Prudent Trader Methods Update

June 18, 2016

I know where I’m going and I know the truth, and

I don’t have  to be what you want me to be. I’m free

to be what I want.

Muhammad Ali

This weekly update will be Free to all, at least through the summer months. Enjoy, comments and suggestions are welcomed.

Prudent Trader’s philosophy is to rotate into the strongest areas as measured by relative strength when a particular asset class is not in a bearish configuration. That is to say it is either bullish or neutral. We can operate in a neutral environment as well.  If the asset class is in a potentially bearish position we move to cash in that asset class.

A word about risk: Recently our primary signal went to buy on Precious Metals Stocks. We executed positions and had those positions go against us, somewhere between 15% & 20%.  I heard from one of our advisers that his clientele would panic with a 20% draw down. Probably true!

However, consider; If you put 100% of your clients funds in the Precious metals positions then your account is indeed down that much and you have an unhappy client. If however, you are balanced across asset classes and have 16.6% in precious metals then that account is suffering by 16.6% times a 20% decline or 3.3% on the total portfolio.  Your client should not be upset. He/She was in fact not down 3.3% thanks to the diversification across asset classes.

Keep in mind that asset classes, like sectors rotate into and out of favor. We use trend following concepts to invest in those that are relatively strong and wait on those that are not.

The current Risk Profile of the Asset Classes: The primary signal is what we base our recommendations and performance on. The Secondary is usually an earlier signal, perhaps a warning, and is for aggressive investors only.  Remember: take the percentage risk shown and multiply by the percentage commitment and that is your approximate risk. If that risk is to high for you or your client then reduce your position size down to the sleeping point.


Weekly Asset Class Overview:

There are no changes as of this reports date. We are long the relatively strong in US Equites, Real Estate, Precious Metals and Treasuries. We remain out of Developed Non-US Equities, Emerging Markets, and Commodities.

Weekly Assets

Sector Rotation Within US Markets:

On the week the upside leaders XLE Energy and XLP Consumer Staples. For the Rolling month however, lead goes to Telecom, Technology, and Materials. Year to date our upside leaders are: Utilities, Energy, and Materials – an odd grouping.

Five are rated overweight by our relative strength models: XLB Materials, XLI Industrials, XLP Consumer Staples, XLU Utilities and XTL – Telecom.

The Price Trends for short intermediate and long term are shown as well as accumulation/Distribution

SPDR Weekly

Utilizing the more diverse Morningstar Legacy Sectors, the following picture arises. The leader for the week; metals and mining, for the rolling month; metals and mining, year to date; metals and mining. 19 of the 31 (59%) of the sectors here are OW or Overweight.

Morningstar Week

Fidelity Select

Top 10 for the week:

FidelityWeekFor Comparison Purposes: Month End Data Member sign-in required.

Our signals and track record are based solely on the Primary month end signal. Editors Note on the Fidelity Select: this is not month end. By month end, conditions could be quite different.

Are you concerned about Brexit?

The 10 largest companies with exposure to the UK, courtesy of FactSet:



Through early June, equities have risen approximately 17% from their February lows. Yet investors and fund managers have taken a very defensive stance.  During this rally Fund managers have raised their cash levels to the highest since 2001. Equity allocations in February had only been lower at bottoms in 2011 and 2012. [Source: Bank of America Merrill Lynch Fund managers survey.]

Remarkably, allocations to cash are now even higher than in February, and allocations to equities dropped to a new 4-year low. Fund managers have pushed into bonds, with income allocations rising to a 3 1/2 year high in June.  This defensive positioning should be enough to advance equities in the months ahead.


Rolling week is 5 trading days, rolling month is approximated with a 21 day period. RS Mkt state is my relative strength state of the market for that asset class, OW = Overweight, UW = Underweight, MP = Market Perform.  RS trend is the slope of a 21 day linear regression line through the relative strength line.

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