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The Question

  There is one question I am repeatedly asked now and it’s a good one.


Is It Too Late To Get In?


     That’s the question. Before I answer, I want to back up for a minute and take advantage of this opportunity to do a little investor education. The question of “should I get back in?” implies that one is not invested now or at some point in time became underinvested. Now we all know there is as much risk in trying to time the market as there is in remaining passively invested through all market conditions. Our system finds a healthy and productive middle ground that is based on a weight of evidence approach looking at both fundamental and technical indicators. The industry calls this dynamic or tactical asset allocation. It is a gradual, disciplined, and prudent approach to managing money. But we don’t make all in or all out decisions, ever. Specifically, as conditions deteriorate, our Net Exposure system will dictate that we sell our weaker holdings and carry more cash, effectively becoming less invested. The same is true in the opposite as conditions improve.


     Back to the point. In late February, there were several early warnings that the markets had just put in some sort of meaningful low, perhaps for the year. By March and early April, we saw enough buying enthusiasm combined with breadth thrusts and expanding 52-week new highs to suggest that the February lows were likely the end of the two-year correction in stocks. A new confirmed uptrend in global stocks was underway – 5 months ago. We began buying then and worked up to fully invested position by the end of June. The Brexit shock in June was probably the last chance to buy a good pullback in the uptrend that was already well underway. We said so here - http://www.allseasonfunds.com/redskyreport/06-24-16-just-what-we-needed.


     Several investors I have spoken to this summer are waiting for the volume in the market to pick up before “getting back in”. Volume is essentially a measure or buying or selling enthusiasm. The theory is that volume confirms a given price move as legitimate (or not). This summer we have seen prices rise to all time new highs on relatively light volume suggesting the move up is a fake, bound to reverse or illegitimate somehow. Bespoke provided some nice research that says, volume doesn’t matter as much as you think.



Pretty eye opening piece of research!


     So the time to “get in” if you were under invested or not invested at all for whatever reason, was several months ago as the best and lowest risk entry point. In a respectful way, I will say this plainly again as I have done before. If you do not have a system that governs your investment program on a daily basis and helps you adjust your portfolio to market conditions as they unfold, I would find someone who does and pay them to manage your money. If you do have a system, good for you; you probably aren’t asking this question.


The Answer


     I do still see SOME opportunities now for investors who are looking to “get back in” or those who are just looking to deploy more accumulated cash into their investment accounts. However, most of the opportunities are not in obvious places.The US market in aggregate is still overvalued and still overbought but that condition can persist for a long time as we’ve seen in protracted bull markets. We view this uptrend as an extension of the five-year-old bull market in the US stock market but probably not more than that. From a pure market timing perspective, we think the next 60-80 days will see a dramatic increase in daily and weekly price volatility meaning we’ll see many more 1% days, up and down. With good reason, investors are very nervous about the upcoming election cycle and I won’t be surprised to see some subjective selling closer to the end of August just to take profits ahead of the political storm. But for now, buyers are in the driver’s seat and the vast majority of stocks are on the rise across multiple sectors and countries.



     Looking at specific opportunities, we probably need to dig a bit beyond the standard benchmark US indices at this point. Two of the most attractive big picture opportunities I see now are commodities and developing markets (emerging markets). Typically, both move in sync, as they tend to march to the same macro factors so it makes sense that we’re seeing combined strength now. In the last week, emerging markets (EEM, EEMV, IEMG) and any of the standard commodity ETFs (DBC) have accelerated their August uptrends putting them on the leader board for the month. Commodities and Emerging markets have been massive global underperformers since 2011 relative to just about anything else. In the process, these markets have become attractively valued again. Furthermore, institutional investors have become significantly underweight in both, relative to their asset allocation models. We won’t be surprised to see them buck current consensus opinion and do very well in the coming years.


     We also see developing opportunities in banks and financials, if you have an appetite for sectors. Yes, we have heard the news that interest rates are falling and will remain or zero or negative for years and years. We simply choose to close our ears and open our eyes to what we see today. To that end, we see real value and we are beginning to see technical chart patterns that look constructive. However, from a timing perspective, we would put both sectors on a watch list rather than an active buy list. Banks are likely to do well once interest rate begin to rise persistently. And financials tend to do well shortly after the arrival of a recession. We are not predicting either a sharp rise in interest rates, nor the beginning of a recession in 2016, but 2017 might see both. As we get closer to the end of the year and specifically beyond elections, we should all keep an eye on these two key sectors. The potential for significant returns is very real.


     The final opportunity I see today is still in the high yield securities world. These are investment and low-grade corporate bonds, high yielding emerging market debt, preferred securities and convertible securities. I would also include Build America Bonds and High yield municipal bonds in the list. All are in well established uptrends, making new highs every week and still look very attractive relative to the 10 year Treasury bond. Like most things, these are no longer cheap, but they do offer a nice blend of capital gains and income for investors. I have no doubt that both of our Income models will hit double digits returns by the end of this year as these strategies remain 100% invested in all of the above. These are not securities that one can buy and hold but we do often see long uptrends lasting 12-18 months. The current uptrend is just six months old.

All told, it is late to be adding new money to the markets. But we do recognize some asset classes, countries, sectors and hybrid type securities that still offer some opportunity. We would advise caution with any new money, as we get closer to elections starting now with a keen eye toward selectivity. This is still the time to seek safe returns, but not necessarily maximum returns (Nod to W. Buffett).



     Next week, I plan to present our thoughts about real estate. We’re getting a lot of questions on this subject again and it seems pretty obvious that we’re approaching an important moment in time. Stay tuned


Have a great last week of summer for all of you parents out there!




Sam Jones