ITA Wealth Management

Walking through the technical indicators for each of the “Big Six” ETFs, I see where all are positive with exception of VOT.  This Mid-Cap Growth ETF is not quite showing a positive CMF.  The RSI and MACD graphs are positive for all the basic equity ETFs.

If one is still skittish about this market, then there is one additional indicator to wait on and that is the 25-Day and 50-Day EMAs you see in the top graph when using the link provided above.  Don’t purchase the ETF or stock until the 25-Day Exponential Moving Average (EMA) moves from below to above the 50-Day EMA.  That would be the final indicator to wait on.  However, if you are beginning to have confidence in the market, then rely on the RSI, MACD, and CMF graphs.  Those are showing positive signs for the “Big Six” equity ETFs.

Photograph:  Near main transportation center in downtown Amsterdam, Holland

Take time today to walk through each investment in your portfolio and check out the following technical indicators.  Link to this StockCharts page to see if your investments are recovering from the Bear Market.

My recommendation, for those uncertain about this market, is to wait for the following to occur.

• Wait for the 25-Day Exponential Moving Average (EMA) to move from below to above the 50-Day EMA.
• Wait for the RSI graph to move from below to above the 30% level.
• Wait for the MACD to turn positive.
• And last, wait for the CMF graph to go positive.

I consider the first three to be the most important indicators.  By waiting for all four to go positive, one will miss the initial days of the upward market move, but no one is likely going to call the bottom so play it safe.

Lowell Herr

Photograph: Fat City Cafe, Multnomah Village, OR

Check out this link and read the article on how Geoff Considine analyzed Warren Buffett’s Berkshire Hathaway (BRK.A) portfolio using Quantext Portfolio Planner (QPP). As one reads more Considine articles, terms such as the Diversification Metric and Portfolio Autocorrelation will become more familiar.

Later this fall I will spend more time analyzing the asset allocation portfolios available to Premium Content subscribers.  You will see some analysis show up over the next few weeks on the free side as well.

Lowell Herr

Photograph:  Fat City Cafe’s Halloween decorations

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What do we do now?  The S&P 500 is down around 40% to 50% from its high.  Once the market is cut in half the probability of going lower is shrinking to a smaller and smaller percentage.  Cash seems to be king and there is no reason not to sit on it a little longer.  However, there is something the investor can do.  Take a little time to examine the StockCharts for each asset class in your portfolio.  Set out four changes you are going to look for in the StockCharts.  Don’t move back into the ETF until all of the following four indicators turn positive, and here they are.

1. In the top graph, the 25-Day EMA must move from below to above the 50-Day EMA.
2. In the RSI graph, the line must move from below to above the 30% line.
3. In the MACD graph (third down from the top), the histogram must turn positive.  The black line will cross from below to above the red line.
4. Wait for the CMF graph to turn positive.

When all four technical indicators turn positive, the probability of moving forward is higher.

Note that I extended the EMA values in the top graph from 13/26 to 25/50.  This slows the action and is an attempt to make sure the broad markets are turning around before making a move back into the ETF of interest.

The reason for waiting for all four indicators to turn positive is to avoid that old nemisis of the whipsaw.  Even so, it can easily happen in this market environment.

Lowell Herr

PS  I wrote this a few days ago, but the information still applies.  There is no reason the 8,000 DJI will not be retested when additional negative economic information hits the wire.

Photograph:  Chinese rug

Mid-morning, check each of your stocks, index funds, or ETFs using this StockChart graph. The reason for waiting until after the market has time to respond to the Asian markets is that it will give you a better sense of the direction this market may move over the next few days.  If you are fully invested, stay the course.  If you have cash available, check to see if any asset classes are under target.  Pay particular attention to the index funds or ETFs of those under weighted asset classes.

Assume, for example, your portfolio is under weighted in Small-Cap Value.  The ETF I use for this asset class is VBR.  I go to the StockCharts VBR graph and I see every graph is negative with exception of the CMF or bottom graph.  I am waiting for the 13-Day Exponential Moving Average (EMA) to move from below to above the 26-Day EMA.  Watch for this action in the top graph.  That will be an important move when that happens.

Next, look for the RSI graph to move from below to above the 30% line.  This could easily happen this week.  And then as confirmation, watch for the MACD or third graph to go positive.  The histogram bars will move from negative to positive when this happens.

Don’t be surprised if all four indicators turn positive (one of the VBR indicators is positive) and then go negative as the market tests or establishes new lows.  This is known as a whipsaw.  An asset class such as VBR may begin to move up and then suddenly swing down again.  With the broad market already down 40%, we must be very close to a market bottom.  I don’t see it dropping much more than another 10%.  However, it is anyones guess as to what will really happen until the credit markets begin to unfreeze.

Getting back to our Small-Cap Value example - buy your VBR ETF in increments as you bring this asset class back into balance.  If you have more than one asset below target, and this is almost sure to be the situation, buy a few shares on alternate days as you gradually repopulate those asset classes that are below target.  Purchase sufficient shares so your commissions stay below 1%.  The lower the percentage, the better.

Don’t be in a big hurry to buy as we may not be at the bottom of this market.  If the market moves up and then turns back down, just relax before making your second round of purchases.  Wait until the indicators discussed above again turn positive and then repeat the buying process.

Lowell Herr

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One of the most frequently asked questions of asset allocators is - How does one know what percentage to assign to each asset class?  Generally one takes examples from books or other investors practicing the investment style of allocating assets.  Now we have a tool to help make this decision and it is the Quantext Portfolio Planner (QPP). Beginning later this fall, we intend to run an out-of-sample portfolio using the QPP analytical method to help determine what asset classes to overweight.  This portfolio and associated analysis will only be available to Premium Content readers.  Below is a sample analysis of one portfolio.

The Mosaic2 Portfolio holds the following ETFs with target percentages as shown.

• VTV = 9%
• VOE = 9%
• VBR = 9%
• VUG = 6%
• VOT = 6%
• VBK = 5%
• VEU = 17%
• VWO = 12%
• VNQ = 10%
• GSG = 7%
• BND = 10%

Using these ETFs, and associated percentages, this portfolio is projected to return 10.75% over the next year.  The standard deviation is a modest 10.2% while the Portfolio Autocorrelation (PA) and Diversification Metric (DM) are 27.8% and 65% respectively.  DM shows excellent diversification as expected considering how the portfolio is diversified over the broad market.

The question before an investor is the following.  Is it possible to increase the return while keeping the SD low, the DM high, and lower the PA?  What the QPP software permits the user to do is vary the target percentages to enhance return while monitoring the other three variables.

Premium Content readers now have access to see how changing the target percentages enhance the return of this portfolio.

Lowell Herr

Photograph:  Fat City Cafe, Multnomah Village

With all the market volatility over the last few days, now is a good time to check the asset allocations of your portfolio.  If the asset classes were close to target a week ago, there likely will not be any changes.  However, value and REIT asset classes are holding up better than growth and international so some shifting in the portfolio is likely.  The +/- 35% band provides considerable cushion against rebalancing.  Nevertheless, make a quick check using the Thomas/Lalla/Herr spreadsheet.

If any rebalancing is required, make every attempt to do it with an infusion of new cash or dividends rather than selling off any ETFs, stocks, or index funds.

If you happen to have more than one asset class below the 35% lower limit, take a look at StockCharts to see if the technicals are of any help.  I’ve discussed this in more detail over on Premium Content over the last few weeks.  If you have access to PC, click on the Technical Analysis link.

The StockCharts graph is set to view the Mid-Cap Growth ETF, VOT.  Type in the ticker of each asset class you are holding to see if any are showing RSI values below the 30% level.  Then look to see if the MACD is negative or positive.  Last, check the Chaikin graph to see if it is positive or negative.

Premium Content subscriptions available for $6.99 per month.  Sign-up today for more information on portfolio construction and management.

Lowell Herr

Photograph:  Alpenrose Velodrome Time Trials

Walking through StockCharts such as this graph for VOT, ETFs that are showing weak RSI graphs are growth, international, emerging markets, and commodities.  A weak RSI is when the graph penetrates from above to below the 30% line.   Mid-Cap Growth is a particularly weak asset class at this time.

When one experiences a market such as what we are now in, it is a good time to look at the technical indicators for each asset class in the portfolio and then review each asset class to see which ones are below target.  If cash is available, consider adding to weak asset classes when the signals turn positive.  I will give a few examples over on the Premium Content side of the blog.

Lowell Herr

Photograph:  Chengdu, China

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Look for changes tomorrow when the “Top Ten Stocks” and “Creme List” are posted over on Premium Content.  Yesterday’s market drop had a major impact on the Point & Figure (PnF) graphs as many stocks I classified as Bull rotated to Bull-O.  To define these terms, go to a PnF graph for Paychex (PAYX). Note the red line has a negative or “Bear” slope.  Then move to the far right column and you will see it populated with X’s.  I code such a graph as “Bear-X” and then give it a quantitative rating.

Now move on and type in the ticker, JNJ.  When I looked at this graph, the blue line has a positive slope and there are X’s in the right-hand column.  I call this a “Bull” PnF graph and the best one can find.  If the graph is blue or has a positive slope and O’s are in the right-hand column, the stock is coded as Bull-O.  This means the overall ranking is positive, but the price is beginning to drop.  I would rather see a Bear-X than a Bull-O graph.  A Bear-X is a stock with a red or negative slope for the graph, but X’s in the right-hand column.

Getting back to the “Creme List” of stocks, I went through the 140 plus stocks I track and checked every stock that had a PnF rating of “Bull.”  Most of those stocks, due to the major downward move in the market, turned from “Bull” to “Bull-O.”  When this happens, it shakes up the ranking system and that is why I expect to see changes this week in the “Creme List” and “Top Ten Stocks.”

These lists should be published sometime tomorrow over on Premium Content.

Lowell Herr

Photograph:  National Air & Space Museum

We are closely watching the RSI and MACD technical indicators to see when it is appropriate to add more shares of ETFs, assuming one has excess cash to put to use in equities.

Here is an example of what we are waiting for. Click on this link and you will see several graphs for VOE, Vanguard’s Mid-Cap Value ETF. Note the RSI graph is below the 30% line, indicating this ETF is oversold. The gamble is when to buy back in. 1) Place a limit order at this point and wait for the price to be struck. 2) Wait for the price to move the RSI graph from below to above the 30% line and then buy when the MACD turns positive.

For the MACD to turn positive, we need to wait for the black line to move from below to above the red line. If this were to happen, there is no guarantee the MACD will not “whipsaw” and turn negative. However, when the RSI is this low and all other signals are also negative, it is only a matter of time until things get better. If the RSI for any of the ETFs of interest were to move below the 20% line, then raise all the cash possible and put in orders for ETFs in that condition.

It appears as if we may be days, if not a few weeks away from a buying opportunity. It is time to stay vigilant.

Watch for the resulting trades within the Premium Content.

Premium Content available for $6.99 per month.  Register now and take advantage of trial offer.

Lowell Herr

Photograph: This is where the “salt stream” comes out of the mountain providing salt for Peru and for export.