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Market Lines and Numbers - - - Very Interesting

Submitted by Steve Selengut | RSS Feed | Add Comment | Bookmark Me! print

Please click this link and open the image in another window:

The chart shows three data lines:

The Navy Blue IGVSI line tracks all Investment Grade Value Stocks that trade on the New York Stock Exchange. These stocks are S & P B+ or better and dividend paying --- a significantly higher quality and safety level than could be claimed by those in the S & P 500 average itself, represented by the Yellow line. The Pinkish, or WCMSI line, is an index of taxable and municipal bond Closed End Funds of the type used within the "income bucket" of MCIM portfolios.

The Market Cycle Investment Management (MCIM) methodology only considers investment in IGVSI equities, and high quality Closed End Income Funds.

Every security contained in MCIM portfolios pays some form of income, and all income is reinvested in accordance with a "cost based" asset allocation mechanism called "the Working Capital Model". Equities are only purchased when they fall at least 20% from their 52-week highs; income CEFs are purchased whenever cash is available for the income asset allocation bucket. Both types of securities have a strictly disciplined, maximum, profit-taking target of 10% net/net. No security is held for higher profits; any security could be sold for a smaller profit if conditions warrant.

The S & P average has no quality safeguards, no profit-taking discipline, no income requirements or reinvestment protocol, and no asset allocation plan. It is a totally unmanaged entity except for equity content manipulation by S & P Corporation. It is widely accepted as the "benchmark" against which most equity portfolio managers are measured, and it typically outperforms most of them. But it really only outperforms those professional portfolio managers who are responsible for public participation mutual funds. Contact me if you don't understand that conclusion.

The chart includes six important dates:

June 30, 2007: Both equity indices (the S & P and the IGVSI) were at their highest levels in five or more years; the income Closed End Fund index was down slightly from highs it had achieved earlier in the year. So, imagine that an S & P 500 constructed, passive portfolio, with no fees deducted is set adrift in the market place ---- with all of your money in its belly.

September 30, 2007: The S & P 500 establishes a new All Time High, hitting 1,527 at the close of business, while both the IGVSI and the WCMSI move lower by approximately 4%. Keep in mind that no profits were taken within the S & P as it climbed, and that only a modest 1% or 2% in dividends was being generated to help you make your mortgage payments, buy groceries, etc.

Because of strict profit taking disciplines, MCIM portfolios would have to hold considerable "smart cash" (cash form profit taking), just waiting for new equity opportunities to appear. Income from closed end funds in the income asset allocation bucket were generating up to 7% in spending money with additional help from every stock remaining in the portfolio and from Money Market holdings.

March 9th 2009: After a 17 month blood bath in pretty much all markets, equity prices hit rock bottom. S & P 500 equities fell 56% from their most recent high; IGVSI equities fell 47% during the same time period; WCMSI Closed End income funds fell just 36%. Dividends and interest continued to be paid at the same level (even higher on municipal CEFs), and MCIM users were compelled to reinvest all available cash in low priced equities and CEFs.

Absolutely no buying was done in the non-managed S & P (or in ETFs, I imagine) as portfolio owners there either jumped ship or abandoned their retirement plans and dreams indefinitely.

April 29 2011: IGVSI equities surge 113% to an All Time High level; WCMSI CEFs gain 40%; S & P 500 gains 80% while remaining 15% or more below 1999 levels. MCIM users have moved from fully invested equity buckets to extremely high levels of "smart cash" while cash flow has increased in the income allocation from reinvestment during the downturn. Profit taking and reinvestment at 6%+ yields is a daily routine within income allocations. S & P 2011 peak is still 11% below September 2007 levels --- the DJIA has fared even worse than the S & P for the entire period.

October 3 2011: Six month correction allows MCIM practitioners time to reload equity portfolios while S & P and other passive index holders do nothing but watch Rome burn for the 2nd time in as many years; WCMSI closed end funds continue to surge upward in price during the correction, achieving higher index ground than either equity index in the 31 months since the financial crisis bottom.

February 2012: S & P 500 regains 2011 high water mark, but remains fathoms below 2009 levels; WCMSI average continues its surge and has outperformed both the Dow and the S & P since the financial crisis bottom; IGVSI climbs 20% more than the S & P from the October 2011 correction low, providing yet another round of profit taking for MCIM practitioners.

And your portfolio, still adrift in the marketplace, having made no forward progress of any kind since that meaningless-because-no-profits-were-taken-peak way back in the fall of 2007. Pity.



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