August 1st: Ed’s Daily Notes and Traders Corner   25 comments

The S&P 500 levels to watch today:

UPSIDE: 1948 (bottom of the Bollinger Bands), 1952 (July 10th’s low and the 50 day moving average), 1955 (July 17th’s low), 1959-1960 (3 data points), 1962 (2 data points), 1965 (4 data points), 1967-1970 (5 data points and June’s high), 1972-1986 (25 data points and the 20 day moving average), 1989 (July 23rd’s high), 1991 (July 24th’s high and the all-time high), and 1997 (top of the Bollinger Bands).
LAST CLOSE: 1930 (July 31st’s low).
DOWNSIDE: 1924 (May’s high), 1910 (100 day moving average), and 1882 (150 day moving average).

S&P 500 Daily Momentum: Bearish
S&P 500 Daily Overbought/oversold: Neutral (leaning oversold)
S&P 500 Weekly Momentum: Bearish
S&P 500 Weekly Overbought/oversold: Neutral
S&P 500 Futures: Negative
Overall: In spite of the futures and the momentum, I am going to make a contrarian call today: Watch for the bounce. The McClellan Oscillator is at -87 (with -60 being oversold), which is the lowest I have seen it recently. At the very least, the markets should finish flat today. If we get a strong drop at the open, I would recommend a UPRO play if you see the momentum shift positive after the open. But I would also recommend selling UPRO before the end of the day, because the bearish momentum is still pretty strong. Next week could be ugly.

And now for the daily notes…

Bloomberg: No-Exit Strategy May Be Fed Burden in Unwinding Stimulus

The Federal Reserve is trying to change as little as possible as it crafts its strategy to exit from record stimulus. The trouble is financial markets have changed so much that the still-developing plan may prove costly and ultimately unworkable.

The approach, sketched out in the minutes of the Fed’s June 17-18 meeting and in officials’ comments since then, retains a focus on the federal funds rate as the central bank’s target. Policy would continue to be conducted mainly through banks rather than via dealings with money-market funds.

…The strategy has drawbacks, given the way money markets have evolved since the recession. Banks no longer need to borrow in the once-vibrant fed funds market to meet reserve requirements, as they did before the crisis, because the Fed has pumped so much money into the financial system during the last six years. As a result, trading in that market has dwindled and now mainly comprises U.S. branches of foreign banks acting as arbitragers, according to research by economists at the Federal Reserve Bank of New York.

…In the minutes of their June meeting, Fed officials displayed a preference for continuing to conduct policy mainly through the banks, which they regulate, rather than through money funds, which they don’t. Most participants agreed that the rate of interest the Fed pays on bank reserves would be their “central” policy tool when the time comes to increase short-term rates, an event they forecast will occur in 2015.

The flaw in the Fed’s thinking is that they will be able to go back to the old system of managing the economy via rates. That system was permanently broken when they introduced QE. Of course, they could go back, if they don’t mind sacrificing the equity markets…

Bloomberg: New ETF Tracks the Billionaire Dream Team

If you can’t beat ’em, join ’em.

That’s the philosophy behind the new Direxion iBillionaire Index ETF (IBLN). The exchange-traded fund tracks the stock holdings of some of the richest and most successful investors, such as Warren Buffett, David Einhorn and Carl Icahn.

The index uses the billionaires lists produced by both Bloomberg and Forbes to identify 20 or so U.S.-based billionaire investors. (So no Bill Gates or Walton family members.) It then picks the top 10 billionaires by performance. It judges performance by looking at filings called 13Fs that investors overseeing more than $100 million in U.S. equities must file with the Securities and Exchange Commission. The filings, due within 45 days of the end of a quarter, list equity holdings that trade on U.S. exchanges. The 30 stocks where the investors have the most combined money becomes the ETF’s index, which is rebalanced quarterly.

For example, in the 13Fs for 2014’s first quarter, Apple Inc. (APPL) was the big money’s favorite stock. It made up 16 percent of Einhorn’s reported holdings, 12 percent of Icahn’s, 8 percent of hedge-fund manager David Tepper’s and just under 1 percent of George Soros’s. The next most popular stock was Micron Technology Inc. (MU), with a combined exposure of 16.8 percent, and Priceline Group Inc. (PCLN), at 14 percent. The 30 stocks are equal-weighted, with each one making up 3.3 percent of the index.

If this sounds a lot like the Global X Guru Index ETF (GURU), that’s because it is. There are a few differences. IBLN only looks at large-capitalization U.S. stocks while GURU, which has $500 million in assets, will look at small- and mid-cap stocks and some international. This should make IBLN less volatile than GURU, which rose 48 percent in 2013, outdoing the S&P 500 Index’s 32 percent. So far this year, with the performance of small-caps and momentum stocks cooling, GURU is up 2 percent to the S&P 500’s 8 percent.

So far this year — in theory, since the index wasn’t live — the iBillionaire Index is up 7.7 percent, compared with GURU’s 2.3 percent. However, in the past two momentum-driven years, GURU has a slight edge, returning 75 percent to IBLN’s 67 percent. IBLN will charge 0.65 percent of assets annually, slightly less than GURU’s 0.75 percent.

The other big difference is that GURU looks through dozens of hedge-fund portfolios. IBLN only looks through the portfolios of the richest and most successful investors.

Considering most of the big names are value investors, this isn’t a bad idea. IBLN might make a good substitute for a large cap index fund for long-term investors.


25 responses to “August 1st: Ed’s Daily Notes and Traders Corner

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  1. Ed,
    In yesterday’s trader thread you posted :”It’s called having a lot of dry powder to take advantage of better long-term pricing.” when I asked how being 60-80% in cash in a 401k could ever be considered a reasonable strategy for a 401k. It is not dry powder it is simply unreasonable fear about the short term outlook for a long term investment. Same goes for your current 100% cash strategy for your IRA. You have shown zero ability to time the market and in fact you are now looking at 12-18 months until your downturn “event” occurs from when you decided to stop investing within your IRA. Instead you have started talking about black swan events as if you have some ability to predict those.
    Folks that move primarily to cash are simply fooling themselves if they believe they will be able to accurately predict when to deploy that cash. If you could accurately determine when to move in and out of the market you would be a professional hedge fund manager.
    Going from 10 to 20-30% cash so you can take advantage of bargains? I can see that, even if you are wrong (most likely scenario) you are only hurting your overall portfolio return a little bit.
    There are only a handful of folks on this board that have shown any ability to consistently beat the S&P year after year and event then we do not see their entire investment return just what they post about. Most of the rest of us are simply playing. I “play” in my trading account which is a small percent of my overall investment portfolio because the many years I have been tracking my performance shows I would have been better off simply buying an S&P index fund on the first day of the year. I believe that if others on this board were to truly track their performance they would come to the same conclusion. For instance Ed you have been annihilated by the indexes since you started this blog and you consider yourself a savvy investor. The only portion of your portfolio that does well is your 401k which you have thus far, for the most part refrained, from treating like a trading account.


    • Robb, I couldn’t agree more with your post. 100% spot on. Nobody can predict market direction, not Buffet (and he admits it), Soros, Ed, you or me. But a lot of people make a living convincing folks that they can. Over the last 4+ years the average hedge fund has returned -6% while the S&P index has returned 62% All of my tax deferred accounts are in mutual funds that I started accumulating in 1986. Most of those funds track an index where I only pay an expense ratio of around 0.1%. I have done very well.

      You and others on this board have made several excellent posts trying to enlighten Ed about his investing philosophy but he seems to be a stubborn Irishman, kind of like me. :). I’m sure we’d all like to see Ed do well in return for all of his effort managing this excellent blog.

    • Robb, I do agree with your post however I do believe everyone should change investments around from time to time. Fidelity really doesn’t give us very much to choose from I think 19 different investments with over 50% being lifecycle funds. I set up this plan in 09′ and didn’t start touching it till the market started breaking new highs. I plan to add less small cap and more Mid cap % going forward also some bonds. New money elections haven’t been changed which I need to address this soon. I tried the set it up a leave it approach the first 9 years at least it wasn’t as risky as I am now.

    • Well provide that your 401K gives you the freedom (and certainly in an IRA) one of the most proven ideas in long term investing is periodic re-balancing.
      It has usually has to be periodic for the simple reason that like Zosa said no one really can predict where things are going to go in the future.
      It also forces you to sell your winners when they are high, and buy others when they are cheap.
      But re-balancing shouldn’t also be done everyday or on the belief that you know what sector is going to be the winner for the next X months.

      • ChrisO, I’ve moved some 4 times this last time being the largest. I gave my small cap a large hair cut and that is the main reason I’m so heavy in cash. I talked with one of the brokers at Fidelity about bonds also Ed gave me some advice and I just haven’t re-balanced anything yet. I’m happy it gained 30% last year, I’m at 3% this year. Going forward I don’t know how much small cap I want but not 40% like it has been.

    • 100% agree with re-balancing and diversification. I was making an example with the S&P index fund since most investors use that as a benchmark for performance. In my 401k I have my money split between Bond fund, Large cap US, Small cap US and Foreign (one European and one emerging markets). I re-balance every January and have default percentage for each fund adding up to 90%. I take the last 10% and add it to one of the funds based on what I think will outperform for the year.

      As for the hedge fund vs index I think the Buffet bet has been a pretty emphatic example of the value of low cost index funds versus actively managed funds.


  2. UVXY @ 32.21. I might hold this for a few days.

  3. After a series of very bad earnings this quarter for me (GNW, SNDK, AVG to name a few); it looks like I finally had a couple wins: FLR and SYNA are up nicely today.

  4. added to my TLM at 10.55.

  5. just saw where PXLW is down 15% this morning. Hope no one is too hurt by that.

  6. Sold tza .4. Not a knock out but busy day at work. Robb I read I’ll reply later.
    Es bottomed below 1913 early this morning. If supports are broke how do investors use that?

  7. Marshall your thoughts on the GE spinoff of SYF?

  8. Out of UVXY for plus 1.56 4.8%. Decided not to press my luck.

  9. Have not looked at it. Generally, these types of spin offs outperform by a significant margin if you wait 1 to 2 weeks post spinoff. Many big boys have to sell the smaller spin off.

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