- The S&P gained 0.2% last week, rising to 2067.56.
- The Russell 2000 rose 0.1% last week to 1173.23.
- Long Bonds (TLT) rose 2.0% last week to 122.49.
- Asset Allocation Model: unchanged. 52% Stocks, 27% Bonds, 20% Optional.
As has been true the past three weeks, the S&P technical model says BUY in all periods. The small cap Russell 2000 has now flashed BUY. Overall market performance across the board is “in gear” with a rising market. The Asset Allocation model remains bullish, with stock allocation at 52%. As the charts below indicate, now is generally a good time to enter the market with wise buys.
Consistent with the results of the Club meeting survey a few months ago, and due to a recurring conflict, the recurring Club meeting is being moved up to the Second Monday of the month rather than the Third Monday of the month.
A few of us from the OTM Club who could make it got together last weekend in Louisville, in part to meet Ed Spyhalski, our new Treasurer who was in town from Richmond VA.
From left: Mark Bates, Ed Spyhalski, Linda Bates, Ed Gawarecki, Joe Kipp, Tony Kern, Jenny Kern.
A few of us got together in Louisville so that everyone could meet the new Treasurer, Ed Spyhalski, from Richmond VA.
Before we ate, Ed presented Joe Kipp with the award for the Best Trade 2013-2014 (CVS up 35%). That is Ed on the left, and Joe on the right.
I am not making updates to the portfolio, but I do need to comment on some recent developments. Many of you are probably worried about IBM. I share your concern as the stock has grossly underperformed. I am going to give the CEO a few more quarters to show evidence of a turnaround before making a change. As for McDonald’s, I am also concerned with the CEO’s performance as results have been disappointing and some of his decisions have been questionable. But let’s give him some more time as well while we collect our dividends. As to United Technologies, I was surprised to hear of the resignation of the CEO today (11/24). That is troublesome but again let’s wait and see because I think UTX is a solid company with good growth prospects in several areas. Finally, as to Verizon, which was recently downgraded, I am not worried. The stock is still cheap at 14 times forward earnings and it pays a solid dividend. So hold on despite what Citibank says.
I finally have some updates for the portfolio. I am dropping DXPE and KLIC. DXPE has performed well but I think there are better choices, while KLIC has gone nowhere. In their place, I am buying Outerwall (OUTR) and Skyworks Solutions (SWKS). Outerwall is the operator of Redbox and Coinstar kiosks. Even with today’s outside gains due to the announced price hike in Redbox prices, I think that the stock is grossly undervalued as the intrinsic value is about 148. Revenue growth over the past 5 years was 29%, EPS growth was 46%, return on equity is 33% and estimated earnings growth is about 18%. As for Skyworks Solutions, they are an innovator of high reliability analog and mixed signal semiconductors. I put its intrinsic value at about 92, so the stock is undervalued as well. Past revenue growth was 23%, EPS growth was about 33%, return on equity is almost 20% and estimated earning growth is about 19%. I think both of these stocks are great choices for the coming year.
- The S&P gained 1.2% last week, rising to 2063.50.
- The Russell 2000 lost 0.1% last week, falling to 1172.42.
- Long Bonds (TLT) rose 0.5% last week, rising to 120.10.
- Asset Allocation Model: 52% Stocks, 27% Bonds, 20% Optional.
As has been true the past two weeks, the S&P technical model says BUY in all periods. The small cap Russell 2000 has now flashed BUY. Overall market performance across the board is “in gear” with a rising market. The Asset Allocation model is slightly even more bullish, with stock allocation rising to 52%. As the charts below indicate, now is generally a good time to enter the market with wise buys.
- The S&P gained 0.9% last week, rising to 2031.21.
- The Russell 2000 lost 0.2% last week, falling to 1171.86.
- Long Bonds (TLT) fell 0.7% last week, falling to 118.39.
- Asset Allocation Model: 50% stocks, 30% Bonds, 20% Optional.
At this time the technical models for the S&P, Russell 2000, and Long Bonds are all BUY. The Asset Allocation model has recovered back to 50% stocks. The underlying market strength that has propelled the S&P 500 all year long has driven the market back above all of the long term trend lines dating back to the beginning of the rally in 2009. I discussed as recently as last week the breakdown in small stocks, and the divergences between the major market index and what was happening to underlying stocks. This has been a familiar story for much of 2014, so too is this advice: follow the quantitative models, which have been correctly positive on the market as well as long term bonds for quite some time now. The November-December period is traditionally a strong period for the market, which no doubt is fueling some investor confidence. I don’t like the underlying divergences, but as the indexes are going up and the models say BUY, who am I to argue?
The S&P went up 2.7% last week, including a 1.2% jump on Friday. It has reclaimed all that it lost in recent weeks, and is now at an all time high. Yet, despite the talk of analysts and others, I am not convinced that this trend will continue. Let me lay out a few facts that have nothing to do with Bank of Japan actions or Fed actions, but do have everything to do with a lot of other people’s actions. Fact 1: The cumulative number of Advancing versus Declining NASDAQ stocks is negatively diverging versus the S&P. The chart below subtracts the number of stocks going down in a day from those going up in a day. If the trend is down in the BLUE line below, more stocks are dropping than going up. Over the past few months, even though the S&P has generally been rising, more individual NASDAQ (smaller) stocks are falling than going up. Signs that smaller stocks are having trouble. Fact 2: If you subtract stocks hitting a new 52 week low, from stocks hitting a new 52 week high, you get the GREEN line below. Again you can see that more NASDAQ stocks are hitting new lows than hitting new highs. Yet the S&P continues to trend up. This again is a sign of broad weakness in smaller stocks Over the course of the past several weeks I have mentioned that small stocks lead large stocks. So again we look at the Russell 2000 for guidance. It is conflicting guidance. Yes the technical model for the Russell 2000 is all BUY, but until it clears that upper RED resistance line I will not be convinced. The S&P 500 technical graph below is BUY for all timeframes. As with the Russell 2000 technical model, all seems “GO”. Summary It appears to me that headline-producing actions by various governments have driven investment in large, prominent stocks such as those in the S&P 500. But there is definite weakness in the rest of the market. The mechanical models say “BUY” but like the market in general they are being materially influenced by governmental activities. Be careful in your asset allocation and do not assume that it is time to be aggressive with stocks. The asset allocation model (http://onthemarkinvesting.com/otm-asset-allocation/) only assumes 35% stock allocation at this time, versus 50% bonds. Given the risk in the market as a whole, that seems appropriate to this observer.
Conservative. Smart. Investing.