Tag Archives: average

The Average Joes Of The Dow

Summary We all know about the Dogs of the Dow. Last week I wrote about the Dow’s lowest-yielding stocks – the Gods of the Dow. The next step was to look at the middle-yielding stocks – the “Average Joes of the Dow.” See the results. In the past week I released an article, exclusively on SA, called ” The Gods of the Dow .” The main thrust of the article was to compare the performance of the 10 highest-yielding stocks of the Dow (the Dogs) against the 10 lowest-yielding stocks (what I called “the Gods”) over a decade. The Dogs won the contest by quite a margin. Here is a summary chart showing the performance of the investment strategies. The next logical step is to see how the middle 10 stocks of the Dow would perform. I call this cohort of stocks the “Average Joes of the Dow.” I am having a bit of fun running these tests, but I do believe these 3 groups – the Dogs, the Gods, and the Average Joes – act as rough proxies for value investment, growth investment and the middle ground in between. The Average Joes of the Dow Investment Strategy On December 31, buy the Dow’s 10 middle-yielding stocks. Hold these stocks for a year. Sell the 10 positions on December 31 the following year. Repeat the above process annually. Note: Stocks that are dropped from the Dow during the course of the year are still held until year-end — e.g., you would still hold AT&T through December 31, 2015, if you had purchased it December 31, 2014. Another note: The data for the test comes from the “Dogs of the Dow” website. I am not sure what would happen in the event or a merger or acquisition. A current example would be Pfizer: Allergan has proposed acquiring Pfizer in 2016. If you bought Pfizer on December 31, 2015, you would most likely sell the merged company or acquirer on December 31, 2016, but I am uncertain as to how such events were handled in this historic data set. The Dogs of the Dow Investment Strategy The same as above, but you buy the 10 highest-yielding stocks of the Dow year after year. The Questions What was the annual performance of each strategy on a total return basis? What was the overall performance of each strategy over a 10 year period? Some Sample Data The Dogs of the Dow on December 31, 2014 were: (NYSE: T ) AT&T 33.59 5.48% (NYSE: VZ ) Verizon 46.78 4.70% (NYSE: CVX ) Chevron 112.18 3.82% (NYSE: MCD ) McDonald’s 93.7 3.63% (NYSE: PFE ) Pfizer 31.15 3.60% (NYSE: GE ) General Electric 25.27 3.48% (NYSE: MRK ) Merck 56.79 3.17% (NYSE: CAT ) Caterpillar 91.53 3.06% (NYSE: XOM ) ExxonMobil 92.45 2.99% (NYSE: KO ) Coca-Cola 42.22 2.89% The Average Joes of the Dow on 31 December 2014 were: PG Procter & Gamble 91.09 2.82% IBM International Business Machines 160.44 2.74% CSCO Cisco Systems 27.82 2.73% JNJ Johnson & Johnson 104.57 2.68% MSFT Microsoft 46.45 2.67% JPM JPMorgan Chase 62.58 2.56% DD DuPont 73.94 2.54% INTC Intel 36.29 2.48% BA Boeing 129.98 2.25% WMT Wal-Mart 85.88 2.24% The Results The total returns each year of the Joes vs. the Dogs is shown in the chart below: 2005 2006 2007 2008 2009 Joes 7.65% 18% 16.60% -24.81% 26.65% Dogs -3.46% 25.80% 2.10% -36.56% 17.19% 2010 2011 2012 2013 2014 Joes 16.40% 9.25% 13.19% 33.77% 11.63% Dogs 21.43% 16.85% 8.95% 28.54% 6.45% Here’s a year-by-year comparison of the Joes Vs the Dogs in an easier-to-read graphic. The true outperformance is best explained by considering how well a $10k investment in each strategy on December 31, 2004, would have fared, as shown below: Over the 10-year period, the Joes strongly outperformed the Dogs. The Dogs strategy would have nearly double your money in 10 years, turning $10,000 into $19,320 — not bad. But the Joes strategy would have performed much better, turning $10,000 into $30,320! Conclusion First of all, I want to qualify the above analysis with the observation that it is only based on 10 years of data. As such, the Joes may have had a few exceptionally good years at the start of the decade which then exaggerates out-performance in the later years of the decade. Indeed looking at the Joes cohort from 31 December 2014, one would be concerned by some of the picks: P&G has lost 14% TR YTD IBM has lost 11% TR YTD Wal-Mart has lost 28% TR YTD But despite the above, the Average Joes has only lost 3% YTD on a total return basis. The Joes has included some good performers: MSFT has gained 20% TR YTD Boeing has gained 15.5% TR YTD JPMorgan Chase has gained 10% TR YTD The Dogs have had a better 2015 so far, with just a 1% loss. I have to say it is quite comforting to know that with such big individual losers in the Joes, that the overall loss is not too bad. I know in my own portfolio that I have had big losers this year, and it is quite easy to dwell on those underperformers. When I look at my total performance, it’s actually okay — it’s breaking even — and I need to focus on the big picture.

What Happens In The Real World: The Average Joe Broad Market Portfolio Q3 Update

Summary About the Average Joe broad market portfolios. The Q3 drop in the major averages. The results of the portfolios. Introduced to the SA audience earlier in the quarter ( here ), the Average Joe Broad Market portfolio(s) seek to provide a methodology and platform for the Average Joe to perform real world comparisons to the broader market. Since these are passively managed portfolio(s) requiring little interaction, they can also be used to amass a decent retirement account with a minimalist approach. There a lots of ways to make money out there. Some of them are a bit slower. Alright, a lot slower. The third quarter of 2015 is now in the books so let’s review the changes and results to the portfolios. The AJ Broad Market Portfolio concentrates its investments in three broad market index funds, the State Street Global Advisor’s SPDR S&P 500 ETF (NYSEARCA: SPY ), Invesco’s Powershares QQQ (covering the NASDAQ 100(NASDAQ: QQQ ), and another State Street Global Advisors product covering the Dow Jones Industrial Avg., the SPDR Dow Jones Industrial Average (NYSEARCA: DIA ). A new portfolio was started each year beginning 1/1/2000 with weekly data provided by Yahoo (Author’s note: Yahoo weeks are listed as the “week of _____.” These portfolios therefore are not on a fiscal nor calendar quarter. Instead, they begin with the first Monday of every quarter and end on the last day of the week of the last Monday of the quarter. This could actually fall into the following calendar quarter as it does in this Q3 review.). For other rules applied to the input of cash and the methods used to make purchases, please see Part 1. About the Averages The S&P 500 began the fiscal quarter at 2076.72 and ended down 125.36 (-6.036%) to 1951.36. While this is a steep drop for the quarter, the October 2nd fiscal close puts the decline for the year at a more manageable -4.57%. In an article/video published on 10/5 on Yahoo, Estimize ( estimize.com ), the open financial estimates platform, reported that current expectations for S&P 500 Q3 earnings will reflect a 2.2% decline. That leads to a big question. Are the earnings baked into the prices yet or do we still have more losses ahead. The NASDAQ 100 followed suit for the quarter dropping 152.7 from the beginning of the quarter (4420.15), ending at 4267.45 (-3.454%). The index is still in positive territory for the year, but trimming its gain to just 54.07 points or 1.283%. The Dow Jones Industrial Average continued the trend for Q3, losing 1288.04 points to finish at 16472.37. This is a -7.252% drop for the quarter and a -7.132% drop for the year. The Average Joe Broad Market Portfolios With a new portfolio starting every year since 2000, there’s never a shortage of data to crunch. First, let’s start with the beginning and ending positions of each fund. Fund Start SPY Shares End of Q2 SPY Shares End of Q3 QQQ Shares End of Q2 QQQ Shares End of Q3 DIA Shares End of Q2 DIA Shares End of Q3 2000 54 54 55 55 46 54 2001 46 46 46 46 38 46 2002 38 38 38 38 38 38 2003 31 39 31 31 31 31 2004 31 31 23 23 23 23 2005 23 23 23 23 19 19 2006 19 19 19 19 15 15 2007 15 15 15 15 11 15 2008 11 11 11 11 11 11 2009 11 11 11 11 7 7 2010 7 7 7 7 7 7 2011 5 7 5 5 5 5 2012 5 5 3 5 3 3 2013 4 4 2 2 2 2 2014 2 2 2 2 1 2 2015 1 1 1 1 1 1 Next, the update on the values including input, quarterly gain/loss and gain/loss since portfolio inception. Fund Start Portfolio Value End of Q2 Q3 Cash Input Cash Position Investments Value Total Value Q3 Gain or Loss Q3 % G/L G/L since Inception 2000 $26,021.14 $585.00 $136.08 $25,137.33 $25,273.41 ($747.74) -2.87% $9,162.41 2001 $22,599.90 $507.00 $533.42 $21,324.68 $21,858.10 ($741.79) -3.28% $8,050.10 2002 $18.821.95 $455.00 $661.12 $17,616.04 $18.277.16 ($544.79) -2.89% $6,451.16 2003 $16,645.10 $403.00 $273.46 $15,930.90 $16,204.36 ($440.74) -2.65% $6,152.36 2004 $13,170.75 $351.00 $603.34 $12,222.26 $12,825.60 ($344.75) -2.61% $4,336.60 2005 $10,888.78 $299.00 $623.81 $10,004.02 $10,627.83 ($260.95) -2.40% $3,493.83 2006 $ 8,790.39 $247.00 $432.99 $ 8,149.70 $ 8,582.69 ($207.70) -2.36% $2,595.69 2007 $ 7,149.38 $221.00 $ 76.86 $ 6,953.70 $ 7,030.56 ($118.82) -1.66% $2,008.56 2008 $ 5,921.86 $195.00 $728.06 $ 5,099.38 $ 5,827.44 ($ 94.41) -1.59% $1,670.44 2009 $ 5,104.82 $169.00 $588.54 $ 4,441.06 $ 5,029.60 ($ 75.22) -1.47% $1,627.60 2010 $ 3,711.20 $143.00 $424.97 $ 3,245.06 $ 3,670.03 ($ 41.17) -1-11% $ 919.03 2011 $ 2,807.31 $117.00 $ 72.60 $ 2,707.88 $ 2,780.48 ($ 26.83) -0.96% $ 576.48 2012 $ 2,112.36 $104.00 $112.27 $ 1,988.74 $ 2,101.01 ($ 11.36) -0.54% $ 353.01 2013 $ 1,488.12 $ 91.00 $186.71 $ 1,317.14 $ 1,503.85 ($ 6.93) -0.47% $ 163.85 2014 $ 962.40 $ 78.00 $ 56.42 $ 927.16 $ 983.58 $ 21.18 2.20% ($ 5.42) 2015 $ 614.91 $ 65.00 $190.02 $ 463.58 $ 653.60 $ 38.69 6.30% ($ 36.40) And the dividend and yield data: Fund Start Dividends Received Q3 Yield (on Value) Yield (on Cost) 2000 $123.46 1.90% 2.75% 2001 $109.31 1.93% 2.92% 2002 $ 93.47 1.99% 2.98% 2003 $ 76.25 1.83% 2.77% 2004 $ 64.60 1.93% 2.96% 2005 $ 51.76 1.90% 2.86% 2006 $ 41.93 1.91% 2.74% 2007 $ 34.29 1.92% 2.59% 2008 $ 27.06 1.83% 2.88% 2009 $ 22.25 1.74% 2.88% 2010 $ 17.22 1.86% 2.74% 2011 $ 12.30 1.75% 2.18% 2012 $ 9.89 1.87% 2.32% 2013 $ 6.93 1.86% 2.32% 2014 $ 4.44 1.85% 1.87% 2015 $ 2.46 1.60% 1.95% Current Expectations The intent of these portfolios is to show the real results of the market, one that even the little guys, the average Joe’s can build. It will amass to wealth over time, but it is slow moving and prone to many whip-saw antics in the short run. This quarter is a perfect example of how a quarter can change long-term projections. The tables below shows the current growth rate and the expected portfolio value at 20, 25, 30 and 35 years based on the Q2 and Q3 closes. The Q3 dip did considerable damage to the older portfolios while the newer ones fared better based on the size of the cash input rather than market changes. 2000 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 8.4353% $54,269.54 $112,121.92 $214,894.36 $389,271.82 Q3 7.4110% $49,722.27 $100,719.91 $188,832.05 $333,778.68 Difference -1.0243% ($ 4,547.27) ($ 11,402.01) ($ 26,062.31) ($ 55,493.14) 2001 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 8.9419% $56,744.68 $118,457.28 $229,688.59 $421,488.74 Q3 7.7992% $51,377.73 $104,834.63 $198,151.43 $353,429.82 Difference -1.1427% ($ 5,366.95) ($ 13,622.65) ($ 31,537.16) ($ 68,058.92) 2002 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 8.9246% $56,657.42 $118,232.41 $229,159.78 $420,328.64 Q3 7.7529% $51,176.13 $104,331.32 $197,006.19 $351,003.16 Difference -1.1717% ($ 5,481.29) ($ 13,901.09) ($ 32,153.59) ($ 69,325.48) 2003 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 9.9939% $62,427.06 $133,331.41 $265,246.35 $500,865.21 Q3 8.7847% $55,959.67 $116,438.32 $224,950.44 $411,116.55 Difference -1.2092% ($ 6,467.39) ($ 16,893.09) ($ 40,295.91) ($ 89,748.66) 2004 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 9.3866% $59,052.89 $124,444.74 $243,866.38 $452,819.50 Q3 8.0701% $52,581.31 $107,852.39 $205,048.52 $368,112.68 Difference -1.3165% ($ 6,471.58) ($ 16,592.35) ($ 38,817.86) ($ 84,706.82) 2005 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 9.6044% $60,232.88 $127,534.63 $251,255.28 $469,317.85 Q3 8.2226% $53,276.59 $109,605.63 $209,079.28 $376,747.06 Difference -1.3818% ($ 6,956.29) ($ 17,929.00) ($ 42,176.00) ($ 92,570.79) 2006 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 9.4431% $59,356.13 $125,236.94 $245,756.14 $457,028.17 Q3 7.9500% $52,042.67 $106,499.14 $201,949.24 $361,500.35 Difference -1.4931% ($ 7,313.46) ($ 18,737.80) ($ 43,806.90) ($ 95,527.82) 2007 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 9.5552% $59,963.08 $126,826.43 $249,557.47 $465,516.79 Q3 8.0202% $52,356.29 $107,286.55 $203,751.34 $365,342.29 Difference -1.5350% ($ 7,606.79) ($ 19,539.88) ($ 45,806.13) ($ 100,174.50) 2008 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 10.4279% $65,006.71 $140,230.05 $282,110.25 $539,404.49 Q3 8.6808% $55,449.00 $115,129.74 $221,891.10 $404,446.28 Difference -1.7471% ($ 9,557.71) ($ 25,100.31) ($ 60,219.15) ($ 134,958.21) 2009 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 12.8882% $82,817.34 $190,156.98 $410,397.39 $848,582.02 Q3 10.8746% $67,820.57 $147,855.41 $301,011.00 $583,235.22 Difference -2.0136% ($14,956.77) ($ 42,301.57) ($ 109,386.39) ($ 265,346.80) 2010 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 11.3194% $70,792.82 $156,020.83 $321,542.12 $631,570.31 Q3 9.0629% $57,359.89 $120,045.72 $233,431.60 $429,717.73 Difference -2.2565% ($13,432.93) ($ 35,975.11) ($ 88,110.52) ($ 201,852.58) 2011 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 11.0573% $69,020.03 $151,137.06 $309,226.75 $602,488.89 Q3 8.3983% $54,094.82 $111,678.09 $213,866.13 $387,051.38 Difference -2.6590% ($14,925.21) ($ 39,458.97) ($ 95,360.62) ($ 215,437.51) 2012 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 11.3342% $70,894.80 $156,302.99 $322,256.82 $633,266.39 Q3 7.9611% $52,091.81 $106,622.44 $202,231.19 $362,100.92 Difference -3.3731% ($18,802.99) ($ 49,680.55) ($ 120,025.63) ($ 271,165.47) 2013 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 10.0768% $62,908.74 $134,612.77 $268,361.34 $507,942.33 Q3 6.1444% $44,837.55 $ 88,828.93 $162,473.94 $279,438.99 Difference -3.9324% ($18,071.19) ($ 45,783.84) ($ 105,887.40) ($ 228,503.34) 2014 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 4.3849% $39,170.40 $ 75,523.24 $134,060.28 $223,109.02 Q3 -0.0829% $27,668.78 $ 50,273.02 $ 83,687.16 $130,019.77 Difference -4.4678% ($11,501.62) ($ 25,250.22) ($ 50,373.12) ($ 93,089.45) 2015 Start Quarter Growth Rate 20 year Value 25 year Value 30 year Value 35 year Value Q2 -5.5230% $21,424.38 $ 37,624.45 $ 60,433.49 $ 90,530.88 Q3 -9.7270% $17,664.10 $ 30,381.94 $ 47,773.74 $ 70,100.49 Difference -4.4678% ($ 3,760.28) ($ 7,242.51) ($ 12,659.75) ($ 20,430.39) With apologies to the Las Vegas Convention and Visitor’s Authority for paraphrasing their slogan, What happens in the “Real World”, happens.

Buy The Fourth Quarter Of The Third Year Of The Presidential Cycle

The best time to buy the Presidential Election Cycle is from September of the second year to April of the third year. Nevertheless, the fourth quarter of the third year is strong, particularly after a weak third quarter. In the past, it was better to buy near the end of October than at the end of September. How does the fourth quarter do in the third year of the Presidential election cycle? ‘Everyone knows’ that the third year of the Presidential cycle is incredibly reliable, and has returns that far exceed the other three years. Even Grantham has touted it, which I thought must be tongue-in-cheek, because he is a macro-guy. So I decided to go back and check, and found his letter written at the end of the third quarter in 2014 for GMO. It turns out he was quite serious. Regular readers know the score: +2.5% a month for the seven months from October 1 to April 30, in year three on average since 1932 (a total of +17%). This is now the 21st cycle. The odds of drawing 20 random 7-month returns this strong are just over 1 in 200 according to our 10 million trials. But 17 of the actual 20 historical experiences were up, and the worst of the 3 downs was only -6.4%, so the odds of this consistency plus the high return would be much smaller. The remaining 5 months of the Presidential year have a good but not remarkable record, over .75% per month, but the killer here is that the remaining 36 months since 1932 averaged a measly +0.2% a month!” Reference to the remaining 5 months means that Grantham views the third year of the Presidential cycle as running from September to September. More importantly, we have missed the key months from September 30 to April 30. From 2014 to 2015, that time span had the S&P 500 rising by 11.39%, which is not too shabby given what the market has done since. Yahoo Finance only had S&P 500 data as far back as 1950. So my analysis is for the 16 third years since then (see the table below). We have completed 17 years from his September to April time frame, however, and I calculated an average 19.72% return for those time periods, with a median return of 19.49%. There was only one decline of -.76% in 1978-79. But dividends have not been included. So every period actually had a positive total return. For the full calendar third year, the average return was 17.12%, with a median return of 18.08%. That’s very good also, but not as good, and that is a 12-month return versus Grantham’s 7-month return. For all years since 1950, the average calendar year gain was 9.18%. Therefore, the average gain in the other 3 years of the Presidential cycle works out to 5.69%. Out of the 16 third years, 15 were up, and one was unchanged (2011). With stocks down YTD, the odds would appear to be good that we will get a nice rally over the last three months. I say ‘appear to be good’, because statistically we can’t calculate the odds. This is a small sample. It is not a random sample. And there is no solid theory to support why the pattern of the recent past should hold in the future. Let’s see how the last three months of the third year have done since 1950. From 9/30 to the end of the year, the average gain in the S&P has been 3.04%, with a median return of 4.39%. The mean is lower because of the skew created by 1987. Third Year Pres. Cycle %ch. Oct. 31 to end of yr % ch. Sept. prev. yr to April 3rd yr % ch. Full 3rd year % ch. April to Sept. 3rd yr % ch. 9/30 to end of 3rd yr % ch. Sept. low to end 3rd yr % ch. Oct. low to end 3rd yr % ch. Sept. 30 to Oct. low % ch. Sept. low to Oct. low 1951 3.62 15.32 16.35 3.7 2.19 2.19 4.9 -2.58 -2.58 1955 7.42 17.49 26.40 15.04 4.14 6.74 11.47 -6.57 -4.25 1959 4.12 15.04 8.48 -1.23 5.29 8.61 6.95 -1.55 1.56 1963 1.36 24.04 18.89 2.72 4.63 4.63 4.38 .24 .24 1967 3.40 22.79 20.09 2.87 -.25 2.98 3.4 -3.53 -.41 1971 8.34 23.31 10.79 -5.4 3.81 4.58 8.85 -4.63 -3.92 1975 1.29 37.39 31.55 -3.93 7.54 9.86 8.75 -1.12 1.02 1979 5.91 -.76 12.2 7.43 -1.35 1.35 7.84 -8.53 -6.02 1983 .84 36.55 17.27 1.00 -.69 .43 .95 -1.63 -.52 1987 -1.87 24.66 2.03 11.61 -23.2 -20.4 9.89 -30.1 -27.6 1991 6.28 22.64 26.31 3.31 7.56 8.73 10.69 -2.83 -1.77 1995 5.92 11.24 34.11 13.54 5.39 8.28 6.65 -1.18 1.53 1999 7.8 31.28 19.53 -3.93 14.54 15.84 17.78 -2.75 -1.65 2003 5.83 12.47 26.38 8.62 11.64 11.64 9.20 2.23 2.23 2007 -5.23 10.97 3.53 2.99 -3.82 1.15 -2.15 -1.71 3.37 2011 0.34 19.49 -.003 -17.0 11.15 11.34 14.41 -2.5 -2.69 2015 11.39 -7.93 Mean 3.46 19.72 17.12 1.96 3.04 4.87 7.75 -4.32 -2.59 Med. 3.87 19.49 18.08 2.87 4.39 5.68 8.30 -2.67 -1.09 (The median date of the September low is the 21st. The median date for the October low is the 17th.) The average fourth quarter gain for all years since 1950 is 4.06% with a median of 4.92%. So the third year of the Presidential cycle has a lower average using both measures. The much lower mean is probably because of 1987, but clearly the fourth quarter of the third year is actually not as good as other years. There were 5 down quarters out of 16. They were 1967, 1979, 1983, 1987 and 2007. But all 5 years that declined from April to September 30 (1959, 1971, 1975, 1999, and 2011) had good gains in the fourth quarter . This augurs well for 2015, but 5 out of 5 does not mean we have to get 6 out of 6. The average gain for the two months following October 31 was 3.46% with a median of 3.87%. I don’t know what the comparable percentages are for all years. Two years had declines – 1987 and 2007. So the return is better for the last two months than the last three months. This should not be a surprise. I compared the October lows with the September lows, and found that on average (in the third year), the October low was 2.59% lower than the September low (see the table). October had a lower low in 10 out of 16 years. If you can identify the October low, then the average gain from there to the end of the year was 7.75% with a median of 8.30%. 2007 was the only down year with a loss of -2.15%. Locating the vicinity of the October low is not as stupid as it sounds. The median low date was October 17th. Unfortunately, the 1987 crash was on the 17th, 18th and 19th with the huge losses on the 19th (I remember it well. I was 100% invested and canoeing a river in Missouri.). Eight of the 16 lows were on the 19th or later. Three of the lows were on the second to last or last day. So if you buy at the close on the third to last day, you should be able to beat that average return dated from the end of October. The last two days in October are pretty good on average. I will buy stocks when Financial Select Sector SPDR ETF (NYSEARCA: XLF ) hits a twenty-day high (adjusted for dividend payments). The levels are posted in my Instablog. I actually buy small caps when XLF hits a twenty-day high. I compared the Russell 2000’s performance in the fourth quarter of the third year with the S&P 500 since 1987, and found that on average the S&P did slightly better. The R2000 is more volatile. In strong fourth quarters, it beat the S&P. In weak fourth quarters, it underperformed badly; e.g. 1987. I’m pretty optimistic about the last two months of the year. There is a strong possibility that October will be bad, because of all the negative macro- indicators. Risky high-yield investments like MLPs, mREITs, and junk bonds have been hammered. Sentiment is very negative as indicated by Investors Intelligence, Hulbert’s sentiment measures, Rydex, and Citigroup’s Euphoria/Panic model. I think sentiment follows the market. If October brings further drops in stock prices, then these measures will become even more negative, but that will set us up for a bigger bounce into the end of the year.