Daily news headlines are mostly noise. It is extremely rare to see a single headline that captures and conveys the “big picture” in a succinct manner. This problem is only compounded by the explosive growth of media sources that provide continuous breaking news alerts and updates 24 hours a day 365 days of the year. All of these sound bites are just pieces of a much larger picture, a picture puzzle.
Economic data and indicators work is the same fashion. Each report and release, from Agricultural Prices to Wholesale Trade and earnings releases from companies large and small, is just a tiny piece of the global economy. Recently, many indicators have been coming in below expectations and the outlook for 2010 has grown increasingly more uncertain.
There are three indicators in particular that have come together the past few weeks to create a less than optimistic outlook for the future. Taken individually they may be easy to dismiss, but when combined, a negative January Barometer (a Down January), the violation of the Dow’s December Closing Low and a developing uptrend in Weekly Initial Jobless Claims (WIJC) are difficult to ignore and cause for concern.
In the past, each of these indicators has foreshadowed further market declines with almost unbelievable accuracy and so far this year is taking a similar course. Perhaps most unnerving, is the rise in WIJC, which has begun to pull its four-week moving average higher. In the September 2009 Almanac Investor issue we examined the inverse correlation between the Dow and this report and observed that peaks in WIJC occurred near Dow bottoms. A closer look at the chart also reveals that new uptrends tended to coincide with market tops.
Job creation is the new focus in Washington and we are cautiously hopeful that an effective bill can be drafted, passed into law and executed. The $13 trillion question that remains is: Will this be enough to spur hiring? Changing tax codes, healthcare and financial reform are still all unknown and are likely to weigh heavily on a business’s plans to expand and/or hire, which would likely stall the economic recovery and put further pressure on the current bull market.
New Recommendations
Healthcare Producers have another seasonally favorable period that begins in mid-March and runs through mid-June. This period has produced average returns of 22.2% and 19.3% over the last 5 and 10 years, respectively. As this seasonality begins just six weeks after it’s current favorable period, that ends in early February, the existing position in iShares DJ US Medical Devices (IHI) is going to remain in the portfolio and is a buy on dips below 53.25. The stop loss and auto sell have been updated for this new recommendation. Top five holdings are: Medtronic, Thermo Fisher Scientific, Stryker, Intuitive Surgical and St. Jude Medical.
Healthcare Providers also come into favor in mid-March and remain so until mid-June. This trade has averaged 6.8% over the past 5 years and 8.7% over the last 10. iShares DJ US Healthcare Providers (IHF) remains the top pick to execute this trade. Use a buy limit of 48.50 and a stop loss of 42.68. Take profits at 57.99, the auto sell. Top five holdings are: UnitedHealth Group, WellPoint, Medco Health Solutions, Express Scripts and Aetna.
Over the past 10 years, High-Tech has generated an average return of 10.0%, but for the last five years the average has improved to 13.2% during its bullish season from mid-March through mid-July. iShares DJ US Tech (IYW) can be bought on dips below 52.75. Employ a stop loss at 46.42 and take profits at the auto sell of 63.83. Top five holdings are: Microsoft, Apple, IBM, Cisco and Google.
CurrentAdvice/ Updates
Three straight down days in a row, with losses greater than 1%, from January 20 to the 22 took a substantial bite out of the gains that the ETF Portfolio was showing in the February issue. For the Dow, the last time this occurred was March 2 2009, just before the bear market bottom on March 9. However, with the exception of most recent recommendations and non-seasonal trades the portfolio remains in the black.
As a result of this weakness, all positions for seasonalities ending in January were closed out when they closed below their 2% trailing stop losses. Additionally, iShares DJ US Broker-Dealers (IAI) was stopped out. Its seasonally favorable time has not yet ended, but the risk is simply too high to justify taking a new position at this time, even at current levels. The shift from healthcare reform debate to financial reform debate has only just begun and headlines are likely to grow ugly, especially as bonuses are paid out.
Biotech’s seasonality is coming to an end in March; iShares NASDAQ Biotech (IBB) is on hold. The rest of the portfolio is also on hold, in order to better align with the growing possibility that the recovery is stalling. Most stop losses have been tightened with the exception of iShares Barclays TIPS Bond (TIP), which remains unchanged. DBA, TAN, FAN, NLR and PBW are not seasonal trades and have less restrictive stops.
Highlights
January and the New Year got off to a strong start, but strength did not last long. Every sector tracked was down for the month, except Bear/Short, Biotech/Pharmaceutical and Bonds. December’s best performer, Semiconductors, was this month’s worst sector, losing 12.2% on average, worse even than Leveraged Long. Telecom and Technology, both closely tied to and dependent upon Semiconductors were the second and third worst performing, losing 7.6% and 7.4% respectively.
As forecast, volume did pick up nicely once the New Year holiday passed as traders shuffled positions for the year. However, there is a dark cloud hanging overhead. Early in the year as the market was climbing to new recovery highs it was on light volume, an indication that buyers may be tiring, and volume quickly expanded as the market declined in the latter half of the month. Expanding volume on declining days tend to indicate a growing uneasiness. The ideal situation would have volume improving as the market is moving higher.
There was only one leveraged fund in the Top 10 Most Active list. This is most likely the result of declining market volatility, as measured by VIX, that took place in the first half of January. VIX did spike as the market declined and remains elevated from January’s lows. As a result, leveraged funds are likely to make a strong showing in next month’s Most Active list.
New 52-week lows did expand in January to 76, but in contrast to past months all were Bear/Short funds or have not been trading at least one year. New Highs did climb to the largest number on record, but the absolute number must be taken with a grain of salt as there has been a significant expansion in the number available over the past three years – and new highs often top out with the market.
Banks and Financials were the best performers, taking six of ten spots on the 1-month Leaders list. This has been a dubious honor for the past several months. Gold and Semiconductors took this honor in previous months only to land on the 1-month Laggards list in the following month. Momentum may have carried the banks to the list, so a watchful eye is in order. The 1-month Laggards list this month is a hodgepodge, from metals and alternative energy to China and Brazil. Note the appearance of PowerShares Dynamic Semis (PSI), a top performer in December.
New ETFs
There have been only eight launches over the past three and a half weeks compared to eight in the first week of the New Year. Four are bond related and fall into an already fairly saturated niche. Even the two leveraged-long-bond funds will find company in the Leveraged Long sector.
Of the remaining four, WCAT looks interesting. Scanning its list of holdings reveals mostly small- to mid-cap companies that explore, produce and distribute oil and natural gas. These shares tend to trade with more volatility than the more commonly known majors, so there is a high probability that this fund will also trade in a similar, more volatile fashion. Without a doubt, there is great potential in this basket, but it comes with a greater amount of risk.
Schwab’s new offerings appear to take direct aim at the other well established (and recognized) fund families by offering similar products, but with lower expense ratios. With all the competition in the online trading universe it is about time that the ETFs followed suit and begin trimming their expenses.
Finally, Global X pushed out another China sector fund bringing their total to six. I suspect they have a few more left before they finish this series out.
Click image or here for larger view of Almanac Investor ETF Portfolio
Disclosure Note: At press time, officers of the Hirsch Organization did not hold any positions in the securities mentioned or listed in this issue.
