Volatility Chart

Volatility has spiked in recent days as demonstrated by the four indices I track on a daily basis. First of course is the CBOE index, symbol VIX. (Click chart to enlarge) illustrating the move from 17 to 20.79 currently.

 Below is Friday’s performance of a few selected securities/indices related to this return of volatility.

             Symbols                              Gain 2/10/12

• IWM 3/30 82 Puts                +20.55% Put options Russell index
• UVXY                                    +17.10% ProShares volatility ETF
• TVIX                                      +17.04% Velocity Shares ETN
• VIX                                         + 8.58% CBOE volatility index
• INDZ                                     + 4.99% Direxion India Bear ETF

(The above securities are extremely volatile and should only be used with great caution and a well developed trading plan)

I recently bought the two in bold and although both performed very well in hindsight my choices could have been better. My thinking on INDZ was based on its history in both up and down markets. I expected it to be up big in this ‘mini’ correction. It performed well Friday but was outperformed by a few other leveraged ETF’s. Oh well, ‘best laid plans of mice and men’ well, you know the rest.

The markets have been relatively stable for a few weeks, moving up in nearly a straight line since mid December. See S&P 500 Chart. But now, with turmoil in Greece back in the headlines a change may be in the offing, at least short term.

I’ve made a few modest changes to our accounts since my last bulletin. I sold Pepsico, symbol PEP. Our accounts have been a bit overloaded with defensive issues so with PEP underperforming something had to give.

I’ve also begun a transition away from bonds in our most conservative accounts. I began with the sale of iShares 7-10 year treasuries, symbol IEF, a short term treasury ETF. With rates so low there is minimal likelihood of capital appreciation and yields remain at very low levels.

The bonds will be replaced by higher yielding securities including Capstead Mortgage, symbol CMO, purchased recently. Capstead is a company that buys and manages mortgage backed securities and has a stellar record over many years. It’s currently yielding just over 13%.

At this point I’m not overly concerned about volatility. A modest correction is a healthy thing, particularly so after the big run we’ve had the last few weeks.

We own a stable of great dividend paying companies and they continue to meet our expectations. As market corrections unfold I’ll continue to buy more with the store of cash still at our disposal.

At the same time I will adhere to our ‘stop loss’ rules and during market corrections potentially take inverse ETF positions as deemed necessary. Above all our mandate is to protect capital and secondarily look for opportunities.

Disclaimer: None of the above constitutes a recommendation(s) for buying or selling securities, nor a particular strategy to follow. The securities markets entail risk.

We’re off to a rousing start this year, the so called ‘January Effect’ in full bloom. This run has been nearly uninterrupted as illustrated by the major indices, S&P 500, Dow 30, and NASDAQ all up since mid December 7% or more. But if 2012 is anything like last year with it’s many corrections, then now may be a good time to consider shorting the market.

None of the indicators I track are flashing red yet but this idea of an imminent correction is based on experience, history, and human behavior. Human behavior that includes taking profits after a big run, which leads to at least what I call ‘mini’ corrections. As long as we follow a rational plan there is opportunity to make money during corrections.

My preferred method of shorting the market is to buy inverse exchange traded funds (ETF’s). An inverse fund is designed to do the opposite of what the underlying market indexes are doing. For example symbol SH, one of the S&P 500 inverse funds, has declined 4.5% so far this year while symbol SPX, the long S&P 500 fund, has gained 4.8%. This effect is magnified if using leveraged ETF’s but that’s a discussion best left for another day.

So while relishing the great start we’ve experienced so far let’s all be aware that what the markets giveth they may take away, sometimes in an eye blink.

The foregoing in no way is a recommendation(s) of securities to buy or sell. Investing in the securities markets entails risk.

As January goes, so goes the year, or so market history tells us. I know it’s early but by that metric we’re off to a solid start for the month. The S&P 500 and Dow 30 are up nearly 2% as I write, and the NASDAQ has gained over 2%. Ah but lest we become complacent remember volatility lurks beneath the surface, ready to upset the apple cart at any time.

Last year was the most volatile period we’ve experienced in a very long time and we could be facing a repeat this year. Many of the uncertainties remain. European problems, our own massive budget deficits at the state and federal levels, a topsy turvy election year, stubbornly high unemployment.

On the other hand there are a few positives. Companies have begun hiring, albeit in small numbers so far, corporations are flush with cash, stocks are reasonably priced by most valuation measures, and there is cash in the hands of institutions to buy stocks.

So what will it be? Another year of gyrations with little market progress like 2011, a year of significant gains like 2010 and 2009? Or a disaster on the scale of 2008?

There is of course no way to answer those questions. But if nothing else the last ten years have prepared us for the unexpected and hopefully enlightened us to alternative methods of investing.

The days of ‘Buy and Hold’ and high expectations are past history for most of us. Our techniques for some time have included using technical indicators to help us understand when to be fully invested and when to become defensive. We are currently heavily invested across all portfolios but retain a healthy cash position for our moderate and conservative risk accounts, ranging from 25% to 45% depending on account risk level.

We continue to own quality dividend paying stocks, still heavily in bonds for the most conservative accounts, and a new gold position for higher risk accounts.

Caution: The above is in no way a recommendation for securities purchase or sale, or investment strategies to implement. So be careful out there, investing in the securities markets can be hazardous to your wealth.

The ‘bear’ is stalking the markets and the ‘bull’ is nowhere to be found. We’ve been in a ‘noisy’ (volatile) bear market since the first of May and the outlook does not look promising.

The financial crisis in Europe continues, gridlock rules the day in Washington, true unemployment is assuredly higher than government tells us, sentiment is negative, the list goes on.

The question is, how do we navigate our way forward from here? My answer, with caution.

More specifically, we continue to own and buy high quality dividend paying stocks, short and intermediate duration bonds, and more than a dash of cash.

Our portfolios include a who’s who of mega brand names including Coke, McDonalds, Pepsico, Raytheon, Home Depot, Berkshire Hatheway, new addition Microsoft, and other companies of similar pedigree. All are very large, financially sound companies and all, with the exception of Berkshire, pay attractive dividends. We may as well get paid while awaiting the markets recovery.

In addition I’m buying leveraged exchange traded funds (ETF’s) for short term holds, both in market rallies and corrections. I use Direxion and ProShares leveraged ETF’s to take advantage of short term moves that have been occurring with regularity. This has been moderately successful so far and has led to portfolio preservation during the more radical market sell offs.

I believe my skills in short term trading are improving and should result in enhanced performance as we move through these times of uncertainty. My in depth study of the great traders has provided education in an area of investment management I’ve not visited in the past, at least not in depth.

Be careful out there. We are in a very difficult investment climate. Feel free to contact me with any questions or concerns you may have.

The above is in no way to be construed as investment advice or recommendations. The securities markets entail risk and potential loss of capital.

Is Santa on the way with a year end market rally? Many signs point to just that. And we’ll need a year end rally to get most market indicators in the black for the year.

As of this writing the S&P 500 is barely showing life, up just 0.89% YTD. NASDAQ is still down -1.01% YTD, and the Russell Small Company index is off more than 5%. One of the few domestic indexes in the black this year is the venerable Dow Jones index, up nearly 6.5%.  (Performance numbers courtesy of morningstar.com)

And the foreign markets? Fuget about it. There’s a sea of red wherever you look, from Asia to Europe, red numbers in double digits.

I’m continuing to build our value oriented portfolios by loading up on high quality dividend paying stocks as these sell offs play out. I’m like a kid in a candy store when these sales occur, and they’re happening with greater frequency and severity.

Those gems filling our shopping cart include companies that produce the staples and basic neccessities of our lives. Oh yes, I’ve even purchased a couple of the worlds greatest fast food companies but then we all need a Big Mac and Coke from time to time, right? In addition I’ve bought and continue buying companies that pull our basic materials out of the ground. Iron ore miners, crop fertilizers, energy and precious metals, all in our cart with more on the shopping list.  

And how do we protect ourselves from these short term market whiplashes? It’s not easy but my method of choice is to buy inverse exchange traded funds (ETF’s) for short term holds. These inverse funds are designed to move in the opposite direction of their underlying indexes. Indexes like the Dow, S&P, Russell Small Company for example. So when the markets go into free fall these types of funds go up.

I hold them in tax advantaged accounts like IRA’s wherever possible until the markets right themselves. The reason for using tax advantaged accounts is to avoid incurring taxable events on the sales. There have been many of these short term buys and sells this year and they’ve gone a long way in protecting our capital. And after all, protecting our capital, particularly through these dangerous times, is Job One.

Be careful out there. We are living in the most turbulent times and face the most risk to our long term financial security than I’ve seen in my 31 year career.

Caution: The above is in no way to be construed as investment or financial planning advice. The securities markets entail risk.

Another speed bump last week on the way to positive returns for the year. About the time markets were beginning to look past Greece another problem appeared, namely Italy. Wednesday was quite volatile and erased 400 points from the Dow Industrials average.

The reality is Italy and a number of other nations, including the U.S., have faced and continue to face very difficult problems. The accumulation of debt over the last three decades at all levels, government and individual, threatens to overwhelm the feeble efforts employed so far to put the financial house in order.

We have fared relatively well to this point. Our Conservative and Moderate risk accounts are in the black for the year to date. Our Value Plus equity account is just slightly in the red, and our non public trading account has made a heroic recovery and performing well.

I remain convinced we are in a Bear market as illustrated by my go to indicators. The degree of descent is not steep at this time but we are still below the August highs on the S&P 500, which were below the April highs.

The above notwithstanding I continue to find what I see as undervalued stocks and very selectively buy them. Case in point is a recent purchase of Raytheon, symbol (RTN). Raytheon is a 25 billion a year defense contractor and sports a hefty dividend of 3.5%. 

I also took some defensive positions recently including Direxion Financial Bear (FAZ), ProShares Ultra Short Europe, (EPV), and ProShares Ultrashort Financial (SKF). These are all inverse exchange traded funds, (ETF’s) designed to go up when their underlying indexes go down. They are extremely volatile and in my opinion best used for short term holds. But they can provide a sort of ‘insurance’ in volatile markets.  

Disclaimer: The foregoing is in no way a recommendation of securities to buy or sell or stategies to employ. The securities markets entail risk.

In spite of continuing financial problems in Europe, the moribund world economy, a stubbornly high U.S. unemployment rate, deadlocked Congress, stock markets of the world for the most part had a banner October.

(Click chart to enlarge). The 10 month simple moving average (SMA) line has flattened a bit but still indicates bear market territory, in spite of the October rally. Historically the 200 SMA turning down has indicated the onset of a bear market. (10 month SMA and 200 SMA are used interchangeably). 

We’ve seen this story play out before. Rallies in the middle of bear markets are not unusual and to be expected, even powerful ones like October.

If not for the last two days of selloff the S&P 500 would likely have had a record month. Even with that late correction the index blasted higher by nearly 11 % in October. Additional evidence we should pay more attention to market charts than economic and political news.

Whereas the last quarter has historically been a great month for investors we should not become complacent. In this time of economic and political turmoil, coupled with extremes in volatility, we must remain vigilant and not necessarily expect the usual outcomes in these unusual times.

We continue to fare relatively well, in the black across most of our various risk level accounts. We currently maintain three publicly offered risk levels ranging from quite conservative to a 100% equity strategy encompassing greater risk.

We’re still heavily weighted in cash, using the pullbacks to buy high quality companies. Recent purchases include symbols ITT and BPT for moderate and aggressive risk investors. To overcome the extreme declines we at times have taken inverse exchange traded fund (ETF) positions. Inverse ETF’s are designed to move in the opposite direction of market indexes. 

So as always be careful out there. We live in turbulent times and job one is to protect ourselves from undue risk.

Note: The forgoing in no way is a recommendation to buy or  sell securities or follow specific strategies. Investing in the securities markets entail risk.

We’ve had a nice run for two weeks or so, gaining over 10% on the S&P 500. Have we bottomed and now moving to higher levels? Only the market spirits and self appointed gurus know for certain. (Well, not really)

Our accounts have just been muddling along, no great gains, no great losses. We’re heavily in bond mutual funds for our most conservative accounts but that idea will need to be revisited soon. Interest rates have reached historical lows and bond prices are correspondingly high so the path of least resistance in the near future is likely higher rates and declining bond values. I won’t jump the gun and anticipate but await market technical indicators to point the way.

Most of our stock mutual funds have been sold over the last few weeks due to hitting their respective stop loss prices. We’re still holding the stronger consumer stocks including Coca Cola and McDonalds, symbols KO and MCD respectively. Now holding large cash positions in all accounts awaiting good values and a few green lights.

I believe we are in a secular bear market but having said that there is still money to be made. We can buy the bargain priced dividend paying stocks. We can also use inverse exchange traded funds, (ETF’s) to take advantage of the market selloffs that are happening more frequently these days.

Inverse ETF’s are designed to go up when their underlying index, i.e. S&P 500, Russell Small Cap, Dow Industrials etc. go down. These strategies along with steady paying bond mutual funds should generate positve returns during these uncertain times. No guarantees of course, but a series of strategies with great potential.

Disclaimer: The foregoing is not a recommendation to buy or sell securities nor adopt specific investment strategies. Investing in the securities markets entails risk.

We indeed live in dangerous times, at least financially speaking. Again today the markets went on a roller coaster ride, down at one point 200 points on the Dow only to finish up 153 points for the day.

As measured at the intraday lows today the markets had corrected 21% from the April highs. The volatility, and the risk, is greater today than even 2008.

None of the problems of 2008 have really been ‘fixed’, only papered over. Literally papered over with ‘printing press’ money and a mind bending array of new rules and regulations. And Congress seems to have no appetite for more money printing, or for that matter doing anything constructive.

I believe we have entered a ‘Bear Market’, one that is very dangerous and may be with us for some time to come. There will be ‘recovery bounces’ along the way but we may be headed for much lower lows before bottom is finally realized.

I sold our last stock mutual fund today, Permanent Portfolio, symbol PRPFX, from all accounts. Conservative accounts are now 60% bond mutual funds and 40% cash.

Moderate risk accounts are 10% bond mutual funds, 15% stocks, and 75% cash. Value Plus, our more aggressive account, is 30% cash, 70% stocks.

My strategy going forward will look like this. We’ll remain very defensively positioned, heavily in high quality corporate and US treasury bonds.

In addition I will buy hedge positions (ETF’s) that go up when the market begins measurable declines and my indicators provide signals to do so. The idea is to protect our capital and even make gains with that part of the portfolio.

When opportunity arises I may buy a high quality stock selling at a bargain price, as I did today. For moderate risk and aggressive investors I bought Warren Buffets company, Berkshire Hathaway, symbol BRK.B. It was selling at a discounted price and the company recently implemented a stock buyback program, usually a good maneuver for shareholders.

Be very careful out there.

Yes the roller coaster markets remain with us. Just today the Fed released its latest salvo, or should I say mini salvo of solutions to bolster the economy. Here’s an excerpt from a ‘Fed’ press release today:

…………..To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. (My underlining)

This, coupled with the latest Obama jobs package is supposed to get the economy back on track. I’m afraid it’s far too little, and awfully late. More serious steps should have been taken long ago. But it is what it is.

So, in light of what the markets are throwing our way I’ve taken steps in recent days to put ourselves in a stronger position going forward.

I’ve sold some weaker holdings including symbols SLGN, MACSX, MAPIX and SYT. I purchased an exchange traded note, symobl TVIX and  exchange traded fund TWM, TVIX for Value Plus accounts and TWM for Prudent Growth accounts. TVIX is sensitive to market volatility and will generally go up when the markets are going south.

TWM is an inverse (opposite) ETF pegged to a Russell small company index (symbol RUT) so when RUT goes down TWM goes up. ’Smaller’ companie tend to lead the markets in either direction and usually at a faster pace.  

I’ve stocked our most conservative accounts, titled Preservation Growth, with conservative Vanguard bond mutual funds and intermediate term treasury ETF’s.

We still hold our stalwarts, mutual fund Permanent Portfolio fund (PRPFX) in our conservative and moderate risk accounts, and McDonalds (MCD) Coke (KO) and a few others in the more aggressive risk accounts.

The days of ‘Buy and Hold’ are over, for we live in times of uncertainty and precarious economic conditions.The markets react, often violently, with the news of the day. We of course can’t know what the news will be from day to day but we can be prepared for any eventuality.

Disclaimer: The above in no way is a recommendation of securities to buy or sell, or strategies to follow. The securities markets entail risk.