VIDEO: T Theory Observations 12-2016

Based on T-Theory concepts of Terry Laundry.

'Winter T' projects tops and bottoms for Stock Market in January and February 2017.
Upon closer inspection I discovered a T with center posts in November and possibly in December of this year. Because 'Winter T' is too short in duration, has questionable center post for 'Last Low' and some other concerns I explain in video - I don't consider these time projections as reliable for top placement. However, if Advance-Decline Line reverses and falls going into some of these dates - then there is a high chance that 'Time Symmetry' actually points to a bottom date and will be useful to find a buyable dip.

Considering that Rate T (post link) projects a Stock Market Lows in spring of 2017 and then again in summer, I think that there are opportunities ... for which cash will be needed.
I want to remind that T Theory is not a trading tool, but a 'range of options' that will have to be evaluated by other measures in real time.

VIDEO: T Theory Study 2012-2016

A 5 year study of T Theory - a method of analyzing general investment trends using time symmetry.
Based on T-Theory concepts of Terry Laundry.

From "A 1997 Introduction to T Theory" by Terrence Laundry:

'The Law of Matched Trend Time' basically states that duration over which investors can obtain 'superior equity returns' will always be equal to the previous time period in which returns were subnormal. A simpler way to put it is to say: the market can only 'make strong run' as long as it previously 'rested'.

As a result of this study... we run out of T...

 ...unless...

VIDEO: Rate T Report. 2015 Study

Completed 2015 Rate T correctly forecast 2016 market lows, by providing multiple estimates over period of time when buyable dips are likely to appear in S&P500.

This is based on T-Theory concepts of Terry Laundry, who discovered these Rate T's back in 1970's (I think) and used this concept quite successfully for many years. Generally it states that a period of time it takes for interest Rates to fall from high to low is approximately equal to period of time from interest Rate low to important low in Stocks.
He acknowledged difficulties with accuracy of these projections since rates went into historic downtrend in 1980's and also during times of heavy intervention.

1st High to 1st Low in Rate = 1st Bottom in Stocks (in 2015)
Highest High to Panic Low in Rate = 1st Bottom in Stocks (in 2015)
Last High to Lowest Low in Rate = Final Lowest Low in Stocks (in 2016)

Faber 25

This is to test a persistent investment allocation recommendation by famous prognosticator, commentator extraordinaire and Asian night life connoisseur (secretly pony-tailed) Mark Faber aka Dr. Doom. For as long as I can remember, he advised to put equally 25% into stocks, bonds, real estate and gold and maintain it indefinitely.

For the purpose of this experiment I pick SPY, TLT, IYR, GDX, but I will be first to admit that his advise needs to be taken more broadly to be used sensibly. Obviously, his real estate holdings are mostly actual ownership of rental and vacation properties and not a REIT ETF (IYR) - stocks of real-estate investment trusts, which also include prisons, nursing homes, land and more of god knows what. Faber's recommendations about gold couldn't be more specific - physical ownership in immediate possession or in a vault outside of US (rich people shit). And I'm sure that stocks and bonds are more diversified than just S&P500 and US Treasuries 20+ years to maturity. Having acknowledge all this, my interest is in systematic investment strategies using financial instruments only, preferably in tax-efficient account (IRA, 401k etc), using low cost mutual funds if possible.

I start back-testing from January 3, 2012, as I have vivid memories of this recent period as well as my own real-life records and results to compare against. Symbols picked for portfolio have adjusted prices available, so they already have dividend income build into historical prices, and closely resemble actual gains or losses. There will be a noticeable difference in Treasuries and REIT's mutual funds actual account balance vs these simulated results, but only if held continuously for more than a year. Mutual fund will actually make more money, because of more efficient re-investment of dividends - basically investor makes money on the money faster.

Part 1. Straight 25.
     If I put equal amount into SPY, TLT, IYR, GDX on 1/3/2012 and held until today, I would make about 25% profit in total. This is not annualized. It's all of it. Minimum Standard Position size $3000, for 12K initial investment, grows to a bit over 15K. Mind you that S&P doubled over this period, and even Bond Fund had a 50% move. Clearly it was a Gold fund that torpedoed investment results. Even recent rally in gold shares was unable to turn a tide here - gold fund is only about 8% of allocation now, and sits a whopping 60% lower than 5 years ago (it was down 75%)... some store of value... he-he.
http://stockcharts.com/freecharts/perf.php?SPY,TLT,IYR,GDX&n=1243&O=011000

     Even more alarming is how this sad state of affairs came to be. See, for a first year Faber's Straight 25 was fine, even up about 10% by September 2012, but when Gold market took a turn for the worst, all gains were lost and account was in a red a year later. These 10% gains will not be seen again until spring of 2014, after which portfolio rose rather steadily and was up about 40% at some point in August of 2016. Clearly, it would be idiotic to sit on such mis-allocation for a better part of 5 years without at-least an attempt to re-balance or alter investment mix.

Part 2. Five for 25.
     Traditional approach to asset allocation is to re-balance as soon as 1 or more components deviate by more than 5% from a model. Of course it was a Gold fund that caused first re-balance during summer of 2012 by falling to 19% of portfolio for 2 consecutive weeks. Second re-balance came in Spring of 2013. This time not only Gold fund fell as low as 16% allocation, but also S&P rose to 31%. As a result of this, the big winner was cannibalized to replenish a worst loser. And it would not be a last time. End of 2013 brought back exactly the same kind of rotation, only this time account balance was actually DOWN -5.7%.
     2013 was one of those fantastic years when everything went up... except gold... and it took Faber's 25 with it. Gold remained the cause of portfolio re-balancing in 2014 and 2015, during which time account showed temporary gains of about 10%, but ended about flat for the beginning of rip-roaring 2016. Now, we are talking YEARS with nothing to show for it.
     2016 was kind to Dr. Faber. After briefly dipping in a red (again), portfolio took off with powerful gold rally and was up 40% by summer. There it needed a re-balancing, only this time gold was largest position in portfolio and S&P smallest. Pay attention... same 40% as Straight 25 version from above. This re-balanced portfolio now sits just shy of 15K total... Basically, re-balance or don't, you are fakt (german accent).

Part 3. Supply 25 Plus 5.
     What is this crazy infatuation with Gold? Or trust in Bonds? Or hatred of Stocks? Why not think independently and let a collective wisdom of market place to guide ... and blah-blah-blah. Since re-balance naturally comes at-least once a year, I can use a long moving average to avoid a fund in downtrend. Ones a fund goes under - it's sold and money supplied to remaining positions. Trade will require 2 weeks away from average to trigger, at which point entire account will re-balance to accommodate equally each position in portfolio. A deviation of 5% will also cause portfolio to re-balance. Mutual funds are perfect for this, as they allow fractional share count and don't have any trading costs (they also require 1 month hold, but it's not a problem - rather a benefit, and I proved it previously).

     I have an actual experience in what happened here and will rely on it in my estimates, but only as a confirmation. Selling Bonds in 2013 and buying them back in 2014 was as evident back then, as it clearly shows in the chart. Only I was short bonds in 2013 ;-). Both Stocks and REIT's corrected in 2015-2016, but didn't break the moving average, just as my bullish bias in System 14 didn't break over this invisible bear market of 14-16. All this would be even easier with 'Supply-25' portfolio that steadily risen at over 10% per annum and stood at 50% gains back in 2015 (give or take some).
     Clearly, Gold was knocked out by 2013 and I used late exit in my back-test. I actually sold all gold stocks back in 2011 and was generally cold to it for a while. Gold was no longer an option until 2016, but even that trade yielded no profit in back-test. My experience with Gold stocks in 2013-2016 had been wildly different, considering that I bought dips and managed to sell enough during summer 2016 run-up that what's left costs me practically nothing....
But it's not a part of this exercise...

http://stockcharts.com/h-sc/ui?s=SPY&p=W&yr=5&mn=0&dy=0&id=p40313652174
http://stockcharts.com/freecharts/candleglance.html?SPY,IWM,EEM,TLT,HYG,IYR,GDX|D|A1,126,1|0
http://stockcharts.com/freecharts/perf.php?SPY,IWM,EEM,TLT,HYG,IYR,GDX

FMSUP Shuffle

This post is to update watch-list for Utilities Portfolio (FMSUP).

read this FMSUP article (post link) to understand what is going on.

There was one important change to portfolio construction. It was started with 6 positions, but represented 20% of my account, which proved to be too much. At some point in the beginning of the year the whole thing felt like one giant utility position with tech and industrial kicker. Of course it's not normal and immediate remedy required was a reduction of utilities portfolio. Since I couldn't cut position size, I decided to go with 4 stocks instead of 6.

Two positions sold (PPL in Feb and ES in June) more than covered a deficit that darn mr. Simmons left me, so I felt it was fair to put whole ordeal behind and just continue with sensible portfolio management. Although I would prefer to diversify into 6 or (even better) 10 stocks, FMSUP seems to be doing just fine even with smaller number of positions, and leads me to believe that I can safely
Forget Mr Simmons Utility Portfolio
and just do my own thing.

BTW, I beat the pants off him, XLU and Ass-n-Pee index too... ;-)

FMSUP as of 12/7/16 (this will change soon - I'm rotating)
http://stockcharts.com/freecharts/candleglance.html?SPY,XLU,FSUTX,PNW,PCG,ES,exc|B|P5,3,3|0

Presently, there are still about 50 companies that satisfy selection criteria, but I noticed that I'm pretty much shuffling thru the same stocks. They just seem to come up no matter how I look at a pool of possible candidates. So in a coming weeks and months, I will use this Shuffle List to (hopefully) streamline rotation process in order to further increase returns.
FinViz Link

http://stockcharts.com/freecharts/candleglance.html?XLU,FSUTX,PCG,PNW,ES,EXC,SO,ATO,AWK,NEE,DUK,D|B|J[XLU]|0
http://stockcharts.com/freecharts/candleglance.html?AGR,NYLD,HE,ETR,OGE,SJI,DTE,SCG,AEE,PPL,PEG,NWE|B|J[XLU]|0

I expect that Shuffle list will change in the future, as we are scraping a bottom of barrel here in utilities. Monster rally that started late last year run out of steam during summer months and turned into a nasty, but orderly correction. Most utility stocks are under 200ma and 10-20% off recent highs. Despite the carnage, this is all quite ordinary and historically able to produce a durable bottom somewhere here. For everything else - there are rules...

FMSUP trades and occasional commentary are published on my private Twitter feed 
(just send me a request - its FREE for now):  https://twitter.com/SWID_iBergamot