Market Health Measures: This
provides a look at the yield curve chart. Watch for it to invert, and look at the
inverted/flat curve that preceded the 2000 and 2008 crashes. Here's
that monitors the Conference Board's Leading Economic
Indicators (LEI) , our most accurate forecast of economic health.
Notice below how each recession (the gray bars) was preceded by a downturn
in the LEI. Read Forbe's Ken Fischer's take on this measure
Finally, take a look at change in corporate profits.
Here's another important article by Steve Reitmeister of Zacks.
Hedging with a
Portfolio using Inverse ETFs (Find article here)
10/26/12 .... Eliminating Long-Stock Risk with Protective Puts
(the Married Put) ...This
buying a put in addition to stock as a vehicle to reducing/even eliminating
the downside risk.
- Find article here
and trade examples.
with the VIX...One
of the hedge vehicles that you hear discussed today is the volatility index
of the S&P's options, the VIX. As shown in the chart below, the VIX
is a linear function of the % DrawDown of the S&P, especially so up to 20%
DrawDowns. The relationship forecasts that a 10% DrawDown in the S&P will
result in a 5.7 point increase in the VIX. Trading at 10.4 at Friday's
close (05/12/17), this is more than a 50% increase in the VIX, i.e., the percentage
change in the VIX magnifies the change in the S&P.
This means that I might buy $50,000 of VIXY (short-term VIX ETF) and expect
a $25,000 gain to offset some of my portfolio loss.
This site shows some of the VIX ETFs available to trade: here.
Another interesting article: How to Go Long on the VIX Index.
05/30/17...Hedging with Leveraged Inverse ETFs (TZA)...I have been
considering using Inverse ETFs to hedge my gains in a taxable account,
specifically using Call Spreads on TZA (the 3x inverse ETF on the Russell
2000). One would prefer a hedge to be relatively inexpensive (the cost of
insurance) and leverage any downside move in a portfolio. Leveraged inverse
ETFs seem to be a good answer to me, but as you'll see here, its
effectiveness really boils down to a question of timing.
ETFs are based on their
underlying's futures and are rebalanced daily. So everyone understands,
let's take a look at an exaggerated 8-day sequence where the underlying ETF
went up 10% then down 10% four times. Starting at $100, the underlying would
be worth $96.06 at the end of the 8 days. Note, it doesn't end up where it
started because of the impact of compounded returns.
Now look what happens in that sequence with a 3x inverse vehicle, i.e.,
one that changes by 30% each day. At the end of the 8 days, this vehicle
is worth $68.57. It lost 41.43% of its value. That's the downside to
leveraged inverse funds: you have to be right about the timing of the
hedge or it will be ineffective. Note, all leveraged inverse funds will
lose money over the longer term. For that reason, one shouldn't buy and
hold them over time. You must combine their use with a market timing
The chart shows the IWM (ETF for Russell 2000) performance
since 5/18/10 in blue. Red shows the performance of an IWM 3x inverse
ETF, like TZA, valued at $100 on that start date. Within 15 months, IWM
experienced a major downturn, but by then our inverse ETF was
ineffective: it's value went up, but not to a degree that made it
profitable relative to our 5/28/10 buy price. It did, however, profit
over the first month (more than 30%) when IWM suffered minor pullbacks.
Contrast that behavior with putting another hedge on in June 2015, a time
when our market timer (maybe the beginning of the poorer performing 5 months
of the year) told us to hedge our portfolio (green line). Within 2 months,
IWM dropped 14%, while our hedge gained 54%. Within 8 months, IWM had
dropped 25.9%, while our hedge gained 110%. Clearly, these type hedges work,
but they have to be combined with a market timing vehicle, i.e., when you
have evidence that the market is turning over, that's the time to put on the
Doing this with options on the 3x inverse ETF just increases our leverage
and lowers our cost.
05/16/17...Monthly Analysis of Value Line 1700...This first table
shows the monthly performance of the equally-weighted, Value Line Arithmetic
Index since May 1984. Unlike similar treatments that track the Dow or the S&P -
both large cap indexes – the Value Line Index is unweighted by company size and
consists of a wide range of company sizes (1700 stocks in all). This index also
reflects more what TripleScreen is actually trading. Several points are obvious
in this data:
1. The top 7 months of the year, based on performance, were Nov
through May; the contrast is remarkable: $50k invested in the good 7 months
grew to $2,874.269 in these 33 years, while $50k invested in the bad 5
months fell to $35,270.
2. December has been a winning month in 29 of these 33 years; next best
has been November at 24 and 9 (clearly December is a special month for the
3. There were 2.29 as many winning versus losing months in the good 7
month period and only 1.16 as many in the bad 5 months (clearly, the bad 5
months puts the market winds in your face).
4. There also were three times as many months returning more than 5% than
losing more than 5% (46 and 15) - and nearly twice as many high performing
months; whereas, that ratio was equal in the bad period (24 and 24).
5. Worst month to be in the market was September - it and June were the
only months to have an overall losing sum for these 33 years.
6. October was the only month to have losses greater than 20%, and it had
two (1987 and 2008).
7. Over this period, the market has performed better under democratic
administrations (Obama averaged 18.4%, Clinton 14.4%, Reagan 13.8%(only a
portion of his two terms), Bush elder 12.6% and Bush younger 4.8%).
8. The 1st year has been the best in the Presidential cycle, averaging
199%, while the 2nd year has been the worst at 39%.
Based on this data, I have always felt that I was better off shifting my
401k funds into bonds during the 5 month period. Though the 5-month period
is difficult, the impact on short-term trading is less severe than just
holding over a longer term.
In the chart, I included the option where one left the $50,000 invested
every month. It would have turned into $2,027,513 in the 32.6 years. That's
29.5% less than you would have accumulated being invested only in the best 7
months each year (Nov 1 to May 31).
The compounded annual growth rates (CAGR) are as follows: 7 month
invested (13.1%), 5 month invested (-1.1%), 12 month invested (11.9%).
What's even more important is that the 7-month investment strategy would
have experienced a 30% max draw down during this period; the 12 month
strategy a 53.9% draw down; and the 5 month strategy a 54.9% draw down.
Obviously, on all accounts, we're better off being in the market long
term on a 7 months a year basis. Also, you eliminate the market risk
entirely for the 5 most dangerous months of the year.
Too, I want to emphasize that short-term trading, though not immune, does
not suffer as badly during the down 5 months each year because TSM's
emphasis continues to be trading quality stocks (those with upwards earnings
revisions), in strong industries (top quarter of 265 industries), that are
pulling back to established areas of support. In 2008 the S&P experienced a
38.5% draw down, while TSM made 450 half position trades (329 or 76.6%
winning trades) and returned 111%.
Let's say that you have a diversified portfolio, say worth $1 million and
you want to protect it during the bad five months of the year (say from a 5%
pullback, which would cost you $50k). You're in a taxable account so you
cannot change your portfolio mix (say go to bonds) without incurring a tax
on your gains, which may be substantial this year. What do you do?
This second chart breaks down these good/bad period returns of Value Line
by year. What it shows is what staying out of the bad five months does for
you is to avoid the risk of the large fall, which have all occurred during
those months. Most years though the bad five months just had a smaller
Note, I don't make every one of these trades myself, though I do make many. Trade results are hypothetical. Think of TSM results as
what's possible from these forecasts. Note, it's highly unlikely that you (or I) will consistently match these results (because one would
have to be sitting in front of a computer screen all day long while the market's open). Having said that, I do actively trade TSM
screened and forecasted stocks for my own accounts (TradeStation).
Links of Interest
Company Profile | MSN Stock Ranking |
Schaeffer Research | IBD Stock Check Up
Daily Point & Figure Chart |
Other Key Statistics | Zacks Fundamentals
and Next Earnings Report