05/24/2014 Defensive is not short

Style Model	Large Value
Sector Model	XLU	-2.50%
Large Portfolio	Date	Return	Days
ABX	4/11/2013	-31.20%	408
NEM	9/30/2013	-15.13%	236
BX	4/14/2014	4.56%	40
TIVO	4/23/2014	0.99%	31
SHOO	4/28/2014	-8.38%	26
UNF	5/2/2014	3.54%	22
CERN	5/8/2014	7.33%	16
PWR	5/12/2014	-1.04%	12
JRN	5/19/2014	0.99%	5
BT	5/21/2014	0.66%	3
(Since 5/31/2011)
S&P	Annualized	12.29%
Sector Model	Annualized	25.62%
Large Portfolio	Annualized	25.48%

 

Rotation: selling CERN; buying PM.

The models remain defensive:

	Large Value	Small Value	Mid Value	Mid Blend	Small Growth	Small Blend	Large Growth	Large Blend	Mid Growth
Utilities	1	2	3	4	7	18	20	28	68
Finance	5	8	9	12	14	33	36	47	74
Staples	6	10	11	13	16	40	43	50	75
Materials	15	19	21	25	31	54	56	59	76
Industrial	17	23	24	30	34	57	58	62	77
Healthcare	22	29	32	38	44	60	61	67	78
Technology	26	35	41	45	51	63	65	70	79
Cyclicals	27	37	42	46	52	64	66	71	80
Energy	39	48	49	53	55	69	72	73	81

 

And that has only strengthened in spite of the relatively poor performance this past week in the Sector Model:

 

Keep in mind that the models measure price against breadth and volume.  If price falls relative to breadth and volume, it only strengthens the signal.  These are not momentum based models, but mean-reversion models.  They target beaten down stocks, rather than surf on the popular ones.

PM, for instance, is resting 2 standard deviations below the trend it has established from the beginning of 2009.  The company is planning to buy back some stock, it has good cash flow, and it is paying a reasonable dividend of 4.34%. Although it is not scheduled to sky-rocket this year, it shouldn’t plummet either.  And with the defensive nature of the internal market structure, that’s exactly the type of stock we should look for.

In spite of the fact that the market indexes have been rising to all-time highs, small growth stocks are getting hammered: http://scharts.co/1miGBFb

Tom Dorsey might call this kind of event a “Stealth Correction.”

The bullish percent index on Stockcharts is showing mild caution, since it has fallen below 70%: http://scharts.co/1miHLkc

 

These are cautionary indicators, and explain some of the bearishness we see in the news lately.

Does that mean the market will go down?

If it does, I doubt it will by much.  Remember, QE is still in play.  The taper is not a reversal.  The Fed hasn’t hit the brakes yet; it has merely pulled back on the accelerator.  People who short the market are still in more “danger” than folks who just hold forever.

At some point we’ll have a full blown correction, but trying to time that point during QE has made a lot of people poorer.

Best just to look for large value stocks in defensive sectors and ride out whatever comes.

And that’s exactly what I plan to do.

Tim