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About Derek Schmidly

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So far Derek Schmidly has created 19 blog entries.

Fibonacci Extensions 2017

Back in 2015 I wrote about the potential resistance from the first major Fibonacci extension from the 2007 peak. See here:

Why Can’t the Market Breakout?

Fibonacci extension is a method that uses ratios that tend to repeat themselves in financial markets as a way to determine when a market peak or valley is more likely to occur (read previous article for more examples). The extension level from 2015 held for over 1 year (Blue lines/arrow), with two significant pullbacks during that year: one in August of 2015, and another in January of 2016.

Since breaking above the 2015 resistance level, the market has been on a great run, but it has just reached the next major Fibonacci extension from the 2007 peak (red lines/arrow).  Extensions can be discredited or validated by the peaks and valleys that interact with the three middle Fibonacci lines.  Notice on the chart above how the lows from January 2016 and October 2014 line up with the upper-middle red line, and how the 2007 peak lines up with the middle red line, and how the 2011 peak and November 2012 low aligns with the lower-middle red line.  This alignment is really strong, and makes me take this extension level very seriously.

There are other factors that warrant caution too.  The CAPE ratio is historically high.  This ratio compares the earnings of corporations to the price of the stock market, and by this measure the market has only been more expensive in the late 1990s (during the internet bubble), and in 1929 just before the great depression.  Additionally, the Volatility Index hit an all-time low last week.  This measure is sometimes called the Fear/Greed index.  And a low reading would tend to indicate high levels of greed and complacency.

Lastly, […]

By |August 3rd, 2017|Commentary, Market Commentary|Comments Off on Fibonacci Extensions 2017

Post-Election Market Dynamics

Market Sectors are Recalibrating Post-Election
What we’re witnessing in the markets post-election has been a remarkable recalibration of market sectors.  There are 9 broad sectors that our overall economy is divided into.  Most of the time, they tend to move together with the overall direction of the market.  But right now, that’s not the story.  There are major divergences between the winners and losers.
The sectors that have seen the most dramatic gains are Financials, Industrials, Health Care, and Materials.   The ones that have fallen hard include Consumer Staples, Utilities, and Technology.  Both Energy and Consumer Discretionary have been somewhere in-between, about average.  Also, worth noting is the big jump in interest rates.  More on that later.

The backdrop of a Trump presidency makes these price moves understandable.  Let’s take them one by one:

Industrials: Trump has promised to increase spending on the Military and to use the proceeds from taxes on repatriated corporate cash (that’s brought back from overseas) to fund the rebuilding of national infrastructure (roads, bridges, hospitals, airports, etc.).  This bodes well for both the Defense & Aerospace element of this sector and the more general Industrial Equipment and Machinery elements.  In addition, the states that truly carried him to victory were the “Rust Belt” states of Pennsylvania, Michigan, and Wisconsin, which more often vote democrat.  If Trump maintains his promise to revitalize manufacturing, which is likely what brought these states over to his camp, then that will also be positive for Industrials.

Health Care: From 2012 through mid-2015, Biotech was arguably the hottest sector in the market by a wide margin.  In September 2015 and August 2016, Hillary made statements about the prices of pharmaceuticals that suggested she might impose price controls onto the industry.  Ever since […]

By |November 10th, 2016|Commentary, Market Commentary|Comments Off on Post-Election Market Dynamics

Sectors of the Month – Sept 2016

An Asian Buffet, the Internet, and Coffee: Three of my favorite things.  And this month, they’re our favorite sectors too.

For a vast number of people in the world, every day starts out with a cup of coffee and checking Facebook, and maybe even a post on Facebook about their coffee.

Between a Starbucks on every corner of the globe and the convenience of the Keurig, Americans are drinking more coffee than ever.  It’s a fact, global demand for coffee is headed toward record levels this year, and supply is having a hard time keeping up.   Other commentators have recently noted that “stockpiles at warehouses monitored by ICE have dropped for 11 straight quarters” and that weather conditions have hurt Brazil’s coffee crop this year.  This sets the stage for a classic supply-and-demand increase in prices.  So one of our top picks this month is the iPath Bloomberg Coffee ETN (JO).

Another sector to love is the First Trust Dow Jones Internet ETF (FDN).  This fund’s largest holding is Facebook (FB) with a weight of over 10%.  Just a few years ago, the consensus was that Google would continue to be the leader in online Display Ad Revenues.  More recent studies show that Facebook has surpassed Google and continues to take market share each year as Facebook Ads have become a central part of many business’ marketing strategies.  As we head into the Fall and Winter seasons, it’s our opinion that businesses will begin to ramp up these ad campaigns and Facebook will see a wave ad spending inflows.  And as investors begin to anticipate this, we think it creates a positive outlook for this fund.

And lastly, we like the Asian ‘buffet.’  By this we mean that we like […]

By |September 2nd, 2016|Commentary, Sectors of the Month|Comments Off on Sectors of the Month – Sept 2016

Sectors of the Month – Aug 2016

There’s something interesting going on with Russia.  The VanEck Vectors Russia ETF’s (RSX) tight correlation with oil seems to have broken down over the last few weeks and looks like a bullish set up.  In our commentary last month, we specifically mentioned avoiding emerging markets that were tied to oil because oil had already run up so much from its lows.  But this month is different.   Notice the tight correlation between Russia and oil from mid-May through the end of June in the chart below.  Then the relationship breaks down through the month of July as oil fall about 20% while Russia stays breakeven or better.  This makes us think that if oil bounces back at all this month, there could be a significant rally in Russian stocks.  Some commentators have made the case that a recent tax overhaul for the oil and gas industry in Russia has improved their margins, which could be one reason for its resiliency. http://www.forbes.com/sites/kenrapoza/2016/07/28/tectonic-shifts-coming-to-russian-oil-industry/?utm_source=yahoo&utm_medium=partner&utm_campaign=yahootix&partner=yahootix#472016622f7e

Additional sectors that we think are attractive are iShares MSCI South Korea ETF (EWY), Utilities Select Sector SPDR ETF (XLU), First Trust Dow Jones Internet Fund (FDN), and iShares US Defense & Aerospace (ITA).

South Korea had a recent breakout above resistance, then pulled back and held support, and now looks poised to rally.

The Utilities sector has had a great run this year and we think the low interest rate environment and continued political and economic uncertainties will cause this sector to continue to be a favorite for investors who seek a safe haven and dividend yields.

The First Trust DJ Internet Fund contains many of the high-flying growth companies that draw so much media attention, with its largest holdings being Facebook, Amazon, Google, and Salesforce.  Through this […]

By |August 4th, 2016|Commentary, Market Commentary, Sectors of the Month|Comments Off on Sectors of the Month – Aug 2016

Sectors of the Month – July 2016

The fallout from the Brexit vote last month has created some very interesting opportunities.  One area of interest are the Asian exporting countries, specifically Taiwan (EWT), Indonesia (EIDO), and Thailand (THD).  Our view is that the global economic climate favors countries like these over the near term.  Landing on this group of countries was more of a logical process of elimination than anything else.

First, the strengthening of the dollar and yen because of the Brexit vote will likely put additional pressure on the already low-growth economies of the United States and Japan. So those are out.
The situation in Europe is still sensitive and uncertain. Some analysts and commentators see the Brexit vote as the first domino in a series of events that could take place over many years, including the breakup of the European Union, the dissolution of the Euro currency, and sovereign debt defaults among the weaker European countries.  None of these things are immediate threats, but they are on the forefront of the minds of many investors and make the region unattractive to us at this time.
There are many emerging market economies whose success or downfall depends heavily on the price of oil. Because the price of oil has already had a big run up from its low and because the dollar has been strengthening, we prefer to avoid markets like Russia, Brazil, and others that depend on energy related commodities.

These factors leave exporting countries that are not sensitive to oil or in Europe as our favorite play this month.  In such countries, their exports could stand to benefit from the strong dollar and yen while mostly avoiding the exposure to Europe or oil that could derail things.

From a technical perspective, all three […]

By |July 6th, 2016|Market Commentary, Sectors of the Month|Comments Off on Sectors of the Month – July 2016

Sectors of the Month – June 2016

New month, same story.  For the third month in a row, the market has been in a sideways pattern, a neutral zone, that is neither bullish enough to break out nor bearish enough to break down.  The chart below demonstrates some of the support and resistance levels we are watching on the FTSE All World Index that define this zone:

Last month the general theme of our sector positions was to “Go long, but safely.”  This month is very similar.  Our positions include iShares MSCI USA Minimum Volatility (USMV), Vanguard Mega-Cap Value (MGV), Utilities Select Sector SPDR (XLU), iShares US Telecommunications (IYZ), iShares US Medical Devices (IHI), and Vanguard REIT (VNQ).

USMV is a Minimum Volatility ETF, which is designed to be fully invested in stocks, but to maintain a lower level of volatility.  For instance, this fund currently has a beta of 0.68, which means that it has tended to be about 30% less volatile than the overall stock market historically.

Another one of the holdings is MGV, the Vanguard Mega Cap Value ETF.  As the name suggest, this fund invests in many of the largest companies in the United States, companies that are mature and slower growing and provide a higher margin of safety than smaller, fast growing companies.

The rest of the holdings are sector-specific rather than broad-based.  They include Utilities, Telecom, Medical Devices (Health Care), and Real Estate.   All of these can be considered to be traditionally defensive equity sectors.  The biggest risk among these is whether or not the Federal Reserve raises interest rates this month.  Utilities and Real Estate tend to be sensitive changes in interest rates, and an increase in rates could negatively impact these sectors.

The most important thing to remember in […]

By |June 2nd, 2016|Commentary, Market Commentary, Sectors of the Month|Comments Off on Sectors of the Month – June 2016

Sectors of the Month – May 2016

“Go Long, but with safety.”  That seems to be the theme of the things we’re buying this month, which includes the following funds: USA Minimum Volatility (USMV), EFAE Minimum Volatility (EFAV), Mega Cap Value (MGV), Telecom (IYZ), High-Yield Municipal Bonds (HYD), and Emerging Market Bonds (EMLC).

Minimum Volatility ETFs like USMV and EFAV are designed to be long stocks but to do so in such a way as to maximize stability.  These funds accomplish this objective by investing primarily in large cap companies that are in traditionally defensive sectors such as Consumer Staples, Utilities, Precious Metals, Telecom, and Health Care.  Both of these ETFs use this same philosophy, the only difference is that USMV holds companies based in the United States whereas EFAV purchases international companies.

Additionally, MGV and IYZ are also defensive equity funds.  The Mega Cap Value fund has many of the same holdings as USMV, but is a little more diversified into other sectors.  And Telecom has been one of the few bright spots through the recent season of earnings, showing very strong growth over the last year.

Lastly, we’re buying into two aggressive bond sectors: High Yield Municipal Bonds (HYD) and Emerging Market Bonds (EMLC).  Both of these pay fairly high yields – 4.57% and 5.38% respectively – but also have government backing, which increases their safety to a degree.

So, why be so defensive?  Here are a few of the reasons:

The overall global trend in stocks is still down. When stocks are in a ‘bull market’ the market will continually make higher highs and higher lows.  As you can see below, over the last year, the highs and lows have been in decline.  This is the basic definition of a downtrend.  In order to […]

By |May 2nd, 2016|Commentary, Sectors of the Month|Comments Off on Sectors of the Month – May 2016

Sectors of the Month – March 2016

At Auxan Capital Advisors, our dominant strategy is a sector rotation style.  For the month of March, we are making several adjustments to our sector exposure.  We’ve chosen to go into Municipal Bonds (MUB, HYD, and SHM), Consumer Staples (XLP), as well as buying funds that are inverse Junk Bonds (SJB) and inverse Emerging Markets (EUM).

Municipal Bonds

Last month, one of our positions was Mid-Term Treasury Bonds (IEF).  We’re now moving out of that position and into several Municipal Bond ETFs (MUB, HYD, and SHM).  There are several things to like about Municipal Bonds right now.  First, relative to Treasuries they are paying higher yields.  Consider the following three Municipal Bond funds: 1) MUB, a fund that invests in high quality, intermediate-term bonds, is yielding about 2.5% whereas a comparable Treasury Bond ETF (IEF) is only yielding 1.84%.  2) SHM, a fund that invests in short-term Municipal Bonds, is yielding 0.9% compared to 0.5% in short-term Treasuries (SHY).  3) MLN, is a long-term Municipal fund and yields 3.4% versus 2.5% in Long-term Treasuries (TLT).

Until recent years it was uncommon to see Municipal bonds yield more than Treasury bonds.  This is because the tax benefits of Municipals allow them to more easily attract buyers at low yields.  This means that for accounts that are subject to taxes each year, the benefit of Municipals yielding higher than Treasuries is even more pronounced on a tax equivalent basis than it appears.

Another reason to like bonds right now is because there seems to be downward pressure on interest rates.  And when interest rates fall, bonds typically perform well.  Because there are many countries all over the world that have implemented negative interest rates, this can act like an anchor on […]

By |February 29th, 2016|Commentary, Sectors of the Month|Comments Off on Sectors of the Month – March 2016

Sectors of the Month – February 2016

Going into the new year, our models got several signals to increase cash and S&P Inverse positions to hedge our market exposure, which really helped us hold our ground as the market fell last month.  Going into February our positions are shifting slightly.  We’ve reduced both our cash and S&P Inverse positions and added Mid-term Treasuries.

These three positions are a result of the continued downtrend in the S&P 500 and the announcement last week by Japan’s central bank to implement negative interest rates.  This should attract funds from overseas into the relatively high yielding US Treasury market.

Strategic Moves

In January, when the S&P was below 1850 we took profits in part of our S&P Inverse positions.  These opportunities to take profits are not as hard to recognize as most might think.  It goes back to basic statistics.  Although financial markets are more prone to ‘fat tail’ or ‘black swan’ events than would be expected by a normal distribution, nevertheless, by applying a long term moving average and measuring 3 standard deviations below, it can help visualize when the market is at an unsustainable level.

For example, when the S&P was setting new lows on January 20th, it began to extend significantly beyond the 3rd standard deviation (blue line).  At the bottom (red line), it was about 3.6 standard deviations from the 350-day mean.  This presented a great opportunity for us to cover part of our hedge because the likelihood of a short-term bounce was extremely high.  The market can and probably will move lower eventually, but it will likely take several weeks or months to allow the long term averages to turn over before that can happen.

Next Targets

Should the S&P get back to 1960, we will add […]

By |February 1st, 2016|Commentary, Sectors of the Month|Comments Off on Sectors of the Month – February 2016

January 2016 Market Update

At the close of 2015, we got several bearish signals and positioned our portfolios to be almost neutral to the stock market by buying ETFs with inverse stock market exposure (SH, SDS).  In other words, our net exposure to the stock market is now very near zero.  If the market weakness continues through the first week of January, we expect to get additional sell signals.

These are the most bearish signals we’ve seen since April/May 2008.  The All World Index, which reflects global economic conditions, looks very similar to early 2008.  There’s rarely a perfect parallel in the stock market, but general patterns do tend to repeat themselves and the current conditions are shaping up to look a whole lot like the market top in 2007-2008.  That doesn’t mean the decline will turn out the same, but it does warrant caution.

And there’s a lot more than just one chart.  Many other things that tend to accompany market tops have occurred in the past year.  Some of these include:

Declining earnings for several quarters

Peak margin debt

Declining transportation index

Flattening yield curve

Deteriorating market breadth

High priced IPOs

Elevated M&A activity

Falling commodity prices

Trendlines breaking down

Aging bull market

High yield debt dropping

Stretched PE valuations

Manufacturing index below 50

Monetary tightening

 

There are a lot of reasons to be defensive right now.

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Interested in learning more? Contact Auxan Capital Advisors, LLC  to talk to a financial advisor Springfield MO to learn more about retirement planning and wealth management!

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

By |February 1st, 2016|Commentary, Market Commentary|Comments Off on January 2016 Market Update

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