WASHINGTON, July 11, 2014 – As we indicated in yesterday’s opinings, Thursday morning’s Wall Street market opening was a nasty bloodbath with the Dow waterfalling down nearly 200 points. Fortunately, this bearish blast didn’t prove to be a record-breaking one.
Bulls gradually gathered their senses about them and fought trench warfare against the morning collapse, leaving markets still down 70.5 Dow points at the close, but much better than they had been.
Futures this morning look for a more positive tone. Shares in dicey, troublemaking Portuguese Banco Espirito Santo was suspended yesterday and remains so as of this writing, as that lender is apparently disseminating a Thursday night press release geared toward calming the investing waters.
Meanwhile, on this side of the pond, Wells Fargo reported earnings in-line with research estimates, easing concerns somewhat on the domestic banking business.
Of course, earnings season, Q2 edition, is just getting started. The children’s crusade continues unabated on America’s southern border. The Middle East is deteriorating as usual. And guns are still booming in the eastern provinces of Ukraine. So the worst may be yet to come. Or not. Action is likely to be tepid but perhaps slightly positive going into the weekend.
Note on JAVA
We’re talking the software kind of JAVA, not the coffee bean trade (ETF = JO), which has been awfully volatile of late.
Our broker alerted us this morning via instant message that many PCs and Macs will be doing an automatic install of the latest JAVA rev sometime on Tuesday, July 15. As a result, some brokerages’ online trading software could get glitchy.
Ergo, staying on top of the upgrade, whether you allow upgrades automatically or manually on your own machine—is advisable on the 15th. Particularly if it happens to be an active trading day, which Tuesdays these days often are.
We increased our holdings in precious metals yesterday as we hinted we’d do, slightly enlarging positions in gold via Swiss bullion ETF SGOL and in palladium (PALL). Silver is still slippery. It could be fun, but looks weaker today, as does gold, so we may wait to see if this game is over or if it’s just begun. Since gold will slip back a bit in relief today, though, we may pick up a bit more here if the price is right.
We held onto our REITs yesterday, which was a good idea since they generally went countertrend, protecting the portfolio yesterday to the point where we didn’t feel compelled to use short S&P 500 ETF SH and the double-short edition of the same (SDS) as temporary hedges.
Since the economy looks a bit wobbly here in the 3rd quarter (and Q2 earnings reports may give us more hints on just how wobbly), we’ll stay cashy for a while, but are also nibbling at the equal-weight Tech ETF, RYT.
A word on “equal weight.” In general, ETFs that mimic various averages are “price weighted,” in the sense that the more expensive stocks represented in the index carry a higher percentage influence on the movement of that index than the smaller stocks do. This gives these indexes—and the ETFs that mimic them—a higher “volatility,” or tendency to move significantly up or down in short order, which active traders favor for quick in-and-out trades.
Equal weight indexes and the ETFs that mimic them will also move up or down in the same direction, but much more slowly each way. That’s because these indexes don’t give heavier significance to the big guys and less significance to the little guys.
As a result, investors who want to purchase ETFs (or mutual funds for that matter) that mimic a popular index like the S&P 500 or the Russell 2000 but don’t like the volatility risk can ultimately get a similar return from an equal weight ETF or mutual fund while generally avoiding the daily heart palpitations one can suffer when sitting in normal, price weighted vehicles.
Since the Maven is getting older now and is ever more convinced markets are rigged by HFTs and big plays, he has begun to prefer these equal weight ETFs over the “normal” ones. With the equal weight ETFs, you get much the same move but can still generally lead a normal life without always having to worry about what some fat-fingered algo might be doing to your portfolio on a given day.
We’ll write a bit more about these equal weight ETFs in an upcoming Prudent Man column. Meanwhile, we are slipping them into our portfolios bit by bit in the general equal weight S&P 500 (RSP), tech (RYT), and maybe a little bit retail/consumer discretionary (RCD), figuring to inch into the latter as it drops under the burden of expected retail sales declines in Q2.
Increasingly, we’ve been favoring general and sector ETFs again as a way of evading to some extent the current market’s weird bouts of volatility. Since we use some of our portfolio holdings to generate needed income, we don’t want to jeopardize the principal, and this is one way to do it, although, as with REITs and utilities right now, we certainly have individual stock holdings as well.
Having recovered far better than most from the 2008-2009 crash by buying bonds at a significant discount and eventually reaping uncommonly large capital gains, we don’t want to fritter that once-in-a-lifetime advantage away by trading here like young guys who still have 40 years of 9-5 worker-bee earnings ahead of them to cushion the common indiscretion of too-daring trading moves.
Old dudes can no longer afford to get wiped out. Yes, we still make mistakes. But a lot less than we used to.
Have a good weekend.