Note: This is a revised blog to correct the Dashboard Headline which was incorrect.
This week’s blog consists of three parts:
Part I: Market Review This Past Week
The stock market continued its upward march on Monday and Tuesday to close 2013 on the highs for the year. However, the market hit a downdraft on Thursday and Friday to start the year on a negative note.
For the week the S&P closed at 1831.37 down 0.54%, the DJIA declined the least, losing only 0.05% closing at 16469.99. The NASDAQ closed at 4131.91 down 0.59%.
So far year-to-date in January 2014, the BDH ETF portfolio is down 0.93% compared to a loss of 0.86% among the three market averages (refer to Top 5 screen).
Bond ETF prices remained flat to up slightly depending on its portfolio composition. Please type in ETF ticker symbols IEF, TLT, BOND, SHY or AGG or others one at a time to see their current week’s performance.
Indicator Review – One SELL Signal This Week
Indicator #2 NASDAQ Composite Index and 100-dma. This indicator remains on its January 3 BUY signal with the index price well above its 100-dma. (Refer to first chart).
Indicator #5 NASDAQ Composite with MACD. This indicator had a clear-cut MACD crossover BUY signal on December 23. (Refer to first chart again).
Indicator #6 AAII Weekly Investor Sentiment Survey Bullish Percentage. The latest January 3rd bullish percentage reading was 43.1% which was much lower than the December 25th bullish percentage reading of 55.1%. Investors are now far less bullish (contrary indicator) looking out six months ahead, than they were two weeks earlier. Remember that this indicator is now is below 50% resulting in a SELL signal.
Indicator #8 NASI Summation Index and MACD. The index crossed above its 5-day ema on December 20, while the MACD crossed upward on December 26 Thus, this indicator is on a BUY signal as of December 26.
Dashboard Remains on BUY Signal
The latest Dashboard data is presented in the link below:
Dark Liquidity BDH Performance Statistics
www.dark-liquidity.com/BDHV2new.php independently tracks the BDH performance. The Dashboard ETF portfolio year-to-date (2014 only) is down 0.93% compared to 0.87% for the three major averages.
Top 5 ETFs – 100% Invested
The ETF portfolio is still fully invested as of the open on December 26, 2013. The current portfolio of 5 ETFs consists of IBB, XLI, QQQ, XLB, and IWM. Note that QQQ has a “fail” rating as there was an MACD downward crossover. The current Top 5 ETFs are shown in the following link:
Note that on the etfscreen.com/buydonthold Decision page now only 18 out of 42 ETFs have a “pass” rating compared to 30 out of 42 ETFs the week before that. This decline could be the beginning of a correction or just a slight pause.
Conclusion – Market Ends the Year on Its Highs
The stock market has now powered ahead for its best performance since 1997. This is a tremendous achievement considering all the potential land mines this year. The first two days of 2014 are indicating a slow start. Be aware that Indicator #6 is now on a SELL signal resulting from a very high bullish sentiment reading that pierced the 50% reading to the downside this past week. Thus the Dashboard is on a NEUTRAL signal. Be careful here and make sure your stops are in place to minimize the impact of any losses.
Part II. Review of 2013 Performance
This past year was one of the best performing years for the stock market since 1997. For the year, the DJIA jumped 26.5%, the S&P 500 advanced 29.6%, and the NASDAQ Composite catapulted 38.3%. Not so for the BDH strategy which increased only 6.10%. This performance was very disappointing. Interestingly, the average hedge fund run by highly-paid professionals advanced about 11.5%, after fees, which is also well below the market averages.
During the year there were eight Dashboard buy signals ( “3” only, not counting “4”) and seven Dashboard sell signals. The most recent signals lost money as the market reversed direction soon after the new signal was given, so any gains were quickly given up. Moreover, the 3% recommended stop LIMITs produced more losses than gains. In retrospect, the 3% stop LIMIT order worked against the strategy as it was much too tight resulting in numerous whipsaws in and out the market. Also, the same or a quite similar basket of ETFs were re-entered at a later time at a higher price on multiple occasions.
The overriding rationale for recommending a 3% stop was to protect profits as this market has advanced smartly since the March 2009 bottom. I thought that the market would have a normal correction that would reduce the profits. The fact that the S&P500 did not experience a decline of more than 7% worked against the success of this recommendation. Moreover, the market did not have a correction of 10% or more during 2013 which was very unusual.
Obviously, in retrospect, the best strategy in 2013 was to hold an equity ETF portfolio all year long making changes for those the dropped below rank 10 and replacing them with higher ranked ETFs. At no time should the portfolio have been in cash. However, since no one can foretell the future that approach was not followed.
Going forward in 2014, I initially recommend that the 3% Stop LIMIT be used as the market is overdue for a decent correction. After the next correction, whether it is 5% or 10% or more, I will recommend going back to the original stop LIMITs of 7% for U.S. equity ETFs and 10% for international equity ETFs. As always, you are encouraged to decide on your own stop loss order percentage that best fits your risk own tolerance.
The rule to sell an ETF in the portfolio if it drops below rank 10 appears to be too tight, as ETFs fell below that level and then rebounded back into the top rankings. Going forward the ranking for selling an ETF will be set at 20 to provide more time for a rebound.
The BDH strategy should perform well in 2014, especially if there is a correction of 10% or more, since the portfolio will be in cash for a significant portion of the correction based on a timely Dashboard SELL signal.
Part III. Inside ETFs 7th Annual Conference Presented by IndexUniverse January 26-29, 2014 in Hollywood, FL
Investors interested in expanding their knowledge of ETFs, especially those residing in Southern Florida, should consider attending this world-class conference held at the Westin Diplomat Hotel in Hollywood, Florida from January 26-29, 2014. I attended this conference in January 2011 and found it to be a very worthwhile comprehensive ETF educational experience. Not only are there 30 or so high-quality informative sessions, but also all the major ETF vendors and are present in the exhibit area and industry professionals are available for interaction. I highly recommend this conference. For further details go to www.indexuniverse.com or www.InsideETFsConference.com or call 415 659-9029. Cost is $295 prior to January 10th and $345 thereafter.