Prudent Trader Methods Update

June 25, 2016

The way to get started is to

quit talking and begin doing.

Walt Disney

Personally I found the market reactions leading up to and following the Brexit vote somewhat surprising. First and foremost, while I certainly did not see all of the polls or even attempt to analyze the polls, the polls I did see seemed to suggest the vote was a toss up. In any event, and for some reason though, the markets wanted to believe the UK would remain in the EU and we rallied.  Then of course the unthinkable. You will read a good deal about this in the coming days and weeks. Avoid at all costs, predictions of what this vote will mean for you and I and our investments.  No One knows what the future holds, No One. Lucky guesses here and there aside.

In my humble opinion, the most important aspect of investing, is to have a plan. Without a plan you are lost, subject to the whims of others, their and your fears and greed,  just guessing, or even worse following the recommendations of some pundit on TV. . If that is you, operating without a plan? Let me ask: Who sold you on that plan?

Our long term timing model is notable here, not so much because of what we are long, but even more so for what we are not. Highlighted asset classes below, were exited on the date shown.


Non US Equities is really Developed Non US which is mostly Europe and Japan. I know that many people have a tendency to watch their portfolios value on a very frequent basis. While this is a good habit, you must be careful not to lose site of the bigger picture.

My secondary signals show long positions in all asset classes. Secondary signals are shorter term in nature and only suitable for fairly aggressive investors.

Let’s begin today by looking at the week that was. I will use the Vanguard Total Stock Market Index, (VTI) for this purpose.


For the week however we are down 1.7%. Not nearly as bad as Friday alone looks. Thanks of course the rallies on Monday Tuesday, and Thursday..

For you fundamental types, who keep on talking about the market being overpriced, this Chart is Courtesy of FactSet: .


It certainly seems high compared to the last 7 or 8 years. It remains however, within the range set over the last few years.  Even at a high level, that does not mean it cannot go higher.  We follow and we avoid prediction. We have a plan and we follow that plan.

With all that being said there are no changes in our asset allocation this week.

Asset Class Risk Profiles:

This is the distance the current price is from the exit signal. Remember now the risk to your portfolio is the asset class risk times the position size. If you wish to take a 16% position in Precious Metals, let’s say, the risk to the total portfolio = 16% times 38.68% = 6.1% of your portfolio. Is that too much? If so reduce position size, you can always add later.RiskWeekly

The exit signal for equities Non-U.S.  shown above (October 2015) can be seen on this monthly display. Measuring the distance price is from the bull/bear line.


Weekly Asset Class Overview:

Weekly Assets

For the week we have advances in Gold Miners and bonds, both treasuries and corporate. With the year about half over we have two decliners and 6 advancers. Upside leader remains the gold miners in each time frame.

Sector Overview

All the SPDRs declined on the week, only 3 are up on our rolling month (21 trading day) and 7 are ahead year to date. Year to date leaders remain: Utilities, and Energy a rather odd combination.


Morningstar Legacy Sectors:

Only two of the 31 sectors rose this week Tobacco and Real Estate. It is the search for yield keeping these stock leading the pack.   Year to date the strength is Energy, Metals and mining, Utilities, and Tobacco.

Morningstar Week

Fidelity Select

Below is a quick look at the top 5 Fidelity Select Funds over the last week, our rolling month, and year to date. Notice how trends can ofter persist for quite a while even when logic might suggest they shouldn’t and why we hope to go for a long ride in our positions.



Lipper flow of funds report shows

$6.1b outflow from equity funds/ETFs this wk. Negative 21 of past 25 wks

$2.5b inflow to taxable bond funds. Positive 20 of past 25 wks

While I keep on hearing how the public has been coming back into the markets the Lipper reports suggest that is not the case. I am quite surprised with yields as low as they are that they are buying bond funds. Must be junk, reaching for yield. Much more on sentiment in our July 1 Advisor Monthly letter.

Performance {Positions are blacked out in deference to paying subscribers]


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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