Author: Richard Moore
Covestor Model: Market Comparables
Disclosure: None
Stock market action in May was to the downside and my portfolio suffered more than it should have given the fact that it was totally hedged for the entire month. This was so because smaller companies that I tend to prefer were hit harder in the decline than the major averages. During the month I moved money into some larger companies in order to reduce risk, but it was too little, too late.
My lackluster performance over the last few months has been the result of my exceedingly cautious approach as I focused on the extremely bullish stance of small investors and speculators and took the contrary approach to my stock market investments. I did not pay enough attention to increasing corporate earnings. Therefore, I am adding an indicator that measures earnings estimates on the S & P 500 index now, compared to the estimate one month ago. When estimates are increasing, this indicator is bullish – as is the case currently.
On a more negative note, my indicator comparing new highs and new lows on the NASDAQ has weakened considerably and I now regard that comparison as being neutral, down from positive for the last several months.
As mentioned earlier, my sentiment indicators remain negative.
So, with one indicator positive, one neutral and one negative, I am still maintaining a hedged position, but with 1/3 of the portfolio trending toward cash. As time goes on, I am going to be more responsive to changes in the market outlook in an attempt to be on the right side of the market as opposed to maintaining a completely hedged position. I think being aware of the current market’s earnings outlook will help me to achieve my investing goals.
In terms of individual stocks, I continue to look for undervalued companies with good momentum characteristics. Because of my risk aversion, though, I don’t feel comfortable allocating a large percentage of my portfolio to stocks unless the market characteristics are mostly favorable, a condition that is not true at this time.
