The Tasgall Group

A topic that I played around with extensively over the weekend is trading sector ETFs on a small scale.? Now I know the general guidance is to avoid trading sector ETFs since there’s a great deal of market forces unbeknownst to many when you get into sector trading.? The general guidance is to stick to major classifications, like large-cap, mid-cap, small-cap, etc. since it’s too risky trying to time buying and selling sectors.? While it’s true that the risk is greater trading sectors, I think there’s a higher chance for profit as well and ETFs present an attractive medium for trading sector ETFs.

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Back on July 26 I wrote a quick note about Scottish Re (SCT) emphasizing the amount of cash they held relative to the market cap. Apparently the long downtrend was prescient about the prospects of the company at large. On July 31the stock price went into free-fall when they announced revisions to earnings and the CEO resigned.

The stock quickly dropped from $15 to a low of $3.50. Wow. After about two weeks of recovery it seems to have stabilized in the $6 to $8 range. In my previous post I said “wait for an uptrend” and that seems to have been the right approach — simply buying because of fundamentals would have been the equivalent to trying to catch a falling knife.

It’s also interesting to me to look at the technical indicators on the SCT chart. Having RSI below 30 is typically a sign of being over-sold, where SCT had an RSI below 30 for almost 3 months!

After all the carnage the stock was up 15% on Friday on rumors of a buyout. I don’t think Scottish is an Enron or a WorldCom… it is still a strong company and worth watching for a trend change (assuming they’re not bought outright). I might consider it again if it spends some time consolidating at current prices then breaks out above $8.

Yes, Virginia, you can time the markets. It begs more careful research but this is an interesting read for the more passive investor. You have to be careful about ever-changing cycles and transaction costs etc. but I like the idea that this is based not just on observed correlations but on a logical explanation for the occurance of this correlation.

With my current >90% exposure in equities, I’m feeling that I’ll be one of the first victims of a bear market.? With the recent minor run-up in the US equity markets, I’m thinking that the time is ripe to move at least a 10% chunk of my US equity exposure out and into either a money market account (like the VMMXX with it’s 5% yield) or into Bonds.? I’m becoming increasingly alarmed at the market conditions now and I’m interested in moving my main holdings out into cash in stages and allow my dollar-cost-averaging approach to continue on with my current asset allocation plan.

What are your thoughts?

I’m thinking that if the market continues to show strength throughout the day, I probably will move 5 – 10% of my Large and Mid-cap US equity positions.? I’m feeling very much exposed on these fronts.? Areas I’m probably not going to touch for now are my Small-cap, Foreign and Energy holdings.? Small-cap has already had a tough year and I’m probably going to keep those relatively untouched for now.? My international holdings are all up around 8 – 10% YTD and showing no clear signs of pulling back at the moment, so I’m planning on leaving these untouched for now.? I still feel that Energy has plenty of upside and I’ll continue to hold these funds for the foreseeable future.

Let me know if you think my concerns are unwarranted or you think I need to lay out my case for why Large and Mid-cap equities are heading for a significant drawndown in the future.

In a fairly odd turn of corporate governance, Horizon Lines (HRZ) has declared its first ever dividend and is also issuing new shares — both announced within two weeks of each other. The news of the new shares has pushed the price down 3.3% today and 11% from its recent high.

Now, if you know you’re going to raise cash by issuing new shares (a 15% dilution, no less!), why would you bother declaring a dividend at all? The point of a dividend is to return cash to shareholders… There is a catch-22 in there somewhere…

HRZ has a nice position as a mid-cap in the transportation sector. It has a strong balance sheet and operates as a Jones Act shipper which basically limits their competition as a shipper to Alaska, Hawaii, Guam and Puerto Rico.

Chicken producers got slammed last year in the wake of the Avian Bird Flu Health-Crisis. The sales for Sanderson Farms and Tyson Foods all dipped a bit, but it looks like demand could be picking back up as people start going back to chicken.

I like Gold Kist as a smaller player with strong fundamentals and a decent technical position. It looks like a bottom was put in back in April, and there was buying strength even as the broad market turned down in May.

You can see what other companies produce chicken, many are diversified into other food production as well (like Hormel).

As individual investors, we have a unique advantage that most institutional investors don’t have… the ability to staand aside when the market is not favorable. That means either not trading, or getting out of your buy-and-hold investments and moving to cash or cash equivalent investments. (more…)

Money Markets are looking really good right now for safe money while we wait for several markets to get over their jitteriness. SECU raised their MM rates to 4.5% (4.6% APR). ING is cruising at 4.35%, but I suspect they will raise within the next 30 days. For parking your money in “cash” in your trading accounts, consider Vanguard’s MM account (VMMXX), which is currently posting a hefty 5.08% yield.

I just drastically scaled back my REIT positions after today’s crushing news from Toll brothers, Bill Gross’ sickening chart (see link within earlier post from Jason) and the additional failure of yesterday’s REIT market peak to hold out. I moved half of my REIT position into equal portions of Money Market (VMMXX) and Total Bond Market (VBMFX).

I’m percolating a blog post regarding REITs but it will take some time to make that post worthwhile.

Time to check in with our density theory again.? Today was significant because the S&P 500 reached the top of the value range it has been trading in for a while, pierced it and then faded back down.? So what does the density concept tell us is the most likely event?? Probably a return to the middle of the bell curve that prices have painted recently.? This is around 1256.? The most popular price recently however is more around 1270 and could provide early support or a launching pad if the bulls can win.

What today has done is bring us to an inflection point.? Price has already made many moves back and forth across the face of the bell curve so it may be getting exhausted and need a breakout to new value.? It seems likely that the market will wait for Bernanke first though.? My personal feeling (not worth much) is that a raise is more likely than people think and, even if it isn’t, the pause concept is probably already priced in.? That would lend some credit to the idea that it might return to “center ice” to await the announcement.? I would venture to guess that uncertainty leads to a retreat to old value while certainty leads to a move to new value.? So I’d assign a good probability right now to a move down to 1256 or so.? If it is to do that by the time of the Fed announcement though it would require a pretty quick drop.? That’s why 1270 may be a better catch-all goal and would be perfectly reachable by the FOMC meeting.? Either way, down is the word because old value is currently below the market.

If price does break up to new value, that is probably going to be around 1306.? A break of today’s high would be a pretty bold statement and should mean the bell is finally broken or at least expanding upwards.

Now we can only wait and see…

It looks like White Mountains (WTM) is shaking off some of the cobwebs… with today’s high, WTM was up about 12% in the last two days. It’s been a value stock that I’ve watched off and on (and owned briefly), and it looks like it might just have the energy to buck the gruelling 2 year downtrend it has been in. The 12% run is a good start…

White Mountains is an insurance company that took a bit of a hit last year with Hurricanes Katrina and Rita. They paid out about $200 million for claims. Despite the fact that they had (and have) a huge cash position that more than covered the claims ($900m then, $1.1b now), their stock price was hammered. In theory, they survived the claims and should have been able to raise insurance rates, thus making this year more profitable.

The current strength is based on their recent earnings release so it could lose momentum quickly. I’ll be watching to see if a new uptrend starts to form and thinking about buying again.