December portfolio review

A relatively non eventful month for my portfolio, especially compared to last month, but nonetheless there were a few changes made. Most of the changes that were made were short term in nature given my uncertainty in the market.

All my IRA accounts are run on the IVY timing portfolio and this month there was one new buy signal for those portfolios as discussed here. This is a 100% automatic mechanical system with great long term results. No need to second guess it by considering any short term issues.

For my trading accounts there were a couple of changes. Overall allocations stayed pretty much the same; 75% cash, 13% muni bonds, 12% stocks. The market seems to be in no mans land and I would like to see a close above 1430 in the SP500 to get more bullish or a close below 1390 to make some bearish bets. I did make some minor changes to the individual stocks that warrant some discussion. There are some tips here that may help investors in the future.

I took advantage of the dead cat bounce in many of dividend stocks to exit my remaining position in EPD. EPD is a great company but as I said last month its had a great run, it was too big a part of my portfolio, and had started to pull back below some key support levels. The chart below shows the price action in EPD over the last 3 months.

The downward break of $52 on increased volume on Nov 9th was a significant tell that there would be further weakness in the stock. $52 had been a strong level of support going back to mid July or so. I sold about 2/3 of my position on Nov 9th at about $51.90. The stock proceeded to go lower and put in a low on Nov 15th at about $48.60. Then came an impressive bounce off the lows, 10% in 9 trading days! This is pretty much a classic dead cat bounce and as an investor you should avoid buying these bounces unless you are an extremely nimble and short term trader. Why do dead cat bounces happen? Because of basic supply and demand dynamics in the market. Support levels tend to become resistance levels and vice versa. That $52 level that broke on the downside was likely going to be a strong level of resistance on the way up. Also, the 50 day moving average was at that level as well. Many investors buy tests of the support levels. Once these levels are broken, many of those investors are sitting on losses and are just looking to get out at break even. That’s the psychology of short term investors. As the chart shows EPD rallied right up to the $52 level, even through it intraday, and turned right around. I sold my remaining position at $51.50 or so. Hopefully learning how to anticipate these types of bounces to resistance levels saves you some money in the future. So, when do you know EPD has turned and the buyers have returned? The first thing that needs to happen is that it needs to put in a higher low – that means the string of down days needs to end at a price above the previous low of $48.6 and at least one up day needs to be put in. The down volume seems to be tapering off so that new low may come soon. Maybe. No need to anticipate though, wait til it happens.

As a dip the toe in the water move, I also bought two stocks this month. AFL and NGLS. AFL is not really new for me but I got back in. On the post election pull back I was out of AFL last month at about $50.50 on Nov 7th. Well, as it turned out AFL proved to be an animal in the sell off and held up extremely well which was a good sign that there may be more upside ahead. One way to notice these relative strengths is to use ratio charts. Below is a ratio chart of AFL to SPY. Can you spot the strength in AFL in the chart post election?

On Nov 14th there was a good upside breakout in the ratio chart. That means AFL outperformed the SPY on that day by a good margin. If you go look at the AFL and SPY price charts you’ll see the 14th was a strong downside day for the SPY breaking the 200 day. AFL on this day was also down but closed above its previous day close and above its most recent low on Nov 9th. This was a good tell that AFL was showing strength and that it could lead to higher prices. I bought back in on Nov 15th at about $50.50 have and have enjoyed the upside since with AFL closing today at $53.80. I hope by now you’re saying to yourself, what an idiot, he would have been better off staying in AFL and not bothering with any of these shenanigans. Well, true in hindsight. I can’t prove a counter-factual. I was protecting capital last month, protecting profits, and reducing risk. The sell-off could have been much uglier. It wasn’t, the stock showed strength, and I have no problem admitting when I’m wrong. I got lucky here to buy back in at the same price I sold but I would not have minded buying back in at higher prices once price strength showed up. The important point in all this is that sometimes ratio charts can give you an early clue to upcoming price strength. Learning this tool can help you make money in the future. Tip: take a look at the EEM:SPY ratio chart vs the individual components.

In short, overall I remain very defensive, heavy in cash and looking for a better time to get much longer equities, especially MLPs which seem to be getting particularly cheap.