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. 

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