Investment Strategy - John Rothe | Portfolio Manager, Quant, Tech Geek, And Sometime Superhero To My Kids

Investment Strategy

Investment Strategy: Summer 2012

I’ve received a few emails this past week asking my opinion on the US stock market, and more importantly – what my summer investment strategy will be.

To start, the strategy that I use is a combination of 3 strategies. This allows investors to be not only diversified among asset groups, but also diversified among investment strategies. The models that I use in ARTAIS are based on technical and historical data and have very specific buy and sell rules.

The models/strategies look like this:

Long/Short Traditional – Based on traditional technical analysis, this model utilizes Fibonacci numbers, Elliot Wave theory and market trends. Why? Today, more and more trading is done by electronic trading systems, which require specific buy-and-sell “signals” be programmed into the trading system. A majority of automated trading systems use traditional technical analysis to program these signals. This model offers important data to determine whether to go long or short the S&P 500, Nasdaq 100, US Dollar and US Treasury Bills.

Historical Market Volatility – As markets become more volatile, investor fear rises. This model uses historic data on volatility to gauge when fear is greatest in the market or, likewise, when investors are comfortable investing in the S&P 500 or  Nasdaq 100 – or would prefer to move to safe-haven investments such as gold or cash.

Seasonal Trends – Historical patterns in the market have shown that certain times of year are stronger for the market than others. For example, the old Wall Street adage “Sell in May, and go away” does indeed hold some truth. Trading volume is typically lower over the summer months as traders and portfolio managers go on vacation. This model, however, goes a bit deeper by also studying the historical strength of the various sectors of the market. For example, the technology sector tends to perform well at the end of the year and into the first month of a new year. Company budgets need to be used or lost, often precipitating large tech purchases. There is also anticipation of new equipment purchases as new budgets begin in January. The seasonal trends model invests in energy, technology and gold, and moves to cash during the summer months.

 

Summer Investment Strategies – Let’s look at the past three years:

With that said, I do have a few thoughts as to what will happen to the stock market this summer – based on market history.

In past posts, I have mentioned that I believe investors are waiting to see what will happen in the Euro crisis AND if the Fed will offer another stimulus package. However, I am starting to see the market react more to the potential for another “stimulus” instead of worrying about Europe. Past trading days where poor economic data has been released has resulted in positive market results. To me, it seems that investors are hoping the data will be bad and will force the Fed into action. In addition, as I have mentioned in the past, this year is an election year. A strong stock market will only help Obama’s reelection.

So what does all this mean for the stock market over the summer? Most likely equities will perform as they have the past two summers:

Summer Stock Market Performance

 

For those questioning why we will see a poor performing stock market this summer should look at the correlation between the market decline and the end of the Fed’s past stimulus programs:

Another Market Dip As Operation Twist Expires?

 

The Fed’s current program, Operation Twist is about to come to an end just as the summer begins – similar in timing to past Fed programs. Investors are starting to worry that a similar pattern will emerge and will await an announcement on a new stimulus package from Ben Bernanke and Fed before investing additional monies into equites. Again, this is being strongly indicated by the inverse relation between the stock market and economic data (poor data = positive stock market).

However, once the Fed announces their next stimulus package, investors should pay attention to the groups that performed well in the past:

Lastly, investors should remember that the incumbent party has the ability to add further stimulus to the system before an election. Europe’s problems may provide Obama and Fed with a reason (that they don’t want Europe’s problems to spread to the US) to start another stimulus program right before the November elections. So, the question for investors will be not “if” but “when”. I would expect the Fed to hint strongly at the need for another package at its next meeting and officially start their next program late summer/early fall.

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