Mark Pankin Managed Accounts Newsletter 1

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Hector Farmer
5 years ago
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1 2017 First Quarter Volume 22.3 Mark Pankin Managed Accounts Newsletter Please Note As I announced in my last newsletter, 2017 will be my final year as Registered Investment Advisor (RIA). I will work with clients individually to determine first if they are interested in having another RIA continue to manage their accounts and if they want an advisor who employs methods similar to what I do. If they do, I will look to the advisors I know who are members of the NAAIM (National Association of Active Investment Managers), of which I have been a member since Location may be a factor for those who prefer to meet in person regularly with their advisor. I am going to withdraw registration as an RIA effective at the end of At that point clients who have not moved their accounts will have to handle them on their own. As has always been the case, they will have full access to their accounts at a broker or mutual fund company. I will be available to answer questions and provide requested guidance, but I will not be able to place transactions. Although I will be happy to provide information about the models I use to make trading decisions and how they work, I will not provide the signals they generate. First Quarter Review The cyclical bull market that began in March 2009 continued in the first quarter as it celebrated its eighth anniversary. The leader among the three indices, as it usually is in bull markets, was the Nasdaq Composite. It rose consistently during the quarter. The Dow and S&P 500 did well, but gave up a little ground in March. The gains in the first two months have been described as a continuation of the Trump Bump (see the Perspective below) that Percent Change 12% 10% 8% 6% 4% 2% 0% began right after the election. The leveling in March may have been due to the reality that governing rquires much more than promotion of policies and objectives and the wonderful things that are going to happen. For the quarter, the Daily Quarterly Cumulative Percent Changes -2% 12/31/2016 1/31/2017 2/28/2017 3/31/2017 Dow S&P Nasdaq Dow moved ahead by 4.6%, the S&P by 5.5%, and the Nasdaq by 9.8%. One factor in the rises was strength in large capitalization technology issues. That is reflected in the 11.8% gain in the Nasdaq 100, which gives them even more weight. Mark Pankin Managed Accounts Newsletter 1

2 The graph on this page provides a longer view by showing the cumulative weekly changes from the beginning of It suggests that the bull market that began in March 2009 is not yet topping out Percent Change 25% 20% 15% 10% 5% 0% -5% -10% -15% Weekly Cumulative Percent Changes for % 12/31/2015 3/31/2016 6/30/2016 9/30/ /31/2016 3/31/2017 Dow S&P Nasdaq because it is still making a series of higher highs and higher lows. On the other hand, measures of market valuation such as price-to-earnings ratios are on the high side. There are other indicators that show stocks may be overvalued, which is a term that does not have a real definition. It is important to note that overvalued does not mean sell because stocks can remain in that state for extended periods of time. As Keynes reputedly said: the market can remain irrational far longer than one can remain solvent. Although the type of analysis and insight above is almost expected by those writing newsletters or making pronouncements on TV, I don t find it helpful in managing accounts. As I have written many times, I use trend-following models for managing tactical allocation accounts that are designed to identify tradable periods of one or more months. Those models, including the one I use to decide when to own funds linked to the S&P, are generally, but not uniformly, positive currently. It is worth repeating that trendfollowing methods are almost always going to be late. That is they are going to sell after the market has made a top and are going to buy after it has made a bottom. That was the case in March of last year when we were somewhat late getting back into broad market funds. However, we have owned those types of funds since then, for over a year now, so the model has provided its worth in identifying a good period to own stocks in general. Managed accounts--first quarter: With one exception, managed accounts had gains during the first three months of the year that were mostly below those of the major indices. All of the returns shown here are based on trading in typical client accounts or personal accounts when appropriate. The returns for the sector fund trading and tactical asset allocation managed account programs include the effects of my management fees. Rydex Sector Trading: I have two methods I use. One, which I call Sector Trading Adverse to Risk (STAR), emphasizes risk reduction more than exceptional profits. We began the year about 40% invested holding two Guggenheim/Rydex sector funds, Electronics and Energy. Electronics had been purchased in September and has been owned throughout the first quarter. Energy was bought in late December and was held for about a month for a small loss. In early January Energy Service and Leisure were purchased. The former was sold at the end of that month for a loss of 3.4%, and the latter has not yet been sold. By late January accounts were fully invested in five sector funds and remained that way through the remainder of the quarter except for four days near the end of March. At the end of the quarter the five funds owned were Electronics, Basic Materials, Financial Services, Leisure, and Telecommunications. The gain for the period was 2.3%. The other method is called Aggressive Rydex Trading (ART). While STAR may own up to five Mark Pankin Managed Accounts Newsletter 2

3 sector funds at a time and may be partially or fully in money market for fairly long periods, ART normally owns just one sector fund at a time. However, it will stop trading sector funds and move to cash when the performance of the trading system trends down. That is most likely to happen when stock prices are falling, so given the strong markets in the first quarter ART remained fully invested in one fund at a time for the entire quarter. There were 18 completed trades, and 12 of them were profitable. All told those trades resulted in a gain of 8.5% for the quarter. Tactical Asset Allocation (TAA): These accounts can trade several types of mutual funds and exchange traded funds (ETFs). Included are broad based stock index funds, Treasury bond funds as well as those that track the Nasdaq 100 (NDX), real-estate ETFs, sector funds, and possibly options positions in some accounts. At the start of the year, TAA accounts held two ETFs. The Rydex Equal Weight S&P fund (ticker symbol RSP), had been purchased in March of last year. That fund owns all 500 stocks in the S&P 500 index in equal percentages, 0.2% each, after each quarterly rebalance. About half of account assets are used to purchase the fund. The trade, now more than a year old, is still ongoing and was ahead by more than eighteen percent at the end of March. The other holding was a Vanguard ETF that owns more than one hundred real estate investment trusts (REITs). It was bought in mid- November with about a quarter of account assets, and was sold on the first trading day of 2017 for a seven percent gain. I discuss below the model I use to trade it or another real-estate fund. That ETF was bought again ten days later since the model used to trade it reversed to a buy signal fairly quickly. An Energy ETF was purchased at the end of January according to a very strong seasonal pattern that produced an exceptional profit last year, but has not done well so far this year. At that point, accounts were fully invested. Twice, about half of each those two funds was sold so the proceeds could be used for short-term Mark Pankin Managed Accounts Newsletter 3 bounce back trades in the Nasdaq 100 ETF. Both produced small profits followed by the original positions in the Vanguard and energy funds being restored. Both of those funds were sold before the end of March. At the end of the quarter accounts were about 75% invested with about half in the equal weight S&P ETF and a quarter in a short-tem health seasonal. For the quarter, the accounts that do not trade options gained close to two percent. One TAA account sometimes trades options, and that trading was profitable so the account was ahead by over three percent for the quarter. Real Estate Fund Model: Several years ago I developed a trend following model based on the Fidelity Real Estate Investment Fund (ticker symbol FRESX). That fund has the longest history of any fund in the sector, and I base my research on historical performance, which is why I used it. Funds from some other companies perform quite similarly as do at least three exchange traded real estate funds. As discussed above TAA accounts had a completed trade in January, which started in 2016 of a Vanguard ETF (ticker VNQ) that holds over one hundred real-estate investment trust company shares. That fund was purchased again in mid-january and held for a little over two months before being sold in March. The fund lost less than a tenth of a percent when the returns during the two holding periods in 2016 are combined. NDX Trading Model: I used to consider this as a separate managed account program, and I still have personal accounts that trade mainly funds that track the Nasdaq 100 index (ticker NDX), sometimes using leverage. Since June 2014, I have traded an account for the National Association of Active Investment Managers (NAAIM) using the model to trade a Guggenheim/Rydex fund that tracks the NDX. Client TAA accounts also may hold the QQQ ETF that effectively owns the Nasdaq 100. If a trade moves ahead by a certain amount, in some accounts I may become more aggressive and use

4 leverage on the trade by moving partially or fully to a fund or ETF that tries to double the daily percent moves of the index. Given the sometimes extended moves of the NDX, employing leverage once a trade has moved ahead somewhat is a good way to take advantage of large rises in the index. Another method I will use during these sell signals is for short-term NDX trades looking for a bounce from oversold conditions according to either to two models I follow for this purpose. Another technique I may use in these accounts is to own a sector fund as a seasonal trade during a period when historically it has done very well. Those trades will be when the model for trading the NDX is giving a sell signal as it was at the start of the year. NDX Trading bought an energy fund, the Rydex one (ticker RYEIX) in late January as a seasonal trade. In mid-february, there was a short-term Investing Perspective: Will the Trump Bump last? Stocks moved up sharply after the election due to hope that Trump s promises to cut taxes, particularly corporate rates and reduce regulations would spur accelerated economic growth. The S&P 500 rose 11.5% from the close bounce trade in the NDX, so the energy fund was sold and moved into Rydex Nasdaq 100 fund. That trade lasted almost three weeks and produced a gain of 0.70%. After it was over, we moved back into the energy fund for not quite two weeks, when there was another short-term bounce trade in the NDX fund. It lasted not quite a week and gained three-quarters of a percent. Since the energy fund had not done well and looked as if it would not follow the seasonal pattern, accounts were moved into cash where they remained for the rest of the quarter. Due to the poor performance of the energy seasonal trade, NDX Trading accounts were down not quite one and a half percent in the first three months of the year. As always, you should not assume that any of the investment performance discussed here will be achieved in the future. Also, there can be no assurances that any of the trading methods or client accounts will be profitable in the future. on election day through March 15 giving rise to the idea that it was due to the Trump bump. It has moved down since then, and if it continues to decline those pundits who can t resist rhyming will be talking about the Trump slump. Taking a longer-term view, it is reasonable to ask about stock market behavior during the first term of a presidency. In late November, Brian Nick writing in TIAA Global Asset Management Insights posted an article with the graph shown here. Mark Pankin Managed Accounts Newsletter 4

5 The horizontal axis is the Shiller s P/E measure that is the average over the last ten years adjusted for inflation. It has been given the acronym of CAPE. The returns shown are the compounded annual returns over each president s four years after his first election, except for Kennedy s two years and ten months. Those shown in red were defeated running for re-election. (Bush 41, Carter, and LBJ who was running in 1968, but withdrew in March after disappointing primary results.) With the exception of the second Bush, the 43 rd president, all of the returns are positive. He took office as the technology bubble was in the process of deflating. Even so, S&P pretty much broke even during his first term. (It did a lot worse during his second term due to the financial crisis that resulted in stocks bottoming out in less than two months after he left office.) Valuations according to the CAPE measure were extremely high when Bush 43 took office, which was one way of seeing the technology bubble. As the graph shows, lower valuations tend to be Developments... Old and New Travel: In early May, I will attend the annual conference of the National Association of Active Managers (NAAIM), of which I have been a member for 20 years. This year it is in San Diego. I will be on a panel of members discussing methods for identifying potential tops in the stock market. Towards the end of the conference, my wife will fly out to join me. Then we will add Pinnacles National Park, the newest one, to our collection. We have been to just about all of the ones in the lower 48 and Hawaii. In late May and into mid-june the two of us will be in Italy taking our 15 th Road Scholar tour. It will be in Italy s lake district and Milan. History and the level of a cyclically adjusted P-E ratio indicate the Trump Bump may become the Trump Slump associated with better stock performance, which is hardly a significant insight. The CAPE is still rather high, so its value for Trump is higher than when all of his predecessors since Eisenhower in 1953, with the exception Bush 43, took office. As I have written, perhaps too many times, I view the rise in stock prices that began eight years ago to be a cyclical bull market, albeit an exceptionally long one, in a longer term secular bear market that began in If so, and in light of the elevated CAPE, it is quite likely that stock prices will drop considerably before Trump s first (and my hope is only) term is over. As I have also written, the above does not affect how I manage accounts. I rely on well researched mechanical models to decide when it is a good time to own or not own stocks, either broad market indices or specific sectors, due to a favorable or unfavorable anticipated rewards versus risks trade-offs. At the end of June, I will in New York for the annual conference of the Society for American Baseball Research (SABR), which I have been a member of for more than 40 years. I will be making a presentation about which umpires, both recent and historical, have been the most pitcher friendly or hitter friendly. If you want to get in touch with me while I am away, is a good way since I will have a computer with me and expect to have Internet access everywhere I stay. You can also leave a message on my answering machine. I usually check it at least once a day, but may not be able to get back to you the same day. Mark Pankin Managed Accounts Newsletter 5

6 Questions and Answers None this time. To make sure I answer the right ones, be sure to ask them. How to Contact Me Questions, comments, requests for information, or anything else you feel like talking about: Mark D. Pankin 1018 N. Cleveland St. Arlington, VA (703) (voice and fax) mdpassoc@pankin.com Internet web site: Mark Pankin Managed Accounts Newsletter 6

Mark Pankin Managed Accounts Newsletter 1

2016 Second Quarter Volume 21.4 Mark Pankin Managed Accounts Newsletter Please Note Please let me know if there have been any changes in your financial situation or your investment objectives, or if you