Welcome To New Platinum Members

New Platinum members who signed up over the last few months and still trying to find your way around this blog will benefit from moving over the the right sidebar and clicking on either Beginning Investors or Critical Material categories.  The advantage of using Categories is that you will pick up the oldest blog posts first, whereas doing a search for a topic will bring up the latest blog post on that subject.  The search engine on this blog is quite powerful, so use it.

A number of recent entries focus on various technical indicators.  This blog is not about technical analysis, although we do use some indicators in an effort to reduce risk to most of the portfolios tracked here at ITA Wealth Management.  I say, most, as I don't have permission to do much with a few portfolios other than to make recommendations and track the performance using the TLH Spreadsheet.  With other portfolios I have full discretion.

New members are advised to watch the updates of the various portfolios.  Soon to be reviewed are the Schrodinger and Curie Portfolios.  The Schrodinger is the best example of a passive portfolio and the Curie is not far behind.

Questions are welcome.  I need to approve your first question, so don't be surprised if your comment or question does not appear immediately.  This blog is for users so make use of it.  Learn how to construct and maintain your own portfolio and save on fees and commissions.

Again, welcome to all Platinum members.  I hope you enjoy this investment ride toward prosperity.

Let’s Get Serious About Reducting Risk

Most readers of ITA Wealth Management remember the dot com crash of 2001 and 2002.  If that memory faded, the devastating bear market of 2008 and early 2009 is still with us unless one was a shepherd in Patagonia.  I assume there are more than a few readers who still recall the bear market of the mid-1970s, and the long wait until the market suddenly woke up on August 12th of 1982 – only to crash again in October of 1987.  According to statistics compiled by Benoit Mandelbrot, these major bear events should occur approximately once every 300 years.  However, they began to appear about once every 30 years and that time is now compressed to a severe bear market every few years.  I doubt any of us expect to see the period between bear markets expand as long as investment banks can socialize losses and privatize profits.  As small individual investors, we need to ratchet up our risk defenses and that is where a number of technical indicators come into play.

As a starting point, we need a portfolio plan and one that makes a lot of sense is the Swensen Six.  It is simple, but global in scope.  There is an effort to hedge inflation with a 20% holding in real estate and another 15% in TIPs.  There is a global component with 20% allocated to international investments.  We might add international real estate to strengthen and diversify both inflation and global components.  For now, we will keep the portfolio as simple as possible and stick with six ETFs.

As shown in past blog posts, adding a few carefully selected stocks has a number of positive benefits on the Swensen Six portfolio.  One of the major advantages is to reduce risk.  But even risk adverse stocks take a hit when the market sinks as it did in 2008.  There was no place to hide as supply exceeded demand – and in a big way.  Is there an alternative or do we stand by and let the bear markets crush us?

Examine the extensive Bullish Percent Indicator data table below.  Pay particular attention to the NYSE column as that is our primary BPI data.  Warning flags began to fly in the summer of 2007 as the market was over bought.  The ball changed hands around July 27, 2007.  Yes, this was early. 

I included data down as far as 1/11/08 as there is a change in market behavior.  Those signals were again early as is frequently the case with the Delta Factor.  This is where the 195-Day EMA comes into play as it tends to lag in "calling" for market tops and bottoms.

What is going on with the numbers in these columns?  On 7/6/07 you see 70.27 in the NYSE column.  That means 70.12% of the stocks in the NYSE were generating a bullish PnF graph.  When the BPI topes 70%, it is time to get cautious as the supply is drying up compared to the demand.  Buyers will finally become exhausted and will will eventually see an oversold market.

  Delta Factor:  What was the Delta Factor projecting on 9/21/2007?  Since there is no record for VEU, VWO, and VNQ going back an additional three years to 9/21/2004, I substituted EFA, EEM, and ICF to represent developed international markets, emerging markets, and domestic REITs.  Note the "blood" projected by both the Delta and Delta Factor columns.  EEM, while a Hold, is no gem as the best days were past.  Just check the historical performance for those clues.  While a few months early with a dire projection, the "Delta Factor" was correct.

Here we have two technical indicators warning us of pending storms.  These are the "red in morning" sailors warning, types of signals.  Remember, supply and demand controls the stock market.

Swensen Six With & Without Stocks

Benefits to Super Charging Portfolio With Stocks

Two portfolios are displayed below.  In the first we have a portfolio made up of only six ETFs.  I call this the Swensen Six. To point out some critical features, note the projected average annual return of 7.89% or 7.9% rounded.  This is based in the assumption the S&P 500 will return an average annual return of 7.0%.

The second key projection is the standard deviation or what I prefer to call the portfolio uncertainty.  For the Swensen Six it is projected to be 14.1%. The remaining points of interest are the Diversification Metric (DM) and Portfolio Autocorrelation (PA).  We want DM to be high and PA to be low.

The following information is not available for publication elsewhere on the Internet.

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Screening For Dividend Stocks

Reducing Portfolio Risk With Stocks

If you have been following the recent comments you noticed the recommendation to add a few highly selected stocks to a core of ETFs so as to reduce portfolio risk.  It is possible to find individual stocks that have a low correlation with respect to ETFs such as VTI, VEU, VWO, etc.  Let's see how this works when seven dividend stocks are added to the Swensen Six Portfolio.  But first we need to screen for the dividend stocks.  Below is the screen I used and the resulting seven stocks that emerged from a database of over 9,000 stocks.

The following material is not available for publication anywhere on the Internet.

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VNQ: A Look At The Technical Indicators

Vanguard's REIT ETF, VNQ, is part of every portfolio I track and due to its importance merits close attention. I track a number of technical indicators for each ETF in the portfolios and here are a few of them. One of the first metrics I examine is my own "Delta Factor" which is a reversion-to-the-mean projection of how well an ETF is expected to perform with respect to the broad market. The current projection for VNQ is positive, but not sufficiently strong to recommend a 'Buy.' As a 'Hold' candidate, it is not projected to do much better than the total U.S. Equities market.

A second indicator is the price of VNQ as measured with respect to its 195-Day Exponential Moving Average (EMA). The price of VNQ remains well above its 195-Day EMA, confirming the "Delta Factor" indicator. A third factor is the Relative Strength Indicator (RSI) as shown in this reference. It is the second graph from the top. Alert points occur when the graph charges above 70 or dips below 30. VNQ is close to 50 or a 'Hold' position. This indicator is frequently early, one reason why I would not rely on it in isolation. The same is true for the "Delta Factor" projection. We now have three technical indicators reinforcing each other.

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Gauss Portfolio Update: 29 May 2012

With the market rebounding, portfolios such as the Gauss are taking a relative hit as we are on the sidelines with a number of asset classes.  In today's market we want to be fully invested in equities, particularly international equities.  I did manage to sell shares of VWO near the high of the day, so that is a plus.  The reason for selling is that VWO is still well below its 195-Day EMA.

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The Simple Six Swensen Portfolio

Amid all the discussion of various technical indicators resides a simple six-asset portfolio advocated by David Swensen.  The six asset classes are: U.S. Equities, Developed International Markets, Emerging Markets, REITs, Treasury Bonds, and Treasury Inflation-Protected Securities.  That's it.  Six ETFs will provide global coverage.

The following slide shows the Quantext Portfolio Planner (QPP) analysis of this simple portfolio.  Five years of history were used in this analysis as that period covers both the devastating bear market as well as the remarkable recovery over the past three years.  The S&P 500 is projected to return 7% over the next year and this portfolio is expected to best that mark by nearly 0.9% point.  The projected volatility of the portfolio is 14.1%, but we should be able to reduce that percentage through the use of the ITA Risk Reduction model.  The Diversification Metric (DM) falls a tad short of our 40% goal.  A little tweaking of the percentages in each asset class may improve this percentage, but it is likely not worth the effort.

One could do much worse by complicating this basic portfolio..

Over the next week I want to walk through the four non-treasury ETFs and see where each is positioned with respect to the technical indicators recently discussed.

Why Pay Any Attention to the Bullish Percent Indicator?

Are there logical reasons to support paying attention to the Bullish Percent Indicator?  Simply put, the Bullish Percent Indicator (BPI) draws special attention when the market or market sectors are overbought or oversold.  When the BPI exceeds the 70 percent level, it is time to be wary of the market.  Demand is high and supply is low.  Everyone that wants in the market and demand is high.  Supply is drying up.  It is time to lighten up on equities or those sectors that act as if they will grow to the sky.  They won't.

When the BPI moves below 30 percent, it is an oversold condition.  Demand is low and supply is high.  Investors are "market skittish" and that is exactly the time when we want to be "market bold."  The Energy Sector is in this condition right now as it is below the 20% level.  However, it may well go lower so we just wait for a correction.

Sectors that are overbought are Consumer Staples (81%) and Utilities (81.3%).  I would stay away from both sectors at this time."

Pay attention to VDE and wait for X's to show up in the right-hand column.  If you are an adept stock picker and have some favorite energy stocks, now is the time to run your fundamental analysis and see if any show up as potential buys.  I'm more inclined to go with a basket of energy companies such as we find in the VDE ETF.

The BPI forces investors to be negative when the value reaches the 70% level and more positive when the value dips below the 30% level.  Consider BPI as another technical arrow to put in your investment quiver. 

“Delta Factor” Update for Bonds

It has been several weeks since I posted information on the "Delta Factor" for bonds.  I don't pay a lot of serious attention to this information, but I do observe the projections to see if there are elements of interest.  In this post, Vale Capital II (CJS) stands out as a possibility.  I'm not familiar with CJS.  I recall a reader of this blog asked that this ticker be included among the other bond holdings.

Examine the PnF and the exponential moving average for CFS before making hasty moves.  I likely would not touch CJS until the 13-Day EMA moved from below to above the 34-Day EMA.  Even then, I need to know more about this company as the data seems to be out of whack with other bond ETF that I consider to be more "stable."

The vast majority of Bond ETFs are in the Hold mode.  From the Delta column, future projections are not expected to match historical (I used 30 months for this analysis.) performance.  I've been cool on bonds for a long time.  However, it is difficult to find other investments that will cut down on portfolio volatility other than to use a risk reduction model such as the ITARR.  For income, I'm more inclined to find strong dividend paying individual stocks to fill this void.

NASDAQ: Watching The Signals Move Together

What are the connections between technical indicators such as Point and Figure (PnF), Exponential Moving Averages, Relative Strength Indicator (RSI), Moving Average Convergence Divergence (MACD), and Chaikin Money Flow (CMF)?  Platinum readers have seen many graphs of all but the PnF variety.  Do these technical signals reinforce each other so we can reduce portfolio risk.  Keep in mind that we are constructing portfolios using non-managed ETFs to populate a wide variety of asset classes.

None of the portfolios tracked here at ITA Wealth Management contain the ETF, QQQ, so there is no emotional attachment to this investment.  Within other ETFs we hold most of the 100 stocks that make up the NASDAQ 100 so there is a connection.

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