The Hunt for Yield Part One: Can Dividends Continue to Grow?

“Those wounds are all the painful places where we fought. Battles better left behind, ones we never sought. What is it that we spent and what was it we bought?”

-Frank Herbert

What quote could better serve up the dilemma facing investment managers as another week of new highs for the S&P 500 which has them wondering, “to chase or not to chase?”  One the one hand, you have a line-up of investment greats like Byron Wein and Jeff Gundlach who think stocks are overbought, not to mention a likely fifth consecutive quarter of declining earnings and on the other…well you have demanding clients who see the market higher and want to participate or an angry MD telling you to clean out your desk if you’re not in the upper quartile this year.  So what do you do?  Continue reading

Sunday Night Special: Where’s the blood at?

The Yinzer Analyst has always been a fan of Baron Rothschild’s famous advice to buy when there’s blood in the street and after reviewing the charts of the damage wrought by the dollar’s strong advance you won’t find any markets bloodier than the emerging markets. EEM may be down 2.5% in 2015 but that doesn’t begin to compare to the trailing 1 year performance (down 2.5% compared to SPY’s 13.32 advance) and the even worst 3 year number (up 2.5% to the SPY’s 16.04% advance). It’s been a rough ride for the emerging market nations ever since the Fed embraced QE and the recent run-up in the dollar hasn’t helped the situation this year, but the bloodshed has reached an extreme that has me wondering if the time has come to embrace the fallen angels. Continue reading

Sunday Night Chartology: Special Champ Kind Edition

The Yinzer Analyst is on the road, so just a short post tonight because there was no way Friday’s Treasury bull slaughter could go by without comment.  The Treasury sell-off started with Friday’s Employment Report which was so far above expectations that even the most ignorant trader couldn’t ignore what we’ve been talking about for the last few weeks; that rates are going higher and the Fed isn’t even trying to hide the fact from you.  So why dig in and fight it?  But the sell-off in Treasuries and the spreading margin calls led to bleeding throughout the market as profits were taken, positions stopped out and heads buried in the sand.  The sell-off was so brutal we need Champ Kind to come in and moderate this one for us:

Let’s start with the carnage in the Treasury market where the ten year yield blew through the downtrend channel and pushed back to last December’s highs.  Maybe the 200 day moving average can contain it.


You can see a similar story for the 30 year yield although the sell-off wasn’t nearly as severe:


And finally Mr. TLT wasn’t feeling the love although he wasn’t the worst casualty by far on Friday:


That spot was reserved for the gold miners; whether on profit taking or the fact that a Fed rate hike will raise the lease rate and opportunity cost of holding gold (and cutting demand for the metal), the miners took it on the chin and blew through support at $20:


The possibility of a rate hike spilled over into the defensive yield trade where both REIT’s and utilities took it on the chin:



What about the Yinzer Analyst’s favorite trade in long European exposure?


You can see on the daily chart that there isn’t a whole lot of support between $38 and $37 and after that we’ve got the upper boundary of the downtrend line at $36-$36.50 to provide support.  Looking at the weekly charts for a longer-term picture you can get a better sense of not just the support at $36 and change but how the uptrend might still be in it’s infancy (fingers crossed.)


What about the picture for domestic equities? Using SPY for the S&P 500 you can see on the daily chart that the market was again denied while trying to breakout of the prior ascending wedge pattern leading to a retracement of the year’s meager gains but for now we’ve got prior support at the 50 day moving average at 206 and then nothing until the 202.5 level.


Looking to the weekly charts, you can see we remain mired in another ascending wedge (bearish) pattern with more strong support at 205 level, so while the market might open down and drift lower we should expect more stickiness around that level.


Which is confirmed by looking at a weekly chart of the S&P 500 itself:


But there were a few flowers blooming amidst the rubble on Friday and not surprisingly found in the financial sector.  The possibility of a summer rate hike has helped spark new life in a sector weighed down by the financial repression of a low rate environment.  With the possibility of higher interest rate spreads and loan growth through an expanding economy, return on assets might finally get itself out of the low range it’s been stuck in for the last several years.  But before you rush out to buy the bank stocks, keep in mind that regional banks are likely to see the biggest boost to EPS (and they outperformed XLF by 150 bps or so on Friday) and even Friday’s rally wasn’t that strong.  Two of the largest regional bank ETF’s (IAT and KRE) saw strong buying pressure give way to late afternoon selling as profit taking kicked in and pushed their one-day CMF scores into negative territory.  Hardly reassuring:



That’s all folks, now get out there and try to make some money!

Sunday Night Chartology

This Sunday night I thought we’d try something a little different here at the Yinzer Analyst; more charts, less chit-chat.  Maybe it’s the season affective disorder or maybe the death of one of my childhood idols but let’s be honest, if you’re reading this it’s either really late and you have a bed to get to or very early and you need to start planning your trades for the day.  We’ll save the deep posts for when you need them, but think of Sunday Night Chartology like Headline News with Robin Meade.  A mile wide and six inches deep.  All we need is a beautiful newsreader for the podcasts…any volunteers?


First up, let’s look at the broader market using SPY for the S&P 500:


SPY has broken out of the consolidation patter and even fought its way back into ascending wedge pattern but ran out of steam soon after.  Momentum has turned and Friday’s close at the low sent the CMF score lower.


On a weekly basis SPY is still stuck in another ascending wedge pattern while momentum hasn’t confirmed a breakout strong enough to make me change my opinion on the strength of this market.  I wrote on Saturday that momentum has been slowly weakening since the great Tapering Announcement in December of 2013 and until something changes to add new life to this market, new highs might continue to be seen but the action will be more volatile.


What about domestics bonds?  Our last post was bond heavy so tonight we’ll just keep it brief with a chart of TLT:


While last week’s rally was enough to give some traders hope that a decent bottom was forming, I think it’s still too soon to get the “Mission Accomplished” banners ready.  The strong January rally had legs all along the $132-$136 range, offering plenty of opportunities for any rally to stall out.

And since it’s hard to separate bonds and the dollar in any discussion of the market this year, let’s move on to Uncle Buck (here using UUP):


On a short-term basis, UUP looks to be almost at the end of it’s consolidation patter and offering the possibility of another move higher this week, but moving to a long-term basis we see a different picture:


Last week’s rally brought us right back to the old high and has me wondering how much more room is there to run for UUP.

And what kind of dollar conversation can you have without talking about gold and commodities?  Start with the MarketVectors Gold Miners ETF (GDX):


On a daily basis GDX found support along the 50 day moving average and close to prior support at $20, but will overhead resistance and the 200 day moving average keep GDX from running higher?  The weekly charts aren’t much more promising:


Using DBC for our broad commodities benchmark, you can see on the weekly chart that the fund is fighting hard to get back into the downtrend channel that kept it bound for much of 2014.  Will a rising dollar sent it back to the recent lows?


It certainly hasn’t helped the recovery in the energy complex:


Or those countries heavily reliant on commodities for their financial well-being like Argentina:


And finally, my two favorite charts showing the continued breakout of European equities versus the S&P 500:



EZU has outperformed SPY by nearly 500 basis points this year and while the weekly charts show that the breakout could be in it’s early stages, the short-term daily charts makes it look like we could be entering a consolidation period for EZU relative to SPY.  You might see the fund lose ground against domestic equities, especially if UUP continues to gain ground against FXE.

See, we’re keeping it brief tonight here at the Yinzer Analyst.  Good hunting out there tomorrow people!

Reading Between the Lines of the FOMC Minutes

The Yinzer Analyst has been on a journey these last few weeks; first a series of interviews with firms in Pittsburgh and beyond and then a journey of self-discovery, learning more about himself, plumbing his depths and mostly discovering how much he hates shoveling snow every freaking day. I’m sorry it’s been so long since the last post, but after a powerful two week rally and with volatility dying down before tomorrow’s FOMC minutes release, now seems the time to get back in the swing of things and take the pulse of the market.  And tomorrow is also Ash Wednesday; a perfect time to stop and reflect on what’s going on around us and what lessons we could be taking in but one nice thing about coming back after two weeks off is getting a chance to revisit my last post and see if my charts came to anything or not. And this week, the Yinzer Analyst is doing a serious victory lap.

In my last post I talked about how the market seemed to have reached new extremes; Treasury yields had plummeted in January and were at levels not seen even at the worst of the Lehman crisis while domestic equity momentum was close to the lowest levels of the 2009 bull cycle. As much as I hate using labels like Treasury Bear/Equity Bull, I had to face up to the fact that yields had dropped way too quickly and were more likely to move higher while equities were likely to continue consolidating around a sticky level of 2030. The thesis behind that logic was simple, I like to call it my “Cleveland Brown” system because it’s so simple that anyone can get it…”S$%T got too damn expensive.”

Since that post, TLT has dropped 8.5%, going from overbought to nearly oversold in two weeks while sisters in the “hunt for yield” trade like utilities (XLU -6.6%) and REITS (IYR-1.42%) followed it and the S&P 500 made a 5.28% gain. Let’s start our investigation by looking at the extremes and in February, nothing has been more extreme that the major shift in the sentiment towards Treasuries.

We asked the question then of whether Treasuries had come too far, too quickly and we got it right almost to the day. After plunging in January, the ten year yield has not only pushed its way back into the 2014 downtrend channel but is threatening to break out of it to the upside. The thirty year yield is telling a similar if not quite as extreme a story.



So what gives? Is this all due to the major shift in equity sentiment that began in late January? Wasn’t it just last month that “global deflation” was the buzz word everyone was spewing? While there’s been some improvement in the economic outlook in Europe and here at home, it certainly hasn’t been substantial enough to completely erase the “global deflation” scare. Or was it the fact that the economy is still on enough of a solid footing for rate hikes to be a serious concern later this year?

The answer is that human sentiment or if you prefer, behavioral finance, has more to do it with it than anyone would really like to admit to. I remember in 2013 the conversation was “well of course rates are going up, so get out of Treasuries (or bonds all together)”, then 2014 it was “well rates are going up, but we don’t know when so it’s back to Treasuries” and so far we’ve had both extremes in 2015. I know one local manager who in mid-January decided to REDUCE duration because he felt rates had come too far too quickly and got an unholy amount of S$#T for it. Guess who’s laughing now?

But the problem for us now is to figure out whether Treasury yields have gone too far in the other direction and what that could mean for the equity outlook going forward. For the technicians let’s start with a few charts.

Starting with TLT, we’re back to prior support but there doesn’t seem to be any sign of a momentum reversal in the immediate future. We could continue drifting lower back to the $122-$123 before a base begins to form. Moving to long-term charts, TLT looks like it could have been in a classic “bump and run” formation meaning a move back to prior support at $122.50 or even below that at $120 could be a best case scenario. But what it could really mean is that the worst of the bond sell-off might already be behind us.



Moving to equities, the S&P 500 has gone from some of its worst momentum readings since the start of the bull cycle to some of the strongest of at least the last year. Given how weak equities have been over the last few months, we would just drift and consolidate for the next week or two and allow some of the buying pressure to cool off which has already been dissipating. Look at the weak volume since the start of the rally; the improving CMF score was more about weak days dropping off than strong buying pressure pushing the market higher. Again, I have to wonder if the best has already come.



Going to a fundamental case on bonds, the battle royale is going to be between economists who feel that there’s a strong likelihood for a rate hike as early as this June and traders who continue to hold large Treasury positions because they feel the Fed will use the weak global economy to justify holding to the ZIRP for even longer. Fortunately tomorrow’s release should shed some “light” on the Fed’s thinking, but given the surge in imports and personal consumption, the economists “might” be right this time.

One of my major mistakes in my past life was confusing what I thought the Fed should be doing with what they were actually signaling their intentions were and while it’s an extremely common fallacy among financial professionals, it doesn’t absolve me of the sin. While the Fed’s statements and commentary will remain obtuse because their function is to obscure, investors need to keep an eye on a few key trends that should determine how likely the Fed is to raise rates:

  • Value of the Dollar: As long as Uncle Buck stays strong and keeps commodity prices under check, the Fed should be reluctant to raise rates. Long-term, the textbooks say that the difference in interest rates should lead to a falling dollar and eliminating any arbitrage opportunities, but it could take years for that to adjust. What’s more likely is that after the initial run-up in rates, Treasuries could stay attractive relative to low global yields and led to a further run on the dollar as more money finds its way to our shores. Worst case, you could get a mini-repeat of the mid-2000’s where foreign credit flooded the U.S. and helped fuel the housing boom…and bust.
  • Real Incomes: As inflation remains low and commodity prices continue to fall, real disposable incomes have continued to expand even while the average workweek and take home pay have remained static. Real DPI in 2014 increased as its fastest rate in December and was up 2.3% in 2014 compared to -.3% in 2013. With unemployment already low and U-6 falling, the Fed is terrified that this increased in real DPI will get translated into more consumer spending and rising imports (a real possibility as the value of the dollar rises.) Personal consumption expenditure contributed more to GDP in 2014 than in any year post-Lehman while the Federal gov’t almost added to GDP for the first time in years.
  • Employment: Seems like a no-brainer to keep your eye on unemployment, but with the headline number falling steadily over the last few months, the FED might become reluctant to raise rates right away…especially with a rising participation rate. If more workers come back into the workforce just as the FED raises rates to slow economic growth, the unemployment rate could skyrocket and cause a major credibility crisis.

Tomorrow every trader in the world is going to be picking through the FOMC meeting minutes looking for clues including comments about those three bullet points above to figure out which way the FED might be preparing to tack. And a lot of traders are putting their money where their mouths are, look at the chart below from the COT Report; open interest in the 10 year has fallen and the rally in January led some to close out short positions but with a whole lot of nothing between tomorrow and the March meeting, why would you want to have a strong position going either way.


So if the FED keeps up the chatter and the market comes away with a strong belief in a June rate hike, we could see more selling pressure in TLT. If Yellen doesn’t really deliver anything new, the market will turn its focus back to Greece and TLT could get a chance to bottom out.

What does that mean for you patient investor? It means get turn on Bloomberg, get out your red pen and be prepared to go through the transcripts with a wary eye!

Is the End of the Fed Bull Cycle at Hand?

While the Yinzer Analyst may had done a magnificent job muddling his case for investors to start shifting their focus to overseas markets where a year of bad news had led to depressed prices but higher return potential going forward. Well someone must have been reading our updates because after a back and forth week, there was a clear shift in momentum today towards international equities while the domestic equity outlook became increasingly muddled as more signs of slowing economic activity ran headfirst into an increase in core PPI here at home.

Staying in the U.S, the Yinzer Analyst’s own momentum models showed a serious breakdown that confirms the end of the great 2012-2013 bull market. We’ve discussed our model previously (here) and while scores haven’t reached their 2014 lows registered on October 13th, or even the December 16th lows, they have recently pulled off something not seen since mid-2012. In a bull cycle, readings as low as we registered on January 6th (97th percentile) should have been meet by a multi-week rally, instead we had a 2 day rally and have found ourselves nearly back to the January 6th lows. It’s tempting to say that a rally is now overdue, but truthfully the market will need some sort of outside factor to give it the shot in the arm it needs. The October momentum lows were only the ‘lows” because comments from St. Louis Fed President Bullard supported the idea of an indulgent Fed same for the short lived rally off comments from Chicago Fed President Evans last week.

But moving beyond the momentum and the Fed, let’s inspect the technical outlook for the S&P 500. Starting with a daily chart, you can see the S&P broke through the rising wedge pattern on heavy volume today, confirming the weakness seen in our momentum models and the divergence in the percentage price oscillator that formed in early December. Even with today’s weakness, the CMF score has continued to improve but largely due to the dropping of the first half of December.


Moving to the weekly chart, you can see the market has continued its breakout from the 2012-2013 Fed inspired uptrend and confirming the end of the bull cycle (whether cyclical or secular remains to be seen.) Having broken below the 20 week moving average on Thursday, it’ll take a major reversal for the market to fight its way back into the uptrend for a third time and seems unlikely at this point.


While a great deal of technical damage has been done, investors with a long term focus and relying on the simple 2/10 simple monthly moving average crossover will not that a sell-signal has been sent yet. If you stay focused on the intermediate term chart with weekly data, we’re already fighting with the first potential point for the pullback to die out, followed by the 20 week moving average and a second stopping out point just below 1900. If we do break through Stopping Point 1, and find ourselves at Stopping Point 2, the risk becomes the S&P will be stuck in a trading range that could persist until the Fed offers reassurances to the market or raise rates sending sentiment even lower.


Back to the Old World:

Shifting our eyes to the east, both the iShares MSCI EAFE ETF (EFA) and iShares MSCI EMU Index (EZU) continued their December weakness in early 2015 and made new lows on January 6th but since then have managed to hold onto their gains while U.S. equities have rolled over. We talked extensively on Monday about why we think European equities could outperform in 2015 and the ECJ’s lead investigator certainly delivered on Wednesday with an opinion that the ECB’s OMT program is legal and although a formal verdict isn’t expected for several months it surely added more lift to the market. Next up is a potential ECB QE announcement next week followed by the Greek elections on the 25th.

Starting with the broader EFA, you can see that while it remains stuck below its 2014 downtrend line while the PPO looks to be turning around. Shifting the focus to relative momentum versus the S&P 500, you can see that today was a stunning reversal out of a seven month long downtrend. For the Yinzer Analyst, stunning reversals are sexy as they get but need confirmation. I wouldn’t mind seeing a strong finish to tomorrow (or even a weak one) but with relative momentum retesting the downtrend line at some point soon.



Moving to just EZU, you can see that its managed to get back above the 2014 downtrend line on a daily basis although like EFA it’ll have to retest it on a weekly basis before investors should get too optimistic. For now EZU is fighting hard to close above prior support and that’s fine in my book. It’s going to be a struggle but we should know within a week or so whether the ETF has what it takes to move forward.



On a relative momentum basis, EZU is still within the downtrend formed in mid-2014 although this week looks to reverse the lackluster performance of the last two. If the trend continues, EZU could potentially breakout next week and signal a major shift in market dynamics is upon us.


Finally, the Yinzer Analyst momentum models show changes underway for both ETF’s although we’re still waiting for confirmation. Like the S&P 500, EZU and EFA made historic momentum lows on October 10th but that only sparked a 2.4% gain for EZU and 4% for EFA over the next 30 days. In the eight days since coming close (but not retesting the actual lows) to the October momentum lows, EZU and EFA have managed a 2.08% and a 2.62% gain compared to a .5% loss for the S&P 500. Still within the realm of horse shoes and hand grenades but worth noting for asset allocation purposes going forward.

One final chart for investors to consider is the performance of the iShares Currency Hedged MSCI EMU Index ETF (HEZU) since that momentum low on October 10th. While HEZU might be a relatively new product, you can see that it has already found favor with investors as it outperformed both EZU and the S&P 500 since 10/10. Clearly investors want exposure to European equities, just not to their currency. But could a QE announcement change investor sentiment on the Euro in 2015?


Jobs Report Friday: Time to Love the Miners?

Another Friday, another Jobs report showing 200K+ jobs created. Doesn’t this ever get old for anyone else? While December’s gain of 252K was a drop from the revised 351K in November, the big jump in construction related employment along with the fall in the headline unemployment rate from 5.8% to 5.6% was sure to give some more levitation to equity futures. The overnight weakness was wiped out at the report’s release although since then, the anxiety has begun to creep back into the market.

After all, the first question being asked on every trading desk is whether this is a “good” report that could signal changes in rate expectations or a “really good” report that could give the Fed the ammo it needs to keep rates low indefinitely. Wage growth on a year-over-year basis was an anemic 1.7% while average hourly earnings fell .2% bringing the average weekly earnings for all employees down slightly in December. Not exactly the sort of awe inspiring economic growth you want to see going into a rising rate environment which has all of the financial interwebs aflutter; will rates start rising this summer?

The unemployment rate has dropped to a level that most people would consider being “average” despite the drop in the participation rate and typically would see the potential for rising rates, especially after the 3Q GDP report although 4Q is sure to come in a lot lower with some estimates at half of the prior period. And with the sustained drop in oil prices, the Fed is surely having visions of the 1980’s where a combination of falling oil prices, strong economic growth and a lax Fed saw inflation pushing nearly 5% by 1990. Not that anyone would consider the economy to be growing nearly as strongly as in the 1980’s and with the global economy facing a higher prospect for deflation than inflation, the Fed might decide waiting and seeing is the best approach.

So what does that mean for your portfolio? Probably just more of the same as visions of 2012/2014 come back to haunt the more active market participants. Every economic report will carry more volatility than it did for the same period in 2013 when everything as A-okay! But the Yinzer Analyst checked his charts last night and came up with a few things that he thinks bear watching.

First we’ll start off at home where the S&P 500 seems to be stuck in a rising wedge pattern; while the rally over the last two days was impressive, it only alleviated some of the prior selling pressure and momentum off the 2000 level has been fairly weak. New highs are still possible, but unless we can clear 2100 on strong volume, it’s likely we’ll be coming back down to the 2000 level.


What has been stronger this week are the gold miners, take a look at the daily and weekly charts below:




I wrote about this over at earlier this week, but there are any number of reasons why the miners could be doing well but the most important for me is broad equity market weakness. Remember, during the long gold miner bear market of the 80’s and 90’s, the miners typically only made gains when the broader indices ran into trouble.  I did a study on that at my last employer, I can recall the exact specifics but typically when the broader market was going through a cyclical bear cycle, the gold miners outperformed 50% of the time on a monthly basis.  And by outperform, I don’t mean “were less negative” I mean “were positive when the S&P 500 was negative.”  Food for defensive thought.

Staying at home for the moment, the weakness following the Jobs Report has hit the energy sector hard this morning as XLE doesn’t seem like to soon challenge the weekly downtrend line. Hopefully it can at least hold on to the 200 week moving average. And while Healthcare stocks may be suffering slightly more than the broader market today, this weekly’s rally left the XLV/SPY relative momentum relationship firmly in the upper half of the uptrend angle. So the take away, when investors are feeling confident (or at least positive if not in a big risk taking way), it’s back to old favorites like healthcare stocks.

XLE weekly



Going overseas, its consolidation time in China as ASHR begins to consolidate after breaking through December’s resistance. Normally, over the last six months this would have been a perfect time to add exposure but for now, I’m not so sure. Looking at the weekly chart, we did manage to get above the high of last week but will likely close down on heavier volume. I think a retest of $36 is in order to confirm the bull case.


ASHR Weekly

And finally we’ll leave you with European equities where the Yinzer Analyst is extremely glad he advised caution before buying the mid-December rally.  Who say’s technical analysis doesn’t have its uses? EZU has broken below the summer’s downtrend line on a daily basis and doesn’t seem to have the buying pressure necessary to break above it again anytime soon. Until the chatter about a Greek exit from the EU dies down, EZU could be heading for a weekly close back to $34 unless Draghi can pull a seriously fat rabbit out of his hat with European QE.



Thanks for stopping by and starting your morning with us!

Sunday Night Recap: Does Every Dog Have Its Day?

The Yinzer Analyst is a simple man; he likes his beer cold, his Bills winning and his mutual funds simple so you can imagine over the years he’s found himself increasing disappointed, and not just by the Buffalo Bills.  The trend among mutual funds has been to develop increasingly opaque strategies as a way to justify high management fees for subpar performance when compared to index funds or ETF’s. From years of researching equity mutual funds I can tell you there are essentially three models; indexed, active managers who are actually indexers, and true active managers; and at the heart of every successful equity mutual fund is a process to find and select individual securities. Some are incredibly complex while others are simply the result of one manager’s particular process. One fund that has eschewed complicated strategies and has still managed to deliver superior returns is the SunAmerica Focused Dividend Strategy (A Share-FDSAX), once the darling of Barron’s magazine and that has since fallen on rough times.

Now when I say FDSAX has an easy to understand strategy, I mean it’s so easy that even someone relatively new to investing should be able to follow the logic behind its construction. Simply put, it’s something I like to think of as “Dogs of the Dow +” in this case actually the 10 highest yielding stocks in the Dow Jones Industrial Average plus 20 stocks from the Russell 1000 (which may also include the Dogs of the Dows.) The stocks chosen from the Russell 1000 are selected based on a screening process that looks at valuation, profitability and earnings growth. The portfolio is put together annually and with the positions more-or-less equally weighted with no concern towards sector weightings and held for an entire year. That’s all there is to it. Now I choose to call it the “Dogs of the Dow +” given that I think it’s fairly reasonable to assume that the 10 highest yielding stocks are likely to be the ten worst performers over the previous year and while the specific metrics used to pick the stocks for the Russell 1000 aren’t publicly disclosed, my assumption is that the system used by SunAmerica would be recognizable to stalwarts of the investment profession like Benjamin Graham.

At its core, the investment theory governing the portfolio construction process (as well as any valuation based investment strategy) isn’t quite reversion to the mean but something close; the idea that stocks will gravitate around an intrinsic value, occasionally becoming too expensive or too cheap relative to that value. Over time, investors will become reluctant to pay for already “overpriced” stocks and begin seeking out “cheaper” securities and as the Dow components are some of the largest and most widely followed stocks in the world, they’re a logical place for investors to start their portfolio construction process. As one of the most well-known relative valuation strategies, The Dogs of the Dow Theory has been used for decades, often with mixed results but typically over a long-time period it delivers returns in-line with the broader Dow Jones Industrial Average and often with the benefit of reduced volatility.

FDSAX is a good example of relative valuation strategies at work; after underperforming during the latter part of the mid-2000’s bull market, the FDSAX outperformed for 5 of the 7 years between 2007-2013 and in its worst year (2012) only lagged the S&P 500 by 320 basis points but something changed in 2014. Despite the strong outperformance by large-cap value stocks, FDSAX lagged the S&P 500 by 463 basis points and the fund dropped to almost the lowest quartile within the Large Value category. While the trailing three-year annualized return is still 19.84% compared to 20.41% for the S&P 500 and 18.33% for the category as a whole (with less volatility-win/win), it got me thinking…is there a problem with the Dogs of the Dow?

The general rule of thumb taught in business schools is that any moderately successful trading strategy that generates excess returns relative to the benchmark is bound to be copied and thus eliminating any further potential for oversized gains. But despite 6 years of college, one more and I could have been a doctor; the Yinzer Analyst has always been something of a heretic. Even after the popularization of the Efficient Market Hypothesis, there’s been ample evidence that shows some individuals can outperform the market both consistently and over sufficiently long periods to prove that there’s more to their outperformance than simple luck. Some degree of skill or investor psychology makes certain trading strategies repeatedly profitable.

So lacking anything better to do on a Saturday, I decided to slap together a quick experiment to test the Dogs of the Dow Theory and see if you can reasonable expect that the worst performers from one period (year) will outperform in the next. Now it’s been a long time since I studied statistics, so this is a fairly basic test and just to avoid being called a complete crack-pot, let me outline my process:

After pulling the performance data for all Dow Components from 2008-2014, I set up my worksheets to test whether a stock that outperformed (underperformed) the rest of the Dow Jones Industrial Average would outperform (underperform) in the next. So every year is really a two-period test. If you outperformed in 2009 (period 1) did you outperform again in 2010 (period 2.) To be included in the test, the stock had to be present in the Dow for the entire time frame in question. As an example, on 9/24/12, Kraft foods was replaced in the Dow Jones by United Healthcare and then on 9/23/13, Alcoa, Bank of America and Hewlett Packard were dropped and replaced by Goldman Sachs, Nike and Visa. So when I was looking at the period of 2012-2013, there were only 26 stocks to test (no United Healthcare, Alcoa, Bank of America or HP) while in 2014, I only had 27 Dow components to test (no GS, Nike or Visa since they weren’t included for all of 2013.)

I also only went back to 2009 as I was both pressed for time and not willing to beg someone with access to Direct or Bloomberg to pull additional return data for me. Still, I think the results in the table below are very illuminating:


As you can see at the bottom of every column, I choose to interpret the results with two basic formulas asking, “If you outperformed in period 1 (example 2009), what were the odds you outperformed in period 2 (2010?) In the 2009-2010 period, of the 16 stocks that outperformed in 2009, 8 outperformed in 2010. For 2010, the 12 Dow components that underperformed the total index in 2009 (P1) were equally as like to outperform versus underperform the benchmark in 2010 (P2). Although there are too many variables to count as to why one stock outperforms and another doesn’t, and there’s a host of ex-ante versus ex-post issues to consider, if you were simply picking the worst performing Dow stocks for your portfolio, it was a coin toss whether one outperformed the benchmark and another didn’t. While the odds worsened slightly in 2011 and 2012, they were only slightly worse than a coin toss and picking a prior winning stock to keep winning sure didn’t guarantee anything in 2010 or 2012.

What’s interesting to me is how the odds have worsened over the last two years to reach the sample extreme in 2014. If at end of 2013 you picked one of the 12 Dow components that underperformed that year, you had a ¼ chance of picking an outperformer in 2014. Only Cisco, Proctor&Gamble and Wal-Mart pulled that off. The other 9 underperformed for a second consecutive year or in the case of Coca-Cola, Chevron, IBM, McDonalds (all currently held by FDSAX) and Exxon Mobil for the third consecutive year in the row. Caterpillar (not part of the fund) has now underperformed for four years in a row, some global recovery. Of you could look at it in a different manner; there were 27 stocks in the Dow Jones Industrial Average in 2013 and 2014, if you had picked one at random on 12/31/12, there was a 1/3 chance that you would have underperformed the index over the next two years! No wonder FDSAX underperformed the benchmark in 2014 although it only underperformed the larger category of Large Value funds by 116 basis points. Assuming that most of the outperformers were index funds and that fee’s were a major determinant of outperformance last year, I might have to compare the fund’s performance to other active managers in the space to determine whether FDSAX is a Yinzer Analyst Best Buy, or at the very least how awful active management really was in 2014.

If you were part of the management team at FDSAX and if you selected 10 Dow Jones Industrial underperformers on 12/31/13 to include in 2014 and the relationship held, 7.5 (let’s round up to 8) of those stocks would likely underperform in 2014 and with an average weighting of 3.4%, 27.2% of your portfolio was going to underperform in 2014. That’s putting a lot of pressure on the rest of your portfolio to outperform so you can keep yourself around benchmark. If a similar relationship held for stocks within the broader Russell 1000, your chances of performing in-line with the benchmark were slim-to-none while outperforming after fee’s wasn’t even within the realm of possibility.

The question is what happens in 2015? Given the extremes between persistence in outperformers and underperformers in 2014; is it reasonable to assume that mean reversion might kick in and see the Dogs of the Dow finally have their day again in 2015? If so, thanks to its formulaic nature; FDSAX could find itself very well-situated to take advantage of that trend. Keep your eyes on those persistent underperformers like Chevron and IBM to see if they can give SunAmerica a happier New Year.

Sunday Night Recap: Can the Last be First?

Amidst the joy that comes from celebrating a winning season with a completely meaningless win for the Buffalo Bills, the Yinzer Analyst turns his thoughts to the opening tomorrow and those last few precious trade days before the start of a new year. There have been a spate of articles lately about how one man’s, or one year’s, treasure can become next year’s trash and to be honest, there’s a great deal of truth to that. Take a look at a Callan table and you’ll see there’s some logic to buying whatever’s been left behind but it’s not consistent. Buying the dogs of the DOW isn’t always a sure thing; check in on Sun America Focused Dividend to see where that got you in 2014. But that has us thinking that it’s time to check in some of 2014’s biggest losers to see how they’re setting up for a brand new year.

Can the Last be First?

First up, the biggest shocker for the broader equity market came from energy stocks; from Jan 1 to June 30th, the Energy Sector Select SPDR (XLE) was up 14.18% versus 6.95% for SPY. Since then, XLE has come crashing down 19.06% as West Texas Intermediate Crude broke down nearly 47% while SPY has chalked up a further 7.59% gain. XLE has firmed up since hitting the 200 day moving average although it has yet to break through the downtrend lines that have held the weekly chart pattern in a downtrend channel since this summer. Currently sporting some of the lowest price-to-earnings multiples to be found in domestic stocks, how long will it be before the can breakout?


As long as we’re on the subject of hard assets, how about equity precious metals, down 13.11% YTD as concerns over rising inflation become a thing of the past. The Market Vector Gold Miners ETF (GDX) showed signs of life last Friday as the potential for more stimulus in China helped spark a rally for the miners although the technical outlook has been improving for the sector over the course of the month. The miners have broken above the summer’s downtrend line and have spent most of December consolidating but have yet to break through the 50 day moving average or move beyond the longer-term downtrend line you can see in the weekly chart. Speaking from personal experience, until it can close above the 2012 downtrend line, any rally for GDX should be treated warily.



And you can’t talk about gold and oil without talking about Russia, so let’s check in on the Market Vectors Russia ETF (RSX):

Ever since bouncing off $12 close to the 2009 lows, it’s been nothing but up for RSX but remember how quickly this can all turn around. Since 12/17 RSX has moved up 15.98% on….well I’m not really sure. Could it be the promises of China to help bail out Russia if it needs it? The lack of further sanctions? Simply closing out of short positions to reinvest closer to home? RSX may have cleared the steep downtrend line dating back to late November but still has to face to the 50 day moving average and the gentler downtrend line from last summer. Until it can get above that, I’d be very cautious about adding Russian longs.


And as long as we’re overseas, let’s wrap up this discussion by focusing on the China A-shares market where it’s been nothing but profit since coming close to a double bounce of multi-year lows this spring. It’s been a strange pattern since then;


the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) has a nearly parabolic advance then cools off to consolidate and digest the recent gains. Then it’s rinse, wash and repeat. It looked like ASHR was going to do more than consolidate this winter but the recent rise in speculation that the PBoC will cut reserve requirements breathed new life in Chinese equities. For now ASHR is stuck in a trading range and consolidating recent gains and while the daily chart may not show overbought status, the weekly chart sure as heck does.


So what about the Yinzer Analyst’s favorite investment, Europe, in 2014? While I still think the U.S. will stay the core of my own portfolio until proven otherwise, I think investors need to put more focus on diversifying their portfolios next year, especially with SPY up 15.45% annualized over the last five years versus 2.81% for the iShares MSCI EMU ETF (EZU) and 5.5% for the iShares MSCI EAFE ETF (EFA.) With such strong performance, why would anyone want to see “performance drag” from investing in anything other than U.S. equities? Performance catastrophes usually start off with logic like that.

So is the Yinzer Analyst still optimistic heading into year end? First on a weekly basis EZU has managed to get back above its summer downtrend line on better volume although it still has to challenge overhead resistance around $39.


What about compared to the S&P 500? On a daily basis, the relative momentum has been bottoming out for nearly two months now although EZU began weakening as it pushed towards the relationships’ 50 day moving average. On a weekly basis you can see that while the relative momentum hasn’t gotten any worse, it sure hasn’t gotten any better. Until it can break out of the downtrend line, domestic equities are still the “safer” bet in 2015.



Domestic Equities:

But what about domestic equities? Are they still the sure fire wager in 2015 that they have been five years into a bull market? Continuing to focus purely on technical, you can see that the S&P 500 has finally pushed above its consolidation range but did so on very weak holiday volume and giving us essentially a neutral CMF (20) score and a notable divergence from the price trend. Given the number of managers underperforming in 2014, I wouldn’t be surprised if the action stays quiet over the next few days with the market only showing a major trend change on Jan 2nd.


But speaking of trend changes, the sector to watch continues to remain the healthcare sector. Despite the relatively weak price action in the second half of the week, XLV remains firmly entrenched in a relative momentum uptrend channel that formed in early 2012. The question remains whether the recent weakness in Gilead will be enough to derail the entire sector and send it lower in 2015.



Setting up for another Defensive Rally in 2015

While everyone else may be off enjoying some holiday cheer, the Yinzer Analyst is still hard at work trying to help give you the edge in 2015…mostly because it’s a great way to avoid watching 3 hours of NCIS with the family. But while investors may be patting themselves on the back for sticking around to enjoy the low volume Santa Claus rally and all new daily highs of .3% moves, I’m starting to wonder if a deeper shift in sector leadership is forming that could portend great changes in 2015. While the FOMC induced rally was a nice Christmas surprise for many managers who expected only coal in their stockings, some of the early December sector trends are beginning to reassert themselves and could be signaling a shift back to the lower volatility sectors.

First, in the interest of full disclosure, I do write for another site,, and the topic I’m going to discuss is one I’ve written about there previously. ETFG does offer free trial subscriptions although you should be able to access the blog without one and I’d encourage all of you to check it out although I will be discussing new material I haven’t shared there. With that out of the way, let’s start by looking at some of the more obvious developments over the last few days:

First, China A-shares are finally seeing some profit taking on investigations by Chinese authorities into market manipulation. There’s a joke in there somewhere, it’s just too obvious to make:


Energy stocks continue to show some signs of life, but have a ways to go before breaking the downtrend XLE has been stuck in for months:


Probably the most significant development this week is that profit taking has finally come to the healthcare sector as XLV has given up nearly all of the post-FOMC gains as a slate of negative announcements about products in the FDA pipeline meets year-end profit taking. Healthcare stocks had a rough first half of 2014 before coming back to life as investors sought out higher volatility wagers, but today’s 2.3% drop broke the six month uptrend pattern and could signify more selling pressure to come although some way-too-early bottom feeding might keep them in the green tomorrow. What’s going to be more interesting in 2015 is that healthcare stocks are the third largest % of the S&P 500 and have nearly twice the weighting of energy stocks. Will healthcare weakness weigh that heavily on the market?


So where are the profits taken from healthcare names being invested? There’s been a great deal of strong performance from the lower volatility sectors that help make up some of the more common low volatility “smart beta” ETF’s such as the iShares USA MSCI Minimum Volatility ETF (USMV). The phenomenon of low volume outperformance is nothing new and is one of the most demonstrated violations of the efficient market hypothesis so of course, someone slapped together an ETF to take advantage of this and all for a measly 15 bps a year. USMV has pulled in some SERIOUS cash this year and no surprise why, it’s up over 17.7% YTD compared to 14.9% for the S&P 500 Total Return and 11.7% for the average large blend mutual fund. But this success comes at a price; USMV and other low-beta ETF’s have been trading at record price multiples which have got the greats at the WSJ and FT wondering if you’re leaving yourself open to a low vol sell-off. Take a look at the chart below and you can see a major volume spike as investors took advantage of the FOMC rally to pick up USMV at a “slightly” lower price.


How did they generate such fantastic performance in 2014? Well yes, utilities were a part of that success but only a small part. For USMV, utilities make up about 8.5% of the allocation compared to the largest sector weighting with healthcare stocks at nearly 18% of the portfolio! Consumer Staples are #2 at 14% while 2014’s masters of “suckitude” energy stocks make up all of 5.7% of the allocation. So why do I go into this now? Well with healthcare stocks are trading at record levels and investors rightly concerned about profit taking, they’ve been casting their eyes at the other large components of USMV that haven’t participated nearly as much in 2014 and cutting out the middle man by investing in them directly to avoid the possibility to big losses after the multi-year run-up in healthcare stocks.

For USMV, the third largest sector holding is tech, with the largest weighting (6.6%) in companies on the services side such as Paychex, ADP and Visa as opposed to the largest positions in the Technology Select Sector SPDR Fund (XLK) like Apple or Google. I use the Vanguard IT VIPER as a better representation of low vol tech and you can see that as fears about the reality of rate hikes in 2014 set in this fall, VGT began making headway against the S&P 500 (using SPY) only to lose steam in mid-December when the “everyone in the pool” rally started on 12/16 and both VGT/XLK underperformed last week. Today it managed to get back above the uptrend line as reason returns after the initial joy starts to wear off (sort of like what happens after buying your wife a new car for Christmas.)


After tech stocks, the next largest USMV position is in the financial sector where high performing REIT’s are only around 3.4% of the allocation with insurance making up over 7.7% with the largest single holding being Chubb (CB) at over 1.3%. As you can see in the charts below; Financials (using XLF) and REIT’s (IYR) both lost steam versus the S&P 500 (REIT’s most noticeable in the late summer) as the sector leadership with the S&P began to change. Only with the breakdown of the energy sector in the fall do you see them begin to make ground with IYR breaking out of its momentum trade range while XLF begins to challenge it later in the year as the prospect for rate hikes becomes more realistic. In fact, financials underperformed last week not just on a pullback on low vol wagers but because the prospect for strong net interest margin growth seems more remote. One of the largest insurance sector ETF’s, the SPDR KBW Insurance Index (KIE), almost broke out of its momentum trading range versus SPY before the FOMC rally left low vol in the dust.




In fact, if you look at this chart of utilities compared to the S&P 500 (xlu:spy) or USMV to SPY, you can see that a good portion of the mid-October rally was the contribution from low vol stocks pulling the S&P 500 higher almost against its own will given the weakness in energy stocks and the short-lived weakness against the high vol sectors last week is easing before year end.


Again we have to wonder, will 2015 see another record year on a defensive rally?