Thursday, May 14, 2015

Market and Economy: How Model Helpds

Market performance has remained lackluster to say the least. Economic data, specially spending report, came in very weak. This was even more troublesome with lower gasoline prices and lower unemployment rate. Lower gas prices and lower unemployment rate have given extra cash to the consumers. However, consumers are holding on to that cash and are not spending it. This either means that they are not confident of the economy or there is something else going on in the economy.

 As a result of these economic cross currents, market keeps on going sideways, unable to decide its direction. One barometer that has been used by market participants in the past few weeks is the yield on long-term treasuries. Yield has been increasing very sharply. This means that the expectation of inflation is going up. If the inflation expectation goes up, precious metals will start performing well.

So far, this sideways action has not impacted the model portfolio. Stocks have been doing well. The best part is that the stocks that aren't doing as well, like the market, are the one whose exposure was reduced. And the stocks that are doing well are those whose exposure was increased as per the model.

Therefore, unlike a typical portfolio which rises and falls in tandem with the market, the smart algorithm based portfolio builds on the bull-market characteristics and properly allocates the funds to amplify the gains. As a result, one will not feel lost about why are they wasting time by keeping their allocation and not seeing any changes in their portfolio and not being able to beat the market.

Another interesting stock included in the model portfolio is Chipotle. Although Chipotle hasn't done well in the last 2 months, its still in a bull market. If it closes below 630 at the close of May, it will be a sell signal. However, prior record suggests that the stock should rebound. Therefore, its a good buying opportunity. If it closes below 630, stock will enter a bear market of its own and all the shares will be sold. Proceeds from this sale will be re-allocated by the model.

We will keep evaluating the portfolio strategy and understand different ways of implementing these across different style of portfolios. 

Sunday, May 10, 2015

Protfolio Performance & Stock Market

Market responded very nicely to the employment report. With a strong employment report, it seems like the economy is back on track to put in a strong performance in the second quarter. Next couple of weeks will bring more economic data to confirm this observation.
As we have been talking over the past few weeks, market is still in a bull market. It has completed a sideways correction, which has lasted over several months. We have gathered enough fuel to break out of this range and embark on the next journey to new levels.
Dollar tree has performed pretty well over the last week. Next stock that we will be looking at in Chipotle. Chipotle has to perform well in this month. Otherwise, it will be removed from the portfolio. :Lets see how it performs over the next few weeks.

Friday, May 8, 2015

Portfolio Positions - Dollar Tree

Sideways action continued this week also. This sideways action can be very demoralizing for regular market watchers, as no one really knows what will happen next. But there is a famous phrase on the street, which says that "one should not short a dull market." Although this market is not dull on a day-to-day basis, it has been pretty dull over the last few months.

Good investors make money in these type of markets by selling stocks that have already rallied during this phase and re-distributing proceeds into positions which have not performed so well. In this way, they are better positioned to take advantage of potential rally.

A very good example in this regard is Amazon. Amazon declined throughout 2014 after topping around 400 in late 2013. While Amazon was declining, it was a good opportunity to accumulate. Since Amazon was in a bull market based on proprietary model, adding to long positions paid off big time in 2015 with Amazon rallying from 300 to 430 in just 4 months. Therefore, the gains would have been amplified, as one would have bought multiple shares at lower price.

The goal of the new model is to buy good businesses that actually sell tangible products or services. This would mean that investors are actually investing in good companies.

The most recent example in model portfolio is Dollar Tree stock. Dollar Tree rallied in the first two months of this year, but since then it has been declining. As a result, proprietary allocation model increased the exposure in Dollar Tree in May because it is in a bull market. Model will keep on changing the ratio based on analytic modeling, as long as the stock remains in a bull market.

If the stock is truly in a Bull market, it will rally sooner or later and thus, gains will be amplified. If not in bull market, portfolio will exit the stock position on proprietary triggers. We will see...


Sunday, May 3, 2015

Market Review - May 3, 2015

After declining sharply on Wednesday, post GDP data and Fed announcement, market bounced back sharply on Friday. Overall, sideways market action continues. Soon the market will leave its current range.

Although the break from this range can be in either direction, chances are increasing for an upside rally. Some of the reasons behind this observation are:
  1. Market has absorbed not-so-good earnings and a much weaker GDP data, without a sharp decline
  2. Market has already taken into account an interest rate hike 
  3. Market has held together over the past few months without significant Fed induced liquidity
  4. Market has gone sideways for the past 5 months. This sideways action can be treated as a triangle formation before the next rally
However, one should keep in mind that we are now entering a traditionally weaker period for stocks and Nasdaq is approaching its all time highs. Since summer months don't yield good market returns and we can experience a sell-off due to double top formation in Nasdaq, things can get a little bumpy in the near term. This is the very reason, why one should trade with a system and not based on their opinion.

In order to take out the opinions, UST has developed a new long term investing model with the goal of optimizing portfolio allocation by combining it technical analysis and capital growth theories.

In comparison to short-term traders, investors with a long-term horizon, lesser time for market analysis and keen financial understanding, have a desire to accumulate wealth over time. In contrast, accurate short-term trading can yield more profits. Therefore, if one can combine short-term trading attributes with long-term approach, one can amplify the gains.

UST team has utilized our expertise in algorithm based analysis and trading to develop a longer term investing. This model has been in test mode since November 2014 and has performed exceptionally well in out-performing the market.

Although model's performance is being discussed on the blog for the past couple of weeks, following is a snap shot of actual market performance of the brokerage account where this model is being implemented in real-time.

Please note that the snap shots start from March because the pull portfolio was moved to the model based investment on March 1, 2015. We will continue to evaluate the model, its performance, holdings and other aspects on the blog.

Note: Overall market remains in a bull.