RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

By Lance Roberts | January 3, 2020

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

  • Market Review & Update
  • MacroView: Is This A Repeat Of 2018?
  • Sector & Market Analysis
  • 401k Plan Manager

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, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

Catch Up On What You Missed Last Week

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

Market Review & Update

The first trading day of the year started with a “bang” with the S&P 500 rising more than 20 points. However, the gain was abbreviated on Friday as news shook the market the U.S. had taken out a top Iranian commander in Baghdad. But concerns over potential Iranian conflict quickly abated as the markets returned their focus to the Federal Reserve, and the continued pump of monetary liquidity into the markets. A point noted in our MacroView below.

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

While the pump of liquidity continues to push asset prices higher, earnings continue to fall. Economic growth remains weak, and despite hopes for a “revival,” it has yet to be seen. Ultimately, stocks are a reflection of economic activity, and, as I predicted in May of last year, estimates were far too high relative to economic growth. Since then, earnings have continued to decline toward our original estimate. In fact, in just the last month, estimates for the end of 2020 fell by almost $2 per share. This is occurring at a time where investors are piling into stocks regardless of price or valuation. Such is just the “Pavlovian” response to more monetary stimulus.

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

This was a point made by Tom McClellan this past week:

“The efforts of the Federal Reserve to inject extra liquidity into the banking system over the past 2-months have helped to fuel the year-end (2019) rally. Questions remain about how long the Fed may choose to keep up that effort, and whether the Fed has enough ink in the printing presses to overcome other market forces.”

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

“The indicator in this chart depicts the net position of the ‘commercial’ traders of Fed Fund futures, expressed as a percentage of total open interest. The fun part comes when we realize that the movements of that indicator get repeated roughly 110 trading days later in stock prices.

Over the past 100 or so trading days, we have seen a big move in the commercial traders’ net position, moving from net long the Fed Funds futures to net short in a big way. It is the biggest such move we have seen in a few years; its implication is that there is a big down move coming for stock prices.”

Given the more extreme extension of stocks currently, Tom’s suggestion of a correction is likely particularly if the Fed decides to slow their monetary inputs. 

As shown in the chart below, the market is currently trading 3-standard deviations above the 200-dma, which is somewhat of a rarity until just the last couple of years. Since the beginning of 2018, there have been three occurrences, with the previous two leading to short-term corrections. 

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

There is an important difference between the previous two incidents and today as the Fed was reducing monetary liquidity instead of increasing it. 

Portfolio Positioning

As we kick off the “New Trading Year,” we remain long our current portfolio exposures in both the Equity and ETF Portfolios. We have also started building a new “Dynamic Portfolio,” which is a “go anywhere, do anything” portfolio of our “best ideas.” 

You can view all of our portfolio models, which are live accounts, at RIA PRO. (You can try out the service for 30-days FREE)

As we head into 2020, our major theme is the potential decline of the U.S. Dollar, relative to other currencies, which has a profound impact on many other sectors of the market. Those areas include:

  • International markets
  • Emerging markets
  • Oil 
  • Gold
  • Commodities
  • Energy
  • Interest Rates

These are themes we have been discussing with RIA PRO subscribers, and building into our portfolios, over the last few months. 

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

We also continue to suspect the yield curve will steepen as we head further into the year. Higher rates will result from flows out of the U.S. dollar into foreign-denominated assets initially, BUT, higher rates will then trigger much weaker economic growth domestically. With weaker growth, comes weaker earnings and lower stock prices. 

Again, we are focused on the U.S. Dollar as foreign speculative positioning has reached extremes. Reversals in positioning have not been kind to stock prices but bode well for alternative asset classes which can hedge long equity risk. 

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

Lastly, we are also looking for a return of value relative to growth. As shown in the chart below, the deviation in performance has reached historic extremes. 

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

The last time that “value” underperformed “growth” by such a large degree was heading into the “dot.com” crisis. At that time Warren Buffett was being ridiculed for underperforming the S&P 500 by such a large degree. 

He was vindicated for his “value” approach shortly thereafter. 

Interestingly, here we are once again, and this was the headline of an article that came across my desk on Friday:

“One of the most reliable rules of American investing over the last 50 years may have finally been broken. Warren Buffett’s Berkshire Hathaway is not the sure bet it once was.” – Motley Fool

Of course, a major reason for that underperformance is the $128 Billion in CASH that Buffett is holding on his balance sheet. Of course, for a value investor like Buffett, it is hard to invest cash into a market where there is little to no value, and forward 10-year returns are expected to be low.

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

In other words, when the media starts dismissing Warren Buffett, maybe its time to start considering the “why” he is sitting on so much cash. 

Importantly, it is for this reason that we are beginning to add “value” plays to our portfolio in small bits until we see the rotation begin to gain traction. In the meantime, this is a great time to review the trading rules needed to be a better investor as we head into 2020.

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

Remember, our job as investors is pretty simple – protect our investment capital from short-term destruction so that we can play the long-term investment game.

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

The Macro View

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO

Financial Planning Corner

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®, ChFC®

Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders

S&P 500 Tear Sheet

Will return next week. I need one full week of trading data to run the analysis for the New Year.

Performance Analysis

Will return next week. I need one full week of trading data to run the analysis for the New Year.

Technical Composite

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

ETF Model Relative Performance Analysis

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels


, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

Improving – Energy (XLE), Communications (XLC)

The improvement in Energy accelerated on Friday as news swirled that the U.S. had taken out a top Iran military commander combined with a larger than expected crude oil draw. The sector has cleared the downtrend channel and the 200-dma but is VERY overbought short-term.

As noted last previously, if you want to add exposure to energy be patient for a bit of a correction, or if you want to buy here, do so with a stop loss at the 200-dma. We recently added 1/2 position in AMLP to portfolios and will begin to add XLE opportunistically now that it has broken above the 200-dma. 

We remain at full weight on XLC, and our thesis of a push in the sector due to the holiday shopping season came to fruition. The sector is now extremely extended, so take profits and rebalance risk accordingly but hold onto the sector for now. 

Current Positions: 1/2 weight AMLP, Full weight XLC

Outperforming – Technology (XLK), Healthcare (XLV), Financials (XLF)

We noted previously that Financials have been running hard on Fed rate cuts and more QE and that the sector was extremely overbought and due for a correction. That correction started on Friday, which is why we recommended taking profits previously. There is still more room for a correction to occur, so take profits if you haven’t and remain cautious for now.

Technology and Healthcare have been the leaders as of late. Healthcare made a sharp recovery from weakening to leading relative to the overall market, and the sector is now grossly overbought and extended. As recommended, we took profits in XLV reducing it from overweight to portfolio weight. Like everything else, XLK is extremely overbought so wait for a correction to add exposure.

Current Positions:  Full weight XLK, XLV

Weakening – Industrials (XLI)

Industrials, which perform better when the Fed is active with QE, has broken out to new highs, but is still consolidating at a high level and has begin to underperform on a relative basis to the S&P 500. Given the sector is extremely overbought, we will look to add, but will wait for this correction to play out first.

Current Position: 1/2 weight XLI

Lagging – Real Estate (XLRE), Staples (XLP), Discretionary (XLY), Materials (XLB), and Utilities (XLU)

After a run to new highs, Staples took a sharp correction on Friday as profit-taking following the “Iran incident.” Momentum remains strong, but the sector remains overbought currently. Watch the support at the 50-dma as a sign to take further profits.

Discretionary remains a laggard but finally broken out to the upside as Amazon finally came to life. With consumer spending, and economic growth, remaining stable for now, we remain optimistic on the sector for now. However, the sector is extremely overbought so a correction is needed that doesn’t violate support at the 50-dma to add further exposure. Take profits if needed.

XLRE has been weak as of late as interest rates have been on the rise, however, as noted above, the incident with Iran sent money into US Treasuries for safety on Friday. This gave a nice bump to the REIT sector confirming support at the 200-dma, as well as a confirmed break above the 50-dma. With a “buy signal” back in play, positions can be added to portfolios for a potential test of old highs. However, stops need to be moved up to the 200-dma. 

Current Position: Target weight XLY, XLP, XLRE, 1/2 weight XLB

Market By Market

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

Small-Cap (SLY) and Mid Cap (MDY) – Small- and Mid-caps broke out of the previous ranges as the rotation to risk continues. However, over the past week, the relative outperformance slowed as money has gone back to chasing the largest of large-cap names. As noted two weeks ago, we added to our small-cap holdings with a small-cap value ETF, and the pullback we expected is in progress. We will look to add to our holdings provided we aren’t stopped out. 

Current Position: KGGIX, Added SLYV

Emerging, International (EEM) & Total International Markets (EFA)

Emerging and International Markets, rallied recently on news of a “trade deal” and finally clearly broke above important resistance. However, the rising international tensions with Iran cause a pullback in both these markets from very extended levels. As discussed two weeks ago, we added positions in both emerging market and international value  positions. We will look to add further provided we are not stopped out. 

Current Position: Added EFV and DEM

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. Currently, the short-term bullish trend is positive, and our core positions are providing the “base” around which we overweight/underweight our allocations based on our outlook.

Be aware that all of our core positions are EXTREMELY overbought. A short-term correction or consolidation is likely before a further advance can be made.

Current Position: RSP, VYM, IVV

Gold (GLD) – As noted two weeks ago, Gold was holding support at the $140 level and registered a buy signal. GDX has also held support and turned higher with a triggered buy signal. Over the last two weeks, gold and miners have turned in nice performances and are pushing back to both old highs and very overbought conditions. We previously took our holdings back to full-weights after taking profits earlier this year, and we will look to do the same again if needed.

Current Position: GDX (Gold Miners), IAU (Gold)

Bonds (TLT) – 

Bonds rallied back above the 50-dma on Friday as money rotated into bonds for “safety” as tensions rose with Iran. Bonds remain under pressure currently as the Fed continues with its liquidity support, but the rally on Friday suggests there is something more going on with the overall market. We remain long our current bond holdings and recommend no changes at this time. 

Current Positions: DBLTX, SHY, IEF

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

Portfolio/Client Update:

With the “New Year” and “New Decade” ahead of us, there are many things that we can expect to be different versus the last decade. Those expectations are:

  • Lower annualized returns (due to valuations)
  • More volatility
  • Higher risk of a mean-reverting event
  • Increased potential for a recession
  • Weaker earnings growth
  • Investment opportunities outside of the stock market.

This is by no means a bearish outlook, it is just what happens following a decade of above-average returns. As such, we simply must understand this fact and begin to prepare for what the next decade may bring. 

This is why over the last several months, we have discussed adding “value” to the portfolio, increased our “gold” holdings, and continue to run shorter-duration in our bond portfolios. One of the big macro-themes we are studying is a weaker U.S. Dollar relative to the rest of the world, which could significantly shift our focus from “stocks” to commodities and other assets which perform better against a weaker currency. 

Please read our “MacroView” this week which discusses more of our view in this regard.

We also launched a new “Dynamic Portfolio” this past week, which we will be building opportunistically over the next few months. This model is a “go anywhere, do anything” portfolio tyhat can own a variety of asset types, both long and short.

In the meantime, the markets remain extremely overbought, and risk of a correction is elevated. Therefore, we are most likely not taking any actions into the next week until we see how the market responds to the Iran situation. 

  • New clients: We are holding off onboarding new client assets until we see some corrective action or consolidation in the market.
  • Equity Model: Last week, we sold BA and WELL for tax-loss harvesting purposes to offset capital gains. No other action taken.
  • ETF Model: No actions taken.

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


A Conservative Strategy For Long-Term Investors

The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

If you need help after reading the alert; do not hesitate to contact me.

Click Here For The “LIVE” Version Of The 401k Plan Manager

See below for an example of a comparative model.

Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.  

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

 The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

, RIA PRO: Market Flat In 2020 As Iran Trips Up Traders

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Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube
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