Archive for March, 2017

Breadth Character of the US Stock Market

Monday, March 27th, 2017
  • Major stocks indexes still in intermediate-term up trends
  • Breadth indicators suggest problems underneath with prospect of near-term corrective move
  • Maintain current reserves in anticipation of better entry point for broad index positions


Stock market breath indicators  measure the degree to which the price of a market-cap weighted index, such as the S&P 500 index, and the broad equal weighted market are changing in harmony — looking for “confirmation” or “divergence”. With confirmation, expect more of the same. With divergence be prepared for the path of the index to bend toward the direction of the path of the breadth indicator.

It works in a way similar  to the physical world as described in Newton’s First Law of Motion, which says that an object in motion continues in motion with the same speed and direction unless acted upon by outside force. The object is the stock index price. The force is the breath indicator.

There are multiple forces acting upon the object (the stock index), and it is the sum of those forces  that determine the speed and direction of the  index. Breadth indicators are among the more  powerful forces, because they reflect the effect of other forces (such as earnings and growth prospects and microeconomic news) on each of the index constituents separately.

Breadth indicators tend to be more effective at signaling impending market tops than market bottoms.

As more and more of the broad market issues move in the opposite the direction of the market-cap weighted stock index, the greater is the probability of reversal in the direction of the stock index.  The breath indicator represents the equal weighted broad market, which normally peaks before the market-cap weighted indexes peak..

Additionally, when breath indicators reach extreme values in the same direction as a market-cap index,  the market-cap  index is thought to be overbought or oversold, and subject to moderation back toward the moving average.

Let’s look at a few breadth indicators that we follow weekly to see what they might be suggesting at this time about the Standard & Poor’s 500.


First, let us stipulate that the S&P 500 is in an uptrend. Actually most major indexes around the world are currently in up trends (see a recent post documenting trends around the world).

Figure 1 shows our 4-factor  monthly intermediate-term trend indicator in the top panel in black (100 = up trend, 0 = down trend, 50 = weak or transitioning trend).  (see video explaining methodology, uses, and performance in a tactical portfolio since 1901).


(click images to enlarge)

2017-03-27_SPY trend



Percentage of S&P 1500 In Correction, Bear or Severe Bear

We  look for divergences between the direction of the combined constituents of the S&P 1500 broad market index with the direction of the S&P 500 index.

In Figure 2, we plot the percentages of constituents  in a 10%  Correction or worse;  in a 20% Bear or worse;  and in a 30% Severe Bear or worse versus the price of the S&P 500.

This measure’s how much bad stuff is happening in the broad market.  The weekly data is a bit noisy, so we also plot the 13 week ( 3 month) average shown as a dashed line over the weekly data.

Leading up to the 2015 correction, these indicators (particularly the 10% Correction or worse indicator) gave an early warning of developing risk of a market reversal.

After the 2015 correction, those indicators continued to deteriorate, event though the &P 500 recovered; once again giving a signal that not all was well, which led to the 2016 correction.

After the 2016 correction,  those indicators improved rapidly  until the period before the 2016 election where concerns were rising. After the election, the indicators once again improved very rapidly, but now those issues in Correction, Bear  or Severe Bear  are rising again, suggesting caution about the possibility of another market reversal.

(click images to enlarge)



Percentage of S&P 1500 Stocks Within 2% of 12-Month High:

In Figure 3, we plot the percentage of S&P 1500  constituents within 2% of their 12 month high, versus the price of the S&P 500.   This measures how much good stuff is happening in the broad market.

That breadth indicator  began to decline months before the 2015 correction and continued to decline even as the market recovered from that correction, portending the early 2016 correction.

The 13 week average turned down before the larger part of the corrective move preceding the 2016 election and rose after the election, but now it is  rising again, suggesting the possibility for a corrective move in the near term.

FIGURE 3:2017-03-26_2pct

S&P 1500 Net Buying Pressure:

Figure 4 presents another breath indicator, which recall “Net Buying Pressure”.

It measures the flow of money into rising and falling prices of the constituents of the S&P 1500 for comparison with the  direction of movement of the S&P 500  index.

The chart below plots  the Net Buying Pressure for 3 months, 6 months, and 12 months.

We multiply the price change in Dollars of each of the 1500  constituents each day, and multiply that change by the volume of shares traded each day. We sum  the negative products, and sum the positive products.     We then divide the sum of the positive products by the sum of the positive and negative products combined. If the ratio is more 50%,  that means there is more positive product than negative product, which we called Net Buying Pressure.   If the ratio is less than 50%,  that means there is less positive product than negative product, which we call Net Selling Pressure.

You can see in the chart that Net Buying Pressure began to decline in advance of correction in 2015 and continued to decline even as the index recovered before going into a second correction 2016. Since then net buying pressure has risen until just recently, when it has begun to decline again. That suggests to us trend in the S& 500  is not well supported by the broad market, and may be ready for a corrective move.




Bottom line for us is the view that the broad market foundation of US stocks is materially weakening, making the major market-cap indexes (dominated by the largest stocks) increasingly, visibly vulnerable to a material corrective price move; which suggests a better time later to commit new capital than now.



Rational Risk Retirement: Gerontological and Estate Perspective on Target Date Funds

Saturday, March 25th, 2017
  • some investors want full auto-pilot on their investments during retirement.
  • many investors will have cognitive impairment sometime during retirement.
  • many investors will develop outright dementia sometime during retirement.
  • all investors planning to leave assets for the benefit of others will die.
  • portfolio construction for these conditions differs from pre-retirement years.

[This is Part 3a of a 3 part series on Rational Risk Retirement – Traditional Withdrawal Strategy, Alternative Withdrawal Strategies and Retirement Portfolio Construction.  Part 1: Withdrawal Strategies is available here. Part 2 is pending.  The is the first two pieces for Part 3 on Retirement Portfolio Construction.]

It is widely acknowledged that longevity risk (risk of outliving your investments) in retirement must be addressed in portfolio construction.

Probabilistic projections such as Monte Carlo simulations are an important part of that process; as well as designing so that withdrawals can be taken from somewhat stable value assets during equity bear markets, to reduce the risk of ruin associated with selling assets into a decline.

In contrast, is not widely acknowledged  that cognitive risk with aging in retirement should also be addressed.

There are numerous dimensions to dealing with cognitive risk, ranging from how assets are titled and held, lines of succession of decision-making if the investor no longer has the capacity to manage assets, and how to structure the portfolio (and the advisor relationship) so that as cognitive decline slowly creeps up from minimal to meaningful, investments are not endangered by lack of attention, poor decisions or conflicts of interest.

For some investors, particularly during or preparing for near-term retirement, target date funds from a major institution may be a suitable choice for part of the cognitive risk mitigation element of retirement.  They may not be a suitable choice for  everybody, but clearly are for  some.  Let’s look a little bit at cognitive decline and then a deep dive into what is actually inside target date funds.

(click images to enlarge)


This is not an argument against using an advisor.  I am one myself, but not everybody wants to, has affordable access to, or should use an advisor.  Similarly (and this can be an argument for either an advisor or a target date fund), not everybody can, wants to or should manage their own money.

Behavioral Finance

There is a lot of study and discussion of behavioral finance, with an emphasis on the problem with doing the wrong thing with investments due to emotions overriding logic, and  filtering information for confirmation of biases.

That is all well and good to understand, but less well discussed are the behavioral issues of reduced cognitive capacity and less effective problem solving related to aging.  That is a real issue to think about before retirement, and to put the proper vehicles, instructions, trustees and portfolio together at least by the time of retirement, if not before.  Remember, you could have an event at any age that reduces your cognitive capacity (such as a traumatic brain injury from an automobile accident).

About Cognitive Impairment and Investing

In 2011, the American Association of Individual Investors interviewed Harvard economic profession David Laibson about cognitive impairment and dementia impact on investing decisions. He said;

“As we gain experience, we become better investors. But our ability to solve novel problems [is] peaking around 50–55, and then we’re gently declining thereafter. The decline tends to become steeper as we age, and by the time we’re in our 80s, for many of us, the ability to make good decisions is significantly compromised, particularly decisions that involve complicated new problems. ….

The likelihood of dementia .. doubles every five years … starting out as tiny levels in the early 60’s .. by the time we get to our 80’s, the likelihood of having dementia is about 20%. … and about 30% of the population in their 80’s has cognitive impairment but not dementia … in total, half the population in the 80’s is not in a position to make important financial decisions.

[a] mistake that I think people make is that they falsely believe that somehow they’re going to magically notice significant cognitive decline setting in, and then at exactly the right moment do [all the things they need to do], before the cognitive decline is too significant. They’ll somehow time it perfectly. At age 82, they’ll wake up one morning and say, “You know what? I’m losing a lot of cognitive function”; they’ll walk out that day [and do what they need to do]. That’s a grave mistake. We don’t have that ability to suddenly recognize it and do the right thing just before we lose the capacity to make these decisions well.”

He provided this data on the prevalence of cognitive impairment and dementia in North America.


State Street Global Investors published a paper in 2016 titled “The Impact of Aging on Financial Decisions”.

They also talk about the difficulties advisors have raising and exploring the investment implications of aging; and the reluctance and fear clients have discussing the topic or planning for what needs to be done.

They discussed many aspects of aging and investments, including a mini-max graph of increasing wisdom and understanding with experience versus declining problem solving ability, with the suggestion that people are generally at peak decision-making capacity in their mid-50;s (as shown in the image below).



I am sure than many of you have witnessed the cognitive decline problem in real life with your parents or other people in your family or among friends, as I have as well.  You may also have observed or been involved in modifying the investments and investment management control of portfolios for parents no longer able to monitor and control the situation, as I have as well.  It is good to do all you can to minimize those problems ahead of time.

Nicole Anderson, associate professor of psychiatry at the University of Toronto identified these intellectual problems experienced with cognitive impairment:

  • reduced memory
  • reduced ability to multi-task
  • reduced ability to switch back and forth between two tasks
  • reduced ability to inhibit irrelevant information to stay focused on what it is important

Anderson also points out that the best ways to reduce cognitive impairment risk are brain exercise along with body exercise and healthy diet:

  • obtain higher levels of education
  • continuing education and intellectual activities
  • job with complex mental requirements
  • social networking
  • avoiding depression.

Heredity is luck of the draw, but there is some hope to pushing that cross-over point farther into the future. It is about brain exercise in youth and throughout life.  Just as your body is a use it or lose it proposition; so to is your brain, and its capacity to make decisions and solve problems.

What are some of the arguments supporting target date funds?

(1) Some investors want to totally retire – no job, no involvement in their investments, and no concerns about who is managing their money or how

(2) In retirement, for many (and you could be one), there will come a time when cognitive skills will fade; at which point it may not be reasonable to manage one’s own money.  At that time use of an advisor may not be a good choice, because the investor would no longer have sufficient intellectual capacity to adequately monitor the activity of the advisor, and would not necessarily know when or if to make a change — and in a change may not have sufficient intellectual capacity to make a good substitution choice.

(3) If dementia sets in (and that could include you), an investor is incompetent to manage or oversee management of assets.  In preparation for that possibility, assets in trust with specific arrangements for asset management for potentially many years could be useful

(4) After death, presuming there are significant residual assets in a trust, or to be put into trust, for a surviving spouse or other family members; there is no opportunity for the deceased investor to assure that the money is being managed responsibly, cost effectively and prudently, if left to the judgement and decisions of trustees to manage it themselves; or to retain an advisor or broker or annuity agent to do the job, particularly non-professional trustees.

(5) After death, if a professional trustee is used, that is another significant layer of expense, that portfolios can ill-afford, — as cost control is one of the keys to long-term total return.

(6) Cognitive decline and death aside, target date funds for some may be a reasonable way to hold a core position (a boring, quiet bucket) in a portfolio at any age without the complexity of owning multiple broad core funds — using the other assets to tactically tilt overall exposures, or to pursue specific opportunities (an interesting, active bucket).

For those and similar reasons, some people may be good candidates for a large or full allocation of their portfolio to a low-cost, index-based target date fund from a well established investment organization that is likely to be around longer than the investor is likely to be alive; or longer than the portfolio is expected to exist post-death.

Even if target date funds are not the best investments, they are far from the worst.  They are diversified, world asset, all season funds, suitable for  a long-term horizon.

On-Balance Best Choice

Why emphasize large, well established organization?

An advanced age investor who has cognitive impairment would not be in a position to make a change decision if the target date fund was liquidated or the investment organization changed so radically that the target date fund moved in a different direction, or the expenses ramped up.

We think Vanguard is a particularly good choice.

Their target date funds are massive, and invest in a collection of massive low-cost index funds, none of which is likely to be liquidated.  They are a mutual company, which means they are not a takeover target as a stockholder owned assets manager may be.  Because they use index funds, their target date funds are not subject to risk of a manager going “sour” or leaving and being replaced by someone of lesser talent.  They have great depth of skills at index management.  Remember, you might be holding the target date fund for a very long time.

Advisors Not Excluded

All that said, a well selected advisor, can do something a target date fund cannot do, and that a robo-advisor can’t do well — tailor a portfolio to the specific goals, preferences, risk limits, asset complexity, tax exposures and other  circumstances of each unique individual investor (which can be complex with wealthier investors) — as well as to help keep the investor on an even emotional keel, to avoid emotional versus rational investment decisions during periods of excess risk enthusiasm or pessimism.

Target Date Funds to Dominate Defined Contribution Plans

Even if you don’t like the idea of target date funds, they are a large and growing part of the employee benefits landscape.  They currently account for 12.5% of assets in employer defined contribution plans, such as 401-k and 403-b plans.  They are projected to be 48% of plan assets by 2020, according to Kiplingers.

It is a lot less stressful on employees to choose a retirement date than an asset allocation plan among plan choices.  And, it is less stressful (and lower liability) for employers to offer target date funds along with the traditional menu of stock and bond funds.  Target date funds are here to stay, so people should be aware of them.

Three Primary Asset Types Determine 80% to 90% of Return

Investors can get fancy and complex in their portfolio construction, but in the end 3 primary asset categories have been shown to determine the vast bulk of portfolio returns (80% to 90% in some studies).  That leaves only 10% to 20% of return coming from asset category subsets of the primary classes and from security selection.

LOR simple small

There are only 3 things you can do with investment money (outside of speculating with derivatives such as options and futures), and those are Owning something, Loaning money to others, and holding cash or equivalents in Reserve.

Accordingly, we refer to those categories as OWN, LOAN and RESERVE.

For the most part, OWN is stocks, but it also includes tangible assets such as real estate, physical commodities such as gold, and private equity funds and venture capital investments.  For the most part, LOAN is bonds, but it also includes private debt funds, private individual mortgages and other non-traded debt.  RESERVE includes sweep cash in brokerage accounts, demand accounts and ultra-short CDs at banks, fixed price money market funds, and variable price ultra-short bond funds, and cash under the mattress or buried in the back yard.

OWN, LOAN and RESERVE is a functional description of asset categories, instead of a mere label such as equities and bonds.  We believe using functional terms helps investors better understand what is in their portfolios.

We have examined target date funds timeline glide paths in terms of those functional categories.  To keep it very simple, and because target date funds conceptually do not raise tactical reserves, we have combined LOAN and RESERVE in the glide path chart as simply LOAN.

The Glide Path

A key attribute of target date funds is the “glide path”.  Each fund sponsor has a planned schedule of allocation change for each fund as the current date approaches the fund’s stated retirement target date.

The glide paths of the leading fund sponsors differ, but they behave similarly, as shown in this glide path chart for 6 target date fund families that carry current Gold or Silver ratings by Morningstar for expected forward relative performance within their class.

Those families are: Vanguard, Fidelity, T. Rowe Price, BlackRock, JP Morgan, and American Funds.  All are no-load funds at the retail level, except American Funds, which are load funds.  We specifically recommend against investing in any load fund.  There are just too many good no-load funds to give up assets to a load fund.  At the 401-k or 403-b level American Funds are not load funds.

In this chart the black lines are for the Vanguard funds (solid line for OWN) and dashed line for (LOAN).  The red lines are for the highest allocation for OWN and LOAN by any of the six fund families along the path. The blue lines are for the lowest allocation for OWN or LOAN by any of the funds.


Side Bar: Capitalizing Pension Income

It may not be unreasonable to “capitalize” highly secure pension income as if it were from bond holdings, and to use that capitalized value in measuring the OWN / LOAN allocation of your “portfolio”.

For example, if an investor receives $30,000 from Social Security, at a 3% capitalization rate, that is the equivalent of having $1,000,000 in AAA bonds (at 4% capitalization rate the bond equivalent is more like $750,000).  And since there is a COLA on Social Security, it’s better than a bond which has fixed interest payments.  The same sort of capitalization could be done with a pension benefit from employment.

You might want to put that capitalization into your asset allocation assessment, and potentially take on less actual LOAN assets and more OWN assets to achieve your overall intended risk level, in light of your secure Social Security and pension income.

55%/45% OWN/LOAN to 40%/60% OWN/LOAN

Vanguard ends up with a 45% OWN and 55% LOAN portfolio in retirement.  Within the group of six families the highest  OWN allocation in retirement is 55% and the lowest is 38%.  The highest LOAN allocation is 62%, and the lowest is 45%.

So for someone following the same general approach using multiple funds, those sponsors are suggesting for retirement somewhere generally in the 55% OWN/ 45% LOAN to the 40% OWN to 60% LOAN range.  Vanguard in the middle area at 45% OWN/55% LOAN.

Note that target date fund are basically funds-of-funds.  They just hold them for the investor in the target date fund wrapper and do the rebalancing and allocation shifting automatically over time.

When it comes to the allocation to sub-classes within OWN and LOAN, the funds separate more in how they structure the portfolios.  In addition to the difference between active management and index funds within OWN and LOAN; the allocation to US and international assets differs; as does the allocation to large-cap and small-cap equities; as does the allocation to duration and credit quality among bonds.  They also hold different levels of cash, perhaps more as a function of tactical decisions among those using active management instead of indexes within their funds.

Deep Dive Into 2020 Target Date Funds

For those nearing retirement, a year 2020 target date fund may be of interest.  Let’s look deeply at the six 2020 funds to see what is inside.  The title in the charts should be sufficient to let you know what they are about.

In each case, data for Vanguard’s 60/40 balanced fund (domestic only, using S&P 500 and US Aggregate bonds) fund is provided for comparison — that being a traditional all-in-one fund.

2017-03-24_Size and rating

In terms of return and risk ratings by Morningstar, the Vanguard target date fund is superior.

Keep in mind as you view the allocation between US and international assets, that this level of portfolio allocation is programmatic, even if the security selection is active in some of the funds.

2017-03-24_Asset Alloc

Notice the allocation between developed and emerging markets diverges significantly.

2017-03-24_DM EM

The allocation between economically cyclical, defensive and in between (sensitive) stocks differs markedly.


So too does the equity sector allocation vary significantly.


The rolling returns and volatility are more similar than the detailed portfolio composition.  That is because the primary OWN/LOAN ratios more similar than the detailed portfolio composition.

This is anecdotal support to the research conclusions that asset allocation between OWN, LOAN and RESERVE (mostly stocks, bonds and cash) determines perhaps 80%-90% of portfolio returns.  And, that only about 10% to 20%, or so, of returns come from more granular asset allocation and individual security selection.

You can see that T.Rowe Price had the superior returns, but at the cost of the highest volatility.  The next table will solidify the appearance on this table that Vanguard had the best balance between return and volatility.



Vanguard and American Funds came out ahead in terms of risk/reward, both by Sharpe Ratio (which considers both up and down volatility), and the Sortino Ratio (which considers only downside volatility).

2017-03-24_risk reward

On a calendar year basis, Vanguard had the lowest drawdown in the 2008 crash.


For assets in tax deferred accounts everything comes out as ordinary income, but in regular taxable accounts, taxation of distributions and proceeds is really important.

Taxation of proceeds depend on the investors holding time, but taxation of distributions is a function of what goes on inside the funds — long-term and short-term cap gains; qualified and non-qualified dividends; and interest earned — as reported on 1099’s to the IRS.  Vanguard and T.  Rowe Price look best in terms of after-tax distributions.


These equity valuation data do not include earnings quality or earnings growth rates which would help interpret the valuations, but it looks like Vanguard has lower equity valuation multiples than the other funds — slightly more of a value proposition.

2017-03-24_equity valuation

Bond metrics are a little harder to compare visually, but here is a simple thing that may be grossly useful in comparing the overall valuation of the bond portfolios:  multiply the yield by the duration and divide that by a numeric value of the credit quality (AAA = 1, AA =2, A = 3 …..).  If you do that, Vanguard seems to give more yield for the combination of duration and credit quality than the other funds.

2017-03-24_bond metrics

Vanguard and BlackRock have only investment grade credit quality, while the other four families use some below investment grade credits.

2017-03-24_quality spread

Fidelity and BlackRock are holding a lot more cash than the other funds.

2017-03-24_bond sec type

Target date funds may or may not be appropriate for you or someone in your family, but they should not be dismissed out of hand, as some have done.

The word NEVER is never supposed to be used in investment, but this I can say with confidence,”As diversified portfolios (like any diversified portfolio), target date funds will never be the very top performing funds, and will never be the very worst performing funds (that is an attribute of diversification), but they are designed to be solid performers over the long-term.”

Target date funds might be used as a component of the broad-based core of an investment portfolio (the quiet, boring part); or for some people in retirement as the entirety of a portfolio.

Please call —  happy to discuss.


All Key Regional Stock Markets Are Now In Intermediate Up Trends

Wednesday, March 22nd, 2017

With Europe and China joining the other key regional markets, they are all now in intermediate up trends, as measured by our 4-Factor Monthly Trend Indicator.  This is not a prediction of the future, merely an observation of the current trend condition of the markets.

(see video description of the indicator methodology and uses; and performance of the US large-caps in tactical allocation since 1901; here).

Each market is plotted below using a proxy ETF, showing the trend indication month-by-month for the last 10 years (4+ years for China ETF).

The trend indicator is plotted in black in the top panel, showing 100, 50 or 0.  A 100 means up trend.  A 0 means down trend.  A 50 means a weak trend or transition between trends.

The 4 factors shown in the main panel are:

  • whether the leading edge of the 10-month moving average is pointing up or down (gold line)
  • whether position of the price is above or below the 10-month average (black vertical bars)
  • whether buying pressure is net positive or net negative (dashed green line, left scale)
  • whether the rate of price change in the direction of the trend is keeping up with a geometric pace  (red dots).


(click images to enlarge)

S&P 500 Large-Cap (SPY)

2017-03-21_SPY trend

S&P 100 Mega-Cap (OEF)

2017-03-22_OEF trend

S&P 400 Mid-Cap (MDY)

2017-03-22_MDY midcap

Russell 2000 Small-Cap (IWM)

2017-03-22_IWM Smallcap

Russell Micro-Cap

2017-03-22_IWC microcap

Russell 3000 “total market” (IWV)

2017-03-22_IWV R3000



Europe (VGK):


Japan (EWJ):

2017-03-22_EWJ trend

China (MCHI):

2017-03-22_MCHI trewnd

Global Emerging Markets (VWO):

2017-03-22_VWO Trend

Frontier Markets (FM):

2017-03-22_FM trend



Equity Market Conditions Assessment & Portfolio Allocation Intentions 2017-03-17

Monday, March 13th, 2017

This note has three parts:

  1. Short summary of our current market view and portfolio allocation implications
  2. Bullet point outline of details behind our thinking in 5 segments (Trend, Valuation, Sentiment, Breadth, Forecasts)
  3. Supporting graphics for most of the bullet points provided in 24 charts and tables.

The short summary is of our market view and intended allocation actions for discretionary accounts, and recommended actions for coaching or “prior approval” accounts

For those of you who want a feel for why we have our market view and why we believe the allocation changes are appropriate; the bullet points will help.

If you want to see what data is behind most of the bullet points, you will want to look at the 24 supporting graphics.

There is an unfortunate need to use some jargon in the bullet points and graphics which may be unfamiliar to some of you, so please call or write in to have any of them explained; and to discuss their significance to portfolio decisions.


Major world equity markets are in up trends — but there is mounting evidence that the US markets are over-extended and significantly vulnerable to a meaningful downward adjustment based on a combination of valuation, breadth, possible turmoil from key elections in Europe; and as Goldman Sachs puts it “rhetoric meets reality” in Washington.

Downside risk exists, but while the trend remains upward, we are remaining invested.  However, we are not committing additional assets from cash positions to US equity risk positions at this time (except for dollar-cost-averaging programs) due to the elevated vulnerability of the US stocks market.  We will be transferring some of the US equity risk assets in portfolios to some international markets that are in intermediate-term up trends that offer better valuation opportunities.

Portfolio changes or recommendations will be framed within the strategic allocation policy level of each client which varies based on individual needs, goals, stage of financial life, preferences, risk tolerance, and other limits or factors.

Based on valuation and long-term forecasted returns, US stocks exposures will transition from the higher end of individual portfolio policy allocations to the long-term strategic objective levels, or a bit below.  We are currently underweighted non-US developed markets and emerging markets allocations, which we will gradually raise to the long-term strategic allocations levels of each individual portfolio’s allocation policy.

Emerging markets have a more attractive valuation level than other non-US international stock markets (although they pose significantly more volatility), and allocation to them may be raised somewhat above strategic target levels within individual permitted allocation ranges.

For determination of intermediate trend status, we relay on our monthly 4-factor indicator. For more information about our trend following indicator and its performance implications, click here to see our descriptive video.


  • TREND (see Figures 1-6): The intermediate-term stock trends are:
    • United States – UP
    • Non-US Developed Markets – UP
    • Emerging Markets – UP
  • VALUATION (see figures 7-12): Based on history:
    • United States – Expensive on Price-to-Book and Price-to-10yrAvEarnings and not expensive when earnings yield is compared to Treasury yields.  However, when rates rise the comparison will worsen, making stocks more expensive.
    • Non-US Developed Markets – Moderately expensive on Price-to-Book and moderately inexpensive on Price-to-10yrAvEarnings
    • Emerging Markets – Significantly Inexpensive on Price-to-Book and Price-to-10yrAvEarnings
  • SENTIMENT (see Figures 13-17): for US stocks are:
    • Institutional Investors – are reducing equity allocations (a Bearish indication)
    • Investment Newsletter Writers – Bullish at record high levels (a Bearish contra indication)
    • Individual Retail Investors – strongly Bearish this week but neutral last week
    • Options Market – complacent to mixed (jargon terms defined below):
      • Volatility Index – below 200-day and long-term average (complacent, expects smooth ride next 30 days)
      • Skew Index – above 200 day average and long-term trend line (nervous about possible large downside move, next 30 days)
      • Individual Equities PUT/CALL ratio – is 9% above its 200-day and its 10-year average (more cautious that institutional investors)
      • Index PUT/CALL ratio – is 7 % above 200-day average and 4% below its 10-year average (cautious but mixed signal)
  • BREADTH (see Figures 18-21) the trends are:
    • Percent of S&P 1500 stocks in Correction, Bear or Severe Bear have decidedly turned up (Bearish)
    • Percent of S&P 1500 stocks within 2% of their 12-month highs have decidedly turned down (Bearish)
    • The net flow of money is into S&P 1500 stocks over 3 month, 6 months and 1 years, but the leading edge of those flow has turned down
    • The net flow is explained by the net Buying Pressure declining substantially more than the Selling Pressure; and both measures are at levels below the 12-month average indicating reduced overall force driving the market
  • FORECASTS (see Figures 22-24):
    • “Street” consensus 2017 S&P 500 earnings growth 8.9% on revenue growth of 7.2%
    • “Street” consensus 2018 S&P 500 earnings growth of 12.0& on revenue growth of 5.1%
    • Consensus 3-5 year earnings growth for S&P 500 is 8.89%
    • Consensus 3-5 year earnings growth for MSCI non-US developed markets stocks index is 8.76%
    • Consensus 3-5 year earnings growth for MSCI emerging markets stocks index is 10.37%
    • Consensus 3-5 year earnings growth for MSCI core Europe stocks is 8.11%
    • Consensus 3-5 year earnings growth for MSCI Japan stocks is 9.43%
    • Consensus 3-5 year earnings growth for MSCI China stocks is 7.13%
    • Bank of America/Merrill Lynch just raised its 2017 S&P 500 price target from 2300 to 2450
    • Research Affiliates (leading factor based investor) forecasts 10-year real (after inflation) returns:
      • US large-cap stocks 0.7% (with 14.4% volatility)
      • US small-cap stocks 0.5% (with 19.6% volatility)
      • Non-US Developed Markets stocks 5.4% (with 17.0% volatility)
      • Emerging Markets stocks 7.0% (with 23.3% volatility)
    • GMO Bearish Mgr (lowest min fund investment $10 million available) forecasts 7-year real returns
      • US large-cap stocks – negative 3.4%
      • US small-cap stocks – negative 2.7%
      • Large International stocks – positive 0.2%
      • Emerging Market stocks – positive 4.1%
    • BlackRock (fund manager in the world) forecasts 5-year nominal returns
      • Large US stocks 4.1% (with 15.5% volatility)
      • Small US stocks 4.1% (with 18.7% volatility)
      • Large International stocks 5.5% (with 18.5% volatility)
      • Emerging Markets stocks 5.5% (with 23.3% volatility)

Options Jargon Description:

VIX: VIX is the options pricing implied volatility of the S&P 500 index over the next 30 days, based on at-the-money options

SKEW: SKEW measures the relative options “implied volatility” (essentially price) of S&P 500 out-of-the-money PUTs versus out-of-the-money CALLs with strike prices the same distance from the market price – essentially measuring the perceived “left tail risk” (tail risk is the probability of prices going below the level that is predicted by a normal probability Bell curve).

Portfolio managers are predisposed to buy PUTs for protection and sell CALLs for yield, which tends to increase out-of-the-money PUT premiums and depress out-of-the-money CALL premiums.

SKEW of 100 means the market expects equal implied volatility (essentially prices) for out-of-the money PUTs and CALLS.  SKEW greater than 100 means the market expects higher implied volatility (prices) for PUTs relative to CALLS – more perceived large downside risk.

The record low SKEW was 101.9 on March 21, 1991. The long-term average SKEW is around 115, and the high is around 150. The current 200-day average SKEW is about 130, and the current level is about 140. That means there is a heightened concern about a greater than typical risk of a large downside move in US stocks.

INDIVIDUAL EQUITIES PUT/CALL RATIO: The Equities PUT/CALL ratio is the PUTs volume divided by the CALLs volume on individual stocks. This tends to be reflection of actions by retail investors; and is often a contrary indicator.

INDEX PUT/CALL RATIO: The Index PUT/CALL ratio is also the ratio of the volume of PUTS and CALLS, but tends to be a reflection of the actions of institutional investors; and is not considered a contrary indicator.


(click images to enlarge)


Over the past year, US stocks (VOO), non-US Developed Markets (VEA) and Emerging Markets (VWO) are generally in an up trend, although the US is way out front.

Over 3 years, the three regions are up, but the US is way ahead, and did not have as severe down moves as the other two regions.

As you will see the outperformance by the US is related to its current overvaluation, and the weaker performance of the other markets, is related to their more attractive valuation.
Our 4 factor monthly trend indicators ranks each of the three regions as in an up trend.
This time series of our trend indicator for the US shows the up trend established since March 2016.
The up trend in non-US Developed Markets was established in November 2016.
The up trend in Emerging Markets was established at the end of December 2016.


On price-to-book basis the US is very expensive (at the top of its 10-year range). Non-US Developed Markets are “normally” valued (at just above their median level). Emerging markets are inexpensive (price significantly below their median level).
In terms of the Shiller CAPE Ratio (price vs 10-year inflation adjusted average earnings), the US is very expensive relative to is long-term history. Developed Markets are inexpensive, and Emerging Markets are significantly inexpensive.
Based on a variety of valuation metrics the US is expensive. The Developed and Emerging Markets inexpensive by comparison.  Emerging Market have more attractive valuations than the Developed Markets.

In terms of profitability, the US is tops, which partly explains the higher valuation. Developed Markets are less profitable than Emerging Markets.

Emerging markets have competitive dividend yields and the lowest payout ratios.

Emerging markets seem to be a bit less leveraged than US stocks, and the Developed Markets are the most levered.

In addition to the price-to-book and Shiller P/E to their respective histories, several other valuation metrics for the US should be considered; almost all of which suggest the market is very expensive

The “equity risk premium” [(stock earnings / price) – (10-yr Treasury yield)] is the only key valuation metric that suggest that stocks may not be overvalued; and that argument depends of the current historically low Treasury yields.


Current equity risk premium for the 10-year inflation adjusted earnings-to-S&P 500 price is 0.90%. Since 1881, the equity risk premium for the S&P 500 and its large-cap precursors was higher 68% of the time.  That suggest modest overvaluation.

However, since the risk premium first went negative in 1964 (except for 4 months in 1929), the equity risk premium was only higher than now 30% of the time — a Bullish suggestion.

The question is whether the 135 history, or the 52 year history is the more important to consider. If the long history is more important, then the S&P 500 is somewhat expensive relative to the yield on 10-year Treasuries; but if the shorter history is more important, then the S&P 500 is inexpensive relative to Treasury yields.  However, Treasury yields are suppressed, and if they normalize to something in the 3% to 4% range before profits increase a lot, then stocks are expensive.
Current equity risk premium for the 12-month trailing earnings-to-S&P 500 price is 1.17%. Since 1881, the equity risk premium for the S&P 500 and its large-cap precursors was higher 68% of the time.  This also suggests moderate overvaluation.

However, since that risk premium first went negative in 1967 (except for 1 month in 1921), the equity risk premium was only higher than now 29% of the time — a Bullish indication.

The question is whether the 135 history, or the 49 year history is the more important to consider. The same logic applies as it does for the equity risk premium based on the 10-year inflation adjusted earnings yield.

S&P 500 GAAP earnings are not much higher than they were 4 years ago, yet the price of the index is a lot higher. That means much of the rise in the price of the index is merely paying more the what you get, not getting proportionately more for paying more.

10-year Treasury rates in 2013 more than doubled from less than 1.5% to more than 3%, yet the S&P 500 continued to rise in price faster than earnings.

Once again 10-year Treasuries have risen in 2016 from less than 1.5% to more than 2.5% and the price of the S&P 500 has continued to rise, even in the face of flat earnings, with falling earnings close behind in the rear view mirror.

If interest rates should make it to 3% in the near-term (not an unthinkable event), the equity risk premium on trailing 12-month earnings would drop from 1.17% to about 0.75%. Since 1881, the risk premium has been higher than 0.75% more than 70% of the time; and since 1967 it has been higher 64% of the time.  That would be Bearish.

This suggests valuation vulnerability in the face of probable moderate interest rate increases.


The State Street Investors Confidence index is a behaviorally measured sentiment index — a measure of increases or decreases in public equity allocation in actual institutionally managed portfolios, a real measure of market sentiment by large institutions.

The rate of increase in their public equity risk allocations began a decline in around 2 years ago.  They began actually decreasing their public equity allocations in 2016 and continue to do so.

This is not an endorsement of current stocks markets.
Investors Intelligence monitors 100 leading investment newsletters to gauge the Bullish or Bearish sentiment of those writers. Extreme peaks in sentiment tend to be contrary indicators (not perfectly, of course), but when “everybody” is Bullish or Bearish, a trend is often about to be exhausted; because there are few additional people to join the point of view and bring move more money in the direction of the trend.

The current Bull-Bear spread is among the most extreme Bullishness of the last 10 years.  This suggests that a corrective action is likely nearby.

The American Association of Individual Investors conducts a continuous online survey of it members — essentially the retail investor.  Last week when this chart was created, the Bull-Bear spread was 2.29%, barely on the Bullish side of neutral.  In the subsequent week it turned on a dime dropping to negative 16.5%; strongly Bearish.

The chart suggests that this data is more a coincident indicators than a forward indicator, so the drop in sentiment parallels the recent weakness in the up trend.
TD Ameritrade publishes the Investor Movement Index.  It is Bullish at this time.  Here is what they do to make their index.

Each month Ameritrade calculates a short-term Beta (volatility relative to a benchmark such as the S&P 500) for each security.
Then it takes a sample of hundreds of thousands of customer accounts with at least $2,000 in their account and in which at least 1 trade was done the month, from its approximate 6 million customers.
It measures the total equity allocation and the aggregate short-term Beta (volatility relative to volatility of the S&P 500) of the equities in each portfolio (and other undisclosed factors) to develop the risk level of each portfolio.
Then equal weighting each account without regard to size or number of trades, it finds the median equity risk exposure, and puts that on its index scale (scale parameters not disclosed), and plots that versus the S&P 500.
The level and direction of the index is an indication of actual retail investor behavior instead of what they might say about their sentiment.

The options market reveals the actual risk taking behavior of investors in terms of the pursuit of gain (buying CALLs) or seeking protections (buying PUTs).  Here are 4 measures of options market behavior.

VIX measures the expected volatility of the S&P 500 over the next 30 days.  At under 12, the VIX is well below the 10 year average of about 20, and among the lowest levels of the past 10 years.  This is complacency.  Complacency is probably like everybody being on the same side of a boat, which makes the boat prone to tip over.  Volatility is a mean reverting measure, which suggest more volatility in the relatively near future than in the relatively near past.

The SKEW Index (defined above in the jargon section) is a measure of the concern over the size and probability of an unusually large downside move.  That measure is elevated, which gives reason for caution.

The Equity PUT/CALL index (defined above in the jargon section) is a measure of the relative “protection seeking/opportunity seeking” behavior of mostly retail investors.  That ratio is slightly elevated versus average levels, indicating a mildly increased relative pursuit of protection.

The Index PUT/CALL index (defined above in the jargon section) is a measure of the of the relative “protection seeking/opportunity seeking” behavior of mostly institutional investors.  That ratio is slightly lower than average, indicating a mildly lower than average relative pursuit of protection.
This is one of our favorite measures, and one that we directly measure weekly since the beginning of 2014.  Breadth measures the condition or behavior of the overall membership of the broad S&P 1500 index and compares it to the price level of the market-cap weighted S&P 500 index — in other words, it checks to see if the rank and file members of the market are going in the same direction as the mega-cap leaders of the market.

For example, the price movement of Apple and Exxon have a lot more impact of the price of the S&P 500 or the S&P 1500 than 100’s of smaller members of the S&P 500 and S&P 1500.  If the rank and file are going in the same direction as the leadership, that is Bullish breadth.  If they are going in the opposite direction, that is Bearish breadth.  The leaders can only go so far for so long without the rank and file coming along.

The percentage of S&P 1500 index constituents in a Correction or worse (grey line — down 10% or more from their 12-month high) rose dramatically before the November presidential election, then dropped off just as steeply to among the lowest levels in the past 3 years.  Just recently, however, the percentage in Correction or worse sharply turned up — still in “normal” range, but the direction change is a negative for the current stocks rally.

The same is true, but to a lesser extent for the percentage of S&P 1500 stocks in a Bear or worse (blue line — down 20% or more), or in a severe Bear or worse (red line — down 30% or more).
The percentage of S&P 1500 stocks within 2% of their 12-month high was declining prior to the election, turned up sharply to reach the highest level in the past 3 years immediately after the election, but has since declined to the “normal” range with a current downward direction.  The provides a note of caution about the current rally.
The Net Buying Pressure (Buying Pressure / Sum (Buying Pressure + Selling Pressure), which has been net positive since the bottom of the early 2016 Correction, began to decline before the election; resumed growing strength after the election; but has recently been losing steam.  This is not supportive of the current rally.


The separate Buying Pressure and Selling Pressure components of the S&P 1500 stocks Net Buying Pressure in the figure above are shown here.

The rising S&P 500 price in 2016 was not matched by rising Buying or Selling Pressure, showing waning enthusiasm for equities.  After the election both Buying and Selling Pressure rose, but Buying Pressure rose more than Selling Pressure.  Recently however, the decline in Net Buying Pressure noted above, is the result of Buying Pressure declining substantially, while Selling Pressure has declined far less.

These data also suggest the fuel of the rally may be running low.

Looking way down the road with 5-10 year forecasts, and supporting our view that a shift in allocation more toward international equities, and less in US equities is appropriate, are forecasts by Research Affiliates (a noted factor-based asset manager), by GMO ( a Bearish asset manager for the very wealthy — $10 million and up to invest in their funds); and by BlackRock (the largest fund manager in the world).
Research affiliates studies factors with focus on the current Shiller CAPE Ratio (Price divided by the inflation adjusted 10-year average Earnings) relative to its historical median, and historical highs and lows.  They find that to be a good long-term indicator of opportunity.  They view the CAPE Ratio as mean reverting over the long-term.

Based on CAPE and other factors, this chart shows how they see the real (nominal less inflation) return and the volatility of US, non-US Developed Markets (“EAFE”) and Emerging Markets (“EM”) working out over the next 10 years on an annualized basis.  They definitely see international equities as the place to be — but with more volatility.

GMO does not disclose their forecasting methodology, but they are among the most Bearish institutional manager, so worth noting for that.  Over the next 7 years, they see the real return on US large-cap stocks as negative 3+%; the real return on large international stocks as barely positive; and the real return on Emerging Market as positive 4+%.  They also see negative real returns on US and Dollar hedged international bonds, but positive 1+% real returns on Emerging Markets debt.

Over the next 5 years, BlackRock sees nominal return on US stocks as very low, and much lower than international stocks.  They see non-US Developed Markets stocks as generating nominal return  at about the same level as Emerging Markets, but with volatility similar to that of US small-cap stocks; whereas they see much higher volatility for Emerging Market stocks.



Intermediate Trend Status of All Stocks, ETFs and Mutual Funds (Feb.’17)

Wednesday, March 1st, 2017

Warren Buffet wisely said,

“Be fearful when others are greedy, and be greedy when others are fearful.”

Clearly, you should only be greedy for fundamentally “good” assets, which requires fundamental analysis as the first level of decision-making.

However, determining “when others are greedy” and “when others are fearful” is a matter of technical analysis, which is a good companion to fundamental asset selection and allocation.

Investors as a whole are most greedy at the top of an up trend, and most fearful at the bottom of a down trend.

To follow Buffet’s advice, you must choose between predicting the tops and bottoms of cycles (market timing), or measuring that a top or bottom has just occurred (trend following).

Trend following is the rational choice in our view.

  • Market Timing is based on unspecified or variable information and opinion inputs – it cannot be defined, automated and back-tested.
  • Trend Following is based only on price and volume behavior – it can be defined, automated and back-tested.
  • Market Timing is opinion; subjectively derived about what someone thinks the market ought to do next.
  • Trend Following is factual; objectively derived by observing what the market price and volume have done.

Diagram Mkt Timing versus Trend Following

The “QVM 4-Factor Trend Indicator” is an intermediate trend following method. It is meant to be a technical companion to fundamental asset selection and allocation.

A video explanation of the indicator methodology, including back-testing results with the S&P 500 and precursors from 1904  follows in this video.

It is reasonable to be in or overweight those securities in confirmed up trends; and to be out of or underweight those in confirmed down trends.

If you are considering certain securities for entry, it is reasonable to enter only in a confirmed up trend.

Why enter during a down trend, since you don’t know where the bottom is.  If those securities you intend to own are currently in a down trend, it is reasonable to wait for that down trend to change to a confirmed up trend before committing capital.

The principle value of trend following in practice is not outperforming in up markets, but rather outperforming in down markets (“winning by not losing”) — having a low capture ratio in down markets and a reasonable capture ratio in up markets.

Each month, we measure the intermediate trend status of thousands of listed stocks and ETFs, and over 1400 retail level mutual funds.

For February 2017, we measured the trend status for 8,020 securities.

  • 74% of both the S&P 100 and S&P 1500 stocks were in demonstrated up trends
  • 61% of the 6,578 listed securities were in demonstrated up trends.
  • 78% of the 1,442 mutual funds were in demonstrated up trends.

While this is a monthly subscription data service, the February data package is available to anyone without charge.  Download the full 2017-02-26 trend data spreadsheet here.


This article will show you the current trend status of key securities, but first, here is the structure of  what is in the data package.

Full Spreadsheet ColumnsView Annotated

Each tab in the spreadsheet has:

  • the overall trend determination, and the status of the 4 components of the measurement
  • a strength measure for the trend
  • the position of the price versus its trailing high and its trailing range
  • an Overbought and Oversold indicator
  • the price change over the past 3 months and 12 months
  • the average Dollars traded per minute for the security (except for mutual funds which have no volume data)
  • and links per security to multiple third-party information sources (Morningstar, Seeking Alpha, Yahoo, StockCharts, & BarChart)

This is what the trend data looks like:

This is what the other data looks like:info2This is what the third-party information links look like:


If you would like to inspect your portfolio holdings in terms of their intermediate-term trend condition, download the February data package.  The tab for the 1,442 mutual funds most likely has any fund you may own.  The tab for all listed securities with sufficient data (about 28 months of existence) will most likely have the vast majority of the listed securities you own.

CAUTION: Bond funds are included in the study, but the trend determinations may be less clear for them, as bonds do not tend to change direction as often or as dramatically as equities — and this methodology has not yet been back-tested for bonds.  Bond funds are included for completeness, but may not all be appropriate for such analysis.  Long-term and low quality bond funds are probably more appropriate for this method of analysis than short-term and high quality bonds funds.


Here are some of the data points that may be of general interest about the state of the markets:


All of the members of this group from Vanguard (the largest purveyor of target date funds) for retirement years 2015 – 2055 are in demonstrated up trends.

tgt date

Vanguard target date funds are composed of 5 funds in different allocations along a glide path — one fund each for:

  • US stocks,
  • International stocks,
  • Aggregate US bonds,
  • Short-term US Treasury inflation protected bonds,
  • Aggregate Dollar hedged international investment grade bonds


These and most US asset categories are in up trends.  Some are in or near overbought condition as the “Buying Pressure Level” column shows.

styles and sectors


More are in up trends than down trends. This list is of the country funds in up trends. Interesting to see that Argentina is in the second strongest trend, as measured by Buying Pressure Level.

countries up

This is the list of country funds in down trends.  Mexico is in that group, which may be partially a Trump effect.

Countries down

The other country funds are rated 50 either because they have weak trends, or because they are in transition from one direction to the other.


74% of S&P 100 stocks are in up trends.  Here are the 25 of those in the strongest up trends.  They are mostly all in or near overbought condition.



SP100 down


Most liquid ETFs (defined here as trading at least $15,000 per minute) are in up trends or rated 50 for a weak or transitional trend, but here is the complete list of those non-bond, non-levered, liquid ETFs that are in down trends.

LquidETFS down


The ETFs in this list represent commonly held asset categories in portfolios:

  • total US stocks
  • large-cap developed markets ex US stocks
  • large-cap emerging market stocks
  • US REITs
  • intermediate-term US Treasuries
  • short-term US Treasury inflation protected securities
  • US aggregate bonds
  • Dollar hedged investment grade international bonds
  • Dollar denominated sovereign emerging market bonds
  • gold bullion.

The David Swensen Portfolio components were referenced in his 2005 book, “Unconventional Success –  a Fundamental Approach to Personal Investment”.  The allocation he used (as updated in 2015 to 5% more emerging markets and 5% less REITs), was 30% US stocks 15% developed markets ex US stocks, 10% emerging markets stocks, 15% US REITs, 15% intermediate-term US Treasuries, and 15% US Treasury inflation protected securities.

He termed it a “reference portfolio” because it is merely a starting point for personalization based on goals, needs, circumstances, and the ability to stick with the portfolio over time.

Swensen is the long-time CIO of the Yale endowment.

2 simple portfolios

We hope you found this helpful and would be pleased to discuss with you how this methodology could be overlayed on your portfolio.  The monthly data subscription is $299 per year.