Dividend Aristocrats

Are the large stable 'boring' stocks the way to go? The SP-500 Dividend Aristocrats have increased their dividends each year for at least the last 25 years.

The first plot above shows the equity curve for the current batch of Dividend Aristocrats versus SPY for the last eight years. The Aristocrats significantly lagged during the tech surge of 1999-2000, but substantially outperformed during the tech collapse of 2000-2002. From 2003-2007, the Aristocrats have kept pace with SPY. However, the Aristocrats have been lagging SPY for the last 9 months. See the second plot above which covers the last three years. The financial sector Aristocrats have been faltering during this period.

For long term purposes, the Aristocrats would seem to be good choices for your large capitalization stock allocation. They also tend to have modest correlation to the SP-500 as a whole and can provide some diversity to your portfolio.

You can find an Excel spreadsheet listing the September 2007 members of the Dividend Aristocrats in the 12/28/2007 post at CrossingWallStreet.com.

Holy Grail

Is the search for the 'Holy Grail' trading method of benefit to the trader? If the trader enjoys the journey and is able to utilize the imperfect methods found during the quest, then it can be of immense value. The trader's success depends on becoming comfortable with taking the calculated risk implied by the imperfect methods. The quest for the grail can provide the trader with the impetus to continuously improve his methods and market understanding.

From 'The Alchemist' by Paulo Coelho:

"Why are you called the alchemist?"
"Because that's what I am."
"And what went wrong when other alchemists tried to make gold and were unable to do so?"
"They were looking only for the gold", his companion answered. "They were seeking the treasure of their Personal Legend, without wanting actually to live out the Personal Legend."

Secret to Success

The article, 'The Secret to Raising Smart Kids', in the most recent issue of 'Scientific American Mind', makes a very important point about success.

Summary points from the article:

"Many people assume that superior intelligence or ability is a key to success. But more than three decades of research shows that an overemphasis on intellect or talent—and the implication that such traits are innate and fixed—leaves people vulnerable to failure, fearful of challenges and unmotivated to learn.

Teaching people to have a “growth mind-set,” which encourages a focus on effort rather than on intelligence or talent, produces high achievers in school and in life.

Parents and teachers can engender a growth mind-set in children by praising them for their effort or persistence (rather than for their intelligence), by telling success stories that emphasize hard work and love of learning, and by teaching them about the brain as a learning machine."

This is certainly a lesson for us all, especially in the area of trading. Effort, persistence, and a love of learning are what is needed and not reliance on some magical insight. Existence exists.

Complete Opposite

The end of the year is a good time to consider what you have been doing in the past year and what you would like to be doing in the coming year. Are there any areas in which you should be doing the complete opposite? Should you try something new? Should you be doing the same thing, but in a different way?

"This is no longer just some crazy notion, this is my religion."
   -- George Costanza

Market Inferno - Rebalance?

The market has been in 'Towering Inferno' mode the past several weeks. How do you adjust your asset allocation for long term accounts? For example, US Small Capitalization (IWM) has been significantly under performing US Large Capitalization (SPY). This is illustrated by IWM versus SPY in the first plot above.

Do you increase the allocation to small capitalization at this time to bring it back into alignment with your allocation plan? In the long term, IWM will outperform SPY. See the second plot above which shows IWM versus SPY for the last seven years. IWM will substantially underperform during market pullbacks, but it will outperform as the market recovers. During the big down market from 2000 through 2002, IWM still managed to outperform SPY. IWM has lagged quite a bit since August so we may be approaching a reasonable area in which to add to the small capitalization allocation.

One approach for rebalancing long term accounts is to accumulate new money in a money fund and then deploy the money to other asset classes when a trigger condition is hit. For example, the T2108 indicator (or your personal favorite) might be used to mark an oversold zone in which you would rebalance the account to your desired allocations.

Magazine Cover Indicator

Does the magazine cover indicator work? For example, two weeks ago the Economist cover (December 1st) featured the falling US dollar. The cover was published at about the time dollar was bottoming (at least for the short term). A chart of the US Dollar Index is included above.

Is there any published information on the reliability of taking the opposite position implied by news magazine covers? By the time a trend becomes so widely recognized that it appears as the cover topic of a news magazine, most everybody must already be on board the reported trend.

I Can't Get No Satisfaction

Well... Today the Fed disappointed the market and the market fell off a cliff. I have been attempting to maintain a longer term perspective, but I may have to go back to more active short term trading. The satisfaction from longer term trading has just not been there recently.

On the bright side, the sell off represents a short term opportunity. After SPY has gone down 2% or more in one day, 70% of the time it is up after 5 days with an average return of 2%. The table above summarizes the results for SPY after 1, 2, and 5 days. The results are based on the last five years of daily SPY data.

What Happened to the Dividend ETFs?

What has happened to the dividend ETFs recently? Take DVY as an example. Since mid year it has massively underperformed SPY. The first image above shows DVY and SPY for the last three years. I looked up DVY at ETFConnect and found that DVY has a 38% weighting in the financial sector. The SPY only has about an 18% weighting. That is how a 'conservative' dividend fund can have surprisingly bad performance. The second image above shows SPY and XLF (financial sector) for the last three years.

The moral of the story is to be aware of the composition of ETFs and the indicies that they are based on. You may not be getting the exposure or diversification that you bargained on.

Hindenburg Mystery

I believe the most recent Hindenburg Omen occurred back in mid October. The Dow is now above its level of mid October, so I assume that the Omen has been closed out. The definition and history of the Hindenburg Omen can be found at SafeHaven.com. (I could not find a post with the history updated after 2005.)

Does the Hindenburg Omen indicator actually work? Is the indicator just a curve fit curiosity? Some of the declines after the Omen are quite small and are likely just the normal market variability. A more detailed look at market conditions at the Omen times would be needed to decide if the indicator actually seems to track market crash potential.

For long term accounts, it probably does not make sense to take any action based on something like the Omen. In fact, the 1937 Zeppelin disaster can provide us with big picture perspective about bailing out prematurely.

From wikipedia.org:

" Despite the violent fire, most of the crew and passengers survived. Of the 36 passengers and 61 crew, 13 passengers and 22 crew died. Also killed was one member of the ground crew, Navy Linesman Allen Hagaman. The two dogs on board the ship also died. Most deaths were not caused directly by the fire but were from jumping from the burning ship. Those passengers who rode the ship on its descent to the ground survived. "

Gotta Have More Crabel

'Day Trading With Short Term Price Patterns & Opening Range Breakout' by Toby Crabel describes many interesting patterns and illustrates his approach to market research. For example, the 'Open to Close' pattern shown in the table above.

The table shows the open to close bias for the QQQQs based on the three prior days' closes and the current day's opening. Whether the three prior days closed up or down is shown by the first three '+' or '-' signs in the Pattern column. The final '+' or '-' shows whether the current day's open is up or down. The Mean column shows the average percent profit entering at the open and exiting at the close. The Buy column contains '1' for a buy and a '0' for a sell. The statistically significant patterns are in red.

Knowledge of such patterns can help you to determine the up or down bias for the day. Applying such patterns to individual stocks will reveal larger percentage biases that might be tradable in isolation. The above pattern combined with other information could form the basis for a short term trading system. I will be reexamining the Crabel approach and will post further on this topic in the future.