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Fear & Greed Trader
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Independent Financial Advisor / Professional Investor- with over 25 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice and Experience to produce Portfolios focused on achieving positive... More
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  • Market Update 11/16 - "All In" Or "All Out" 8 comments
    Nov 16, 2013 11:00 AM

    The markets continued to grind higher this past week as new highs could be found everywhere.. The elusive correction continues to wreak havoc with investment managers looking to put new money to work and the hedge fund guys & gals that are once again behind the 'eight ball" as their funds trail the major averages YTD. Now the 64,000 question is whether these same managers will provide a 'bid" to the market into year end , or will we see some resistance here at S & P 1800.


    During the course of the last 3 months or so , I have suggested harvesting gains along the way, by trimming extended positions. Increasing income by the use of a covered call strategy in an effort to slowly raise cash along the way.. A simple strategy that has served me well over the years.

    In keeping with my bullish long term view of the equity market , I continue to maintain my core dividend growth holdings. Many have e-mailed recently questioning whether its now time to cash in the chips after this 25% + gain in the S & P YTD . I simply reply going "all in" and going 'all out" is a recipe for failure if one has an eye to the longer term.

    It rarely pays over a considerable time period to be 100% in or 100% out when you manage money for others the way I do. The same applies to those that manage their own retirement funds. There are a few simple reasons for this:

    1. You're not god, you're not a clairvoyant, if you're caught all-out and the S&P has a plus-6% week, you better hope you've caught at least some of that, it could be the entire year's gain!

    2. When you go to 100% cash, something changes in your mind. You get to this place where mentally you won't be satisfied unless you pick the perfect entry point. It's harder to do some buying at 100% cash than it is at 75% cash or 50% cash - at least then you're "adding to positions" rather than taking a stand from scratch. Price will drive you crazy without an existing position or average cost to anchor you, whether it's higher or lower than the current quote.

    3. There are high yields being paid plenty of stocks , yields in excess of what the bond market is offering. When you buy a building in the commercial real estate market, you are buying it in large part for the rental income it will produce. Sure you'd like to sell it at a higher price one day but there are no quotes online for what it's worth on a day to day basis. You except the fact that on any given week or month the building may be worth less than the week or month before. But the rents are rolling in and you don't have to pay attention to the swings in value on a daily basis. Can you do that with stocks? You should certainly try to in some cases. If you own a non-cyclical stock with a 4% yield and you've bought it at a reasonable PE ratio, what do you care if it's up or down a few bucks in a volatile tape? You're still getting paid and there's no reason to react to the headline volatility of the market today or tomorrow. Think like a landlord, not like a tenant.

    4. There's a tendency to pay closer attention to things when you've got money on the line, and a tendency to be lackadaisical about things when they aren't making or costing you money. If you're 100% out of the stock market, you're also 100% excused from having to pay attention to it - and you probably won't. -Its Human Nature.

    5. In real estate, they say Location Location Location. In the stock market it's Timing Timing Timing. Everything is timing, it's what makes the guy who bought Apple @ 700 a loser and the guy who bought in this year @390 , a winner - same stock, very different result.. The average investor should be striving for maximum upside capture with minimum drawdowns and volatility. Easier said than done, but for most people that's the game..

    There are funds that run a very specific momentum style and for them it might make sense to go 100% to cash when the market acts "unhealthy". For those running stock mutual funds, in many cases it's their job to be 100% exposed to the market at all times, by the terms of their charter they can't be anything but All-In.

    But as individual investors we don't have those restrictions, it's actually an advantage , we can be 30% in, 50% in, 65% out, 28% long and 44% short etc. We can change our exposure as we go, assuring that we'll never be fully exposed to a nasty fall or completely on the sidelines during a rip-your-face-off rally.

    This isn't just market sense, it's common sense.

    Looking ahead , one group that I believe will produce good returns in '14 are the Financials. Banks still have some of the best bottom line earnings growth in the S&P 500…

    The Financials have lagged since the start of the 4th quarter, taking a breather from their big moves since the start of '13. According to Bespoke Group in a very overbought stock market, the Financials are the least overbought of the 10 SP 500 sectors. I added JPM, & GS recently. C , BAC are two more that can be bought here. - Don't Chase !

    I've mentioned this before, but its worth commenting on again as we move forward to a more normalized interest rate environment. An environment that initially may send shock waves to the market. The worst investments will be those linked to interest rates - bonds, utility stocks, are prime examples. That's not a call to sell all of your core utility holdings, its a suggestion to possibly lighten up if you are overweight the sector and a call to not add to positions in that group.

    The best investments will be those with low current PE ratios and sensitive to the economy. With stronger economic growth as the fed slows down its asset purchases the environment will be bullish for technology, cyclical stocks, discretionary consumer stocks, and financials.

    JP Morgan's excellent quarterly analysis report supports my point about rising interest rates and P/E multiples. Rising rates have historically been positive for stocks, as long as the ten-year is below 4.5%. So if the market gives us that knee jerk sell off as rates do begin to normalize , it will be a buying opportunity.

    This week I'll start to look ahead to '14 and share some thoughts for what we might see on the equity front as we turn the page and close out '13 ..

    A quote from a financial blog I follow :

    "Most of your favorite crash-fetishists have track records that you wouldn't' wish on your worst enemy. It is one thing to be aware of the potential for terrible things to happen, it is quite another to give up on life and opportunity altogether."

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Comments (8)
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  • dc984
    , contributor
    Comments (631) | Send Message
    Thanks FG...would you expect homebuilders to do well or worse in a rising rate environment? Thank you for your excellent insight.
    16 Nov 2013, 12:51 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10764) | Send Message
    Author’s reply » streak,


    I ran across a research note on the homebuilders that is quite interesting ;


    The "homebuilder" sector presents one of the most powerful and consistent seasonal trading phenomenon we've witnessed among any industry group in the market. Based on our data documenting the performance of public homebuilders, we find the period running between mid-November and Super Bowl Sunday typically works best (generally November 15-January 31 on average) for this trading window.
    Most impressively, by our count, the homebuilding sector has
    outperformed the S&P 500 nine consecutive years during this calendar period, and 23 of the past 29 years.. Moreover, whether interest rates have been rising or falling has mattered little to the success of this trade. 79% of the time when 10-year Treasury rates were falling (15 of 19 years), builders outpaced the S&P 500. When rates were rising, builders beat the market 80% of the time (8 of 10 years).


    It also suggests that this seasonality may carry over to '14 as they note builder valuations have compressed nearly 30% since peaking in May; the 3Q earnings season has provided cover for analysts to reduce 2014 estimates to more reasonable levels following the summer sales slowdown. While this is typically is a seasonal call - and should note that homebuilders have a similarly inverse track record of underperformance during the summer months.


    My view : A couple of quality names in the sector are TOL, & WCIC, both of which operate in the "high" end and have some of the best & highest quality of "land positions" available to build. I would also add LEN to a watchlist.


    Good luck
    20 Nov 2013, 10:15 AM Reply Like
  • dc984
    , contributor
    Comments (631) | Send Message
    Thank you very much kind sir. Your expert opinion is appreciated for newbies like myself.
    20 Nov 2013, 10:26 AM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10764) | Send Message
    Author’s reply » streak,


    I have totally missed the rise in the hombuilder sector since 2012. I would say however that since they have had nice runs from the bottom, a rising rate environment will be a good headwind for the group and they will have to start posting increased earnings growth from here to take the next leg up


    I believe we can find opportunities for profits in other sectors.


    Good Luck !
    16 Nov 2013, 04:29 PM Reply Like
  • blablah
    , contributor
    Comments (173) | Send Message
    You were prescient about your calls. Kudos. Do you still believe that we are in a secular bull run? If so are you finding any value picks in this overbought market for long term holds?
    16 Nov 2013, 06:45 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10764) | Send Message
    Author’s reply » blah,


    Yes i do believe we are still in a secular bull market, corrections of course along the way.. Please take a look at the recent articles here on the blog as they mention a few names that i just added to my own account ..


    JPM, GS,CVX,XOM,TGT are a few names to look at


    I will have more in December as I look ahead to '14
    Best of Luck !
    16 Nov 2013, 07:23 PM Reply Like
  • synchrogeddon
    , contributor
    Comments (392) | Send Message
    Thank you for wise posts like this one. This is very helpful for beginner like me. I can personally relate to point 2 when I was buying stocks - it was a lot easier to add to my current stocks. So far I did execute only 2 orders in my investing history and it was buying AAPL for 426$ 8 months ago (+22% now) and also AAPL for 473$ 2 months ago (+10% now). Adding to that dividends: +1.6% for first trade, +0.55% second one. I will hold that for a little more time. I could get a little more from dividends but I didn't know from beginning about W-8BEN about taxing of foreign investors that lowered my tax in latest dividend from 30% to 15%. Anyway, your writing helped me a lot in past months. Keep up the good work :).
    23 Nov 2013, 06:28 AM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10764) | Send Message
    Author’s reply » synch,


    thanks for the kind words,


    Best of luck
    23 Nov 2013, 08:51 AM Reply Like
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