Last week we talked about the market being overbought in the short term, so the three day selloff (Wednesday-Friday) was to be expected. The media will blame the Fed but they didn't tell us anything we didn't already know. Bottom line, when the market gets extremely overbought traders will use anything and everything as an excuse to take profits. Interestingly, last week was the first streak of three down days this year. The S&P 500 seemed to find some support at 1640.
In the category of sort of interesting but completely useless information Tuesday marked the 20th consecutive up Tuesday in a row, the most on record. The next most consecutive up Tuesdays was in 1927 when we had 15 consecutive up Tuesdays, according to CNBC.
More Useless Information
Last week Goldman Sachs raised their S&P500 target to 1750 for year-end 2013 (these are the same guys that predicted $200/barrel oil right before oil prices collapsed). Their reasoning was:
-End of U.S. economic stagnation suggests S&P 500 P/E expansion.
-Our S&P 500 forecast reflects a one P/E multiple point premium
-We expect dividends will rise by 30% between 2013 and 2015
-Further multiple expansion possible if rates stay low, growth improves
I guess that all sounds more intelligent than the Fed is forcing people into stocks by keeping interest rates low, the economy doesn't stink, and Europe isn't going to collapse quite yet. But the end results are the same.
Recent Moves
The selloff that the market saw last week reversed the short term trend (the long term trend remains up) so we used that as a buying opportunity, scaling into the S&P 500, Small Cap Stocks, and US Dividend Stocks.
What Could Go Wrong?
It seems that I have been having the conversation a lot this week with advisors, investors, and the media about looking at things from the standpoint of what could go wrong. As the markets continue to go up it is natural for people to focus on trying to find that assets with the best current or potential performance---what could go right. As interest rates stay low it is also natural for people to search for places they can get yield- also what could go right. I have no problem with upside but you need to first focus on what could go wrong.
For example, an advisor came to me earlier in the week and asked me what I thought about a client who had to have their municipal bonds. What could go wrong with muni bonds? Interest rates could go up (don't have to be a genius to predict that they will), the state could have financial problems (take one look at the finances of states), etc. What could go right? The investor could earn about 3%. To me, not a great trade off.
In another example a reporter came to me with a question about what frontier markets (extreme emerging markets) I would recommend. The answer was none. Yes you could get eye popping returns if you invest in Vietnam at the right time but you could also lose your shirt. Not worth it.
In another example, an advisor asked me what I thought about a tactical manager who had a strategy of moving in and out of high yield bonds when they were in an uptrend. The past performance had been good. However, if you think about it, the performance was generated during a bull market for high yield bonds, not too hard to do. What happens when high yield bonds are no longer in a bull market? The strategy just sits in cash and earns nothing while all sorts of asset classes around it make money.
So called investment experts are not immune to this by any means. I recently talked with an advisor who had used a tactical manager who lost a lot of money trying to arbitrage different volatility ETFs. Clearly a case of not asking himself what could go wrong with this strategy.
I understand it is more interesting for the media to talk about areas that could generate great returns or yield. It is also tempting to look at the past performance of an investment and assume it will continue. However, in just about any case where an investor or investment professional lost a good deal of money on an investment or a strategy it is because they only focused on potential gains and not what could go wrong.
Take buy and hold or asset allocation for example, what could go wrong? The market could go down a lot and you would go down with it.
I think about what could go wrong every day with our strategies. You should be doing the same for any investment you have.
For a more in depth discussion of how to incorporate what could go wrong in your investment decision making read our latest blog post:
All Investment Strategies Stop Working
Top Holdings
1. S&P 500
2. Cash
3. Treasury Bonds
4. US Small Cap Stocks
401k Advice
Below is our recommended allocation for 401k plans held outside of TTM:
Conservative
High Yield Bond: 33%
Cash/Money Market: 67%
Moderate
Large Cap US Stock: 20%
Mid Cap US Stock: 20%
Small Cap US Stock: 20%
High Yield Bond: 13%
Cash/Money Market: 27%
Aggressive
Large Cap US Stock: 34%
Mid Cap US Stock: 33%
Small Cap US Stock: 33%
Notes:
This should be based on the amount of risk/return you are looking for on this block of money.
If you do not have Mid Cap and/or Small Cap funds available that part of the allocation can go into the S&P 500.
If you do not have multiple bond funds then fixed income allocation can go into an investment grade bond fund and/or multi-sector bond fund.
© Tuttle Tactical Management
