Daily Gains Letter

cyclical stocks


How to Protect Your Portfolio and Profit as Interest Rates Rise

By for Daily Gains Letter | Apr 9, 2014

Interest RatesAccording to data released by the U.S. Bureau of Labor Statistics (BLS) last Friday, the unemployment rate stood at 6.7% in March, which is similar to the unemployment rate in February. A total of 192,000 jobs were added, of which food and drinking places added more than 30,000 and “temporary” help services in the professional and business industry added more than 29,000 jobs. The labor market fell slightly short of expectations as analysts had forecasted the unemployment rate to be 6.6% for March. (Source: “The Employment Situation — March 2014,” Bureau of Labor Statistics web site, April 4, 2014.)

The Fed announced it would start to scale back its monetary stimulus last December, after jobs numbers started to show signs of a recovering economy. The unemployment rate initially dropped, only to settle at levels that have remained unchanged for the greater part of the winter season. Simultaneously, initial jobless claims increased by 5.16% during the week ended March 28, 2014, raising eyebrows toward the ability of the Fed’s policies to carry the string of economic recovery further. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 7, 2014.)

While most economic challenges faced by the Fed for the last four months have been blamed on cold weather, a rigid unemployment rate and increasing jobless claims point towards a weaker-than-expected recovery. Amidst this, the Fed chair, Janet Yellen, while speaking at a press conference on March 19, confirmed that the Fed plans to go ahead with the tapering program in its bid to elevate interest rates up from their near-zero levels. (Source: Risen, T., “Janet Yellen Continues Tapering … Read More


Time to Ditch Swinging Cyclicals?

By for Daily Gains Letter | Apr 4, 2014

investment strategyThe stock market appears to be getting somewhat top-heavy. Scanning through my screens, I am quite amazed to find that the majority of S&P 500 stocks are well above their respective 200-day moving averages, which makes opportunities much more difficult to come by for the average investor who might look at their portfolio once a week or month.

But the buying in the stock market has still largely been with the technology, growth, and small-cap stocks, due to the higher potential to make quick money versus investing in blue chips or industrial companies.

In 2013, we saw staggering upside moves in some of the momentum stocks, such as Google Inc. (NASDAQ/GOOG), priceline.com Incorporated (NASDAQ/PCLN), Netflix, Inc. (NASDAQ/NFLX), and Chipotle Mexican Grill, Inc. (NYSE/CMG). These are the top players in their respective areas.

But that was then. Now, we are seeing a renewed interest in some of the safer names in the stock market, which is why the Dow Jones and S&P 500 outperformed in March.

My view is that while there will still be money to be made in some of the more speculative and momentum plays in the stock market, we could also see a pause for investors to digest the gains made.

Cyclical stocks, or those companies that swing with the economy, are still worth a look, but should the economic renewal stall and jobs creation dry up, it might be time to look elsewhere. Here I’m talking about those sectors such as auto, furniture, retail, travel, and restaurants.

Everyone is spending when all is good and people are making money on the stock market, but spending will … Read More


The One Chart Stock Market Bulls Can’t Ignore

By for Daily Gains Letter | Feb 3, 2014

Stock Market BullsThere are many indicators that can give us an idea about where key stock indices may be headed. It may seem obvious, but always remember that nothing is certain until it happens. As I say quite often in these pages, trying to predict the exact top and bottom on key stock indices can significantly damage your portfolio in the case that the markets move in the opposite direction.

When I am trying to figure out what the next move will be by the key stock indices, I look at investor sentiment; I look at where investors are placing their money and what kind of assets they are buying. For example, when investors think the risks on key stock indices are increasing, they go towards safer stocks—big-cap companies may be one example. On the other hand, if investors think the key stock indices are moving to the up side, they move into stocks that provide better-than-market returns.

One indicator of investor sentiment that I look at is the relationship between the Utilities Select Sector SPDR (NYSEArca/XLU) exchange-traded fund (ETF) and the Morgan Stanley Cyclical Index. The XLU tracks utilities companies that are considered safer by investors because their products or services are needed regardless of economic conditions, like electricity providers, for example. On the flipside, the Morgan Stanley Cyclical Index tracks cyclical stocks, which are the stocks that move with the markets and are considered riskier assets, like furniture retailers, for example—they are dependent on how the economy is doing overall.

With this in mind, please take a look at the chart below. It shows the movement in the XLU and … Read More


The Best Stocks for Cushioning Your Retirement Portfolio

By for Daily Gains Letter | Jul 30, 2013

defensive stockWord on the street is that the U.S. Federal Reserve will soon be announcing its intention of keeping interest rates low for a long time. While this may be good news for first-time home buyers looking to lock their mortgages in at near-record-low rates, it’s terrible news for anyone with a retirement portfolio made up of fixed-income investments like cash, bonds, and annuities.

To make up the ground lost to artificially low interest rates, investors may need to rebalance their retirement portfolio to include a higher allotment of stocks. But where should investors turn? During the first five months of the year, it was pretty hard to lose money on the stock market.

Between January 2 and May 21, the day before the Federal Reserve hinted it would scale back its $85.0 billion-per-month quantitative easing policy, the S&P 500 was up more than 17%. Since then, the Federal Reserve-inspired roller coaster has rewarded patient investors with a one-percent return.

For much of June, the S&P 500 experienced a volatile ride, with investors wondering just how well Wall Street would do without the intervention of the Federal Reserve. To calm investors, the Federal Reserve intervened and said that there is no hard and fast set time for any tapering. Not only that, the Federal Reserve said that eventually cutting back won’t necessarily translate into higher interest rates. Disaster averted!

What that means is that those with large sums of money to plunk down on the stock markets will continue to do well. While those with their money tied up in their homes—the majority of Americans—will not.

Those investors parked somewhere in … Read More


These Companies Can Protect You from the Coming Market Decline

By for Daily Gains Letter | Jul 8, 2013

Why Central Banks Have Encouraged RiskInvestors who love technical analysis must be having a sense of déjà vu. Whenever the Federal Reserve announces it’s ending its quantitative easing policy, the markets respond by cratering.

In March 2010, when the Federal Reserve announced it was ending its first round of quantitative easing (QE1), the Dow Jones Industrial Average and S&P 500 both fell 14% over the next three months. To help prop up the economy, the Federal Reserve initiated QE2 in November 2010 and concluded it seven months later. By early October, the Dow and S&P 500 had lost close to 15% in value.

In September 2012, the Federal Reserve initiated QE3—investors’ nerves were calmed when they discovered it was open-ended. Today, the Federal Reserve spends $85.0 billion a month on Treasury bonds and mortgage-backed securities to help prop up the American economy.

As I have been reading, that massive monthly cash injection doesn’t even begin to give the full picture of how much liquidity the Federal Reserve’s quantitative easing policies, and those of other central banks, are flooding the financial markets with.

Since the financial crisis began in 2007, the five biggest central banks have purchased roughly $12.0 trillion in assets. Coupled with the near-record-low interest rates, that accounts for about $33.0 trillion of fiscal and monetary stimulus spending—that’s about 46% of the global economy.

Suffice it to say, the Federal Reserve’s artificially low interest rates have made it easier than ever to borrow money, sending many international stock markets to new heights. And it’s from these dizzying heights that the markets are pondering the future of QE3.

While the Federal Reserve hasn’t said equivocally … Read More


U.S. Economy Getting Better; Should You Jump into Cyclical Stocks?

By for Daily Gains Letter | May 20, 2013

U.S. Economy Getting BetterAs the risks in the stock market increase, investors most often run towards defensive stocks. The main reason behind this phenomenon is that companies that are considered defensive provide investors with a stream of dividends, even when the markets, as a whole, crumble. They are generally strong players in their industry, with healthy market shares and stable earnings year-over-year.

The stock market rally, which began in March 2009, was born on a significant amount of pessimism. At the time, when the key stock indices like the S&P 500 bottomed, there were still concerns about whether the financial system was able to get back on its feet, or if the U.S. economy could avoid a depression: unemployment was staggering, consumer spending was crushed, and businesses were struggling to sell and earn profit.

This resulted in investors rushing towards defensive stocks. Below is the chart of the Utilities Select Sector SPDR (NYSEArca/XLU) exchange-traded fund (ETF). This is just a one example of where investors rushed to.

Utilities Select Sector Chart

Chart courtesy of www.StockCharts.com

The utilities sector is considered to be defensive because the companies in the sector sell what people usually need. In times of economic slowdown, they might just decrease the amount of a certain product used, but can’t really stop using it; for example, electricity providers are considered to be defensive stocks in the utilities sector.

Moving forward to now, the reasons investors rushed into defensive stocks are running out. The U.S. economy is getting better—or at the very least, there is some progress that suggests it is moving towards economic growth. Why? Unemployment is much lower, the housing market is slowly recovering, … Read More