Prudent stock traders pull back Monday, preparing for 2017

The Prudent Man continues to work on this year’s year-end bounceback stocks, while pinching in on the 2017 Edition of “Dogs of the Dow.”

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It's the time of the year for investors to consider tax-loss selling, bouncebacks, and Dow Dogs. (Edited collage via Wikipedia)

WASHINGTON, December 19, 2016 – As we have indicated in our companion column, stock and bond trading action took an indefinite tone Monday, as investors awaited the final electoral vote tally—due today—and pondered the price of oil as well as the surprising (but perhaps not unexpected) terrorist attacks unfolding today in Berlin and Ankara.


Read also: Stocks pause for Electoral Vote, Euroterrorism updates


The Prudent Man is likely to do some minor portfolio fiddling and little else, devoting most of his attention to prepping for 2017 at this point. On tap is our nearly-complete list of year-end bounceback stocks—stocks that have been ruthlessly sold for tax loss purposes recently but are promising enough to give us snapback gains in January-February 2017—and closing in on that other popular year-end tradition, namely, determining the 2017 Dogs of the Dow.



Read also: Terrorist plows truck into Berlin Christmas shoppers


Different flavors of this latter game have developed over the years, and now encompass “Dogs” strategies that cover stocks not only in the Dow but wherever you can find them.

The original “Dogs of the Dow” strategy was fairly simple. After the current year’s closing trade—which this year will happen at the closing bell on December 30, 2016—you simply look at the final stock rankings in the Dow Jones Industrial Average (DJI or DJIA) and pick the top ten stocks that pay the highest dividends. (Alternatively, you can apply a few additional criteria.)

Once you have your list, depending on how picky you are, you pick the top 5 dividend paying stocks, which have often though not always fared poorly in the just-ended calendar year, and put money in all five at strategic points (down days) that happen as soon as possible after the first of the year.

So the theory goes, these stocks, primarily due to the perceived value of those dividends, are supposed to outperform most other stocks in the new calendar year, i.e., 2017. So the theory goes.

Over many years, the “Dogs of the Dow” strategy has often proved rewarding. But those doggy picks are far from being the investing slam-dunk some folks thing they are. That’s why alternative “Dogs” theories have developed over time.

As for us, we’ll take a look at the spectrum of eligible Dow stocks and other stocks, and present our own doggy list as soon as we can figure it out, likely very late next week or even a day or two after January 1, 2017.

As far as our bounceback candidates are concerned, we’ll probably toss a few of them out this week—two of our likely candidates have already started making their move—but may add a couple more after the turn of the New Year.

The problem right now is that it’s tough to figure out if this year’s post-election Trump-Santa Claus Rally has another spike in it before the first of the New Year, or if it’s already done for now, meaning we should be at least a little cautious during the first trading days of 2017.

We got caught being a bit too bullish in January-February 2016 and got our heads handed to us on a platter, although the market roared back later in the year. The problem is that making mistakes like this, in which Mr. Market puts most of your misaligned portfolio through a tree-chopper, makes it tough to recover win-loss numbers throughout the rest of the year.

We’re still slightly down at the moment, although this is largely due to the outsized hit taken by our ungodly large position in Allergan Convertible Preferred A shares (symbol: AGN/PRA, your broker’s symbol may vary). The parent Allergan shares (AGN) have been savagely beaten not only by the horrific non-earnings numbers the company reported in October; but also by the general hammering pharmaceutical stocks have taken in general since President-elect The Donald ripped them a new one for their pricing schemes in post-election comments.

That said, AGN/PRA, now selling at a deep discount (slightly higher than $700 per share as of today’s closing trade) carries an attractive dividend that computes to well over 6 percent at its current price. Plus, all preferred shares will be redeemed at par ($1,000 per share) as of March 1, 2018. In other words, unless the world comes to an end or Allergan goes bankrupt (the former more likely than the latter at this point), whatever our current portfolio gain/loss percentage, this win will add an impressive number to our 2018 returns, or so we project.

There are no guarantees, of course, but let’s say we are quietly optimistic on this one.

Trading Diary:

We simply snugged up a few very small positions today in Schwab ETFs, namely FNDA and FNDF, Schwab’s “fundamental” funds targeting small caps and foreign large cap stocks respectively. As opposed to Schwab’s regular ETFs in these areas, their “fundamental” portfolios are built out of “smart beta” stocks, meaning, so the theory goes, that these sector average portfolios are constructed in a way that takes other elements (like earnings projections) into account instead of merely going by charts or PEs as the portfolio adjusts.

Frankly, at least for us, the jury is still out on these relatively new animals, which is also the case for similar internal products your own brokerage firm may offer. But the strategy sounds promising, so we’re experimenting with it to see if these ETFs perform better than Schwab’s regular ETFs in the same or similar areas over a longer period of time.

We also sneaked a little money in SCHP, the Schwab portfolio of government TIPs bonds as well as VRP, a portfolio of mostly adjustable preferred stocks. The theory behind investing in both these ETFs at this time is that now we can allegedly take advantage of rising interest rates by investing in bonds or bond-like investments whose floating yields will also rise right along with Federal Reserve interest rate fun and game.

So far, alas, all we’ve done is average down on these puppies. But hopefully, this kind of negative-tinged boredom will gradually reverse in 2017 as the Fed (allegedly) continues to ratchet those rates back up to what might pass for normal in the coming year.

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