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From The Top

     As we know, the view “from the top” can be quite different. Today, we find the US stock market again approaching our previous tops made on June 21st (S&P 2130) and November 3rd (S&P 2109). Today the index is trading at 2051. This is a great moment to drop our packs and take a look at the distant landscape since our last visits.


Valuations – Still High


     Despite the unsavory volatility of this quarter which included a near vertical decline of 12-15% and subsequent recovery by as much, you might not be surprised to hear that valuations are exactly where they were at the end of last year, perhaps a little higher if one is measuring against earnings per share on the S&P 500. Over the quarter, EPS on the S&P 500 index fell by 4% and prices are within a stone’s throw of the previous peak so it stands to reason that valuations are about the same. The important thing to remember is the market is still priced at a fairly rich level and no one should really be compelled to load up on stocks here. The best, most trustworthy valuations are those based on backwards looking data, like the last 6-12 months of earnings and price action. Forward EPS measures are always guesswork and can lead to some back decision-making. So we know that based on backwards looking data, valuations are not attractive at these levels (again). Now look forward (wink), we might be open to a more favorable outcome. Here’s why.


US Dollar Uptrend Has Stalled


     If you were to read the actual earnings reports from various fortune 500 companies you would find a common issue for which they blamed poor or weak earnings. This has been the case since the second quarter of 2015. Over 65% of companies reporting cited the “strong US Dollar” as dilutive to their earnings, meaning our strong currency hurt their bottom line revenues. This is especially the case for large multinationals that generate significant revenue overseas but see those foreign revenues eroded when converting back to US dollars. Thankfully, near the middle of February, the uptrend in the US dollar stalled and our domestic currency has really traded in a sideways band, even declining slightly, since then. Looking forward then, one of the main blame centers for poor earnings could be going away. Of course, earnings can fall for other reasons like a slow down in global demand and we are seeing some of that as well.


Gaining Ground - From the Top


     I find that ranking and sorting various sectors, indices, countries and asset classes from a certain point in time is a valuable exercise. The chosen point in time has to be relevant however, like a notable low or a notable high. Now that we’re back at the top, let’s see what “things” have actually gained ground relative to the dates of the previous market tops. I also like to add a ranking filter that shows which “things” are gaining ground above the last peaks with the last amount of weekly price volatility. In doing so, we can shorten up our list a bit to consider investments that are moving in the right direction without thrashing our portfolio balances. Here’s the short list among those sectors that have moved beyond the highs of June and November, 2015 and their corresponding ETF investment options:


Gold/ Precious Metals (GDX)

Japanese Yen (FXY)

Intermediate term Muni bond (MUB)

Treasury bonds – all (TLT, IEF, IEI)

Consumer Staples (XLP)


Utilities (XLU)

Dividend Payers (DVY, HDV, VIG)

Industrials (XLI)

Emerging Market Bonds (EMB)

Basic Materials (XLB)

Latin America (ILF)

Preferred Securities (PFF)


     So that’s a pretty odd and defensive looking list of securities and sectors right? What you don’t see on the list in our view “from the top” is all the stuff that the financial media seems to be focusing on, like oil, small caps, high yield bonds, and yes of course, the S&P 500. None are on the list because all have simply recovered from some recent losses but made zero new headway since 2015. Let that sink in for a minute. In our view from the top, we recognize that the majority of equities and commodities are still in down trends and possibly carving out larger topping patterns. Some will argue that the correction is almost over and soon, so soon, the US stock market will blast out to all time new highs making this very large and substantial topping pattern look like an 18 month correction cycle. That might happen but as of right now, that is not happening.

Now we must remember and respect the fact that if we pick a date in time that corresponds to a stock market top, then of course, all things that look and act like the equity markets are going to look relatively poor and we would expect to see a list like the one above. If the markets do breakout to new highs, we can adjust by adding back exposure to the growth sectors as the list of winners will certainly change. In the meantime, I can see a fairly good looking, well constructed and diversified portfolio in the list above. Our Blended Asset strategies hold these securities almost exclusively and all are up YTD by 2-3% you’ll be happy to know.


Climbing Down


     At this point, we are prepared to cut equity again if the markets run into trouble, especially among holdings with higher weekly volatility. This is that inflection point where we need to consider defense again if conditions warrant. Our Tactical Equity models are still 60-65% invested, with the remainder in cash and hedges but again, we are prepared to reduce that level to 50% again or add to our short positions. Timing is everything and so far, this year, we’re getting it right.


     I’m thinking about the view from the top as I just returned from a ski trip to a remote Canadian lodge with my brother and 12 friends (http://www.kmhbc.com/) . I haven’t taken an off –the-grid vacation for over a decade and it did feel good. Don’t worry, decisions regarding your money were covered while I was gone. It was one of the best ski trips of my life and I found myself gaining some valuable life perspective – from the top. I’d recommend any adventure that allows you to truly get away from your phone, your computer, etc – at least once every 10 years. Get out and do it, life is short indeed.



Sam Jones