Markets Swooning, Expect Extreme Volatility, Finger on Put-Option Trigger

by

Image shown: We notified members December 26 that we had 

the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio to a “fully invested” position, from a 30% and 20% cash “weighting” at the high end of the range, respectively. 

—
No change to simulated newsletter portfolios…at this time. 

—

Hi everyone,

—

Hope you’re navigating these tumultuous markets well.  

—

If you recall, during the holiday season last year, we had moved the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio to “fully invested.” See image above (point of the arrow). Because many members were traveling and out of the office, not all were able to read the notification until a week or two after. They were a bit disappointed that the notification wasn’t as prominent and that it came during the busy holiday season. I’m sorry about that.

—

But let’s talk about this. Investors cannot time the market perfectly. It is simply impossible. However, I believe that investors can make intelligent probability-weighted bets at times to capture upside potential while protecting against downside risk. That’s what we did near the Christmas-bottom. We went to “fully invested” with the view that we’d keep our finger on the “put-option” trigger. Nothing has changed since then. We’re still cautious about these markets.

—

To the point, however, it’s far less important to pinpoint tops and bottoms than to be directionally “correct” with a call. Whether you read our notification email December 26 or January 2 or later than that, you should still be very happy. Long-term investors should not be concerned about the initial 5-10% bounce, and no investor should operate under the severe behavioral condition, FOMO (fear of missing out). 

—

Timing, not perfect timing, and being directionally “correct” is what matters. Understanding that you cannot pinpoint tops and bottoms perfectly will make you happier, as you’ll be able to focus more on directional alpha, not on missing the exact bottom by a week or two. Over a four-decade investment horizon for many, a week or two just doesn’t matter.

—

Fast forward, and now the markets have given back some of the gains from those all-time highs reached a few trading sessions ago. I wrote an entire book and a “call to action” on what I believe is the threat of price-agnostic trading, and since the short-vol ETN blew up in February of last year the markets have been on a wild ride. Read more in Value Trap >>

—

Our finger remains on the “put-option” trigger, but we’re not going to be “adding” protection to the newsletter portfolios today. The cost is too high. We’ll be looking for some sort of bounce in the markets first, but it seems the markets don’t want anything to do with a trade war escalation between US and China. This could be just the beginning of some very rough sledding.

—

As we noted in “US-China Trade Spats Continue, More Reports,” China may view economic pain as a much more palatable situation than caving to US demands, and it seems like that is the road the country is taking. President Donald Trump seems to be putting some serious pressure on China, and we don’t think the country is easily broken. China is fighting back, announcing tariff retaliation to take effect on June 1. 

—

As Warren Buffett has stated, a trade war between the US and China, “it would be bad for the whole world, and could be very bad, depending on the extent of the war.” We genuinely agree with the Oracle on this topic, and we also agree with the market’s reaction. Posturing is now over, in our view, and US and China seem to be going head to head with a trade war. Neither country is ready to back down, from what we can tell, and it could very well send the global economy into recession.

—

That said, none of this should be surprising. If you’ve read Value Trap, you should be expecting considerable market volatility. You are aware of where the global economy is with respect to the economic cycle (almost 10 years into a bull market). You have a good idea of the intrinsic values of the companies in your respective portfolios, and we’ve been waiting for a snap-back lower such as this; our finger has been on the “put-option trigger.” 

—

Price agnostic trading and the proliferation of indexing will only make volatility worse, as these traders know very little about the underlying of what they are trading and will get spooked easily (even as they say they won’t). We’re staying the course as others around us panic. Though we may make a few tweaks here and there in coming weeks, we still like the ideas in the newsletter portfolios long term. 

—

Please let me know if you have any questions.

—

Kind regards,

—

Brian Nelson, CFA

President, Investment Research

Valuentum Securities, Inc.

brian@valuentum.com

—

Recent Editions of the Monthly Newsletters

The Newsletter Portfolios are Housed in These Monthly Publications

—  

The High Yield Dividend Newsletter archives are only available via email at this time.
Next Up: The Best Ideas Newsletter is scheduled for release May 15th, 2019.

Tickerized for stocks in the SPY.

—–

Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.

Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.