The Markets Had Been Calm Until Recently

Posted on October 16, 2014 | Investor Update


If the volatility we’ve been experiencing as of late feels like a splash of cold water, it’s likely because it’s been a while since we’ve really experienced it. An extended stretch of calm waters preceded the U.S. market’s recent bout of volatility.

I’m going to share with you some updated numbers from what we crunched for last week’s AAII Dividend Investing update to put things in perspective. We use the iShares Dow Jones U.S. Index ETF (IYY) as the benchmark for both our DI and for our Stock Superstars Report portfolios. This ETF tracks the performance of the largest 1,260 U.S. stocks, giving it exposure to a combination of large-, mid- and small-cap stocks. This ETF incurred daily price changes of 1.5% or more 62 times in 2011 (29 days up by 1.5% or more and 32 days down by 2% or more.) For the entire period following 2011, meaning January 3, 2012, through yesterday, October 15, 2014, the ETF experienced a total of 39 days with a daily price change of 1.5% or more (20 down and 19 up). Again, 62 days in 2011 alone versus just 39 days for the nearly three-year period of 2012 through 2014.

Let’s look at the volatility another way. Wayne Thorp, who maintains a dashboard of market indicators for our Computerized Investing service, has been tracking the number of 1% down days for the Dow Jones U.S. ETF since 1999. Through Wednesday, he counted eight 1% down days over the last six months. This is below the median of 17 days and the average of 19 days with drops of 1% or more since 1999. (Wayne elaborates on this indicator in his Editor’s Outlook in the October Computerized Investing email newsletter that is being sent out this weekend.)

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AAII Sentiment Survey: Optimism Rises as Sentiment Becomes More Polarized

Posted on October 16, 2014 | AAII Survey

Optimism among individual investors rose to a six-week high despite the recent downward volatility in stock prices, according to the latest AAII Sentiment Survey. Neutral sentiment fell to its lowest level in 19 months, while pessimism rose to a two-month high.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 2.8 percentage points to 42.7%. This is the highest level of optimism registered by our survey since September 4, 2014 (44.7%). It is also the ninth week out of the past 10 with optimism above its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 5.5 percentage points to 23.6%. This is the lowest neutral sentiment has been since March 14, 2013 (22.6%). It is also the third week in the past four with a neutral sentiment reading below the historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 2.7 percentage points to 33.7%. The increase puts pessimism above its historical average of 30.5% for the third consecutive week.

We’re starting to see some signs of polarization in terms of attitudes towards the market. Neutral sentiment has plunged by a cumulative 10.1 percentage points over the past two consecutive weeks. The drop has put neutral sentiment close to the bottom of its historical range. (One standard deviation below average is 22.1%.) At the same time, bullish sentiment has rebounded by a cumulative 7.3 percentage points over the same period. As far as pessimism, the current three-week streak of above-average bearish sentiment readings is the first such streak since August 22 through September 5, 2013.

Some AAII members have been looking for a dip in stock prices to reduce valuations, and this may be contributing to the increased optimism. Also playing roles are earnings growth, sustained economic expansion and the Federal Reserve’s tapering of bond purchases. Keeping other AAII members cautious are worries about a continued drop in stock prices, a sense that prevailing valuations are still too high, geopolitical events, the pace of economic growth and Washington politics.

This week’s AAII Sentiment Survey results:

  • Bullish: 42.7%, up 2.8 percentage points
  • Neutral: 23.6%, down 5.5 percentage points
  • Bearish: 33.7%, up 2.7 percentage points

Historical averages:

  • Bullish: 39.0%
  • Neutral: 30.5%
  • Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at:

Weight by Fundamentals, Not by Price

Posted on October 15, 2014 | AAII Journal

Robert “Rob” Arnott is the chairman and chief executive officer of Research Affiliates. He has published many research papers, served as the editor in chief for the Financial Analysts Journal and pioneered several unconventional strategies, including the Fundamental Index approach. We spoke recently about his quantitative approach to managing stock portfolios.
—Charles Rotblut

Charles Rotblut (CR): Given your background in quantitative analysis, what suggestions could you give individual investors regarding stock characteristics and ratios that lead to better returns?
Robert Arnott (RA): The characteristics that historically produce the best returns are value measures. A higher yield does deliver a higher return and a lower price-earnings ratio delivers a higher return. One of my favorites is a lower price-to-sales ratio. While largely ignored, it does deliver a higher return.

To me, the more important opportunities are not so much in individual stocks as they are in portfolio construction. Typically when you buy a stock, the size of your investment in that stock drifts up and down with price—the higher the price, the higher the weight of the stock in your portfolio. That’s also the Achilles’ heel of market-capitalization-weighted index funds. So reweighting the portfolio to mirror the economic footprint of the business—something we call the Fundamental Index approach—weights companies by the fundamental size of the business and not by the popularity or price of the stock. This turns out to add a lot of value, partially because you’re trading against the market. As the stock’s price soars, if the underlying fundamentals aren’t soaring, if the company isn’t actually getting bigger, then a Fundamental Index portfolio will prompt you to sell some of what you own.

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Posted on October 15, 2014 | Stock Screens

YTD Return of Top Performers: Rule #1 Investing 50.3% — O’Neil’s CAN SLIM 37.5%

See the results and passing companies »

October 2014 AAII MODEL PORTFOLIOS UPDATED: This Way and That Way

Posted on October 15, 2014 | Model Portfolios

The S&P 500 index climbed 4.0% in August, pushing past any resistance to trade at new all-time highs. Eventually, the bears will be right and there will be a pullback, but it hasn’t happened yet. While global worries ranging from war in Ukraine, Syria and Iraq to a possible European Union recession continued to dominate headlines last month, these concerns didn’t slow down the indexes like they did in July. Data continued to point to a slowly strengthening economy, and with Fed chair Janet Yellen insisting that the Federal Reserve is in no rush to raise interest rates, the market’s climb had little to oppose it. Earnings were overall better than expected and supported the story of a strengthening economy. The positive momentum carried over to both the Model Shadow Stock Portfolio and the Model Fund Portfolio, although only the Model Shadow Stock Portfolio beat its benchmark in August. The Model Fund Portfolio was up 3.6% for the month, while the Model Shadow Stock Portfolio, which concentrates on small-cap stocks, rose 6.4%. The Model Shadow Stock Portfolio can experience greater short-term volatilities because it is made up of stocks trading in the “shadows” of Wall Street, and are therefore more likely to be mispriced. While there may be negative periods in such a portfolio, over time the portfolio tends to significantly outperform the S&P 500. Short-term volatility is the price to be paid for higher long-term expected returns. While in July this worked against the Model Shadow Stock Portfolio, in August it turned in the portfolio’s favor.

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Top Charting Web Sites

Posted on October 14, 2014 | Investing

The FreeStockCharts site (formerly BestFreeCharts) is a relative newcomer to the online charting arena, but has already made quite an impression on us. From Worden Brothers, the maker of the popular TC2007 charting software, the site offers charting, scanning, and portfolio tracking on a free and fee-based basis. The site is unique in that it offers free streaming “real-time” charts of stocks, exchange-traded funds (ETFs), indexes, and forex (foreign exchange) without exchange fees. It does this by providing real-time data from the BATS (better alternative trading system) exchange.

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Posted on October 14, 2014 | Weekly Features


This week’s AAII Weekly Features has been updated.
View this week’s Top AAII Articles, Featured Stock Screen and Member Question.

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Higher Volatility is Not Necessarily Bad

Posted on October 10, 2014 | Stock Superstars Report

Down 300, up 300 and then down 300; the middle of the week saw some rather sharp fluctuations in the indexes. The swings were not limited to the indexes; our benchmark, the iShares Dow Jones U.S. ETF (IYY), also suffered from the increased volatility. Still, while the week felt tumultuous, put in perspective this volatility only feels sharp because the last two years have been unusually calm. Despite these swings, the indexes are only about 6% off of their all-time highs. With an improving economy making its presence more and more known, via such indicators as jobs numbers, even a short sell-off shouldn’t be of concern to long-term investors. U.S. airstrikes in Iraq continue to generate headlines, as does the Ebola virus as cases begin to appear in developed countries. Inflation expectations continue to drop, even for the long end, which could support the Federal Reserve’s dovishness.

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Putting This Week’s Volatility Into Perspective

Posted on October 10, 2014 | Dividend Investing

The relative calm the market has enjoyed over the past couple of years was interrupted this week. Our benchmark, the iShares Dow Jones U.S. Index ETF (IYY), rose or fell by at least 1.5% on three consecutive days. This was the first time the fund has changed in value by 1.5% or more on three consecutive trading days since November 2011.

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Members Closely Watching Monetary Policy, Interest Rates

Posted on October 9, 2014 | AAII Survey

This week’s special question asked AAII members if there are any economic or market-related characteristics they are looking for over the next few months. Monetary policy and interest rates, the November elections, economic growth and geopolitics were listed by the largest number of respondents. Just under 20% of respondents said they are watching how Federal Reserve policy will evolve and what interest rates will do in response. Nearly 18% are awaiting to see the outcome of the November elections. About 16% are monitoring economic growth, with several watching job growth specifically. Geopolitical events were named by 14% of respondents. Ebola was cited by slightly less than 5% of all respondents.

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