The NYSE Advance / Decline Line

On the prior post I began to seek out useless exchange traded funds which in order to qualify had to be either a thinly traded managed retail product or so complex you can’t figure out what it is.

However the recent slide in the global equity markets has got the market timers all excited and so I must serve up some analysis. I can just imagine a portfolio manager on a conference call with several large clients explaining away the 60 per cent cash component in the portfolios. “I always sell-in-May and go away, and besides last month the moon was on an annualized basis very close to earth.”

At important junctures I prefer to look at the NYSE advance – decline line which is an under used measurement of market breadth. According to Investopedia the advance/decline line is a very simple measure of how many stocks are taking part in a rally or sell-off. This is the very meaning of market breadth, which answers the question, "how broad is the rally?" The formula for the advance/decline line looks like this: A/D Line = (# of Advancing Stocks - # of Declining Stocks) + Yesterday's A/D Line Value

Our chart this week is that of the daily NYSE A/D Line clearly displaying the recent breakdown of the S&P500 and the NYSE A / D Line which is a significant negative technical event. However equally significant is the major support levels which are just below the current prices at Friday May 19, 2012. Clearly it is too late to sell so let us change the mantra from sell-in-May to stay-in-May

Too Many Useless ETFs

In order to be classed as a useless exchange traded fund (ETF) we need to satisfy two conditions. Let us refer to them as a UETF.

(1) A UETF has to be a thinly traded managed retail product: That means industry pros like portfolio managers and investment advisors (IAs) won’t go near these things and if they avoid them so should private investors. The big problem for the industry pros is they never know what the manager is doing with the assets inside the fund. In many cases the trading activity is almost silly.

(2) A UETF is usually so complex you figure out what it is. Is it a bond fund, an equity fund or some kind of a hybrid equity / bond / futures hedge fund?

Currently the industry leader for the production of UETFs is the folks at Horizon Exchange Traded Funds. Currently the investment industry’s most useless award goes to the Horizons Gartman ETF trading on the TSX under symbol (HAG). According the Horizons the HAG gives investors direct exposure to the investment strategies of The Gartman Letter. The ETF uses equity securities, futures contracts and exchange-traded funds to provide the ETF with long and short exposure to multiple asset classes which may include but are not limited to global equities, commodities, fixed income and currencies. It seems the fund does everything except provide positive returns – since inception from March 2009 this turkey has a negative annualized return of -6.6%. A buy and hold of the Dow Industrials over the same time period generated a positive annualized return of 9.2% - not including the dividend income! By the way at 3:20 pm Monday May 14, 2012 the HAG has traded a whopping 800 shares.

Our chart this week is that of the weekly closes of the HAG plotted above the Dow Jones Industrial Average. No need to explain this train wreck. Next post we look at another useless exchange traded fund – the Horizons Seasonal Rotation ETF (HAC)

The when-to-sell decision

The when-to-sell decision has always been more difficult than the when-to-buy decision because the decision to buy only needs two conditions. We need to have the free cash and we need to have a compelling story. The when-to-sell decision has always been a historical nightmare for both professional and private investors because there are too many moving parts to consider. We have the micro or bottom up worries such as the compelling storey that has suddenly gone sour. Perhaps some chart pattern has negative implications. We also have the emotional baggage that compels us to sell a winner too soon and to hold on to a loser too long.

We also have the macro or top down worries such as the current crisis be it the never ending Euro-Zone problems or the threat of a slowing Chinese economy. Now we have the mindless chirping of the seasonal “sell” crowd pressuring investors into switching a good portion of their equity portfolios to cash.

The root of the problem is the failure to have an exit strategy in place at the time of the decision to buy. The exit strategy or stop loss option should never be based on changing fundamentals, otherwise known as the “compelling story” because the price decline will often lead the deteriorating business model. I am sure long tem investors in the shares of Nortel Networks Corporation or Research In Motion Limited would agree with this observation

The Lowest 26-Week Low is a simple strategy with no math required. Set your stop at the lowest low of the past twenty six weeks. This is a moving 26-week window, so each week add the new week and drop the oldest week. Sell if the weekly price closes below the prior lowest 26-week low. Conversely, if the price is rising the lowest 26-week low will follow the stock upward which allows us to hold a rising stock in some cases for weeks, months or years.

Our chart this week is that of the weekly closes of Research In Motion plotted above the lowest 26-week low price channel. Note the numerous price declines below the 26-week price channel trough 2010 and 2011. No excuses for big losses here.