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Preferred Member Report and Selections

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July is over. It saved its worst for the end. On the last trading day, the major indices were especially hard hit — the Dow was off 317 points or 1.88%;  the S&P was off 2% and the Nasdaq off 2.09%.  This performance came after a claimed 4% rise in GDP for the second quarter. Apparently bad news in the economy is good news for markets and vice versa. Or, perhaps few believe government statistics any more.

The last day had a particularly damaging effect on the basic asset classes followed by this service. Make sure to note the changes below from the previous rankings.

For the month, the three benchmarks used to judge portfolio performance performed poorly. SPY declined 1.34%, EFA declined 2.60% , and EEM increased 1.36%, although got hurt badly in the last week.

General Market Channel

The rather amazing rise in SPY is captured in the graph below. The white lines represent a channel within which SPY has pretty much remained since its climb began in October 2011. Its only violations of the downside boundary on this channel were a few weeks in the late 2012, early 2013 period.

The yellow line represents a 50-day moving average, often considered a key technical indicator. As seen on the chart, this line was penetrated rather severely on the last day of July. The other key indicator is the red line which remains close to the bottom of the channel. It is a 200-day moving average, another measure considered to be an important support point.  A month or so it was suggested that 185 might be a trigger to abandon markets. That was based on the lower bound of the channel, which has since moved up to the 187 area. That also is the current approximate value of the 200-day moving average.

spy1since2013

The ferocity of the drop yesterday was not unusual. Markets generally correct on the downside much more quickly than they move to the upside. If, and no one knows for sure, this is the beginning of a correction it could be severe.  A 10 – 15% drop is considered a normal, “healthy” correction. (What is healthy about losing 10 – 15% of your nest egg?) A severe correction of which there were two in the first decade of this century could be in the 50 – 60% range. Extreme caution would be prudent at this time.

Individual ETF Performance

The following table shows those  ETFs that ranked highest and were possible selections at the beginning of July. These ETFs (and SPY, EFA and EEM) are ranked in order of percentage return over the last twenty days (approximately a month of trading).  Not one ETF was positive for the month. All approximated the return on SPY. Also shown are returns over the most recent 5-day increments.

 

julyresults

These are dangerous times. The economic underpinnings for current market levels are at best dubious. Regular readers know that I do not believe there is an economic recovery and that one cannot occur with today’s economic, tax and regulatory policies.

Basic Asset Classes

The damage done by the late July swoon provides an ominous looking basic asset class ranking:

basicassetswww.etfreplay.com 2014-07-31 20-46-34

No equity ETF exceeds the SHY cutoff.  Only other bond classes do.

The ranking algorithm still finds individual ETFs that exceed SHY as will be seen in the selections below. This kind of asset class ranking is not the environment in which to be aggressive. Remember this ranking when you make your decisions. (Return A is the return on these classes for the last twenty trading days.)

Highest Ranked ETFs at End of July

Ranking all the ETFs, including ones not included in the portfolios used in this service, produces the top 20 in this order of ranking:

top20

This table includes a lot of fixed income and “off-beat” ETFs reflected by the green and brown coding. This composition is unusual, as is the behavior of current markets. (Return A is the percentage return these ETFs earned in the last twenty trading days.)

July Full Month Performance

(New selection method reflected in all results)

July US(6) BigInt(3) Emerg(3) Intl(6) All(10) Inflat(3) Inverse(1)
Selections -2.94% -0.09% -0.29% -0.41% -1.03% -3.34% -0.08%
Benchmark -1.34% -2.60% 1.36% -0.62% -0.98% n/a n/a
Bet/(Worse) -1.60% 2.51% -1.65% 0.21% -0.05% n/a n/a

 

Year-to-date Through July 31

(New selection method reflected in all results)

YTD US(6) BigInt(3) Emerg(3) Intl(6) All(10) Inflat(3) Inverse(1)
Selections 6.20% -1.20% 3.30% 2.10% 3.70% 2.40% -11.10%
Benchmark 5.50% 1.70% 5.70% 3.70% 4.60% n/a n/a
Bet/(Worse) 0.70% -2.90% -2.40% -1.60% -0.90% n/a n/a

Final Rankings By Portfolio

The major move on the final day of the month produced some changes from the preliminary rankings. Here are the final rankings:

US(6) BigInt(3) Emerg(3) Intl(6) All(10) Inflat(3) Inverse(1)
IGV EWC AAXJ AAXJ AAXJ SHY DOG
IHF EWH FXI EPP EPP SHY
IHI EWS GMF EWC EWC SHY
QQQ EWH EWH
VGT EWS EWS
VOX FXI FXI
GMF
IXN
QQQ
VPL

It should be noted that the Inflation category which had been leading the performance outcomes until last week, turned very bad very quickly. This portfolio has gone to all cash. Additionally, for those interested in shorting this market (something not necessarily recommended), for the first time in quite a while there is a selection in this category. That alone should make you wary of these markets.

Monty’s Comments

July was horrible on any basis one wants to judge it by. The quarterly report for GDP (for those who still believe the numbers) was superb and markets collapsed. Employment figures due out later this morning might be revealing. If there is a good labor report (lots of jobs created), don’t be surprised if markets continue downward. If so, then bigger players seem to be assuming that the Fed will tighten sooner rather than later. That tends to support the notion that these markets are being held up by liquidity and not fundamentals.

I have little to add to prior month’s comments regarding these markets. Stay out for a while unless you have to be in for some reason or another. If an unwillingness to sell because of the capital gains problem, then use puts to protect against the downside.

It is hard to imagine a rapid market run-up from here, although anything is possible in these managed markets. Geopolitical risks are as high as they have ever been. The political class is completely dysfunctional, usually a good thing, but not when regulatory and tax reform are so desperately needed. The border crisis has no solution other than to return the illegals home. The president will do almost anything to prevent that from happening, including presumably provoking a Constitutional crisis.

For those willing to trade these markets, ATRs will be provided in the next day or so in order for you to place your stops (mandatory in markets like these).

As always, good luck and good trading.

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