Tag Archives: stocks

6 Weekly Sentiment Charts – SPY Plunging With Deteriorating Sentiment

Summary The time to buy stocks is when there is “blood in the streets”. In late August through early September, my sentiment charts were screaming BUY. Charts 1a & 1b suggest we had a major market low. The Market & Sentiment Recovered. SPY is plunging today following deteriorating sentiment. The time to buy stocks is when there is “blood in the streets” when others are fearful and selling. In late August through early September, my investor sentiment charts were screaming BUY and I added to many positions during this time. Since then, investor sentiment recovered quickly and I took some profits. Now I wait for extreme levels to buy back or take more profits. Every week I review my sentiment charts of the weekly data. In this article, I compare the sentiment levels from various surveys in my table to get an idea of overall investor sentiment. After making his fortune buying during the panic that after Napoleon’s Battle of Waterloo, 18th century British nobleman and member of the Rothschild banking family, Baron Nathan Rothschild, is often credited for telling his clients that “The time to buy is when there’s blood in the streets.” (See ” When There’s Blood In The Streets “) I’ve explained in past articles such as ” SPY 8% Off Record High While WLI Rises To 6-Week High ” why I like SPY as an investment for the long-term. I use fundamentals to pick individual stocks and SPY for my portfolio, but I seldom buy as they are making new 52-week highs. I try to buy when they are on sale and when the blood is running in the streets. To get better prices, I start with my list of “Explore Portfolio” stock picks then wait for market pullbacks and extreme negative sentiment levels to buy if they haven’t quite reached the “low ball” prices I set ahead of time to buy during market panics and other periods of market inefficiency. Said another way, I like to take profits as markets make new highs then buy back shares when my sentiment charts loudly shout at once “Buy” as most investors are afraid and selling. On August 25, 2015, when the S&P500 made its closing low for the year, most of my sentiment indicators were at screaming buy levels not seen since the 21% bear market correction in 2011. Below is a market summary for the closing prices showing four major indexes were down double digits from record highs. Some of the sentiment indicators I track are still improving and have yet to reach extreme levels. Others, like the ten day moving average of the put to call ratio. CPC-MA(10), shown below fell enough that along with the recent market recovery, I took some profits in my stocks. Now the CPC-MA(10) is rising which indicates the short-term path of least resistance for SPY is lower until this turns down again. The extent of the pullback from here is unknown but we get a large enough decline to buy back some of what I took profits in earlier, they I will be a buyer again. Chart 1a: Put-to-Call Ratio – 10 & 66 day moving averages – 10-Years : Chart courtesy of Stockcharts.com Chart shows the ten day moving average, MA(10), of the Put-to-Call ratio was above its 1.25 peak value at the bottom of the 2011 mini bear market correction. (click to enlarge) If you have other favorite sentiment indicators you want tracked in my table, then let me know in the comments and I will consider adding them to future articles. What follows are the charts and brief explanations for the measures of sentiment I follow, in no particular order of importance. Chart 1b: Put-to-Call Ratio – 10 day moving average – 3-Years chart courtesy of Stockcharts.com (click to enlarge) Chart 2: AAII American Association of Individual Investors Sentiment Survey Numbers posted weekly here on Seeking Alpha From AAII Sentiment Indicator , “The sentiment survey, taken once a week on the AAII web site, measures the percentage of individual investors who take the survey who are bullish, neutral and bearish.” (click to enlarge) Chart 3: II: Investor’s Intelligence Survey From Investors’ Intelligence Sentiment Indicator : The “Investors Intelligence Survey” or IIS questions stock-market newsletter writers once a week to see if they were bullish or bearish on the stock markets in the near-term. Newsletter writers have a large following as a group and are thus considered “market experts.” Investor’s Intelligence web site (click to enlarge) (click to enlarge) Chart 4: Ticker Sense Blogger Sentiment vs. S&P500 From Ticker Sense Blogger Sentiment Poll : “The Ticker Sense Blogger Sentiment Poll is a survey of the web’s most prominent investment bloggers, asking “What is your outlook on the S&P 500 for the next 30 days?” Conducted on a weekly basis, the poll is sent to participants each Thursday, and the results are released on Ticker Sense each Monday. The goal of this poll is to gain a consensus view on the market from the top investment bloggers — a community that continues to grow as a valued source of investment insight. © Copyright 2015 Ticker Sense Blogger Sentiment Poll.” (click to enlarge) Chart 5: NAAIM Exposure Index From NAAIM Exposure Index – National Association of Active Investment Managers, “The NAAIM Exposure Index represents the average exposure to US Equity markets reported by our members.” Screenshot courtesy of NAAIM Chart 6: CNN Money Fear & Greed Index The CNN Money Fear & Greed Index is derived from seven indicators explained here Screenshot courtesy of CNN (click to enlarge) Chart 7: SPY Charts Top (black) is SPY adjusted for dividends Middle (green) is SPY prices not adjusted for dividends Bottom (orange) is the yield of the S&P500 which closely matches the yield of SPY less the small management fee. (click to enlarge) From charting sentiment for nearly 20 years, I’ve observed that major market (S&P500 or SPY) bottoms usually line up well with major spikes in the sentiment charts. The absolute levels are not as important as the relative levels of sentiment. For example, notice how the two biggest declines in SPY since the bottom in 2009 align with the two largest spikes in charts 1a and 1b above. Notes I trade SPY around a core position in my newsletter’s ” Explore Portfolio ” and with my personal account. With dividends reinvested, my explore portfolio holds 137.889 shares of SPY with a “break-even” price, after the 10/30/15 dividend, of $98.83. I also have the index fund version of SPY in both my newsletter’s “core” portfolios. SPY is the exchange traded fund for the S&P 500 Index. VTI is Vanguard’s “Total Stock Market” exchange traded fund. If you want to invest in a single fund, that is my first choice over SPY. I recommend SPY and several others in my core portfolios for more opportunities to rebalance. VOO is Vanguard’s new exchange traded fund that tracks the S&P 500 Index. It is a lower cost alternative to SPY. I own and write about SPY, as I have many years of data for it, but VOO could do slightly better than SPY over time because it has a lower expense ratio. Disclosure : I am long SPY and own the traditional index fund versions of VTI and VOO bought long ago in various taxable and tax deferred accounts. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

XLU: This Sector Is Unhappy About Higher Rates

The Federal Reserve is expected to raise its benchmark lending rate in coming months. Utilities stocks have thus trended lower due to their bond-like qualities, and dependence on debt financing. As the Fed tightens its policy, XLU presents an attractive short opportunity. While the stock market as a whole may not correct due to the U.S. rate increase, Utilities Select Sector SPDR (NYSEARCA: XLU ) will likely show weakness. The utilities sector is heavily dependent on interest rates for two reasons. First, utilities use a lot of debt financing to run its operations. This means that when interest rates rise, their debt servicing costs increase, and thus weigh on bottom line growth. Another factor is that utilities companies are generally slow growing, and thus return earnings to shareholders in the form of a dividend to attract investment. This aspect gives utilities stocks, as well as the broader XLU a bond-like asset quality. Therefore, when interest rates rise, share prices of utilities stocks decline. The chart below shows the correlation between the U.S. 10-year Treasury yield compared to XLU over the last five years. As the Federal Reserve began slashing its lending rate as a result of the financial crisis, the 10-year yield fell from over 3.6%, to a bottom of 1.375%. This drastic decline was the catalyst for a sharp move higher in XLU, as well as broader U.S. equity markets. When the Fed made it evident in 2013 that it was planning on ending its stimulus measures, interest rates rose, while XLU consolidated tightly, but then utilities resumed their uptrend as an actual rate hike was found to be years away. Now, however, as markets prepare for an actual U.S. lending rate, XLU is experiencing volatility again, and has underperformed the broader market throughout 2015. With the Fed likely hiking rates over the next few months, utilities companies, such as– NextEra Energy (NYSE: NEE ), Duke Energy (NYSE: DUK ), Dominion Resources (NYSE: D ), Southern (NYSE: SO ), and American Electric Power (NYSE: AEP )-have all begun to trend lower. Their operating environment looks to become more challenging amid higher rates, while investors find the sector’s dividends less attractive relative to higher prevailing interest rates. For this reason, XLU and its component companies look to be interesting short opportunities in coming months as the Fed tightens policy measures. (click to enlarge)

AGG: A Solid Bond Fund Offering Low Expenses And Diversification

Summary The expense ratio on AGG is one of the drawing factors for this fund. At .08% it is one of the cheapest bond funds in the market. The fund has extensive diversification in the maturity of the bonds which provides more diversification in the risk. The credit ratings are fairly high with a significant allocation to treasury securities. Allocation to MBS does not thrill me since mREITs are available at material discounts to book value, but the low expense ratio still helps the expected return. Overall, there is more to like about this fund than to dislike. The major risk factor facing the fund is rising domestic rates. The iShares Core Total U.S. Bond Market ETF (NYSEARCA: AGG ) is a highly diversified bond fund with a reasonable yield, great expense ratio, and great liquidity. Expenses When I’m looking for a bond ETF, I normally want to see diversification in the holdings. The only real exception would be if I’m looking for treasuries with a fairly steady maturity date. Getting any thorough due diligence on the bonds in a fund can require having a higher expense ratio to cover the costs of doing research. The challenge for a bond fund with a high expense ratio to create solid returns is that it requires them to be doing sufficient research to consistently produce superior default estimates to those available in the market or to have a method for acquiring bonds at a discount by dealing in illiquid bonds where counterparties are more difficult to find. Some funds are able to offer low expense ratios and mitigate their risks by strictly dealing in the most liquid bonds where pricing is most likely to be efficient and relying on the market to ensure that the risk/return profile is appropriate. Generally I favor ETFs that have low expense ratios and strictly deal in highly liquid bonds where the pricing will be more efficient. The expense ratio for AGG is a .08%. This is one of the funds falls into my desired strategy of using highly liquid securities and a very low expense ratio to rely on the efficient market to assist in creating fair values for the bonds. Yield The yield is 2.41%. The desire for a higher yield should be fairly easy for investors to understand. Bond funds that offer a higher yield are offering more income to the investor. Unfortunately, returns are generally compensating for risk so higher yield funds will usually require an investor either take on duration risk or credit risk. In many situations, an investor will take on a mix of the two. Junk bond funds generally carry a high degree of credit risk but low duration risk while longer duration AAA corporate funds have only slight to moderate credit risk combined with a significant amount of duration risk. Theoretically treasuries have zero credit risk and long duration treasuries would have their risk solely based on the interest rate risk. Duration The following chart demonstrates the sector exposure for this bond fund: At the present time I’m concerned about taking on duration risk in early December because of the pending FOMC (Federal Open Market Committee) meeting. I believe it is more likely than not that we will see the first rate hike in December. I think a substantial portion of that probability has already been priced into bonds, so investors willing to take the risk prior to the meeting could see significant gains if the Federal Reserve does not act. Even though most of the impact is priced in, I suspect it will happen and that there will be some impact on rates which may trigger a solid opportunity for starting investments in bonds. I’ll be looking to increase my positions in interest sensitive assets if rates move higher. I’ve been focused on bond funds that are free to trade for me or have a longer duration exposure to corporate debt, but AGG is a pretty solid option for investors looking to add bonds in December. Credit Risk The following chart demonstrates the credit exposure for this bond fund: The exceptionally high rating to triple AAA stocks includes positions in treasury securities. The very high credit rating of this fund is excellent for investors looking for something that can withstand a sharp decline in the equity market. Rather than declining with equity markets this bond fund should see strength in share prices when investors are scared about the risk of higher defaults and weaker equity performance. When things look ugly, this fund should perform well. When things look great, this fund should underperform some of the riskier options. Sectors The following chart demonstrates the sector exposure for this bond fund: I have some concerns about the sector allocation including a substantial allocation to MBS Pass-Through securities. There are several mREITs where investors can get MBS exposure at a substantial discount to book value. On the other hand, that exposure also includes exposure to hedging the portfolio with Eurodollar Futures contracts in most scenarios and the expenses of management for an mREIT will dramatically exceed the .08% expense ratio of holding AGG. Conclusion Overall the diversification here is pretty solid and I don’t see much to complain about. This is one of the largest bond funds on the market and it offers great liquidity, a decent but not incredible yield, and a very low expense ratio. That liquidity extends to the point of millions of shares trading in a single day. That keeps the bid-ask spread small and makes trading in and out the ETF much easier for investors that want to use it to stabilize their portfolio value.