WASHINGTON, June 9, 2014 – As of a bit after 8 this morning EDT, all standard market indicators, including the Dow, the S&P 500, and the NASDAQ will have a weak open this morning, which is not atypical for Blue Mondays, particularly during the summer. That said, signals from a number of the services we follow are almost universally on green and we’ll likely do a bit of buying when it looks like prices are at their lows.
Why would we do that when we’ve been wondering over the last few columns just where “sell in May and go away” got up and went in 2014? It’s fairly simple. Although the Maven follows a selection of charts and systems like pretty much any other reasonably successful investor, he’s still a fundamentalist at heart, and prefers stocks, in general, with relatively low PEs, decent dividends, and a bright outlook at least for the upcoming quarters.
Frankly, all these are hard to find, currently. Which is where the technician comes in and sometimes trumps the fundamentalist. Active investors have all internalized Marty Zweig’s twin dictates: “Don’t fight the Fed. Don’t fight the tape.”
Although the Fed has been letting up on the gas pedal lately (apparently), the tape tells us that the current amazing light-volume market melt-up is likely continue until it doesn’t. It’s stupid, makes no sense, but there it is and we’ve been forced to go with it although we’re still a bit cash-y.
Apple (AAPL) bounced around like a summer beach ball last week and we sneaked into a few of these costly shares bit by bit before the split, grabbling a few during each sickening face-plant and then riding them up like a roller-coaster before the next smackdown. The action was nutty, and it was likely the HFTs playing games since most pros seem to have adjourned for the beach or somewhere else for the summer.
Post-split shares start trading this morning. CNBC estimates initial value at slightly over $92 per share post-split, but who knows where AAPL will open or where it will go. The Maven’s average cost, post-split, is under $90, but he expects a bumpy ride all week as traders—particularly amateurs—figure out what’s always been mathematically obvious: they now have 7 new shares of AAPL for the price of one old one, except that the 7 new ones are now priced at 1/7th of the original model.
In other words, the AAPL holdings you had on Friday are the same only different.
The main reason the Maven bought shares last week after hanging back most of 2014 is that it’s fairly obvious now—at least to the Maven—that this is a stock that’s likely to have a big fall season with new product(s) and likely an Iron Man crack-resistant sapphire reinforced glass face iPhone 6 or whatever Tim Cooke, Jon Ive and their band of Merry Engineers choose to call this Android killer. (Don’t they wish?)
So the Maven figures hitching a ride right now will be a good position, even though it will look a bit dumb in the near-term.
There are other things to play with besides Apple stock of course. And Apple action is likely to be depressing at least for a bit when the reality of what a split really is sinks in, so let’s move on to where some other fun might be.
Today’s trading tips:
We tend to do a fair bit of buying on Mondays, mainly because we can buy into what’s usually an opening fusillade of selling, but we’re still fairly cautious. “Sell in May” may have failed us, for now, but this lighter-than-air market is likely to take a belly flop at some point this summer if only just because. Keeping some cash on the side will enable us to hedge with our usual shorts if and when necessary.
That said, almost inexplicably, foreign rather than U.S. stocks seem to be unaccountably happy these days, so sneaking in mightn’t be a bad idea, but ETFs are generally the way to do it to spread the risk. EEM, the iShares MSCI Emerging Markets ETF might be one way to play.
As a longtime Schwab customer, the Maven has been slipping into the Schwab flavor of this play, symbol SCHE because it tracks pretty well and because Schwab doesn’t charge a commish to customers for buying and selling its own ETFs and other select ETFs. Note, however, that other discount brokerages do have similar deals with internal products and some others. Schwab’s SCHF is a broader venture into a basket of much larger and more mature foreign stocks and that can work, too.
Another ETF that, if you buy it right, can actually be a “buy-and-hold” is the Guggenheim S&P Equal Weight, aka RSP. Equal weight ETFs are rather democratic, as each stock big and small has equal weight in the average. This is the opposite of straight averages and their ETF equivalents, i.e., like the Dow or the S&P averages (represented by ETFs DIA and SPY) that weight stocks according to how much each share costs—with bigger weightings for the big guys.
The advantage of equal weight ETFs on major averages is that they have notably less volatility. The disadvantage is that you don’t catch the major moves of an average like the tech-heavy S&P 100, represented by the ETF QQQ.
Overweighted Apple, for example, has been upward of 12-18% of QQQ (known as “the Q’s), meaning that, as Apple goes, so go the Q’s. Which is good when Apple is soaring and very bad indeed when it’s tanking. But the equal weight edition of the Q’s, QQEW, makes Apple an equal weight. So when the iPhone maker gets clobbered, QQEW will get nipped a bit, too, but not slaughtered. Ultimately it all depends on your risk tolerance and investment style.
We continue to pick up an occasional preferred issue, too, to collect the dividends. The Maven, like everyone else who’s not part of the 1%, is looking for yield since he pretty much can’t find it anywhere else. He’s been reducing his bond holdings gradually by attrition, either as the bonds mature or are called, as bonds are likely to be an unhappy place starting fairly soon.
But with preferreds, you can get a great yield, yet also escape more quickly should negative bond action engulf these preferreds, which it eventually will.
We’ve become somewhat adept at getting hold of these issues below par (usually $25 per share) on the OTC “gray market” where they’re usually floated first. We explain this strategy briefly in the article tagged below, and we’ll write more on this somewhat bizarre way of trading in a future column.
READ ALSO: Market meanders as traders digest Fed
Another stock we’ve liked long term, oddly enough, is the Spanish bank, Santander (SAN). It pays a swell dividend. And, as U.S. residents, you can dodge the Spanish tax on that dividend (as SAN encourages you to do) by taking the dividend as shares, essentially a reinvestment plan.
We’ve mostly gotten into SAN at $9-ish dollars a share for the American Depository Recepts (ADRs, the way many foreign stocks are available to U.S. citizens). It’s up over $10 now but has been range-bound between $9-11 for quite awhile, so you have to be patient. But SAN appears, to us at least, to be an extraordinarily strong bank in a weak Euro-system, so this could prove to be an awesome long-term hold. All of which has made the Maven decide to take a rare long-term bet on this one.
More ideas as they come, but do keep in mind that the fun could come to an end abruptly, so keep some cash available for when that time comes.
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