We last wrote on April 19 and asked the question of whether or not we should "Sell equities in May and go away". We also asked, "If we sell what else should we buy". 

We ask those questions within the context of our basic themes for this year:

U.S. stocks could easily underperform other major global markets in 2015, including emerging markets. However we entered 2015 with most of our equity investments concentrated in the U.S. 

We also entered 2015 with the bias that U.S. stocks are likely in a secular bull market that could last for several more years. 

We also believe that U.S. stocks are currently expensive by historic standards, but they are showing few signs of quitting their upward price trend. 

We like stocks that have great histories of raising their dividends year in and year out. Equity investors will be well served by emphasizing rising dividends in their portfolios.

Japan's stock market may be on the verge of a new multi-year "secular bull market".

China's stock market has gone from cheap to not so cheap but may have lots more room to run up.

European stocks are on the verge of breaking out above their 2000 and 2007 highs (Stoxx Europe 600 Index).

Despite lots of anxiety about rising yields there are no signs of a significant turnaround in long term interest rates. The major trend remains downward. 

We do not expect the U.S. Federal Reserve Bank to raise short term rates in 2015. 

Central banks around the world continue to stimulate major economies and the world is awash in liquidity. We are firmly convinced that record stock prices are tied to record levels of liquidity. 

The U.S. dollar index is showing signs of breaking out of a secular decline that started in 1985.

Gold has been in a bear market since September 2012 but is showing signs of stabilizing.

Commodity Prices, as represented by the Reuters/Jefferies CRB Index, have collapsed and recently approached the low price of 2009. We asked whether or not this was advanced warning of a more serious deflationary trend?

While we didn't "sell in May and go away", we did make several adjustments in our tactical models in the past 30 days. Those models are ORCA and Mendocino.

We sold stocks that had not kept up with the advancing market and which don't show prospects of doing so in the near term. (for ORCA and Mendocino)

We took profits on a few speculative small cap stocks (for ORCA)

We continued to diversify both ORCA and Mendocino internationally by adding stocks from Israel (ORCA), India (ORCA and Mendocino) and Japan (ORCA and Mendocino).

We added to a winning biotech position. (ORCA and Mendocino). 

We added to one of our favorite rising dividend stocks. (ORCA and Mendocino)

We started a new position in the beaten down oil & gas sector. (ORCA & Mendocino)

We started a position in a U.S. based equity Real Estate Investment Trust that has been recently beaten down in price but has a dividend we believe is secure. (ORCA)

We nibbled at a couple of gold mining positions. Very small for now. (ORCA and Mendocino)

We collected a lot of dividends!

We started a small "short position" in the Russell 2000. That means we will profit from a decline in the Russell 2000 Index. (ORCA & Mendocino)

While stock prices continue to rise most major U.S. averages are showing technical signs of either slowing down or correcting. Here is a chart of the Wilshire 5000. This is an extremely broad based U.S. market index. On this monthly chart you can see that stock prices are still rising. So are all the moving averages on the chart. It is clearly a bullish pattern.

However MACD has rolled over and is now on a clear sell signal. The same is true on monthly charts for the S&P 500, NYSE Composite Index, Dow Jones Industrial Index, Russell 2000, and S&P Mid Cap 400. 


The Russell 2000 has also triggered a more recent sell signal on its weekly chart for both price and MACD.

We showed you this table last month. While it continuously updates we are showing last months version again. It forecasted on .2% growth for U.S. stocks. The current version forecasts NO growth for U.S. stocks over the next twelve months.

No one knows for sure if that is true, but it certainly wouldn't surprise us if it happened. We therefore continue to try to diversify our tactical models into assets that are more likely to go up in value. We would prefer to add to U.S. stocks following corrections, whether they be for the entire U.S. market or sectors within the market. 


Earlier this week the Wall Street Journal reported that, according to a Bank of America Merrill Lynch survey, investors have cut their exposure to U.S. stocks to the lowest level since January 2008, 

"....with more fund managers trimming their equity holdings to underweight as confidence in corporate profits dwindled."
 

"The shift in exposure marks the single biggest monthly drop in fund manager allocation since September 2009, the bank said, with overweight cash positions rising sharply.


There is no loss of faith in economic recovery, and positioning still assumes that the U.S. dollar goes up, but doubts are creeping in - hence this jump in allocation to cash," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a note.


Beyond the U.S., most investors remain broadly bullish on equities, but the number of managers in favor of stocks fell, with around 47 percent of respondents overweight - down 7 percentage points month-on-month.


Confidence in corporate profitability has also fallen, with only 7 percent of investors surveyed viewing the U.S. as the region with the most favorable earnings outlook."

We also saw this from Goldman Sachs earlier this week: 

Goldman Sachs analysts believe the S&P 500 may climb a bit higher before its ascent is over at least for the next 12 months. Strategist David Kostin and his team see the index rising to 2,150 in the next couple of months-another 1 percent or so from its mid-day levels Monday-before seesawing around and ultimately settling around 2,100 by year's end.


The next 12 months hold little prospect for gain, according to the analysis, with the index at just 2,125 in 12 months, which would be basically flat from here. 


The forecast comes as Wall Street deals with economic growth considerably slower than expected and a backdrop in which the Federal Reserve will have to weigh its desire to increase interest rates against decidedly weakening fundamentals. 


Goldman holds to a forecast that the Fed will hike in September, but futures market traders now assign just a 52 percent chance the central bank will tighten even in December, with just a 20 percent for a September move.


In the face of dwindling returns, investors could have little else but dividends to count on.

Goldman forecasts that all of the 2 percent gain in total return by the end of the year will come from dividends, which are expected to account for 46 percent of market returns for the next 10 years. By contrast, prices have accounted for 80 percent of total return during the current bull market, which has seen the S&P 500 surge about 220 percent since the March 2009 low.

If Goldman is correct about the impact dividends will have on stock returns then we surely want to own lots of stocks that pay healthy dividends. That has been a bias of 5T for a long time. This forecast bodes well for our DIVIDEND DIAMONDS model. We are also trying to see to it that ORCA and Mendocino have good allocations to solid dividend payers. 

Dividend Diamonds is NOT a tactical model. It remains fully invested in stocks. It's #1 goal is rising income. You can't get rising income if you sell all your stocks. 

ORCA and Mendocino are tactical models. We can shrink or expand the allocation to any asset class in these models. Sometimes we look very smart in doing so. Sometimes we don't. But we always reallocate with conviction. 

Here are the current allocations for ORCA and Mendocino and our personal portfolio at Fidelity. We own both the ORCA and the Mendocino models.

All of these allocations are subject to change at any time. Our approach to ORCA and Mendocino going forward is a follows (for now):

We like having some cash to use on the short side if the markets do start to break down or to deploy on the long side following market or sector corrections.

We continue to look at other countries and asset classes for further diversification for both models. We suspect that broad diversification will win the race in 2015, sprinkled with a healthy dose of dividends. 

We are also watching the U.S. Dollar Index very closely for a breakout of the downtrend which started in 1985. A breakout could be a real game changer. 

All the best,

 

Paul Krsek
MANAGING MEMBER & CHIEF INVESTMENT OFFICER  
5T Wealth Management
(707) 603-2672 Office
(707) 486-7333 Cell

Paul@5TWealth.com  

Disclosure and Disclaimer - Updated last on July 23, 2012 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5T WEALTH MANAGEMENT .

Paul Krsek is the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5T WEALTH MANAGEMENT members and staff, Krsek writes without editing and therefore is solely responsible for the content and opinions contained in ELLUMINATION.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5T WEALTH MANAGEMENT does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5T WEALTH MANAGEMENT manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

Krsek makes frequent reference to the model portfolios called Hatteras, Mendocino, Point Reyes, Diamond Head, Cape Lookout and Dividend Diamonds as well as our Fund of Funds Portfolio. During 2005 Paul Krsek was appointed Chief Investment Officer of 5T WEALTH MANAGEMENT, and as such is responsible to make all trading and management decisions for all client accounts which are being managed according to a specific portfolio model. A description of each of our models can be found on our website at http://www.5twealth.com/prd_port_signup.cfm.

Not all accounts managed by 5T WEALTH MANAGEMENT are "modeled" accounts. We strongly urge our clients to understand which model, if any, are being used to manage their accounts.

From time to time 5T WEALTH MANAGEMENT receives requests from clients to purchase securities that are not included in the model portfolio to which they are assigned. Effective May 24, 2006, 5T WEALTH MANAGEMENT has encouraged clients to hold such securities in a separate account for the client. Because 5T WEALTH MANAGEMENT is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5T WEALTH MANAGEMENT makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in E-Ellumination may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5T WEALTH MANAGEMENT.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5T WEALTH MANAGEMENT may include stocks, bonds, cash, commodities, foreign exchange or mutual funds or exchange traded funds (ETF's), money market accounts or limited partnerships that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5T WEALTH MANAGEMENT do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

From time to time Krsek lists the simple annual returns of the six model accounts in this newsletter. These accounts are "models" and do not represent the actual results accruing to individual accounts. Simple annual return does not represent "time weighted return" as reported individually to clients in their quarterly reports prepared using Centerpiece.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

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