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

Sectors of the Month – Dec 2015

Sectors of the Month – December

Going into December, we recognize that the current state of the market is one of the more difficult ones we’ve seen in a while for managing risk.  Some areas of the economy continue to perform well, but enough macroeconomic data has been soft and the potential for changes in fed policy have the potential to cause a lot of downside risk during a time of year when the stock market tends to perform well.  So, we are in the market but with a cautious eye to exit quickly if price deteriorates.

The three key sectors we’re focusing on this month are Technology, Industrials, and Insurance.

Technology (XLK)

This is the area that looks the strongest to us right now.  Whether it’s Internet, Semiconductors, Software, or Hardware – every area of the Technology space has been among the best performers over the last 3 months.  We’re investing in XLK, which is a broad representation of the Technology sector.  Technology has become so integral to our everyday lives and each year contributes to so much of the growth of our economy, we believe these are the companies people will more likely want to own regardless of the state of the economy.

Industrials (XLI)

Many of the larger holdings in the Industrials sector are in Manufacturing, Defense/Areospace, and Transportation.  In particular, we think that conditions could favor the Defense and Transportation elements of this sector.  The strong dollar and weak oil prices tend to bolster airlines because the strong dollar makes it more affordable for American to travel internationally and the low fuel costs helps improve the profit margins of the airlines.  The increasing conflict in the Middle East and other parts of the world makes it likely […]

By |December 3rd, 2015|Commentary, Sectors of the Month|Comments Off on Sectors of the Month – Dec 2015

Market Update & November Sectors

The market has been on quite a roller coaster ride the last 3 months.  In August and September, our systems got widespread sell signals across the board.  All the charts and indicators showed the typical characteristics of the early stages of a new major bear market.  Because of that, for most of the month of October we were positioned defensively to protect against a market decline.  But, instead, the market rallied ferociously with some serious velocity and magnitude.  Unfortunately, because of our position we didn’t participate in the rally as many of our systems don’t get a new buy or sell signal until the end of each month.

So, with October ending, many of our strategies got signals to buy back into the market.  We’re still a little skeptical of this rally; economic data hasn’t been great and the rally could just be enough to squeeze out the sellers before making another move down.  Regardless of our opinions, we follow the rules of our strategies because that’s how we get an edge on the market over time.

So for the time being, we have an ‘all clear’ to move back into stocks.  However, if the S&P falls below 2030, that’s where we would start to reduce our market exposure again.

As for the trades we made, our Sector Rotation system purchased Software (IGV), Real Estate (IYR), and Leisure (PEJ).  Other systems moved into the ETFs that follow the broad market (IVV, FEX).


The Leisure sector is all about the holidays.  This fund invests heavily in consumer discretionary companies like Starbucks and Disney as well as many Airline and Travel related companies.  We think that low fuel costs will continue to boost the airline and travel industry and help this […]

By |November 2nd, 2015|Market Commentary, Sectors of the Month|Comments Off on Market Update & November Sectors

Tactical Update – October 2015

Last month our strategies took defensive position, so much so that we had net negative exposure to the stock market.  So far this has paid off as we have profited from the market’s drop.  The decision to do this was based on broad macroeconomic risks picked up by our models, and these risks are still the dominating force that is driving our positions going into October.  These macro conditions have not improved, so for the second month in a row we will continue to be defensive in our positions.  Our largest position is and will continue to be an S&P Inverse ETF (SH), Bonds, and Cash.


However, we plan to add two new holdings next week to begin dipping our toes back into equity exposure.  These new positions are part of our Calendar system, which is just one piece of our overall strategy for wealth management.  Combined, the new positions will represent less than 15% of our portfolio.  The result will be that our net exposure to equities will be breakeven (evenly hedged) to slightly negative.


The first of these new positions is going to be an Alerian MLP fund (AMJ).  MLP stocks are typically high dividend payers with ties to Energy, Infrastructure, or other Basic Materials.  This ETF has fallen nearly 50% since its peak just over one year ago (See below).  Because of this substantial fall, the dividend potential is all the more magnified.  This particular ETF has a current dividend yield of over 7%, and there are plenty of individual MLPs that are in the 10-15% range on dividend yield.   In addition to the dividend, we believe there is plenty of potential for capital gains over the next 6 months because the price is […]

By |September 30th, 2015|Commentary, Sectors of the Month|Comments Off on Tactical Update – October 2015