Trading Diary: A Blue Monday as traders await news from the Fed

A Fed interest rate increase of 0.25 percent is baked into the stock and bond markets. But investors still hold their fire in Monday trading action. Also: attractive ETFs.

Edgar Degas' yawning 19th century laundry lady pretty much sums up today's stock market action. (Image via Wikipedia)

WASHINGTON, December 12, 2016 – Markets—and the Prudent Man’s portfolio—are looking anemic Monday afternoon as traders are predictably digesting last week’s big market moves by taking short term profits and wondering what the next hot market sector will be.

While rather boring for active traders, this kind of pullback, even if it lasts a few days, is the kind of action that allows robust bull markets to consolidate a bit before attempting to go higher and break through to new record highs. No guarantees of course, but that’s what we’re seeing in U.S. markets right now.

Read also: Trump rally pauses, Lockheed Martin takes a Trump hit

For us, it’s time to nibble a little bit here, and research our list of followed stocks there, so that’s how we’ve been occupying most of the day, while also rejoicing that DC Metro area residents have at least been spared from this fall’s first substantial winter snow event, which has already struck the Rust Belt before heading off to New York and New England where mountain ski resorts will likely embrace the white stuff with open arms and ready ski poles.

Trading diary

We’ve added tiny bits to our existing positions in several Schwab sector ETFs in our portfolio, targeting areas where we expect at least short-term growth or capital gains opportunities. We’re currently in SCHX (large cap), SCHV (large cap value), SCHP (TIPs portfolio of inflation-protected U.S. Treasurys) and FNDA (“fundamental” portfolio of international stocks); and we’ve just added tiny positions in FNDA (“fundamental” portfolio of U.S. small cap stocks) and SCHG (large cap growth).

We should have taken a position in FNDA earlier, but small cap stocks—the kind that populate this ETF portfolio—took off like a rocket, and we’ve probably already missed the easy part of the current move up.

Two items that are important to note. First, we’re not doing a commercial here for Schwab. This longtime discount brokerage house is where our portfolios happen to live right now and we don’t get any monetary favors for mentioning the firm here.

Schwab’s sector ETFs generally hold good to very good ratings from Morningstar. Their ETF management fees are so low that in some cases they approach statistically nonexistent. And, best of all, Schwab customers can trade all the company’s in-house ETFs without a commission, making tiny, incremental additions and deletions easier and thriftier to accomplish.

That said, there are many other brokerages that have similar in-house ETFs to Schwab’s. Likewise, they offer their customers the opportunity to trade them in-house without a commission, just like Schwab’s. So most individual traders today will have an option for similar securities via their own brokerages house accounts. To help diversify smaller portfolios, small investors should take advantage of these ETFs if this kind of diversification is central to their investment goals.

As for us, we do trade other company’s ETFs from time to time, such as Guggenheim’s equal weight sector ETFs (current holding: the Guggenheim Equal Weight S&P 500 financials, symbol: RYF). But many of these are also commission-free due to arrangements they’ve made with Schwab. Your brokerage may offer similar deals. Check them out. You could be missing out on one of the best potential deals going for the small investor.

Plus, we can’t ignore the substantial number of Vanguard ETFs, sector and otherwise. We can’t trade them at Schwab without commission but Vanguard products in general offer extremely low internal management fees and most of them have excellent track records so they shouldn’t be ignored.

Second of all, we pick up tiny bits of various ETFs as our own version of what’s known as “dollar cost averaging.” We start out in most positions by purchasing a mere 5 shares of a given ETF, usually on a very bad day for the ETF (to get the best price).

Then we add to the position, usually 5 shares at a time, every time the ETF takes a noticeable hit. We do add to these positions when we think they’re generally in an uptrend (just like the ones we’ve mentioned today), but generally let them ride on up days. The whole idea behind dollar cost averaging is that over time, a position you want to add to your portfolio can be acquired bit by bit at the best price you can get, giving you a lower average cost (theoretically at least) over time.

Once we’ve established a large enough position in a given ETF, we then ask the brokerage to reinvest the quarterly dividends which most of them pay. That also adds a bit more punch to the dollar cost averaging equation.

This isn’t a new idea. Most mutual fund holders do the same thing, allowing dividends to reinvest as well as adding money to the position from time to time as the situation warrants. Since ETFs are essentially mutual funds you can trade just like stocks, we prefer them to mutual funds, which are clumsier to trade and which are priced only once per day, after the market close.

ETFs are particularly good for new investors just starting out. You can acquire a portfolio of these sector “stocks” with very small amounts of money, and if you acquire the in-house ETFs, you don’t have to pay commissions either, maximizing the value of your small investment.

We are stock pickers at heart here, but we use ETFs to balance out areas of our portfolios where we can’t find an individual stock we’re passionate about. So we use these ETF “baskets” of sector stocks instead, helping balance the portfolio.

Individual stock wise, we may add to our small position in Marathon Petroleum (MPC) if it pulls back a bit more, and may also add either an oilfield services firm or a locally-headquartered fracking sand firm—U.S. Silica (SLCA)—later today or sometime tomorrow. Despite a jump once again in the price of crude on Monday, some of these stocks have pulled back sharply, and now may be the time to buy, lest we find ourselves chasing them.

Other stocks tempt. The McClellan Oscillator (see our companion column) looks okay if a bit toppy, so we might grab a few of the aforementioned shares if we don’t have to chase them.

Fingers crossed. If nothing else, this Trump-Santa Claus Rally is a heck of a lot more fun than the miserable crash that launched the 2016 trading year last January.

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