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Tony Roylance
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I am a St. Louis-based independent and fee-only Registered Investment Advisor (RIA). My passion is market research and strategy development. I look forward to talking with other investors and traders. I am always up for a chat about the market, feel free to contact me at... More
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MCR Capital Management
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MCR Capital Management
  • Tactically Trade The S&P 500 In Your 401k 0 comments
    Jan 22, 2014 2:19 PM | about stocks: SPY, MDY, IWM

    "The art of prophecy is difficult, especially with respect to the future." - Mark Twain

    As most of you know, I focus most of my research on developing tactical investing strategies that follow the major market indexes specifically, the S&P 500 large cap index (NYSEARCA:SPY), the S&P 400 midcap index (NYSEARCA:MDY), and the Russell 2000 small cap index (NYSEARCA:IWM). Mutual funds or annuities that track these indexes are present in almost all 401k plans, and an individual investor can implement an effective strategy using these 3 indexes alone.

    Tactical Investing

    Let's start with what tactical investing is not. Tactical investing is not "market-timing". Tactical investors make absolutely no predictions about what the market is going to do. George Soros in his book The Alchemy of Finance states, "My financial success stands in stark contrast with my ability to forecast events…all my forecasts are extremely tentative and subject to constant revision in the light of market developments." Tactical investing focuses on what the market is doing at the present time. That means, we buy when the market has turned up after a correction, but before it has risen too far-and we sell when the market turns down, but before it has declined too much. We attempt to be invested in an appropriate asset allocation in the direction of the primary trend. The asset allocation is going to be dependent on your own risk tolerance and investment duration.

    There are several different paths investors can take to reach the same destination. "Buy and Hold" is a perfectly acceptable investment strategy, purchasing quality companies at a discount and holding them until their true value is realized. Unfortunately, "Buy and Hold" didn't work for me. I would buy quality companies at a discount, but they would become even more discounted-and then even more. I couldn't stand watching my account dwindle until I finally couldn't take it anymore and sold. I had to find another way of investing in the market and began my quest 16 years ago.

    The earlier you choose one that is most in sync with your belief system, and have the discipline to stick with it, the better off you'll be. An investor can choose anything from Ben Graham's long-term valuation techniques, to buying high-yielding stocks, to buying strong stocks with virtually no yield. Numerous techniques can make money in the market, you must choose the one that is most agreeable to you to have the discipline to follow it.

    Implementing in a 401k

    The 401k retirement plan is the primary vehicle that most Americans will use to fund their retirements. Americans have been told by Wall Street that if they contribute enough money to their plans over a long enough time period, that there should be enough money for them to retire. Once or twice a year, you may have a meeting with your "financial guy", who will put your information into a financial program that will estimate whether or not you will have enough money to retire at a certain age. If the program estimates a shortfall, you have 3 choices, 1) increase your contribution, 2) work past your anticipated retirement age, or 3) lower your expectations for the type of retirement you envision. None of those options are very pleasant. What if there was another way? What if there was a way that we could generate a greater return in retirement plans? If we are using a tactical model to assist in limiting risk, then when we are invested we can choose investments that provide a greater return. We can also use a tactical model to assist us in investing our deferrals.

    Top Down Approach

    401k's almost always have a limit on the number of transactions that participants can do per quarter or per year. We must design our model so that it trades less than a dozen times a year. I have found that market breadth provides some of the most actionable information to trade on in the financial markets. Market breadth takes into account all of the individual equities that make up each of the major indexes. Many of the commonly known are market cap weighted. A handful of huge companies that are going up, can hide the dozens of companies that are in decline. For this reason, I like to look at every single stock to see if it's in a bullish or bearish trend.

    The following chart is a recent chart of the Russell 2000 small cap index. The Russell 2000 small cap index frequently leads the larger cap indices at major market turning points. For this reason it is frequently at the top of my screen. In the middle pane is a proprietary indicator, it shows the number of stocks in the Russell 2000 that are in a bullish trend and the number in a bearish trend. As you can see, the number of bullish trend stocks has been decreasing as the market was making new highs. In addition, the number of bearish trends was increasing. This is known as a divergence, and it's very bearish. In addition, the bottom pane shows another proprietary technical indicator I call Money Flow, as you can see the flow of money has been out of the market as it made new highs. This is also a bearish development.

    Now is not a good time to be entering speculative long positions in the market. In fact, now is a good time to be moving to more conservative investments (money market, etc).

    (click to enlarge)

    Good luck, for further information you can visit

    Disclosure: I am long TWM.

    Stocks: SPY, MDY, IWM
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