we track, our programs which follow the seasonality trends will re-enter the stock market with more aggressive positions with an aim to “buy” the best 6 months of the year. 

We don’t know if the historically strong period from now through May of 2017 will meet historical norms or if this upcoming 6 months will be an anomaly like we saw last year.  We do know that over long periods of time, following seasonality can help put the odds in your favor. 

   

IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.

 

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Clock Running Out for 2015

Clock Running Out for 2015

Time is running out for the stock market to end 2015 in the black. As of Monday, Dec. 21, both the Dow Jones Industrial Average and S&P 500 Index showed slightly negative year-to-date results. Can a last-minute rally save the year?

A last-minute rally is certainly possible. If we get one, it will just make 2015 end at break-even or mildly positive. No one will call it a banner year.

This may be positive in one way. This year brought a significant deterioration in corporate earnings, due partly to the stronger U.S. dollar. Had U.S. equity prices continued higher, we might be looking at a much more serious overvaluation right now. A flat year could actually set up a rally in 2016 if earnings recover.

The market’s other problems, as we noted last week in Fasten Your Year-End Seat Belt, include both oil prices and high-yield bonds. Crude oil broke below $35 this week, which put it below the 2008 panic low point. Analysts at Citigroup and Goldman Sachs both have $20 downside targets for oil. OPEC is unwilling to reduce production while U.S. shale producers are still providing ample inventory. A move in Congress to lift the crude oil export ban probably came too late in the cycle to make much difference.

The degree to which energy drives capital expenditures in many parts of the economy wasn’t well known until recently. Now it is painfully clear. Cancelled projects mean that energy companies aren’t buying or leasing a wide variety of supplies and equipment. Excess supplies of everything from iron pipe to portable buildings to dump trucks are weighing down businesses in many sectors.

The many small energy companies that financed their operations with high yield bonds are having a rough time, too. The lucky ones are making enough revenue from their production to cover debt service and operating costs. The unlucky ones are going deeper into the red every day. The lower oil prices go, the more companies fall into that “unlucky” category. Yet oil prices can’t recover while supplies remain so abundant. Escaping from the trap is proving very difficult for many.

The non-energy portion of the high yield bond market is actually holding up quite well. Default rates are still low by historic standards. The high-profile failures have been almost entirely in funds with heavy energy exposure. Junk bonds issued to fund merger and acquisition activity are mostly in good shape. Credit is still available on good terms to healthy companies in stable sectors.

It’s also worth noting that the two main NASDAQ indexes, the broad NASDAQ Composite and the large-cap NASDAQ 100, are both positive for the year with open gains in the mid-single digit range. This is due mostly to outperformance in the biotechnology segment and strong gains in a handful of other companies, notably Amazon.com (AMZN) and Netflix (NFLX).

In fact, this year’s more-or-less flat market in the benchmarks conceals weakness in most individual stocks. This chart from Bespoke Investment Group shows how the “average” stocks within each sector is down substantially from its 52-week high. This doesn’t show up in the benchmark indexes because gains in a handful of large-cap stocks offset losses elsewhere.
 


As was widely expected, the Federal Reserve raised its overnight lending rate last week. Markets took the news as well as we could expect. We saw volatile trading as analysts tried to assess the Fed’s future plans, and Friday’s “quadruple-witching” option expiration also confused the picture. The fact that the Fed’s first rate increase since 2006 didn’t immediately crash the markets is a good sign.

We are right now at a point in which a “Santa Claus Rally” is often underway. It is a little disturbing the market hasn’t yet seen Santa this year. It hasn’t received lumps of coal, either, so maybe the year will end neither naughty nor nice.

Flat years are never fun, but they are certainly better than sharply negative years. We have not seen one of those years in some time, so 2015 will beat the odds if it ends near even. Only time will show us whether 2016 is better or worse. It will be a bad omen if a Santa Rally doesn’t materialize before year-end. In either case, we will monitor the markets as always and take the position we think is most prudent.


IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.


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Seasonality Update: Selling in May Helped This Year

Seasonality Update: Selling in May Helped This Year

The year 2015 isn’t just confounding short-term traders. It is also highlighting the way stock market returns tend to follow seasonal patterns.  The old “Sell in May and Go Away” rule looked questionable at first, but those who heeded it are probably glad they did.

Let’s start with a review.  According to Stock Trader’s Almanac, equity markets show a significant performance bias based on the time of year.  Historically, most gains occur in the fall, winter and spring.  The summer months tend to be flat.  Hence the saying, “Sell in May and Go Away” until sometime in October/November.

Does this rule work every year?  No, it doesn’t. Some years show strong gains in the summer and/or big declines in the winter. The pattern is still strong enough to convince many investment managers, including Republic Wealth, to include it in their decision-making process.

At Republic Wealth, the strategy typically holds balanced mutual funds from the fall through the spring to take advantage of the seasonally strong period and then shifts to more conservative non-equity investments for the summer months.  Historically, the summer holding would be a traditional bond fund but with the current low-interest rate environment of the last several years, we changed the holding to simply non-equity exposure.  This summer, our holdings are a preferred securities fund, a structured credit fund, and an absolute return fund. 

After a volatile start in 2015, major benchmarks finished the first quarter largely unchanged.  The strength persisted until the latter half of April when markets entered a sideways trading range that ultimately resolved to the downside in mid-August.

Republic Wealth’s strategy does not follow “sell in May” by selling exactly on May 1st.  We use other indicators to fine-tune our seasonality “sell” signal. This year it triggered in the last few days of April.

Since our move out of stock exposure, May brought small market gains, but a loss in June left domestic stocks slightly lower for the two-month period and roughly at breakeven for the first half of the year. July was volatile but ended positively. Then August unwound all the upward progress and left the S&P 500 at a 4.2% year-to-date loss, not counting dividends.

Holding the S&P 500 for the January-April period would have resulted in a 1.3% gain, not counting dividends. The next four months were significantly worse with a -5.4% loss, so being on the sidelines for that period would have avoided losses. The seasonal investor would have still had that 1.3% gain at the end of August, while the “buy and hold” investor would be down 4.2%.

b2ap3_thumbnail_150903-SPX-seasonality-2015.png 
Alternatively, this year’s Republic Wealth holding yielded a return of approximately -0.45% gross of management fees from the end of April through the end of August. This compares to our benchmark 50% S&P 500 and 50% Barclays Aggregate return of -2.85% over the same period.

Of course, we’re only looking at one instance of the seasonal pattern. Some years it worked better, and in other years, the results were worse. Even in years where we don’t see meaningful pullback, we are lowering overall portfolio volatility by reducing exposure for half of the year.

We won’t have a final verdict for 2015 until the seasonal strategy re-enters the market, which typically occurs sometime in October. Further losses in September-October will add to the seasonal investor’s 2015 advantage. Gains in that period will reduce the advantage from a return only (not risk) perspective.

The adage “Sell in May and Go Away” has worked well this year and we believe it is a valuable tool in controlling portfolio risk. We want to stack the odds in our favor, and that includes minimizing risk during unfavorable periods. Preventing large losses is critical to a successful long-term investment strategy.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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Stock Market Update: S&P 500 Breaks Down

Stock Market Update: S&P 500 Breaks Down

Summer seasonal trends historically bring stock market weakness, and this year is no exception. The major benchmarks have pulled back over the last few weeks after touching record highs in the spring and again in mid-July. Today brought a large wave of selling pressure.

Is a major crash imminent? We don’t think so, but we have turned considerably more defensive by raising cash positions and tightening stop-loss levels.

Many events are contributing to this weakness. The U.S. economy still shows mild but reliable “Plow Horse” growth. The rest of the world is not so stable. Worries about the Chinese economy as well as a move last week by the Chinese central bank to weaken its currency have wide global implications.

Other emerging market countries are beginning to react already. A potential Chinese downturn is also affecting crude oil prices. The West Texas Intermediate benchmark is very close to dropping below $40 - not good for energy stocks.

Traders are also anticipating a possible Federal Reserve interest rate hike next month. The latest data, including minutes of last months Fed meeting, released yesterday, suggest the Fed may further postpone tighter policy. We really wish they would just get on with it.

While news of these events is interesting to follow, our investment strategies adapt to the current market environment as opposed to trading on news headlines and speculation.

First, let’s keep the current weakness in context. Just one month ago on July 20, the S&P 500 Index closed at 2128, a few points shy of an all-time high set in May. Today, the market closed at 2036, a 4.6% decline from its high point. This pullback is very mild volatility by historical standards.

The bars in the chart below show the S&P 500 yearly returns back to 1980, and for the first half of 2015. The red numbers below each bar show how far down the index fell at its worst point during the year. Stocks have actually shown much lower than average downside volatility so far this year and in the three prior calendar years.


b2ap3_thumbnail_SPX-drawdowns.png 
Of course, the year isn’t over yet and the present drawdown could get worse. So far, though, this volatility is mild in historical context. Even a 10% decline – which we haven’t seen since 2011 – would simply be normal volatility.

The S&P 500 has been in a “trading range” this year between a high of 2134 and a March low near 2040. The index has stayed between those two levels since February, indicated by the blue lines in the chart below.


b2ap3_thumbnail_SPX-082015.jpg
With today’s close, the market broke through the lower bound of the range. Unless the index is able to recover back into the range in the next few trading days, it appears that the selloff will get worse – and could do so very quickly.

While we have no way of predicting the next move, as of today it seems that the risks of a greater decline to the lows made in January and then October 2014 are rising. For that reason, we have been reducing equity exposure by raising cash in Republic Wealth managed programs over the last few weeks.

In Republic Wealth’s 15+ year history, we have never hesitated to assume a defensive posture when our indicators showed weakness. Could a recovery begin tomorrow? Yes, but we think now is a time to err on the side of caution.

As always, we are available to discuss your portfolio strategy at any time. Feel free to call on us.

 

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Republic Wealth Summer Update

Republic Wealth Summer Update

View this Commentary in PDF format

Greetings,

We hope you are doing well as the calendar rolls into summer.  We wanted to take a brief moment to comment on the market before we reach the Fourth of July holiday.

Major U.S. markets have been mostly range bound over the last several months with both the Dow Jones Industrial Average and the broader S&P 500 trading within unusually narrow ranges since late December 2014. 

The chart below shows the two major large-cap stock benchmarks – the Dow Jones Industrial Average and the S&P 500 – for the last twelve months:
b2ap3_thumbnail_DJI-SPX-150626.jpg

The two benchmarks tracked very closely for the entire period.  Both suffered a mid-month decline in October 2014 followed by a rally into year-end.  They again fell to begin 2015 only to recover those losses and make a new high in the first few days of March.  Since then, large-cap stocks have been chopping up and down within a narrower range.  The Dow reached an intraday peak of 18,351.36 on May 19 before falling back again toward the bottom of this range.  Both benchmarks are now at roughly the same level as early December.

So far this year, while the market has lacked broad leadership, we have seen strength in both the Nasdaq Composite and the Russell 2000 (note the Russell 2000 was a market laggard in 2014).

One sector exhibiting notable weakness is transportation, with the Dow Jones Transportation Index lagging noticeably since peaking back in December.  According to Dow Theory, the Dow Jones Industrials can’t sustain a move higher unless the Dow Transports also move up.  This theory dates back to a time when economic growth was evident in the number of rail cars in motion.  It may be less relevant in today’s information-based economy.

b2ap3_thumbnail_DJT-150626.jpg
Nevertheless, there is reason for concern with the Dow Industrials going sideways and the transports falling.  Transports are officially in “correction” territory after falling more than 10% from their most recent high.

Sailing with No Wind

To sum up the year for anyone trying to navigate the market, investing this year has been like sailing with no wind.  Several factors have contributed to this impression.

CNN runs a daily “Fear & Greed Index” that uses seven factors to measure market sentiment.  You can review it for yourself at this link

As of today, the market is full of fear, with their index reading 14 out of a possible 100.  One month ago, the index was only slightly fearful at 43, and 1 year ago it was in Extreme Greed territory at 76.

b2ap3_thumbnail_CNN-Fear-Greed-150629.jpg
The Fear & Greed Index, which CNN updates daily, turned considerably more bearish over the weekend.  On Friday, it stood at 33, still on the fear side but not nearly so much as today.

One of the indicators – Safe haven Demand – was actually in Greed territory last week.  That changed just today as stocks weakened compared to bonds.  Bond are not such a safe haven when interest rates move higher, as they have done lately.  On the other hand, higher rates are a sign of a good economy in which stocks would likely outpace bonds. 

Three other indicators – Put & Call Options, Market Volatility, and Junk Bond Demand – shifted from neutral to either Fear or Extreme Fear over the weekend.  Volume in put options had been lagging volume in call options by 37% as investors made bullish bets in their portfolios. 

In terms of market volatility, the CBOE Volatility Index (VIX) jumped today, indicating that market risks are climbing.  Finally, the yield on low quality junk bonds over safer investment grade corporate bonds rose, indicating corporate bond investors are turning cautious.

Market Momentum, Stock Price Breadth, Stock Price Strength were all in “Extreme Fear” mode last week and became even more so today.  The S&P 500 crossed slightly below its 125-day moving average.  The index has typically been further above this average recently, so this suggests investors are less confident in market returns going forward.

Stock Price Breadth measures advancing and declining NYSE volume.  Over the last month, more of each day’s volume has traded in declining issues than in advancing issues, pushing this indicator towards the lower end of its two-year range.  Finally, Stock Price Strength, which measures the number of stocks hitting 52-week lows, is slightly greater than the number hitting highs and is at the lower end of its range.  This indicates extreme fear.

Looking at Extremes

Considering the Fear & Greed Index over time provides some useful insight.  The best market gains often come when the market is most fearful.  Conversely, when the market is greedy it is usually time for caution.  With a current reading of 14, the market is extremely fearful. 

b2ap3_thumbnail_CNN-Fear-Greed-Time-150629.jpg

We suspect the market may remain fearful over the coming weeks for the following reasons:

Seasonality.  The seasonal period when stocks make most of their gains ended in April.  Stocks historically tend to not make much progress from April / May through September / October.  So far, 2015 is holding true to form.

Corporate Earnings.  There is little corporate news right now, but quarterly earnings reports will resume in mid-July.  Meanwhile, many companies are in an SEC-mandated quiet period and have slowed buyback activity ahead of their earnings announcements.

Greece.  Greece’s problems within the Eurozone have been ongoing for five years now.  Their situation finally appears near a resolution one way or another in the coming days.  In terms of total economic impact, though, Greece’s economic impact is comparable to that of Detroit.  Will Greece default, exit the Eurozone and destroy its economy for the next few decades?  In the latest development, the Greek government has called for a referendum vote on whether to accept austerity measures demanded by the country’s creditor.  If they vote “yes”, the current leadership will probably exit and a new government will accept a compromise.  And, if they vote “no”, Greece will likely default and exit the Eurozone. 

No one knows the outcome today, and the uncertainty has played world markets like a yo-yo.  Yet for the last five years, ignoring the Greece news and just sticking to your investment strategy would have been better than trying to jump in and out of the market.  Institutions have had a long time to reduce their exposure to Greece in the event of a default.  While there may be a negative knee-jerk reaction, long-term implications for global markets should be minimal. 

The Federal Reserve.  As expected, interest rates remained at zero at their June meeting, with the consensus belief that the Fed will raise rates 0.25% in September.  They will pause to see how the market reacts before potentially moving another 0.25% by year-end.  Time will tell what happens, but the anticipation of higher rates sent the ten-year Treasury yield from below 2% early in the year to nearly 2.5% (before falling again, at least temporarily, as a safe-haven with the Greek situation continuing to develop).  Rising rates puts negative pressure on anything yield-sensitive, including bonds, real estate, and utilities. 

Experts have talked about the impact of rising rates for many years – when rates move up, yield investments lose value as they acclimate to the new rate environment.  While you might believe bonds are a safe haven, they can actually be dangerous depending on their interest rate sensitivity.

Stock Valuations

In addition to the aforementioned market drivers, it is also important to look at market valuations.  The current 12-month forward price-to-earnings (P/E) ratio for the S&P 500 is 16.7, above the 5-year average (13.8) and the 10-year average (14.1).  The graph below compares the S&P 500 price chart to the forward P/E ratio. 

b2ap3_thumbnail_SPX-EPSvPrice.png
The market has traded higher over the last year while earnings moved sideways.  As such, the market is now expensive on a historical basis.  However, valuations are not close to extremes seen at typical market peaks, and it is not common belief that the market is significantly overvalued.   Instead, markets have gotten ahead of themselves and are taking a breather while earnings “catch-up”.

One big reason for the higher earnings multiple is the negative drag from the energy sector.  Energy prices fell 40%, smashing energy earnings.  That’s the bad news.  The good news is energy companies have done a good job of managing the slowdown and have actually performed better than many analysts’ expectations.

Republic Wealth Outlook

Given our belief that the market will remain fearful, our expectation is the rest of the summer will be choppy.  We don’t foresee any major catalysts to drive markets higher and any significant risks to move markets lower; as such, our expectation for a range-bound market until the fall.  For now, the strongest market sectors are technology, healthcare, financials, and small caps.

In the very near-term, headline risk out of Greece is increasing volatility even though their economy is small.  Beyond Greece, in the second half of year we will likely see the Federal Reserve raise interest rates for the first time in a decade. This could also increase volatility.  However, stocks typically perform well in rising interest rate periods, especially when an improving economy is behind the higher rates.  

Looking at the calendar, in the fall we will enter a strong seasonal period, the best six months of the year.  In addition, 2015 is a pre-election year, typically the strongest of the 4-year presidential cycle.  The Dow has not fallen in the third year of a presidential term since war-torn 1939. 

Given these factors and barring any major economic hiccups, we believe reasonable earnings growth with drive stocks moderately higher into year-end.

We have turned slightly more defensive in our Republic Wealth strategies. Balancing the known risk factors with the near-zero returns we would earn in cash, we think the best course is to remain bullish in carefully selected market segments.

Conclusion

As we near the third quarter of 2015, we encourage you to consider your asset allocation to ensure you are best positioned for the current investment landscape. If you would like to discuss your personal financial situation in more detail, please do not hesitate to contact us to schedule a review.

Wishing you a Happy 4th of July!

Best Regards,

Kenny Landgraf & David Levy



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this commentary content should be construed as legal or accounting advice. If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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Uncertain Summer Ahead for Stocks

Uncertain Summer Ahead for Stocks

Summertime is typically a slow period in the stock market, so much so that traders have a slogan for it: “Sell in May and go away.” Historical patterns suggest buying interest won’t pick up again until around Halloween.

However, we have to remember that “typically” is not the same as “always.” Any given year can be an exception to the rule, and 2015 is proving it. We see several important differences in this year’s action.

First, the calendar patterns like “Sell in May” don’t show the expected correlation so far. May 2015 was actually a good month, with the Dow Jones Industrial Average and S&P 500 both gaining about 1% and the Nasdaq Composite almost 3%. We’ve seen some strong days in June so far, too, even though the benchmarks are up only slightly for the year.

Anyone who moved to the sidelines in early May missed some gains, but could still prove to have made the right call.  Summer could yet bring a downturn that makes exiting a month ago look like a good move in hindsight.

The presidential cycle is also deviating from its historical averages this year. I explained back in December how “pre-election” years are a calendar sweet spot. Based on history, the Dow and S&P 500 should both have shown strong gains in the first quarter. Instead, the Dow notched a fractional loss and the S&P 500 gained only about 1%.

Presidential cycle underperformance was even more striking in the Nasdaq Composite Index. Looking at all pre-election years since 1971, the Nasdaq had a 13.8% average first quarter gain but gained only 3.5% in that period this year.

The second quarter looks a little better for all three indexes, but they are still nowhere near the kind of gains normally seen in a Pre-Election year. In fact, 2015 so far looks more like a Post-Election or Midterm year.

b2ap3_thumbnail_4yrelectioncycle.jpg
While the historical data shows strong gains in pre-election years, most of the gains have been concentrated in the first and second quarters. With 2015 almost halfway gone, all three major benchmarks need to get moving quickly if they are to match the historical pattern.

When previously reliable patterns fail, it is usually because some unusual factors intervened. What are they this time?

Interest rates are definitely having an influence. The Federal Reserve ended its quantitative easing program last year and is now looking for a chance to “normalize” policy – which means higher interest rates.

The problem is timing. Janet Yellen and other officials say they intend to tighten rates as soon as incoming data convinces them the economy is strong enough. That means expectations change with each new employment, inflation and economic growth report.

The guessing game is taking a toll on yield-sensitive asset classes. If Treasury bond rates rise, then other income-generating categories like corporate bonds, utilities stocks, preferred stocks and REITs lose some of their attraction. This process is already well underway; the utilities sector went virtually nowhere since this time last year.

Changing energy prices are another important factor. When crude oil started falling last summer, economists talked of a “fuel dividend” that would boost retail sales as consumers spent less money on gasoline.

As it turned out, consumers were in no hurry to spend their savings. They either banked the money or used it to pay down debt for the first few months. Spending is picking up this quarter, though. Retail chain store executives certainly must hope so.

Investors also feared crashing oil prices would cut into corporate profits, but the latest data shows an “earnings recession” averted. We will get more data when second-quarter earnings reports start coming out in mid-July.

Summer rallies can and do happen in the stock market. We may get additional clarity on Fed policy after its June 16-17 meeting. Positive second quarter earnings news could also kick the indexes into gear quickly.

Up to now, 2015 has actually been a quiet year. The S&P 500 has yet to show a year-to-date change in either direction of more than about 3.5%. This is very unusual, especially with the year almost halfway finished. I think the calm will likely last through the July 4th holiday.

At Republic Wealth, we monitor a wide variety of trend and relative strength indicators as well as seasonal patterns. Past performance doesn’t necessarily indicate the future, but we try to capture gains in market strength and reduce volatility in weak conditions. We’re optimistic 2015 will turn into another great pre-election year.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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Stock Market Approaching Calendar Sweet Spot

calendar-ringsSeptember is historically weak for stocks. Will 2014 break from the pattern? As of Tuesday, Sept 23, the S&P 500 had lost just over 1% for the month. The Russell 2000 Small Cap index did significantly worse than the blue chips, losing almost 4% so far this month.

Stocks could fall even further in the coming weeks, but history suggests the stock market could post strong gains as we move toward year-end.

David and I noted in our 2014 Summer Review that stocks have historically shown a bullish bias as we move out of summer into the fall. Traders who follow the “Sell in May” strategy typically re-enter the market in October, but the turning point can range from late September through early November in any given year.

We have another reason to be bullish on the rest of 2014, too. The strongest part of the four-year presidential cycle begins in the fourth quarter of mid-term election years. The table below from Stock Trader’s Almanac shows average quarterly results for the three major benchmarks.

prez-cycle

Observe the red-boxed quarters. Since 1949, the Dow Jones Industrial Average rose an average 7.3% in Q4 of midterm years and four more winning quarters totaling 16.9% in the following year. The S&P 500 and Nasdaq Composite show the same tendency.

Notice as well the blue box around Q2 and Q3 of Midterm years. These represent the historically weakest part of the four-year cycle. Right now, we are reaching the end of Q3, which suggests a bottom may be near.

We don’t know if the next quarter or next year will match the historical pattern, fall below it or exceed it. The seasonality indicators are only part of the strategy we use to adjust market exposure in our Republic Wealth managed accounts. Flexibility is key to our approach; we let the market action guide us instead of expecting the market to follow us.

Nevertheless, the seasonal pattern combined with favorable monetary policy, a steady “plow horse” economic recovery and solid corporate earnings presents a strong argument for equity gains in the next few quarters. Some investors are waiting for a 10% or greater correction to buy stocks, but the window for such a decline may be closing for this year.

 

IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice. If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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Republic Wealth Summer Review 2014

quarry-lake

 

We hope you are doing well and have plans in place for some summer fun. We're writing to update you on several new initiatives here at Republic Wealth.

The Quarry Lake photo is taken from our new northwest Austin office. It is so beautiful and has a walking trail around the small lake –great when you need some fresh air. We would love to schedule time to visit with you at the office or our favorite restaurant on the other side of the lake.

 

Why Stocks Could Fall 21% in 2014

We continue to see "not normal" market actions for equity markets. If you follow the headlines, you will see that most major equity indexes are at or near their all-time highs. Will stocks take a breather from their march higher? Click to read more (PDF)

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