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Old_Skeet's Market Barometer ... Spring & Summer Reporting ... and, My Positioning

edited July 3 in Other Investing
As of market close March 6th, according to the metrics of Old_Skeet's stock market barometer, the S&P 500 Index is extremely oversold with a reading of 168. This is down 7 points from last weeks close of 175 where the Index was also considered to be extremely oversold. A lower barometer reading indicates there is less investment value in the Index over a higher reading. During the week, the average naked short volume moved from a weekly average of 52% to 64%. A great deal changed there along with the VIX (which is a measure of volatility) which went from 29 to 36. The the stock Index's valuation gained a little ground through the week with an 18 point gain moving from a reading of 2954 to 2972. From a yield perspective, I'm finding that the US10YrT is now being listed at 0.767% (MarketWatch) while at the beginning of the year it was listed at 1.92%. With the stock market swoon the S&P 500 Index is currently listed with a dividend yield of 1.96% while at the beginning of the year it was listed at 1.82%. As you can see there is now a good yield advantage for the stock Index over the Ten Year Treasury. With this, I'm now favoring equity income over fixed income due to this yield spread. I also I feel that the stock market is somewhat oversold and bonds are extremely overbought. My three best performing funds this past week were SVAAX +3.14% ... PGUAX +3.10% ... and, DIFAX +1.88%. All of these are good dividend paying funds.

This week I thought I'd write about Old_Skeet's SWAG (Scientific Wild Ass Guess). There are a number of sources that I use to formulate my SWAG. A couple of these I'll cover in this writting. One is the forward earning estimate (FE) and the trailing twelve months earnings (TTM) for the S&P 500 Index. I usually get this data from S&P. Then another data point that I use is a multiplier. This multiplier is derived from using the total return from a couple of my multi sector income funds for their five year average total return period. This is then used to compare the earnings yield of the S&P 500 Index to my better performing multi sector bond fund's total return. The TTM earnings yield for the Index computes to 4.7%. While, the total retun for my better performing multi sector income funds is found to be about 5%. Thus, the multi sector bond funds currently have the advantage by this metric.

But, that is not all! We still have forward earnings estimates to consider for the stock Index. Using a revised forward earnings estimate number of $159.00 (down from $175.00) computes to an earnings yield of 5.3%. This favors the stock Index.

Combining the two to produce a blended number TTM (4.7%) and the fordward number (5.3%) produces a blended earnings yield of 5%. With this, there is no current advantage to either using the blended metric. In looking at this from a little different perspective and by using the multipler number 20 (representing a 5% earnings yield) and dividing it by the closing value of 2972 produces an earnings number of $148.60. At the close of this month, for March, S&P projects TTM earnings to be $139.95. And, using the full year $159.00 earning number puts the stock Index at 3180. Using this analysis puts the Index near term overvalued (valuation ahead of earnings) and for the full year undervalued (valuation behind earnings).

I'm with the thought that the market is going to reflect a TTM valuation model of what have you done for me over what are you projected to do for me model (FE) due the uncertainty about the coronavirus and the virus' effect on forward earnings. This has caused many investors that were using leverage to deleverage and sell stocks which has lead to the stock market swoon we are currently facing.

What does this mean? For me, I'm not looking for stocks to out perform my better performing multi sector income funds over the next few years. However, I am favoring my beaten down equity income funds to out perform the stock Index and my better performing multi sector funds over the near term. Just this past week my two best performing funds were of the equity dividend paying type. They were SVAAX +3.14% & PGUAX +3.10%.

With this, I plan to position new money (generated by my portfolio) towards my good dividend paying equity mutual funds. In addition, I plan to open a position in IDIVX which is up +2.95% for the week.

I hope this weeks barometer report has provided you with an insight that might not have been previsouly considered. Just because this is what Old_Skeet's course of action will be inside of his own portfolio doen't not mean that you should follow my plan of action.

Simply stated ... "The stock and bond markets might not follow my SWAG."

Thanks for stopping by and reading.

I wish all ... "Good Investing."

Old_Skeet
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Comments

  • Thanks for the update @Old_Skeet. In fairness I believe SVAAX was down the week before, so nice to see it rising again !

    Have a nice weekend, Derf
  • Morning,
    You noted:
    I'm finding that the US10YrT is now being listed at 0.97% while at the beginning of the year it was listed at 1.92%.
    My data indicates the 10 year ended the week with a yield at .74%
  • edited March 7
    Thanks @Catch ... you are correct. I'll note the change. MarketWatch and the WSJ have it listed at 0.767%. I'm sure some other sources will list it differently. I remember CNBC stating, last evening, that it was 0.73%. I just plain old goofed. Thinking one thing and typing another. Comes with age. Anyway it is extremely low as some investors seek shelter in US Treasuries. Again, my bad. Skeet
  • Heck, I goof a lot. Now days, I generally do a review X 2 before I post. Tis not uncommon to discover the "edit" is part of my posts.

    I use this Treasury page for yields.
  • "Comes with age." Tell me something that I hadn't already noticed, he said sadly... :(
  • edited March 7
    I read these updtes with interest, each time. I'm still buy-and-hold, but not forever. So... just in case, I sure do want to know what Skeet's take is, up-to-the-minute, almost!

    I was headed to Value Line with wifey's old 403b. I could sit and wait forever for them to catch up with their own mail, or to at least correspond with me, if they have questions, because of the way we filled-out their forms. Those transfer forms were arranged by a brainless Venusian with his head stuck where the sun don't shine. I'm thinking of going with an old standby: MAPOX. OR TRP Balanced fund. Good dividend payers, there. Big and giant -cap names. Lots of tech. I'd still love to find another option or two to choose from. I've pretty much decided it will be a balanced fund in the 50-70 percent equities category. I'll go and take a look at the US News list that Ted used to direct us to.... Again.
  • edited March 8
    Hi sir thankyou
    What levels sp500 or Dows [?22500] you think bottom maybe there and perhaps add more equities . Its still early spring flu coronavirus still going to peak for at least 4-8 wks, maybe slow recovery after and I don't know if we get late spring bounce or flatline until pre election then maybe a good bounce after election if new favorable potus/team is throned)
    Thank you
  • edited March 8
    Hi @johnN, Thanks for your question. And, @Crash here is another update. Your comments are always appreciated.

    John, for me, I bought when the Index was down 8% (pullback range) and again at minus 13% (correction range). My next buy will be made should the Index fall into a downdraft which would be a decline of 15% to 20%. Since, I am retired and in the distribution phase of investing along with being mostly fully allocated on the equity side of my portfolio, within my asset allocation ranges, does not leave a lot of room for me to become a big buyer of equities. However, this stock market decline has created an open to buy on the equity side of my portfolio. With this, when an open to buy takes place on the equity side of my portfolio I have been buying equity income type funds in baby steps as noted above in my opening comment. In this way, I will get paid dividends while I await equity valuations to rebound.

    Currently, I'm favoring equity income over fixed income and staying within my asset allocation guardrails of 20% cash, 40% income and 40% equity. In general, my rebalance threshold is + (or -) 2% from my neutral positions while allowing cash to float. This past Friday's portfolio review had me at 20% cash, 41% income and 39% equity. With this, I've now got a small open to buy on the equity side of my portfolio. In addition, should I choose, I can overweight equities by up to 5%; but ... for now ... I'm a long way from doing that.

    I'm also thinking no bell is going to ring to tell investors it's now time to buy equities as each of us have different circumstances, risk tolerances and objectives that should be factored in with our buying decisions. I'm posting what I am doing as I can not say what might be right for another investor. Again, for me, when I have an open to buy within my asset allocation and my barometer has a high reading North of 160 then ... that's, for me, an equity buying opportunity.

    Old_Skeet

  • edited March 10
    Hello. I thought I'd provide an update on the barometer with today's historical market selloff where the S&P 500 Index declined by 225 points moving from a Friday's closing number of 2972 to Monday's closing number of 2747 resulting in about a 7.6% decline for today and about an 18.9% decline off it's 52 week high.

    The barometer based upon it's metrics is pegged at a reading of 180 indicating that the stock Index is extremely oversold. That's it's max reading on the high side. Folks it just does not go any higher than this. So, what did Old_Skeet do today? He spent a little cash ... a sum equal to one percent of his portfolio's Friday's closing value ... and bought in my equity income sleeve. Thus, I lowered cash by 1% and raised equity by 1% which puts equity back pretty close to it's neutral weighting of 40%. With this, my portfolio now bubbles pretty close to 19% cash, 41% income and 40% equity.

    I have bought, on the equity side of my portfolio, as the S&P 500 Index has declined, at the 8% decline mark, 13% decline mark and now the 19% decline mark. Should we get into bear market territory somewhere between a decline of 20% (2710) to 25% (2540) I plan to buy again.

    And ... so it goes. I wish all ... "Good Investing."

    Old_Skeet
  • a vonnegut reference. love it. intentional or not, welcome to the slaughterhouse!
  • edited March 9
    linter said:

    a vonnegut reference. love it. intentional or not, welcome to the slaughterhouse!

    But tomorrow morning won’t be “A Breakfast of Champions.”
  • I miss Tralfamadore, don't you?
  • edited March 10
    Hi sir thankyou for Commentary

    Maybe large dead cat bounce today.. futures 2+% up
    Added more equities today still too long to retired

    So far down ^3.5% past 3 months w private brokerage acct
  • edited March 11
    In tabulating my portfolio's asset allocation yesterday evening I noticed that my income funds were down while my equity funds were up. What's this saying? For me, it means some investors are having to sell bonds to cover their margin calls and/or perhaps some investors are now starting to move money back into stocks and leave bonds. For this past week I have favored equity income over fixed income and did a little equity buying reducing cash by 1% and raising my equities by 1%. This puts me back to my neutral equity allocation of 40%. This now leaves me somewhere close to 19% cash, 41% income and 40% equity within my asset allocation. In addition, my portfolio generates a good bit of income with an annual distribution yield of about 5%. This gives me the flexability to invest this income generation as I feel warranted (or take it to my pocket if needed).

    FWIW: I have been a buyer of equities at the 8%, 13% and 19% decline marks. My next buy step is targeted to take place, should the 500 Index move into bear market territory, somewhere between a decline of -20% to -25%. In addition, when the equity markets turn upwards I'll most likely buy during the upswing.
  • Morn'in @Old_Skeet
    In tabulating my portfolio's asset allocation yesterday evening I noticed that my income funds were down while my equity funds were up. What's this saying?
    My view: As I noted in a previous post.
    While equity had an up day (March 10), most investment grade bonds took a break. While most U.S. gov't. issues are "holding", corporate bonds are not and had another substantial down day on Monday. I see this as investors not having to sell bonds for whatever reason, but a continued rotation away from corporate bonds; and also a rotation into longer duration. These bond types have more potential to be impacted to the negative as corporate earnings are likely to continue downward in the current COVID-19 market.
    Overall, I also expect equity-income funds to continue to struggle IF corporation earnings remain negatively impacted. A double whammy of falling equity prices and a downgrade of their quasi investment grade bonds. Plain vanilla active managed bond funds are being whipsawed, too; from a very active bond market, where corporate bonds are being whacked and if there is not a big enough percentage of AAA gov't. bonds in a fund, the corp. bond side is impacting this funds to the negative.

    The below list is from March 7, but the LQD has continued to move downward from this date. From March 4, last Wednesday; through yesterday, Tuesday, March 10; the general range for corporate "investment grade" bonds is: -3 through -4%. Whatever quality of IG corp. bonds that are held within any particular fund you hold, will be reflected. Digging into the quality of bond holdings within any of your funds will help identify why some are behaving in a particular fashion. Example: Ford Motor Co. has a large holding of BBB rated bonds in their debt issuance. This credit quality is borderline and may be downgraded as needed by S&P or Moody's, based upon forward prospects for the company's profitability.

    --- A quick look at S&P's bond rating guide:
    "AAA" and "AA" (high credit quality) and "A" and "BBB" (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ("BB," "B," "CCC," etc.) are considered low credit quality, and are commonly referred to as "junk bonds."


    Week / YTD

    --- MINT = -.02%/+.5% (Pimco Enhanced short maturity)
    --- SHY = +.7%/+2.2% (1-3 yr bills)
    --- IEI = +1.6%/+5.4% (3-7 yr notes)
    --- IEF = +2.8%/+9.5% (7-10 yr notes)
    --- TLT = +7.5%/+23.5% (20+ Yr UST Bond
    --- EDV = +10%/+31.4% (Vanguard extended duration gov't)
    --- ZROZ = +10.6%/+35% (UST., AAA, long duration zero coupon bonds)
    ***Other:
    --- LQD = +1.85%/+5.5% (corp. bonds)
    --- TIP =+2.1%/+5.2% (UST., inflation bonds, mixed duration)
    --- LTPZ = +7.1%/+17.9% (UST, long duration TIPs bonds)

    Enough from me, and hopefully not too clunky from a fast write.
    Take care,
    Catch
  • Selling to cover margin calls seems legit. Trying to figure this one out all day. Thanks for posting Skeet.
  • edited March 12
    Hi guys ... Not much has changed with the barometer reading as it remains "pegged" on the high side at 180. Reviewing my shoppling list ... and, I still like equity income over fixed income. However, before I buy again I'm thinking the S&P 500 will continue to decline some more from it's present level of 2741. I currently have it off it's recent 52 week closing high of 3386 by 19% as I write. I'm wanting to see a decline somewhere between -20% (2710) to -25% (2540) before I buy again. Getting close by not there yet. And, they way things are looking today could become a buy day for me. Take care. Old_Skeet
  • edited March 13
    Hi guys ... Old_Skeet's stock market barometer reading remains "pegged" on the high side with a reading of 180 indicating that the markets are extremely oversold based upon the metrics of the barometer. I'm thinking that many investors are having to sell the good stuff to meet margin calls and this has lead to the extreme selling that we are now seeing. For today, the S&P 500 Index declined to a reading of 2481 from yesterday's closing of 2741 which equates to a 9.5% loss for the day; and, a decline of 26.7% from it's 52 week closing high of 3386 just weeks ago. This now puts the 500 Index into bear market territory. I'm also thinking that the momentum remains to the downside until the weaker investors get flushed. Friday may shape up to be a throw back rally as throwback rallies generally follows an extreme down day.

    So, what did Old_Skeet do today? He bought (again) in my equity income sleeve as I currently favor equity income over fixed income. In doing my portfolio's tabulation for today my asset allocation bubbles at 18% cash, 42% income and 40% equity. With this, I have now bought equities at the 8%, 13% 19% and 27% decline marks for the 500 Index.

    My next planned buy will be somewhere off the Index's 52 week high somewhere between -25% (2540) to -30% (2370) and most likely in my equity income sleeve. However, I might hold off my equity buying until next week until how I see the US10YrT closes for week and the Index bubbles.. Seems, thus far for this week, the big down days have been on Monday and Thursday. Perhaps, this will hold true for next week.

    Take care ... and, I wish all ... "Good Investing."

    Old_Skeet
  • I read these updates avidly, Old_Skeet. Thank you. Wifey has promised that I can "do whatever I want with the next paycheck." I'm salivating.
  • edited March 13
    Hi @Crash, Thanks for making comment and I am happy to learn that you find interest in my barometer postings. Some words of caution. I'm thinking that the markets are far from stabilizing. My father taught me not to invest money that I might need in the nearterm. My best to you and your wife. Skeet
  • Old_Skeet said:

    Hi @Crash, Thanks for making comment and I am happy to learn that you find interest in my barometer postings. Some words of caution. I'm thinking that the markets are far from stabilizing. My father taught me not to invest money that I might need in the nearterm. My best to you and your wife. Skeet

    :) You're correct, of course.
  • edited March 15
    As of market close March 13th, according to the metrics of Old_Skeet's stock market barometer, the S&P 500 Index remains extremely oversold with a reading of 175. This is on the high side of the barometer's scale. A higher barometer reading indicates there is more investment value in the Index over a lower reading. For the past two weeks, the short volume has averaged 64% of the total volume for SPY. The VIX (which is a measure of volatility) has moved from 36 to 53 which reflects volatility has been high. The the stock Index's valuation lost ground during the week moving from a reading of 2972 to 2711 for a -8.8% loss and off it's 52 week high by 19.9%. From a yield perspective, I'm finding that the US10YrT is now being listed at 0.98% while at the beginning of the year it was listed at 1.92%. With the recent stock market swoon the S&P 500 Index is currently listed with a dividend yield of 2.15% while at the beginning of the year it was listed at 1.82%. As you can see there is now a good yield advantage for the stock Index over the Ten Year Treasury. With this, I'm favoring equity income over fixed income due to this yield spread. I also feel that the stock market is somewhat oversold and bonds are somewhat overbought.

    For the week, I was a buyer of equity income at the 19% and 27% decline marks with also having bought equities earlier during this swoon at the 8% and 13% decline marks. I most likely will continue to buy equities as long as they remain in bear market territory and there is a fit for them within my asset allocation. Otherwise, I will simply sit tight and enjoy the upward equity ride when it comes.

    It is interesting how my asset allocation has moved with the changes that have taken place within the capital markets. Both my cash and income percentages have risen (acting as stabilizers), during this stock market swoon, while my equity allocation percentage has fallen due to the decline in equity values. With this, Old_Skeet has been busy buying equities during the stock market swoon thus keeping my equity allocation on bubble. This equity buying caused a cash draw. As I write, I am 18% cash, 42% income and 40% equity.

    From my perspective the advantage of my buying during the swoon means I should get back to even quicker when the upswing comes. Plus, I increased my portfolio's income generation as the equity income funds that I bought have a yield of about 3% to 4% while the cash used to make these purchases was yielding about 1%.

    Thanks for stopping by and reading.

    I wish all ... "Good Investing."

    Old_Skeet
  • edited March 14
    "...For the past two weeks, the naked short volume has averaged 64% of the total volume for SPY...." Didn't that used to be ILLEGAL? Death of Glass Steagall, ya? Goddam Phil Gramm and his cohorts.
  • Equity income-payers. Wife has been in VEIRX for quite a while. 3.16% yield right now. We've been happy with it, but it dropped like a lead-weight through the recent tumble. I suppose that's because those good dividend payers are the pillars or anchors of the markets: big, established names. So, when they fall, they fall hard.
  • @Old_Skeet: Noted SPY volume took off between 2/20 - 2/21. Any chance that was the start of Mr. Market drop ?
  • edited March 15
    @Crash: Thanks for making comment.

    The two equity dividend paying funds that I have been buying (during the market swoon) are IDIVX with a yield of 4.0% and INUTX with a yield of 3.2%. And, yes they have been hit hard during this stock market sell-off. On Friday's stock market rebound, I have the S&P 500 Index being up for the day 9.27% while IDIVX was up 7.45% and INUTX was up 8.80%. And, in comparison, VEIRX with a 3% yield was up for the day 9.18%. And, so it goes. With this, they will recover as the market recovers and I will collect coupons and dividends while I wait.

    In the stock market, investors have the trade day plus two days to settle their trades. This gives those shorting the trade day plu two days to cover and secure borrowed shares that cover their short positions. Otherwise, they would become a naked short position and a buy-in takes place thus keeping it form becoming illegal. The stock market is the only place that I know of where you can sell something that you don't own and not go to jail. Below is how shorting is supose to work.

    When a trader or speculator engages in a practice known as short selling—or shorting a stock—they are essentially borrowing the shares. The short trader borrows shares from an existing owner through their brokerage account. They will then sell those borrowed shares at the current market price. Here, the objective is that they believe the share's market price will decrease before they are forced to pay back the borrowed shares allowing the trader to pocket the difference in the two share prices.

    With this, I removed the word naked from my above script. But, there again, investors have trade plus two days to settle their accounts (Trade plus 2 days, aka T+2).

    Now here is another take on how shorting is actually working in the markets. The below script comes from the Naked Short Site.

    What is Naked Short Selling?

    Before we get into Naked Short Selling let’s understand the basic premises around short selling.
    Short selling is the sale of a security that is not owned by the seller.

    The motivation for short selling is an investor's belief that a stock's price will decline, enabling the short seller to buy the stock back in the future at a lower price and make a profit.

    Normally, when one short sells a stock, their broker will lend them the shares to sell. The loaned stock will come from the broker's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to the short seller's account. As payment for borrowing the shares, the short seller is charged a fee, quoted as an annualized percentage of the value of the loaned securities - i.e. a borrower of a stock with a 5% stock borrow rate will be charged $5 per year for every $100 of stock borrowed. Stock borrow rates change daily based in large part on the supply and demand to borrow that particular stock.

    If the number of shares available to borrow is in short supply and/or great demand (which is often the case in highly shorted stocks), finding shares to borrow can be difficult and expensive.

    A frequently asked question and outlined in our FAQ’s but let’s look at naked short selling from various perspectives.

    How does naked short selling effect the stock market?

    When a seller "naked short sells a stock" they do not own the shares they are selling and therefore are selling artificial shares. This is like counterfeiting a stock. This process creates an obvious unfair advantage to the seller and an imbalance in the market as the sell side is now increased with more shares – many of which are counterfeit. There is a time limit on how long the seller can sell these shares and be naked on the trade and the time limit is 3 days. This is where the RegSho rules come in and the data we track. If the sellers broker-dealer has not located a borrow to cover this short trade within 3 days they will need to purchase back the shares they have sold on the open market. This process is referred to as a "Buy In".

    "When it comes to illicit short selling, the shorts win over 90% of the time"Naked Short – A license to steal?

    Naked short selling is yet another creation of the securities industry and is in essence nothing more than a license to create counterfeit shares. When you are inflating the amount of stock that is outstanding in a company, this is considered counterfeiting. The rules justify the practice by saying it helps create smooth, efficient and orderly markets. Same stuff we have heard countless times around high-frequency trading, but in reality we believe this practice leads to shady characters creating unlimited supplies of counterfeit stocks which in turn results in your investment continuing to decline and you wondering why?

    I am sure you here because you are a shareholder in a company that just continues to go down, and you have no idea why. Nothing material has happened but the trading doesn’t make any sense. We hear it all the times. Most CEO’s don’t even understand, and are baffled. The worst part is, good luck getting anyone to listen! There is a major epidemic going on right now with naked short selling right now.
    It's funny when we hear CEO's say , I will just buy all the shares up and own the whole O/S and they wont be able to short me anymore. Really?

    Read about: Global Links Corporation and see what happened when Robert Simpson purchased 100% of Global Link’s 1,158,064 shares. Then you will truly understand how the system is rigged. Back to counterfeiting…

    I'm now thinking that one can come to a better understanding of how shorting is working in this high frequency trading market and why the short volume was elevated for the past couple of weeks.
  • edited March 15
    Hi @Derf: Thanks for your question. I use the Elder Input System to track buy and sell activity. A red line indicates that sellers controlled the market. A green line indicates that the buyers were in control. And, a blue line indicates both were active. For the past two days ... Thursday being a big down day was red (sellers in control) while Friday being a big up day was blue as both sellers and buyers were active with neither having control even though the market climbed. I'm thinking that we are starting to see a floor beginning to form. With this, I look for some more blue days with some green starting to appear in the charts. But, with the weekend news not being as favorable as it could be ... Well ... it is still a daily dice roll. This buy and sell activity accounts for the volume traded. Skeet
  • edited March 17
    The barometer will be moving to the other investment category from off topic. So, in the future start looking for it in the other investment category going forward.

    Yesterday, Old_Skeet just watched. I'm thinking of buying should the Index reach a 32%/33% decline mark. In addition, yesterday my income area got hit pretty hard so it is starting to look attractive as well for some nearterm buying activity. Still sitting on a sizeable cash position but may reduce down to about the 15% level soon.

    By the way ... The barometer is pegged on the high side at 180+.

    Take care ...
  • Thanks @Old_Skeet, as always, for sharing your research & thoughts.
  • edited March 17
    In checking the feeds on the barometer this evening, from today's market activity, the barometer scores the Index with a reading of 175 indicating that the Index is extremely oversold. I did a little buying today and I spent a sum equal to 1% of my portfolio's value. With this, I reduced cash by 1% and raised my holdings in the growth & income area of my portfolio by a like amount. Currently, I favor equity income over fixed income.

    I am also going to temporarily raise my equity allocation by 5 percent and reduce my cash allocation by a like amount. When I complete my buying process this will put me somewhere around an asset allocation of 15% cash, 40% income and 45% equity. In time, I will trim back to my 20/40/40 allocation.
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