US bond returns are now negative over the past 2 years. The last time that happened was 1981. While there will likely be bumps along the way, I don’t think it will take another 37 years before we see another negative rolling 2 year return, do you? If not, it’s a good time to be thinking about how to immunize your portfolio.
Forewarned is Forearmed
As you can see in the graphic below, for the most part US equities mirror those of the rest of the world. Well, at least we can say they tend to both move up and down together. There are times when one of the two considerably outperforms the other. The first instance of this performance divergence occurred beginning in 1986 when global equities turned tail and left US stocks in the dust. It took about a decade before they came back into balance.
For the next 20+ years the two pairs tracked fairly well except just before the 2007-’08 huge market draw-down where foreign stocks, once again, vaulted to the upside. In both cases of foreign stock out-performance, you needn’t look any further than the dollar for an explanation as it fell precipitously, bringing rise to foreign asset values.
Fast forward to today’s post-apocalyptic 2008 market crash revival, US stocks are massively outperforming. The reasoning may be flipped but the cause is still the same, the dollar. It’s been ripping higher since the 2009 stock market bottom. If you are like me and believe the dollar is on a mission to much, much higher levels, its likely US stocks will continue their tremendous out-performance. Keep this in mind as you rebalance your portfolio. If I am wrong, it will present investors with one the greatest reversion-to-mean trades in recent history. Forewarned is forearmed.
Mo
There are a number of compelling academic studies including the Jegadeesh and Titman report published in the Journal of Finance which showed a portfolio of momentum stocks outperforms the broad-based SP500 index. Other studies demonstrate it’s not required to put your entire portfolio into momentum stocks if you want outperformance. Just having portfolio exposure works too.
One of my go-to vehicles if I want to spread my risk across many momentum stocks is MTUM, the Ishares ETF. The chart below is a 5 year look at the ETF. In the upper pane is RSI which was massively overbought but after the recent double digit pullback, has been reset, is above 50 and rising. In the middle pane is price which is above both its blue uptrend line and the rising 200 day moving average. I would be remiss if didn’t mention, it is within 9 cents of breaking out to new, all-time highs.
And if you are wondering how it has performed, the bottom pane is the ratio of MTUM against the SP500 index. When looking at ratios remember a rising line says the ETF is outperforming the US stock index. Pretty easy to see this momentum play does very well during uptrends, but loses more in downtrends so keep that in mind when investing. Over the last 5 years, MTUM has outperformed the index by more than 35%, a 6% annualized rate of return greater than the benchmark.
May 2018 Charts on the Move Video
The US stock markets continue to consolidate and digest its huge 2017 year run-up and subsequent double digit correction. The lone exception being small cap stocks as they have moved on to all-time highs. Will the rest of the market follow suit? The benefit of the doubt has to be given to the prior underlying trend but I don't think the answer will be resolved any time soon. Until then, check out this month's Charts on the Move video at the link below ...
Cisco Bulls on Notice
One of old techs beloved companies, Cisco, has been on an 8-month tear. But its recent earnings announcement, while not bad, was not well received by investors and The Street. Price gapped down more than 4% the day after the call and has been consolidating sideways since. As you can see in its daily chart below, price sits right on a confluence of support, including both horizontal and its rising uptrend line which, just coincidentally, is the bottom of the (blue) bearish rising wedge. On a longer-term time-frame, price is well above its rising 200 day moving average telling me any short-term concerns are, well probably just that, short term. But risk is clearly elevated right here so CSCO bulls have a decision to make if support does not hold.
If price were to break support and hold below, I have identified likely downside targets on the chart as T1 and T2. CSCO shareholders have to be open to the potential for further downside as price sits below both its declining 10 and 50 day moving average, telling us in the short term, the sellers are in control. This is made obvious by perusing the lower volume pane where the big volume is dominated by the red (selling) bars. I would be remiss if I didn’t mention the slight bearish RSI momentum divergence and the head and shoulders top pattern which adds further caution to the stock continuing its move higher.
If the buyers can hold above the current support zone, it is likely we will see CSCO go on to make new, all-time highs. A break below and move to one of the lower targets would likely signal the (short term) end of its recent bull run and a much longer-term sideways consolidation, something most traders would prefer to avoid.