The first week of 2016 has been the worst in the history of the stock market. My January Effect portfolio has been reduced to smoke and ashes. I did have some shorts on for a hedge, but not nearly enough. I had individual company issues also: SKUL warned of a bad holiday season and the stock tanked 25%. This was the largest holding in the portfolio. So far I have sold some positions but I am holding others, as most technicians believe we should see a bounce here in the general market for the next week or so. Long term though, most are looking for a much larger correction (as do I).
Stocks now on the Tax Loss Portfolio list include SKUL - OBCI - TUES - ENG - BOFI - FHCO - WTT - and a couple funds in the energy sector - FCG and AMLP. I am either buying these, adding to existing positions, or looking to buy.
The downside target of 2000 to 2020 was hit on the S&P at 2019. The rally has now taken us to 2097 before backing off a bit on Friday. I did put on a small short position as the rally started fading from the 2097 level. At this point it seems as if we may trend a little lower, maybe to the 2060 level or so before resuming higher. Either way I feel I need to have at least some shorts on here as a hedge as I build the January Effect portfolio. So far I have targeted SKUL and TUES to be included in the portfolio and will add to those positions over the next few weeks. I am also looking to buy FCG as the energy component of the portfolio. FCG is a natural gas/oil ETF that may get some January Effect buying after the tax loss season. The components of the fund are generally small to mid-cap names. Here is the complete portfolio composition today:
https://www.ftportfolios.com/retail/etf/ETFholdings.aspx?Ticker=FCG The 2015 and 2011 chart playbook is now underway (see posts below). Unfortunately I did not expect the current market to creep much higher than 2080 and of course (because the market will spread as much pain as possible) I had to trim my short position down somewhat as we broke above 2100. Downside is most likely around 2000 to 2020 before the obligatory Santa Rally, but we shall see. I have added a few names to my watch list for the 2015/16 January Effect portfolio. The names I am watching so far are SKUL - TUES - SCX - FHCO. I will add others soon.
My favorite trading strategy each year is building my "Tax Loss" - "January Effect" portfolio. This is generally a two to three week trade where I purchase beat-up small and micro-cap stocks with tax selling through November and December adding downside pressure. Since this selling tends to be exaggerated, there can be a slight to moderate reflex in price towards January and beyond... Hence the "January Effect".
I generally do limited research aside from chart/price action and I attempt to find more value related stocks (low P/E - low price to book value - below liquidation value if negative earnings). The second issue is when to start buying. Some stocks seem to sell off all the way through December 31st, when others seem to start getting buyers in the first few days of the final month. So I generally buy a few shares here and there and build the position over a couple weeks. I also like to find at least five stocks for the portfolio, so if I get one or two bad trades out of the bunch it won't kill the whole return. Market performance during Dec and Jan obviously also has a big effect on the general return of the trade, with poor market performance translating into flat/no returns or good market performance leading to outstanding returns. Since energy has done so poorly this year I am assuming that those stocks would dominate any screens I perform. Therefore I will most likely limit the portfolio to just one energy name to keep it balanced. I will post updates as I add stocks in Dec. First Internet Bank posted 51 cents for the Q just ended. They beat the analyst's view by 5 cents and crushed last year. But they only increased the prior Q by one cent, and therefore the stock will most likely just get a lukewarm response. I have not dug into the numbers yet so I don't have much to comment on. They did raise some $10 Million through a debt placement so this should allow them to grow the book of loans (and accounts) which could help #'s going forward. In the meantime there is a bit of a scandal going on over at our original stock pick in this space - BOFI. Apparently, one of the former employees (that happened to be an inside auditor) was fired. He subsequently filed a lawsuit that basically said he was terminated because the company wanted to silence his concerns and that BOFI was not forthcoming with its regulators. So as a result the parade of class action attorneys have been piling on and the stock has taken a beating. The company denies all this and the regulators seem to agree so far - or at least are quiet about it. I currently have no position in either stock mentioned (but may purchase shares at any time). On another note, this past week has been my worst in years; my market shorts are getting crushed as the Central Bankers (Planners) over at the EU have been letting everyone know that they will keep printing until all currency is worthless. China does not want to be left out of the party either so they announced another rate cut overnight. The currency wars (or a race to the bottom) are ongoing. At this point the market is very near recovering the old highs. Most of the big boys like MCD - MSFT - GOOGL - AMZN are all exploding to new all time highs. It almost seems as if they have to make up for the 30% of the remaining stocks which are stuck in bear market territory (it is tough work but someone has to do it...) During the pullback in 2011, the market action was somewhat the same: A massive rally off the bottom to a high around October 26 - then fading quite a bit until about the third week in November, then the obligatory Santa Rally that took it to new highs. I am looking for the same type of action now. I should add that I am less confident in this view than I was a day or so ago, but for the time being, I am sticking with it. This last Friday, Oct 16 was the usual option expiration day. I was looking for articles about market performance going into and after options expiration to see if there are any trends. Sure enough, I found a couple different sources which shows pretty strong evidence of outperformance heading into expiration and underperformance after.
It seems that the Monday following expiration is usually the worst day for going long, followed by Wednesday. Turnaround Tuesday, Thursday and Friday of that week are not as bad. So putting some ultra-short ETF's to work just before the close of option expiration Friday could probably be a good one-day trade. Well I shall see how it works out as I came into today (the Monday following Option-Ex) with some heavy short exposure. Long SDS and DXD (short term trades). ***Update: The S&P was red most of the day until the last minute when it poked higher by a half a point. This market has been trading like it won't close red for the past couple of weeks. I am keeping my short bias on as the S&P is only off 4.5% from its all time high at this point, and is currently at 2033. With all the technical damage done lately and the deteriorating fundamentals, I can't see how the August meltdown was just a one and done. I did go slightly long Crude and Nat Gas by shorting the 3X's leveraged ETF's - DWTI and DGAZ. So if I told you that you could have a market beating return by just being fully invested for 8 days out of the year and in cash the remaining 357 days, would that seem crazy? Well according to research created by the NY Fed, you can do just that:
http://www.newyorkfed.org/research/staff_reports/sr512.pdf According to the research, which primarily looks at data from 1994 to near present, if you buy the S&P on the stock market open on the day prior to a Fed meeting, and sell about 15 minutes prior to the announcement at 2:15 the following day, you can have an average daily return of about .5%. Interestingly, if you remove the historical performance of these 8 days from each year going back to 1994, investing in the stock market wouldn't be so hot. I suppose the best strategy here would be to buy call options on the SPY or perhaps use a leveraged 3X fund (like SPXL) as the trading vehicle on those 8 instances. My biggest concern with this strategy is the simple fact that the cat has been let out of the bag and generally strategies fail as soon as they are identified. The research report was dated 2011. There was not much difference between periods of tightening or easing. In the chart below, the solid line is the market performance on Fed days and the dotted line is the average return on non-Fed days. We have been picking up a few shares of SLGD - Scott's Liquid Gold - around the $1.20 area and higher. With a market cap around $14MM and cash on hand approaching $7MM - there seems to be some value here, especially considering earnings have been on fire the past couple years and they are adding cash at an incredible pace. The old product line (furniture care product) is not what is fueling growth here, but it's their health and beauty line (some of which they do not manufacture but only act as distributor). The earnings have been nothing short of amazing at about 24 cents the past year (which gives a P/E of about 5) - and no, this does not count the tax benefit they received in the last Q. They recently renewed some distribution agreements which should last at least another year and a half until they need to be renewed again (their big product is Batiste Dry Shampoo which is owned by Church and Dwight). These types of deep value plays (with strong growth) don't show up every day.
**Disclosure: As usual we can buy more shares or sell at any time. Now that crude is once again crashing and burning I have been playing bounces down here below $45 by shorting the 3X Crude Bear fund (DWTI). I am having a hard time at this point though taking any investment a step further to invest in any micro-cap oil, like ESTE - Earthstone. If oil stays this low for a longer period it could prove quite bad for these small players, even the ones with solid balance sheets like ESTE.
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Paul SaadSenior Manager, Paul Saad and Associates, LLC Archives
May 2020
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