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STREET SMART
REPORT ONLINE
From: Asset Management Research Corp.
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We wouldn't think so. We have a broad range of subscribers, with quite different interests regarding the market and investing. So we provide several types of portfolios for them to choose among as a rough model they should adjust in accordance with personal situations, financial situations, age, goals, interests, time for the market, etc. Because we have no way of knowing what those personal considerations are, we cannot provide asset allocation recommendations or specific portfolios that will suit all. Our model portfolios should be considered as guides of how we think current market conditions could handled, with subscribers understanding our caveat as expressed in each issue of our newsletter, that "These reports express our opinions, provided solely as a supplement to your own further research. It is each subscriber’s responsibility to decide which, if any, opinions or recommendations are suitable for their own situation, and in what manner to use the information."
But in general, the regular Seasonal Timing portfolio is designed for those who want to spend very little time watching and worrying about the market (two trades a year), but want a strategy that has good odds of outperforming a buy and hold strategy, and with less risk. The aggressive Seasonal Timing portfolio is for those who, for the same reason, want to follow the seasonal strategy, but whose personal and financial situation, and risk tolerance, has them wanting to take more risk in an effort to outperform the market to an even greater degree. So it uses mutual funds that are leveraged to the market indexes, and takes some short-sale positions in the unfavorable season. The regular market-timing mutual fund portfolio is for those who prefer to spend more time on the market, and market-timing, and use mutual fund holdings, (including ETFs and bear-type funds for sell signals).
First: Analysts, money-managers, mutual fund managers, etc., appearing on financial shows or interviewed for print media articles, and columnists in newspapers and magazines, know they won't have an opportunity to provide follow up information when the time comes to sell. So they have to provide targets and protective stops as a substitute. But we believe it's a poor substitute for ongoing analysis of positions, since conditions for companies, sectors, even the entire market, can undergo significant changes after initial buy or sell-short recommendations are made. So we attempt to provide follow-up advice on every recommendation we make until it's closed, via website commentaries and our hotline updates. That way we can allow profits to run past what may have been chosen as targets, or can take profits before targets are reached if conditions change. Similarly, when positions move against us, we can give them more room to get going for us if our work shows we should, even if the position moves past where we might have set a stop. Or we can cut losses even quicker than a stop would, if the outlook for a position deteriorates for some real reason.
Second: Some years ago when we did give protective stops, there were a number of times when a stock would suspiciously reverse and move opposite to the direction we expected just enough to reach the stop and pick off our position, and then return to the direction we expected. About the same time that we were becoming concerned, Martin Zweig, a well-known newsletter publisher at the time, announced he would no longer be providing protective stops. His reason was that the specialists and market-makers couldn't help but notice the several hundred or several thousand protective stops all set at the same time, at the same price, for the same stock, in their 'books'. He suspected it was often too big a temptation for them, for instance on a protective stop on a buy position, to simply move the stock down in the direction of the stop enough to trigger the stop and automatically bring in all that selling so they could pick up the buy positions for themselves at an even lower price. (The reverse on short-sales, an opportunity to bring in a substantial amount of artificially induced buying as the stop is hit, to drive the price even higher where they could take the short-sale positions for themselves at an even higher price). In any event, when Zweig stopped providing stops, his subscribers' problem of being mechanically stopped out of positions that later turned out to be good, ended. And when we also stopped providing stops our subscribers' occasional problem ended.
As many of you will remember, in 2000 we succumbed to subscriber pressure to provide stops, and decided enough years had gone by that maybe we should give it a test. So when we sold Dell short at something like 50, we provided a downside target of 25 and a protective stop at 56. The stock, which had started to decline, almost immediately reversed direction when all those subscriber stops poured in at 56 in the market-maker's 'books'. Dell climbed back up, reached 57 for a day or two, and then immediately returned to the downside, and within a few months exceeded our downside target of 25, getting as low as 15. It was an expensive test. By providing the stop we lost out on a profit of more than 100% on the short-sale. We decided we would go back to doing it the way we think best, no stops.
This answer is particularly for stock-brokers and public relations firms: Sorry. Wasting your time. Not going to happen. Because of the business we're in, we receive literally hundreds of write-ups, charts, and even very expensive Fed-Ex'd presentations, etc. of stocks from people who think we should recommend them to our subscribers. Some come in anonymously, no signature, similar to the anonymous 'tips' in chat rooms. Some are signed "John" or "Bob" because everyone knows a John or Bob, right? Most that are identified come from corporations, public relations firms representing corporations, stock-brokers trying to hype a stock, other newsletters (trying to get us to recommend a stock to drive the price higher for their subscribers), and from individuals probably trying to hype a stock they already own by sending similar messages to every newsletter they can find, hoping a few will bite. They are all deposited in the round file. Those that arrive as e-mail attachments are not opened for an additional reason. We do not open attachments due to the risk of importing a virus. There are numerous strategies and methods of picking stocks. We have our own.
We can't respond. We receive dozens of charts, studies, and opinions every day asking for our thoughts. All we can say is that there are numerous ways of analyzing every situation, otherwise there could not be a market, as there must be a buyer for every seller and vice versa. Meanwhile, our subscribers are paying for our analysis, opinions, and recommendations only, and it adds to the difficulty of remaining focused on our own approach and strategies to have all these 'alternative' charts and explanations arrive.
People also send us dozens of clippings and quotes every day from the analysis of other newsletters, magazine columnists, and links to other financial websites, asking us to look them over and comment on why our opinion is different. We cannot even look at them, let alone take the time to comment on them. Not only would we get nothing else done, but again it would be very difficult to maintain our focus on our own strategy and approach to market analysis, if we allowed ourselves to be distracted by the approaches of others. And after all, it is our research and analysis, right or wrong, that our subscribers are paying for. Keep in mind that there are 600 newsletters out there, as many or more investment websites, thousands of reporters and columnists at magazines and newspapers across the country writing their opinions of the market and individual stocks, as well as 20,000 analysts working for brokerage firms, investment banks, mutual funds, and money management firms. There is no shortage of differing opinions. For everyone who has analyzed a situation and wants to buy, there are just as many who have analyzed the very same information and want to sell. And it's a good thing that is so, or there could be no market, since in order for trades to take place there must be a buyer for every seller and vice versa. Lastly, we use the limited space in commentaries and hotline updates to provide all subscribers with the information we believe is important, that pertains to our analysis, and cannot use them to answer an individual subscriber's questions, or to comment on what some other newsletter or research firm is saying.
We're sorry but we cannot include individual consultations with a subscription, or act as a personal financial advisor to each individual subscriber (particularly at a subscription cost of $4.50 a week). We are able to provide our research, analysis, and recommendations at such a low cost only because it goes out to everyone at once. As far as providing advice on individual stocks that people have in their portfolios that we have not researched and recommended, there are more than 10,000 stocks out there. Analysts being interviewed on TV make it look like they can just give buy, sell, or hold advice off the top of their heads to viewers who call in, and so subscribers sometimes expect we should be able to do the same. But we know from our own experience that the questions are known to the analysts being interviewed on those TV 'call-in' shows well before the show, so they can research them. Additionally, there are always hundreds of callers and only a few picked for the show, and those are the callers asking about stocks the particular analyst is familiar with. It takes hours to download data, study financial statements, analyze competitors, products, etc., to come up with a recommendation on a company, and whether we believe you should hold that company's stock.
We're sorry we can't provide a better answer, but our indicators only give us one buy signal and one sell signal (or one sell-short and one close-out signal for a short-sale) on each cycle. Although what we're going after are intermediate-term moves of one to four months, we have no way of knowing how long each signal will last. Once a signal has been in place for a month or more, obviously a holding that has already made a move of 10% or more in that month is not as low risk or as good a buy as it was at the recommendation.
There's no simple answer. When we give a batch of recommendations in a specific portfolio, it's usually best to buy some of each, as the best investors in the world, even the likes of Warren Buffett and Peter Lynch, say the best you can hope for is to be right 75% of the time. But that's more than enough to make good profits as long as you cut your losers quickly and let your winners run. So to pick the recommendations that haven't yet performed on the theory that they have to do so is probably the opposite to what you should do, as since they haven't begun to work out, they could be the 25% that will not work out. It would probably be better to buy the whole package, or the ones that are moving as we expected.
Brokerage firms and mutual fund companies would have a tough time surviving if very many investors were aware of the market's seasonality and moved their money to cash for six months every year. So they must go to whatever lengths they can to distort the information.
Invariably in trying to refute the very clear proof of the market's consistent seasonal patterns, these firms run their data from 1900, even though all of the research on seasonality shows the seasonal pattern did not begin to show up until 1950. The reason for that is simple. The seasonal pattern results from the extra chunks of money that flow into investors' hands beginning in the fall, from distributions from mutual funds (most of which have fiscal years that end either September 31 or October 31), from Christmas and year-end bonuses, from profit-sharing bonuses, income tax refunds etc. Additionally, extra chunks of money flow automatically into the market at year end from employers' contributions to their employees' 401 K and other pension plans, from automatic re-investment of mutual fund distributions, from tax-payers' annual contributions to their personal IRAs, Keough plans, etc. These extra chunks of money provide $billions of extra fuel for the market over a six month period, driving prices higher in the favorable season. In the spring those extra chunks of money dry up, removing that fuel from the market and making it much more vulnerable to any selling pressures that develop.
However, there were no such extra chunks of money prior to 1950 because there were no mutual funds, no tax deferred 401K plans, IRAs, Keough plans, etc. The concept of companies sharing their profits with employees through profit-sharing plans had not appeared. Income taxes were non-existent, and when they were introduced were a tiny fraction of what they are today, so income tax refunds were not a factor. And so on.
So when a brokerage firm tries to refute the market's seasonality by running their numbers from 1900, and then claim that the advantage of the seasonal periods is too small to utilize, they have totally distorted the actual numbers they know they would have if they ran the numbers from 1950 when seasonality began.
Further, they invariably do not include the interest on cash that a seasonal investor would receive in the unfavorable seasons. While that may not seem like much in these times in the interest rate cycle when interest rates are low, but at the high of the interest-rate cycles rates are often in double-digits. So, leaving interest income out of long-term calculations is a gross distortion of statistical analysis.
Also, none of the firms that pioneered seasonal research, including Ned Davis Research Inc., The Institute for Econometric Research Inc., Stock Traders Almanac, Asset Management Research Corp., claimed that an investor would outperform the market by investing only in the market's favorable season of Nov. 1 to May 1. The research only revealed that an investor so investing would have matched the performance of the S&P 500 over the last 50 years, and would only have had 50% of market risk since they were in the market only 50% of the time. Or in other words, an investor would have been just as well off to stay away from the market during its high risk unfavorable seasons.
Finally, the brokerage firm's attempts to refute the market's seasonality only refer to calendar-based seasonality, and do not tackle our Seasonal Timing Strategy, which employs MACD to better define the entry and exit points. It is only the combination of that momentum reversal indicator with the market's calendar seasonality that produced the back-tested and real-time performance in which STS approximately triples the performance of the S&P 500.
It's really up to each individual to decide which of our recommendations are suitable for their individual situation. We've been providing our market analysis for many years, while our Seasonal Timing System was introduced in 1998. Many of our subscribers have switched over to it as it has a great record, and simply requires two trades a year, in and out of an Index fund.
Others prefer to be more active or more aggressive, by using individual stocks, short sales, sector funds, options, what have you. Some of those confine their buying to when the Seasonal Timing System is in its favorable season, and their short selling to when the Seasonal Timing System is in its unfavorable period, but don't use the STS as designed, to simply switch in and out of index funds twice a year.
Still others ignore the Seasonal Timing System and follow our ongoing market timing, some on the short term signals for short tem trading, others for the intermediate term signals. The thing is that while over the long term the Seasonal Timing System has a great record and is easy to follow, there are sometimes rallies in its unfavorable season, and sometimes corrections in its favorable season that traders can take advantage of with our ongoing charting and market timing.
Still others follow the seasonal timing with a portion of their portfolio and dabble in the other recommendations with the rest. Still others follow none of the portfolios, but utilize the market timing and risk level information in their own decision making.
All in all there are just a great many ways of using our service, as we try to pinpoint for you the outlook for the market short term, intermediate term, and long term, as well as its seasonal tendencies, the risk levels as conditions change, and stocks and sectors that look either positive or negative at the time. But, since our subscribers have various personal, financial, age, and risk tolerance levels, it is up to each to decide what is suitable for their own situation.
MACD as we use it is plotted as follows:
Using the daily closing prices of the index or security you want to plot MACD on, subtract the value of a 26 day exponential moving average of the closes, from a 12 day exponential moving average of the closes. That produces the solid indicator line. Then plot a 9 day exponential m.a. of the indicator line, and display it on top of the solid indicator line as a dotted or different color line, so you can tell the two apart. The dotted line is known as the signal line. When the solid line crosses the dotted line to the downside it produces a sell signal. When the solid line crosses the dotted line to the upside it produces a buy signal.
If you use weekly data rather than daily data, or assuming you're doing this via computer, simply compress the daily data by a factor of 5, you will change the short term MACD indicator to an intermediate term MACD indicator. Only the short term version is usable with the Seasonal Timing System.
A related question: What is an exponential moving average? See the seminar on moving averages in the Street Smart School for more details, but an exponential moving average is calculated by applying a percentage of today's closing price to yesterday's moving average value, and doing so on a continuous basis. The idea is that by doing so, more weight is given to recent market action and increasingly less to older data. To quote the example given in the Equis Metastock manual;
To calculate a 9% exponential m.a. of IBM: First, take today's closing price and multiply it by 9%. Then add this product to the value of yesterday's moving average multipled by 91% (100% - 9% = 91%).
M.A. = [(today's close) x 0.09] + [(yesterday's m.a.) x 0.91]
That is a very basic description. Technical analysis textbooks run to numerous pages just on moving averages.
NOTE: MACD is not a perfect indicator by any means. We use the short term (daily closes) MACD by itself only to better pinpoint the exits and entries of our Seasonal Timing Strategy, as all we need is a simple momentum reversal indicator that has good odds of telling us if a short term rally has begun as the calendar date approaches. If a rally has begun, we can enter then rather than waiting for the mechanical calendar date entry. Similarly, as the calendar exit date approaches in the spring, if MACD triggers a short term sell signal as the calendar date approaches, we use the MACD signal to exit a couple of days to a couple of weeks early rather than waiting for the mechanical calendar date exit. Likewise if MACD is on a buy signal and a rally is underway when the calendar exit date arrives we will stay in until MACD triggers its next sell signal indicating that the rally has ended.
We use Metastock Professional from Equis International. But, it is quite expensive, and is overkill if all you're looking for are a few simple indicators like MACD. We have not done a study of which other charting programs include MACD. However, we've had subscribers tell us they got it in free software supplied by their broker, or from free shareware on the Net. There are also numerous advertisements for charting software in the advertising section of Investor's Business Daily, some of them offered free. (We don't know if there is some catch to getting the free ones or not).
There are no guarantees in investing, only probabilities and odds. There have been corrections in favorable seasonal periods, but they have tended to be smaller and easier to hold through than the serious corrections and crashes that have mostly taken place during the unfavorable seasons. That is why being invested only in the favorable periods over the last 50 years more than tripled the performance of being invested also through the unfavorable seasons.
Our business is strictly a research firm that sells its opinions and recommendations derived from that research via subscription. It is able to do so at the very low cost of roughly $4 a week because the information goes out to several thousand subscribers at once. There could be any number of reasons why you are not able to duplicate our indicators or charts, either within the data you are using, the limitations of the charting software you are using, or how you are using it. We are just not able to take $50 an hour analysts off their work for all subscribers to try to help those who are interested in doing their own technical analysis. That is just not the purpose of our work or within the scope of our subscriptions.
There are numerous financial websites that do provide chart-making abilities on-line on an individual basis (Yahoo Financial, and Big Charts apparently being the most popular), and which provide basic information on technical analysis for those interested in doing their own analysis. Most also provide chat rooms for investors to carry on individual discussions of the market, compare their opinions and analysis, etc. They usually obtain their revenues from advertisers, by renting or selling subscribers names and e-mail addresses, etc.
For what help in might provide, the data used in our charts is primarily downloaded from Reuters Datalink and Dial Data. Economic, inflation, interest rate, sentiment data, etc., is obtained directly from the source, including the U.S. Labor Department, Commerce Department, Conference Board, Fed Reserve, SEC, etc., and is compiled in our own spreadsheets for analysis. Our charts are produced using Metastock Professional charting software, Microsoft Excel spreadsheets, etc. Some of our indicators use proprietary formulae we have developed and do not make public.
We've been inundated with suggested variations for the STS ever since we introduced it a number of years ago. They've included using various short term indicators or moving averages instead of MACD, using alternatives to cash during the unfavorable seasonal periods such as short sales, bear type mutual funds or put options, and all sorts of different investment vehicles like technology funds, growth funds, various Index funds other than S&P 500 Index funds, even Call options and Futures, during the favorable seasonal periods.
The answer in general is that in the course of our research we tried many, many variations to optimize the system, and found what we have is the best we could find. There are other indicators that have been a bit better in specific periods, but were not consistent over the long haul.
Regarding using various alternatives as the investment vehicles, the Seasonal Timing Strategy was back-tested against the Dow and S&P 500 because the Dow data goes back to the late 1800s, the S&P 500 back more than 50 years. So both provide enough data to be statistically meaningful and predictive. More than 75% of mutual funds, however, were not in existence even 10 years ago. There is no way to statistically correlate their past performance with how they might perform in the future. Even if they have longer track records, a change in manager frequently changes the performance.
But the Dow and S&P 500 Index funds that we recommend using in the favorable seasonal periods, and money market funds in the unfavorable seasonal periods, like the Seasonal Timing System itself, are mechanical. They are mechanically invested in the same stocks without deviation or the input of a particular manager's bias.
Therefore, if STS is to be used as a mechanical system, with no varying input each year, while other holdings might do as well or better, it is only by using a Dow or S&P 500 Index fund that we can say that if history is any guide, our Seasonal Timing System should greatly outperform the Dow and S&P 500 over the long term. Since only 5% of mutual fund managers have even matched the S&P 500 over the long term, using the Seasonal Timing System in a manner that has the prospect of tripling the S&P 500 over the long term, with half the risk, seems like it should be more than satisfactory.
For some of our subscribers to even use an S&P 500 Index fund to follow the STS with 100% of their money would not be a comfortable situation. Nor would it necessarily be wise.
And yet, 100% in an S&P 500 Index fund is obviously too tame for others, judging from the questions from those who want to use an Index fund that's leveraged 2 to 1 to the S&P 500, or even leveraged 2 to1 to the more volatile NASDAQ 100. But, that is as it should be.
We can only try to hit a median point, but expect individuals to adjust either way to suit their personal situations. In fact, as our newsletter and home page states, it is each subscriber's responsibility to decide which, if any of our recommendations are suitable for their personal situation, and in what manner to use the information.
Being in the market only six months each year would have a tax penalty for some investors. Whether that penalty would be serious enough to offset the benefit of tripling the Dow over the long term, but paying the tax bill as we go, rather than letting the tax bill accumulate, is difficult to determine in a manner satisfactory to everyone. So we don't try. Tax rates vary dramatically depending on an investor's tax bracket. Some states impose additional state taxes on capital gains to widely varying degrees. We live in New Hampshire and Florida, neither of which has state income taxes at all. Further, Congress changes the tax holding periods and capital gains rates so frequently as to make it difficult to back test an after-tax performance, and impossible to predict what it would be in the future.
However, we can know seasonal timing would have no tax impact on assets in tax deferred plans like IRAs, 401Ks, Keough plans, etc. Nor would it have any impact on those already following a strategy of mutual fund switching, or of making portfolio changes to follow changes in market leadership.
It also would not affect those who think of themselves as buy and hold investors, but on looking back at their portfolios realize that is not the reality, that they've done a fair amount of switching anyway for one reason or another.
I also believe seasonal timing would have a positive impact, even considering taxes, for the majority of those who have been led to believe, by the seemingly endless bull market, and the misleading sham of Wall Street's slogan that the market always comes back, that they can be buy and hold investors this time around. It is my contention that the theory sounds easy during a bull market, but they will bail out when losses pile up in the next bear market, and the financial and emotional pain becomes unbearable. But they will do so at the lows, rather than at the highs that usually prevail at the end of favorable seasonal periods. At least, that is what happened to the majority of those who became determined buy and hold investors in previous bull markets. My reasons for being convinced of that is too big a subject for a brief question and answer period, but is clearly outlined in Riding The Bear.
A few observations about taxes:
Using money borrowed from the government, which is what deferring taxes is, is similar to buying on margin. It leverages one's portfolio. That is wonderful on the way up, as gains are not only being made on the investor's own money, but on the money that is owed to the government. But, the portfolio is also leveraged in a down market, and so declines hit the investor not only on their own money, but on that portion which is deferred taxes.
Investors need to also realize that if they're sitting on long term capital gains on which they would pay a 20% capital gains tax if sold, they are not cushioned against a market correction of 20% by not selling. What they are saving is paying the 20% tax only on that portion of their portfolio which is profit. Even then they're not saving it, but just deferring the payment, (and hoping capital gains rates don't go back up). But, in a market correction, the decline takes place on the entire portfolio; the paper profits, the investor's original investment, and the portion that is the government's deferred taxes.
One can either follow seasonal timing mechanically or not. We are not dictating that. But what we are saying is that as soon as the entries and exits are determined even once by what Alan Greenspan has said, or what inflation is doing, or what charts are saying, or what Wall Street is saying, or what the valuation levels are, or what traditional technical or fundamental analysis or market-timing are saying, then we are following what? Some kind of Greenspan indicator, or inflation indicator? Or a valuations indicator? Certainly not seasonal timing. Certainly not a mechanical system that eliminates the surrounding noise or the tendency to follow the crowd.
That said, while STS is designed as a mechanical system that greatly outperforms the market over the long-term, and which can be followed by anyone without being a subscriber to our ongoing work, as part of that ongoing work for subscribers, we can and will occasionally use our substantial non-seasonal market-timing input to overrule the mechanical system and try to get even better entry and exit points for STS.
