Transcript MAR 21, 2015

IBD MEETUP/NORTHRIDGE
LET’S MEETUP TO DISCUSS SECTOR ANALYSIS FOR 2015,
CANDLESTICKS
AND REVIEW OUR MARKETWATCH GAME
MAR 21, 2015
DISCLAIMER
1. During the course of this meeting we will review stocks that
should be considered as additions to your watch list.
2. These are not trade recommendations. These are
candidate trades. Do your own research, keep position
sizes modest, and stay diversified.
3. Also past performance is no indication of future stock
trends.
4. We will also discuss Trading Strategies we believe to be
effective; however keep in mind that nothing works100% of
the time sothere is no guarantee these strategies will work
for you.
THE BUSINESS CYCLE
A Short Review
BUSINESS
CYCLES
The components of Gross Domestic Product
(GDP): consumption spending, physical
investment spending, government spending,
and net exports.
• The pattern of
expansion-recessionexpansion-recession that
we observe is not
random, but built into
our system.
• Expansions create the
conditions that cause
recessions and vice versa.
BEGINNING THE CYCLE
• The business cycle is considered to “begin” as the economy is
rebounding from recession. Economic activity begins to pick up,
which can be seen through growth in Gross Domestic Product (GDP),
reported company profits, and employment.
• Businesses can generally keep low inventories and see rapid sales
growth during this stage. Additionally, fiscal and monetary policy may
still be “stimulative” which provides a further boost to the recovery.
• During this phase, the leading economic sectors are those that are
more sensitive to changes in interest rates, like consumer
discretionary and financial stocks.
MOVING THROUGH THE CYCLE
• As the economy pushes forward through the initial recovery, growth rates tend to
moderate, and the price performance of many stocks may taper off.
• This cycle has tended to be the longest phase of the whole cycle, with different
sectors having outperformed at different times. Information technology stocks
have historically earned strong returns during this phase.
• Certain industries within the technology sector, such as software, computers, and
peripherals, tend to outperform in particular as other companies are more willing
to spend capital and buy their products. As well, companies in the industrials
sector are not consistent outperformers, but historically do tend to fare well in
these mid-cycle expansions.
• The Utilities and Materials sectors can show lackluster performance in these
environments, as they tend to lag the broader market. However, since there can
often be a lack of clear sector leadership in these environments, investors may
want to be extra careful with their sector allocations.
TOWARDS THE END
• The sustained growth in economic activity will tend to mature and slow
towards the end of the economic cycle.
• Inflationary pressures may build in these phases, which can lead to
outperformance from companies in the Energy and Basic Materials
sectors.
• As investors begin to see signs of an economic slowdown, defensiveoriented sectors (like healthcare, consumer staples, and utilities) have
the potential to outperform the market.
• Information technology and consumer discretionary stocks tend to lag
the broader market in these environments, as investors shy away from
economically sensitive areas.
HEADING INTO RECESSION
• Recessions, the shortest phase of the business cycle, can be trying for investors.
During these periods, credit contracts, sales tend to slow, and it can be difficult
for certain businesses—particularly those that are more economically sensitive—
to thrive. The broader market lost an average of fourteen percent a year during
these periods.1
• Those sectors that are not as sensitive to the broader economic environment can
be a bright spot, however. Sectors like Consumer Staples, Utilities,
Telecommunication Services, and Healthcare may attract investors. Since they
produce items which consumers are unlikely to cut back they have less sensitivity
to a decrease in consumer demand than companies in other sectors.
• In particular, the Consumer Staples sector has outperformed the broader market
during every recessionary period, because businesses in these sectors are
comparatively isolated from cyclical changes in demand. Other sectors with
similar characteristics—utilities and telecom stocks [high dividend yields]have
frequently outperformed when current income is demanded by investors.
• There is historic evidence that certain
companies in specific sectors show
relative outperformance at different
times in the business cycle. By
understanding how certain
companies and sectors react to the
business cycle, you may be able to
position your portfolio to outperform
the rest of the market.
• The business cycle is the collection of
stages that an economy goes through
as it expands, slows down, and
declines. These “cycles” repeat, and
investors who understand where the
economy is situated within the
business cycle can better position
their portfolios by investing in
securities that benefit from the
unique characteristics of each stage.
SUMMARY
BUSINESS & MARKET CYCLES
A discussion of where we think they are today
SO
WHERE
IS THE
CYCLE
AND
MARKET
TODAY?
10 SECTORS
PERFORMANCE
VS THE S&P AS
OF TUESDAY
MARCH 17TH
2015
MARKET FUNDAMENTALS
Is the Stock Market Cheap?
Consider the S&P P/E RATIO:
Mean: 15.53
Median: 14.57
Min:
5.31 (Dec 1917)
Max: 123.73 (May 2009)
The average P/E ratio since the
1870's has been about 15.
But the disconnect between
price and TTM earnings during
much of 2009 was so extreme
that the P/E ratio was in triple
digits — as high as the 120s —
in the Spring of 2009.
In times of critical importance,
the conventional P/E ratio
often lags the index to the
point of being useless as a
value indicator.
• The current Bull
Market is 6+ years
old.
• Does that mean we
are overdue for a
major correction?
• Going back to the
year 1925, data
shows that during
the typical secular
bull market, a 5%
price correction
occurs every 84
trading days on
average.
The VIX –
Fear Factor
– moves
inversely to
price.
SECTOR INVESTING
SECTOR INVESTING
• One way to invest with the business cycle and diversify an equity portfolio is
using sector-based securities and funds. In order to employ this type of strategy,
you should know how sectors and industries are comprised.
• Different approaches
• Thinking of the market in terms of sectors can be advantageous for investors,
however, sorting stocks into separate sectors and industries may not be as clear
cut as it may seem.
• This may be due in part to companies belonging to different industries,
depending on the criteria used.
• Most classification systems use one of two approaches to sort companies in to
industries and sectors; the production oriented approach and the market
oriented approach.
PRODUCTION ORIENTED APPROACH
• The production oriented approach focuses on grouping companies
that produce similar products or use similar inputs used in the
manufacturing process.
• In product oriented approaches, many companies that manufacture
products are classified differently than those that provide services, for
example.
MARKET ORIENTED APPROACH
• The market oriented approach focuses on classifying companies by
the markets they serve, rather than on the products they produce. In
addition to how the company earns revenue, this approach also
focuses on how customers use the company’s products.
SECTOR CLASSIFICATION STRUCTURES
• There are three main classification
schemas. They are the Global Industry
Classification Standard (GICS), the
Industrial Classification Benchmark
(ICB), and the Thompson Reuters
Business Classification (TRBC).
• These classification schemas are
designed to provide an acceptable
and meaningful method for
standardizing industry definitions so
that comparison and analysis can be
conducted between companies,
industries, and sectors worldwide,
and for creating benchmarks.
Comparison of Major Sector
Classification Systems
Level/System
1st
2nd
3rd
4th
GICS
10 Sectors
24 Industry Groups
68 Industries
154 Sub-Industries
*Source: Thompson
Reuters, S&P/MSCI, FTSE
ICB
10 Industries
19 Supersectors
41 Sectors
114 Subsectors
TRBC
10 Economic Sectors
28 Business Sectors
56 Industry Groups
136 Industries
• The business cycle influences the
rotation of stock market sectors and
industry groups. Certain sectors
perform better than others during
specific phases of the business cycle.
Knowing the stage of the business cycle
can help investors position themselves
in the right sectors and avoid the
wrong sectors.
• The graph shows the economic cycle in
green, the stock market cycle in red
and the best performing sectors at the
top. The green economic cycle
corresponds to the business cycle
shown previously.
• The centerline is contraction/expansion
threshold for the economy. Note the
red market cycle leads the business
cycle. The market turns up and crosses
the centerline before the economic
cycle turns.
SECTOR ROTATION
PREPARING FOR THE TRADING WEEK
1. On weekend, decide what types of trades to be focusing on for the upcoming
week (long or short).
• Look at the moving averages to determine if the bias is to the long or short side
of the market.
• Remember that staying in cash (having no positions) and out of the market is a
strategy. You do not have to trade!
2. Then its a good idea to get a feel for what will likely affect the market for the
week ahead. These are some of the things to look at:
• Economic Calendar - To see what types of reports are coming out that could
influence the market.
• Industry Groups - To see which ones are strong, which are weak, and which ones
have potential to make major moves.
CHARTS AND SCANS FOR SWING TRADING
3. Charts – To see all the major industry groups on the following charts:
• Monthly – Major Trend
• Weekly – Intermediate Trend
• Daily – Minor Trend
• 4 Hour – Use this chart to set up Entry signals.
• All above Trends must agree or don’t take the trade.
4. Scans - to find some potential trades. Remember to look for stocks that have pulled
back into a potential reversal zone. Stocks that:
• are in Stage 2 or Stage 4 of a wave, i.e. Elliot Wave
• are in strong trends
• have relative strength [RSI above S&P] or weakness [RSI below S&P]
• are at a support or resistance level
• Are in strong Sectors and are supported by Candlestick reversal patterns
Sift through your scan results and find the ones that show these specific characteristics.
Add these to your watch list.
POSITION SIZING
Brief Explanation
HOW TO EFFECTIVELY USE
CANDLESTICKS
A Quick Review
CHART CHALLENGE
Reading Charts