Winning In An Uncertain Market Environment

Includes: ACN, ADP, HD, LMT, RL, SHW
by: Mark Bern, CFA

Model portfolio results from Friedrich Global Research.

Examples of our portfolio holdings and how far we think they have yet to run.

The games played on Wall Street.

Positioning to handle whatever may come.

While we are patiently waiting for the promised tax reform to wend its way through the legislative process so we can add another 1% to each of our holdings, our 1995-1996 Chicago Bulls model portfolio continues to outperform our benchmark this quarter. (We are the red line)

We are well ahead of our benchmark, the NYSE composite index, since inception of the portfolio on December 8, 2016 and we are doing so while remaining 30 percent in cash. Do not let the aggressive appearance of our returns fool you. Our holdings are companies of the highest quality with elite management that turn in consistently superior results year after year. Our portfolio holdings are also well-positioned for future growth well into the future.

Our 1927 Yankees model portfolio is also doing well with extremely low volatility by comparison because we are 74 percent in cash and only 26 percent invested but keeping pace relative to its benchmark:

The markets seem to love our holdings as Friedrich has done an amazing job so far in selecting winners and the good news is that all of our holdings have a long way to go before they get a sell signal from our algorithm. The red lines in the charts for our model portfolio holdings Accenture (NYSE:ACN), Sherwin Williams (NYSE:SHW), Home Depot (NYSE:HD) and Lockheed Martin (NYSE:LMT) are well below our sell prices so, as you can see, we have a long way to go yet.

Wall Street is quite insane these days as investors are unclear about the future so they just decide to put blinders on and buy. There are also a lot of major manipulators out there that have the power to moves stocks after earnings are reported and knock them down even though their reports were good.

When Accenture reported last time the stock got hit, but if you look at it today, it is back to where it was before it reported and as you can see the manipulators have done this before.

The same thing was done with our Automated Data Processing (NASDAQ:ADP).

It should be obvious from the above examples that there are a lot of games being played. Memories are very short on Wall Street. A few weeks back the Dow fell almost 400 points when former FBI Director Comey was fired. The panic that ensued two weeks ago is already in Wall Street's rear view mirror and he has not yet testified (scheduled for this coming week). Buckle up your seat belts as it could be an interesting week.

Pundits also saying that the economy is growing and that everything is great, but I am sorry to say that this is somewhat of an illusion. The jobs report for May 2017 was released and jobs creation came in at 138,000 vs. 185,000 estimate (with downward adjustment to the two prior months' report of about 65,000 as well) so that is what is called a major whiff. Small investors just keep adding to positions but many millionaires are taking a different view of the markets as can be seen from this report.

It seems that these millionaires are seeing the same thing that our Friedrich algorithm is seeing. We analyze 17,000 stocks from 36 countries these days and are finding just a handful of stocks to invest in out of our entire universe. And if you want to become rich I think it is smart to watch what the millionaires are doing as they have already made it.

If you want to see what the real economy is doing all you need to do is look at the retailers. Just last night Restoration Hardware reported and this is how it is doing in pre-market as a result of their terrible report.

Why anyone would buy this dog with fleas is amazing to me, but the manipulators have been playing this for some time now. This has been an obvious roller coaster from hell from which Friedrich has protected us.

You can't really blame Amazon for RH's miss as they sell furniture. So if housing is so great then why is this company suffering so much along with Sears (SHLD), Kohl's (NYSE:KSS) and Target (NYSE:TGT)? It is because the consumer is broke and deeply in debt. When 70 percent of the economy is consumer spending and retailers are going out of business at alarming rates that should be the ultimate warning sign Markets are driving 100 MPH over speed bumps and are destroying their suspensions, but don't care as long as they can get the last drop of any market gain that remains. = PURE GREED and ZERO COMMON SENSE or LOGIC.

One of the best apparel companies out there is Ralph Lauren (NYSE:RL) and just look what has happened to it.

Source: Yahoo! Finance This same phenomenon is happening all over the world in retail shops and it's not all Amazon's fault. The consumer is either broke or preparing to retire in droves and spending less. With 70 percent of the economy dependent upon consumers this extremely overvalued market is operating on cruise control over the speed limit despite all the retail speed bumps that should be slowing it down.

The smart way to play this market environment, aside by being in a ton of cash, is to only buy the Goliaths while avoiding the Davids for in real life the Goliaths will survive and will be the first ones to recover after any crash. That is what Friedrich is doing for us as our model portfolios are invested in either the #1 or #2 players in each industry, a position that is only achieved through consistency. The stocks in our portfolios have that quality in spades as they are superstars on Main Street but also on Wall Street and that is something that is very hard to find these days. We are perfectly positioned to take advantage of whatever shows up as we have elite companies and a ton of cash.

Disclosure: I am/we are long ACN, HD, LMT, SHW, ADP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.