Saturday, May 29, 2010

The Gerritz Letter

The June 1, 2010 issue of The Gerritz Letter has been published. It should be in your email inbox now. If you do not see it, check your junk or spam mail folder and mark it as not junk mail.

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Market Comment 05 28 10

During the month of May the Dow fell 7.9%, while the S&P 500 and Nasdaq gave back 8.2% and 8.3% respectively. In the historical context, this was the worst May for the Dow since 1940; 1962 for the S&P 500 and 2000 for the Nasdaq.

On Friday, the markets were down.

Have a nice holiday weekend.

Thursday, May 27, 2010

Market Comment 05 27 10

The market finally had a great day. It opened strongly and even gained momentum going into the close. As I said in yesterday's blog, the market has been extremely oversold and due for a bounce.
Many of the market indicators I follow have now turned up.  To add to that, we have the "bullish hammer candlestick formation" mentioned yesterday, as well as a double bottom put in at the 1040 area. Technically the outlook has improved significantly.

Even with the sudden positive change in sentiment, I plan to proceed causiously: as I often say, one day does not make a trend. 

None the less, due to the strong market action, I did liquidate our US Dollar Index ETF (UUP).  UUP is generally considered defensive and, more often than not, moves inversely to stocks. I also took a 5% position in the S&P 500 index ETF, SPY. If an uptrend develops, I will add more equity positions. If, on the other hand, the 1040 support level does not hold, we should expect more downside.

Wednesday, May 26, 2010

Market Comment 05 26 10

We are finally getting the expected bounce off of the market lows.  The market was extremely oversold and due for this bounce. Below is yesterday's chart of the S&P500. There are some interesting observations:

   1.   Support held a around the 1140 area. Support was determined and established from the Nov 09 low of 1145 and the Feb low of 1144.

   2.  We got a bullish candlestick formation called a hammer. A hammer suggests a potential short term reversal.

(Click on chart to enlarge it for easier viewing)

(Click on chart to enlarge it for easier viewing)

A caveat, one day does not make a trend. An uptrend is defined as a series of higher highs and higher lows. Risk remains elevated so quickly jumping back into shark infested waters is not prudent.

*Added After Market Close:

The market closed to the downside after attempting a morning rally. The danger signs in the market persist.

Saturday, May 22, 2010

Buy & Hold is Dead

If you still buy the myth that investments should be bought and held for the long term, I suggest you study the following long-term chart of the stock market very carefully.

Those who continue to embrace the widely held investment theories of the past are simply setting themselves up for continued failure. Modern Portfolio Theory, a strategy suggesting that risk can simply be managed through diversification across non-correlated asset classes, is no longer working. It has not worked since the year 2000. Yet, the great majority of so called financial planners, advisers and Wall Street brokers continue to tout it. Seven out of the nine stocks on Goldman Sachs' client conviction buy list have lost money this year, while Goldman has made huge profits from their own proprietary trading. They obviously don't practice what they preach.

The great majority of mutual funds remain 90%+  invested in both up and down markets. If you believe they make an attempt to protect investors from the downside you are badly mistaken. Mutual fund companies themselves will tell you that you need to have your own system of risk management.

The best advice I can give the individual investor is to seek out a competent personal portfolio manager and to shun anybody that advocates holding investments without a viable risk management plan in place.

While markets that merely trend up and down in wide swings is detrimental to the buy & hold investor, this same market movement creates opportunity for clients that employ active portfolio  management strategies.


Friday, May 21, 2010

Market Comment 05 21 10

 The market was deeply oversold and overdue for a short-covering rally and that is just what we got on Friday. Short-covering rallies sometimes lead to prolonged uptrends, but they also sometimes fail quickly and violently. Therefore caution is still called for.

When the market does bottom and resume trending up in a sustained manner, we will have plenty of time to participate. We did not let the emotion of the day get a hold on us during the recent extreme volatility to the downside and we will not let the emotion of the rally dictate our re-entry back into the market.

Thursday, May 20, 2010

Market Comment 05 20 10

The global selloff in stocks accelerated Thursday, sending the Dow down 3.6% to 10,068 while the S&P 500 lost 3.9% to 1071.59 and the NASDAQ shed 4.1% to 2204.

All major U.S. averages are now down for the year and at least 10% below their 2010 highs, meaning the downturn has officially entered "correction" territory.

We got a sell signal for Metropolitan West High Yield Fund (MWHYX) and subsequently sold it today. Additionally, I did sell various income funds for a number of new accounts that transfered in recently. Putnam Diversified Income fund is holding up very well and has yet to deliver a sell signal.

At the moment, the majority of our client accounts are positioned 70% cash - 20% bond/income funds and 10% in a long US dollar index ETF.

GWM clients have largely avoided the pain average buy & hold investors are feeling at the moment. If you have friends and relatives that are getting tired of have their money going on a roller-coaster ride every few years, encourage them to visit the Gerritz Wealth Management web-site at They are also welcome to subscribe free of charge to The Gerritz Letter, our monthly newsletter and Gerritz InSights, our daily blog.

Most people do not have access to a qualified Active Personal Portfolio Manager, yet alone think they can afford one; the reality is they can't afford not to have one. To start a conversation, just ask your friends if they are comfortable with their current investment program during periods of extreme volatility. I am sure they will appreciate your concern. Give them my 800 number and tell them to call me if they are interested in learning more about protecting their accounts at times like these.

Steve Gerritz 1-800-877-1967

Wednesday, May 19, 2010

Market Comment 05 19 10

As of today the S&P 500 is up just 1.26% year to date. From the April 23, 2010 high of 1217.28 the index has fallen 8.39%. We are nearing the S&P 500 level of 1097, which would represent a full 10% bull market correction.

The market is now extremely oversold and due for a bounce. If we don't get that bounce soon we should expect further declines, giving us an indication that the market has completed a topping pattern.

We liquidated all equity positions on May 4th and have avoided this market volatility.

For the majority of accounts over $25,000 I bought a 20% position in a long-term US treasury ETF (symbol: TLT) on Monday. I sold it today (Wednesday) making a very quick profit of 1.25%. Often when fear drives stock prices quickly and dramatically lower, long term treasuries inversely take a sudden and sharp bounce up. I took advantage of this and was able to scalp a little extra return for our client accounts. This was a low risk strategy that paid off. This short term bounce in the long treasuries will be short lived if stocks start to rebound soon.

For the same accounts I also took a 10% position in a US dollar index ETF (UUP). If matters take a turn for the worst internationally the US dollar would continue to benefit as a safe haven.

A market correction in the magnatude of 10 to 12% would be healthy for the market at this juncture. This cleansing process would pave the way for a sustained  move to the upside. We will have to wait and see what cues the market gives us next.

Sunday, May 16, 2010

Sunday Speculation

Well, where does the market go from here near term?

I don’t really know, but, I do know that the bulls and the bears have a fight on their hands. While that battle wages we will remain on the sidelines as spectators. There is an old Wall Street axiom: “The trend is your friend”; and clearly no friends can be found at the moment.

Allow me to speculate, just for fun of course, and paint a picture of the upcoming battle. A lot of market participants are worried that we could see a repeat of the extreme volatility the market experienced on May 6th and are more likely to sell on bounces. On the other hand, some traders feel they missed out on a bargain during the sharp decline and will want to buy on the dips. As a result the market bounces up and down with last week’s high acting as resistance and the low set on the 6th acting as support. The market will be stuck in a trading range for a period of time, going sideways until the market breaks out and the winner emerges.

If a scenario like this plays out we will take our cue from the ultimate breakout of that trading range.  As a new trend reveals itself we will be prepared to act.

Thursday, May 13, 2010

Market Comment 05 13 10

The stock market remains volatile confirming the negative technical condition of the market spelled out last week. It could take a week or two before we know if the recent declines are the beginning of a major downtrend or just a normal bull market correction nearing its end.

At the moment we are sitting safely in cash with the exception of our two remaining bond / income fund positions. Our high yield fund position is nearing its 50 day moving average. If the share price crosses over that line in the sand we will get a sell signal.

The big benefit of having a defined risk management plan in place is that we don’t have to anguish over making tough decisions. We merely remain disciplined and follow the plan.

Wednesday, May 12, 2010

GWM Market WatchList 05 12 2010

Market Watch List 05 12 2010

We constantly monitor the major sectors of the market by tracking the performance of the ETFs that represent those sectors. We subdivide the watch list into two main categories titled: Market WatchList and Global WatchList.

The Market WatchList and the Global WatchList reflect the rapid deterioration in market conditions. Although most of the sectors in Market WatchList are not in well-developed downtrends, most have completed a topping pattern and have formed a pattern of declining peaks with RSI-14 below 50. Most of the foreign ETF's that make up Global WatchList are already in well-defined downtrends. Please keep in mind, however, that my comments and trend analysis in the domestic and global watch list are not meant to be predictive, but rather, are just observations of the current situation.

Not only does the Market WatchList reflect significant market deterioration, it also reflects a substantial reshuffling of relative performance. The top groups on this list are now Precious Metals, Muni Bonds, and Treasury Bonds. These are defensive groups that investors typically move into when they perceive risk to be high. The bottom three groups on this list are Europe, Foreign Diversified and Latin America, reflecting the same broad weakness in foreign funds that we have observed in the Global WatchList for the past several months. I still see nothing in the charts that would suggest it is time to consider foreign funds.

The rush to these defensive assets will more than likely subside as risk aversion wanes. Gold, however, is definitely in a bull market. Due to its high level of volatility gold may only be suitable for clients capable of tolerating the associated risk.

If you want a position in gold investments let me know; send me an email or call.

RSI 14 - Relative Strength Index - RSI

What Does Relative Strength Index - RSI Mean?

A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine possible trend reversals as well as revealing overbought and oversold conditions of an asset.

A reading below 50 indicates that a change of trend may be at hand.

Tuesday, May 11, 2010

Waiting for the dust to settle

The legendary investor Jesse Livermore said:

"The successful investor is not invested in the market all the time. There are many times when you should be completely in cash. If you are unsure of the direction of the market, wait."

In the aftermath of the extreme volatility of late, I am inclined to be a bit more patient and let the dust settle before rushing back into the market. I will look to add to positions incrementally as the market begins to stabilize. If we miss some bargains, so be it. I prefer to invest with the wind at my back. Right now, it’s swirling. To jump back in to make pennies when there are dollars to be made in better environments makes little sense to me. I prefer to follow trends and not chase returns.

Monday, May 10, 2010

Market Comment 05 10 10

The Market surged higher this morning on news of a bailout package for Greece and other European nations if needed. The recent stock market decline may be over, but we cannot draw any conclusions based on the surge in buying this morning alone. The market was extremely oversold and due for at least a short term bounce. This morning’s bounce may be primarily due to short covering. It will be a couple days before we can put the recent sharp decline and this morning’s sharp advance in proper perspective. Just as we did not get caught up in the emotion of the day during the decline, we will not get caught up in the emotion of the current rally.

Our investment style and investment game plan is clear. We check our egos and notions of what the market should do at the door and let the market itself be our guide. If the rally holds I will begin to add some new positions this week.

Sunday, May 9, 2010

Trendline Analysis - The proof is in the pudding

Does past performance tell us anything about future performance? An astute investor pointed out the fact that every prospectus ever printed discloses that past performance is no guarantee of future performance.

Does what happened last month, last week, or yesterday in the market really have any bearing on what may happen in the near future? After all, what happened in the past is old news and the future cannot be known.

Trendline Analysis is based on the past and the present. Is it really of any value? If you are not familiar with Trendline Analysis read the May 2010 issue of The Gerritz Letter; a link is provided below.

When you were a child you might have placed your hand on a hot stove, ouch! If you did, it would be my guess that you never did again, at least not on purpose. Life teaches us a lot of lessons. We either learn from our experiences or we repeat mistakes.

Market movement is comprised  of three important trends superimposed on each other.

Primary Trend

The main or primary trend, is often referred to as a bull or bear market. Bulls go up and bears go down. They typically last about nine months to two years with bear market troughs separated by just under four years. These trends revolve around the business cycle and tend to repeat whether the weak phase of the cycle is an actual recession, or if there is no recession and just slow growth.

Primary trends are not straight-line affairs, but are a series of rallies and reactions. These series of rallies and reactions are known as intermediate or medium term trends.

The intermediate or medium term trend can vary in length from as little as six weeks to as much as nine months, or the length of a very short primary trend.

Intermediate trends typically develop as a result of changing perceptions concerning economic, financial, or political events. It is important to have some understanding of the direction of the main or primary trend because rallies in bull markets are strong and reactions are weak. On the other hand, reactions in bear markets are strong and rallies are short, sharp, and generally, unpredictable.

If you have a fix on the underlying primary trend, you will be better prepared for the nature of the intermediate rallies and the reactions that will unfold.

In turn, intermediate trends can be broken down into short-term trends, which last from as little as two weeks to as much as five or six weeks.

The market after all does have a history of trending both up and down as well as going sideways from time to time. Past market price trends are therefore relevant to the present condition of the market.

Trend lines can help us determine current market direction. Additionally, trend lines can help us filter out normal short-term market fluctuations. If a trend line is broken it warrants our attention. If a new counter trend develops it needs to be confirmed and assessed.

If we use this information and decide to sell out of an equity position, we have protected our account from a potential drawdown. If we are wrong and the market resumes it's climb higher; we just buy in again. Most people cry harder over big  losses than missing a couple points of gain.

As you may known our portfolio model went to zero equity exposure on the 4th of May, two days before the extreme volatility on the 6th. Without the benefit of Trendline Analysis we could not have made this, what now seems to be, critical decision. We protected client accounts from a large drawdown in what is now clearly an intermediate change of market direction.

The proof is in the pudding.

Saturday, May 8, 2010

The Tail Wagging the Dog - Greece

In  2007 the sub-prime mortgage problem was generally thought to be contained; an inconsequential problem that would affect a relatively small part of the market. The events that followed soundly put that notion to rest.  Now a potential default by little ole Greece is shaking markets worldwide. Mohamed El-Erian, CEO of PIMCO, offers some great insights as to why we should be concerned.

Click the link below to view a brief Morningstar video interview with Mohamed.

Friday, May 7, 2010

Putting Yesterday's Mid-day Plunge into Perspective

Yesterday’s sharp intraday plunge was apparently due to a trading error exacerbated by the high speed computerized trading systems used by the likes of Citigroup. The stock market was already in a short-term downtrend. I don’t consider that mid-day plunge to have much long-term significance. As to the decline that started almost two weeks ago, I think it is still too early to really know how significant it will be. All major market tops start out as a short-term downtrend, but not all short-term downtrends turn into major market tops. That is why we use stops to help manage volatility and risk.

Investing involves risk. It is generally counter-productive to attempt to avoid all risk. It is never a mistake to take a systematic approach aimed at managing risk.

Thursday, May 6, 2010

Market Comment 05 06 10

The volatility of the market today was off the charts. You will be happy to know that going into today most client portfolios had no exposure to stock funds or equity ETFs.

On Tuesday the 4th we sold all equity positions in our model portfolio. On April 30th we also tendered all shares of XOSAX. We continue to hold only two income/high yield bond fund positions. Our bond positions are much less volatile than the stock market. Given the reemergence of extreme market volatility we will be watching our remaining positions very closely.

The risk management systems we have in place definitely did a great job of protecting our client portfolios today. Our analytic tools and indicators gave us warning signs and we heeded those signs.

Wednesday, May 5, 2010

Market Comment 05 05 10

Tuesday’s sell-off suggests at least a short term top in the market. This does not mean that the bull market that began last year has come to an end, but rather odds have increased that the short term trend is now to the downside.

I would expect the usual bounce to the upside after such a decline is likely. If that bounce is not sufficient to take us back up to pre-decline territory and if it is followed by a down-leg that exceeds the preceding decline, a trend reversal will be confirmed. Remember, an uptrend is defined as a series of higher highs and higher lows. A downtrend is defined a series of lower highs and lower lows.

A potential correction of 8 to 10 percent would not be an unreasonable expectation. At this point however, we will have to wait and see what transpires next. Given the multiple negatives at the moment caution is called for.

Tuesday, May 4, 2010

S&P 500 Chart Analysis by Peter Worden 05 04 10 video

S&P 500 Chart Analysis by Peter Worden 05 04 10 video.

Click the link below to view video on current market turmoil.

SmartStop Sell Triggers 05 04 10

SmartStop QuickAlert 05 04 10

QQQQ - SPY - XLI - XLY have all been stopped out (sold) today.

Volatility has returned, triggering our sell-stops for most of the remaining equity positions that we were holding.

The long awaited market correction may now be at hand. A correction would actually be a plus for the market's health longer term. Markets need to wring out excesses and digest gains periodically. For now we have exited our more volatile equity position and will remain on the sidelines.

Our low-volatility high yield / incomes funds really do not closely correlate to the daily ups and downs of the market. They will trend with the stock market, but in a delayed fashion. This fact buys us additional time to make important decisions about exit and entry points.

Monday, May 3, 2010

Market Comment 05 03 10

The market sell-off last Friday was rather steep. The market opened higher on Monday (today), but we will need to see how the market behaves the next few days to assess whether or not the character of the market is changing and if any portfolio changes are warranted. This is a market that bears watching closely.

Fortunately, the low-volatility portfolios that most our investors have provide us additional decision-making time. Stay tuned.

Sunday, May 2, 2010

More in depth Tutorial on Trendline Analysis Available

A more in depth tutorial on Trendline Analysis is available on the GWM web-site. To access it go to the GWM web-site and select Featured Article from the top menu; then click on Trendline Analysis Tutorial or just click the following link.