December 2018 Report

Transcription

1 MCG Capit al Management LLC December 2018 Report December 20, 2018 MCG Capital Management LLC is the adviser to investment partnership entities available to accredited investors. The firm also manages individual accounts on a platform offered by Jefferson National Life Ins Co. This report is general in nature and provides information thought to be of interest to investors. Any reference to strategies, positions, or performance is related solely to those accounts managed through Jefferson National. The stock market goes through 4 stages in its life cycle. Here is a convenient way to remember them. A = Accumulation, this occurs in the very beginning when smart money begins to accumulate stocks; think of late 2008 and early B = Breakout, this occurs as a new bull market emerges and stocks move higher; this phase lasted longer than usual thanks to Janet Yellen s heavy hand at the Federal Reserve. C = Consolidation, this is sometimes called distribution as the smart money begins to sell; this began in late January and is ongoing. D = Downtrend, or what some call the Damn it, I missed the top! phase. I believe this is coming in S&P 500 I don t think there is any doubt the S&P 500 is in a Consolidation Phase. The principal of MCG Capital Management LLC believes so strongly in the firm s investment philosophy and strategies that he and his family invest directly alongside clients in some of the same programs. Wealth protection and creation through a commitment to consistent profitability are MCG Capital Management s goals.

2 I am going to argue that the S&P 500 will enter the Downtrend Phase in First, I will show you major markets and indices. On the next page I will show you how this year s bull market leaders are doing. Then I will show a chart of investor brokerage account credit balances and finally a roadmap as to when I think an important bottom/s will occur. This is the Emerging Market ETF (EEM). Emerging Markets have been in a Downtrend in They are generally one of the first markets to catch a cold. This is the US Homebuilding Index (XHB). This group is sensitive to interest rates and tends to predict future economic health. This is the US small-cap Index, the Russell 2000 (IWM). Small caps tend to lead the broader market up and they tend to lead the broader market down. Smaller companies are more sensitive to economic fundamentals and consumer demand.

3 This year s market leaders are not doing so well. Without these stocks starting up again and taking the lead, it will be hard for the stock market to sustain a meaningful rally. This is the Financial Sector (XLF). It is composed of banks, insurance companies, and brokers. Financials are one group that is typically part of any bull market advance. This is Apple (AAPL). Apple was probably the most owned stock in the universe. Apple (AAPL) Down 30% It seems like every investor, institution, and large hedge fund were convinced Apple could do no wrong. Even Warren Buffet finally threw in the towel and began buying Apple, after decades of saying he would never buy a tech stock. Seems he bought at the top. Ouch! The problem is EVERYONE owned the stock. There were no buyers left to push the stock higher. Amazon (AMZN) Down 25% This is Amazon (AMZN). On June 28, I did a piece on the FANG stocks of which Amazon is a member. I said that they make up such a disproportionate percentage of the indices that basically when they catch cold it will be hard for the stock market to hold any ground.

4 Here is a chart of credit, or cash, balances in brokerage accounts. You can see we are at record negative levels. The Federal Reserve actually encouraged people to buy stocks as they kept interest rates way too low for too long. Normal income investors had no where to turn except dividend-paying stocks. Now, everybody is all in according to this data, and many have taken on way too much debt to do so. It is this chart that gives me more pause than any other. The RED part represents Negative Credit Balances. Stock MUST be sold or Cash deposited into accounts to remedy this situation. Look at the extent to which investors have exceeded the negative balances that existed in 2000 and 2007.

5 While fundamental analysis cannot tell us about the future path of the stock market, cycle analysis, however, can offer reasonable turning points down-the-road. There is a predominate week cycle in the S&P 500. This is the best we have. The cycle bottomed in February, then in June, and most recently in November. Bottoms are next forecast for the end of March and in July. It is in July that longer-term cycles also bottom. Is this how I manage your money? NO. Do I think this is relevant? YES. As long as the market continues to trace out a pattern consistent with the predominate week cycle, it simply gives us the confidence to buy should the stock market decline into those time frames, July/August 2019 being the most likely time. About mid-july About 3/31/19 Conclusion: Bear markets are a NORMAL part of investing. I certainly don t know if the current period of stock market weakness will actually lead to a Downtrend and bear market. I do know there are many signs pointing to trouble ahead. I personally embrace bear markets because, in the end, they offer the buys of a decade. Successful long-term investing is a lot easier if one can sidestep bear markets and have most, if not all, of their capital intact to take advantage. That is what I will try very hard to do as 2019 unfolds. MCG Capital Management, LLC is a registered investment adviser, providing fee based services to clients only. Management of Jefferson National variable annuities is not available to Utah residents. All other individuals and interested parties should consult with their financial advisor. Information provided herein is not a recommendation to buy or sell any security. The Dow Jones Industrial Average, S&P 100, S&P 500, Russell 2000, NASDAQ 100, and NASDAQ Composite are unmanaged indices and cannot be invested in directly. Relative strength charts include reinvested dividends. MCG Capital is not associated with any mutual fund or mutual fund association. For information about specific mutual funds, readers should consult the fund s prospectus. Market data provided by Investor s Fasttrack. Chart performance computed by Trade algorithm, Ed Gilbert Charts shown may not represent actual results in all accounts. Some data reflects hypothetical backtested data. Backtested performance results have certain limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. Past performance is no guarantee of future results. High Yield Bond Fund Model is an average of 78 high yield bond mutual funds. Charts and graphs are from Investors Fasttrack, StockCharts.com, and TradeStation. These sources are believed to be reliable but the information is not independently verified.