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Acceleration In The Underperformance Of Dividend And Value Stocks

The top 20% of SPY components in Dividend and Value have lagged the benchmark for 18 months. The last few weeks have been especially harmful for them. Momentum stocks have widely outperformed. This article compares the trends of four investing styles: Value, dividend, quality and momentum. It doesn’t suggest that investors should use these simplistic models, but it shows how stocks may be influenced by cycles, not only in asset classes and sectors but also in dominant investing styles. Large groups of S&P 500 stocks selected on value, dividend and quality factors have been lagging SPY since the third quarter of 2014. This phenomenon is not limited to small groups. It can be observed in the 100 best stocks of the index in each category. These categories are defined by taking the top 20% of the S&P 500 ranked on a unique factor. The top 20% of value stocks is defined as the 100 S&P 500 stocks with the lowest price/earnings ratio (P/E). The top 20% of dividend stocks is defined as the 100 S&P 500 stocks with the highest yield. The top 20% of quality stocks is defined as the 100 S&P 500 stocks with the highest return on equity (ROE). The top 20% of momentum stocks is defined as the 100 S&P 500 stocks with the highest price increase in one year. Variations in the relative performance of such large groups of stocks on long periods are the expression of behavioral changes in the market. My aim here is to observe and quantify these changes, not to explain them. The next charts show equity curves and statistics of the four “top 20%” groups for one month. The groups are updated and equal-weighted on market opening of the first trading day every week. Dividends are reinvested. Top 20% Value: (click to enlarge) Top 20% Dividend: (click to enlarge) Top 20% Quality: (click to enlarge) Top 20% Momentum (click to enlarge) The next table gives the annualized excess return over SPY of the top 20% group for each category since 1/1/2000, then on the last 12, 6, 3 and 1 months. Annualized excess return of the top 20% stocks in… Since 2000 Last 12 months Last 6 months Last 3 months Last month Value 6.60% -7.45% -16.30% -15.30% -27.76% Dividend 4.61% -7.31% -8.93% -9.55% -32.9% Quality 3.14% -4.29% -6.31% -12.94% -5.82% Momentum 1.12% 2.82% 5.24% -7.06% 8.49% Value stocks have outperformed for 16 years but they have lagged the benchmark since June 2014. The meltdown in energy companies is an incomplete explanation: It’s accountable for less than half of the negative excess return of value stocks. The relative loss of value stocks has accelerated in the last month. Dividend stocks also have lagged for at least one year. Their underperformance has accelerated considerably in the last month. It seems that expectations of a rate hike this week have made some dividend investors more nervous. Momentum stocks have outperformed their own historical excess return for at least one year. They started to lag in the last few months, but their excess return surged again in the last weeks. The transfer of excess return from value and dividend to momentum started more than one year ago and seems to continue. I have written in a previous article that such a pattern is not a reliable clue of a market top . Value and dividend offer a statistical bias on the long term, but in the short term investors following strategies based on these investing styles may experience more frustration before getting back their edge. Indeed, momentum stocks traditionally benefit from “window dressing” at the end of the year: some fund managers buy them to make their portfolios look better in annual reports. If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article. Data: portfolio123

Is UVXY Shutting Down Due To New SEC Rules?

Summary A look at newly proposed SEC rules. How they could affect ProShares products. A look at the current volatility landscape. Before we get started I wanted to highlight my last article: Neuroeconomics and Volatility . I really enjoyed writing this piece and it is a very different take on your normal volatility reading. Feel free to share this unique piece. A reader of mine recently alerted me to an article that claimed many leveraged ETFs would need to close due to a newly proposed Securities and Exchange Commission (SEC) rule. This article will serve to properly inform readers on how this may affect the ProShares Ultra VIX Short-Term Futures (NYSEARCA: UVXY ). Article In reference to the original article that made this claim, I would like to focus for a minute on the strategy they are talking about. This strategy is close to the ones I have shared with you here on Seeking Alpha in regards to shorting volatility and taking advantage of contango and the effects of leverage. David Miller’s Catalyst Macro Strategy Fund uses a bread basket of many leveraged ETFs to short and take advantage of the decay of the underlying assets over time. He specifically mentions UVXY as one of the funds holdings and maintains a net short position in the volatility ETF. I encourage you to read the article as it presents other ETFs and strategies that we have not discussed in relation to volatility and leveraged ETF investing in general. SEC Comments On 12/11/2015 the SEC proposed new derivatives rules for registered funds and business development companies. You can read the full release here . The bottom line of the proposal, in relation to ETFs, is to prevent funds from liquidating due to extreme moves in their underlying indexes. It appears that this rule may put an end to my dream for a leveraged inverse volatility fund. ProShares Comments According to ProShares (view release here ), they are confident that this proposal will not impact their ability to offer the current 2x inverse and 2x ETF and mutual funds which include UVXY. However, it may impact their ability to operate 3x leverage funds. These funds mainly track broader market indexes and sectors. You can view a list of those funds here . My take I wouldn’t be concerned with the talk about UVXY shutting down and I also wouldn’t let it affected your trading objectives. The only affect this has on my current objectives would be to switch to the iPath S&P 500 VIX ST Futures ETN (NYSEARCA: VXX ) options if I am looking at more than a year until expiration, just in case. Any decision the SEC makes will be phased in over time and this proposed rule must still be approved by the Commission and will then be subject to a 90 day comment period. Seeking Alpha is a great place to get up to date information on these types of changes and any new information will surely be covered by myself or other fine contributors. Current Volatility Futures Backwardation has once again appeared. See below: (click to enlarge) Current Futures: (click to enlarge) Conclusion As we move into 2016 I am looking forward to the change in pace of volatility spikes. Hopefully we will move toward a trading environment where we see backwardation events on average every 2-3 months. I am not currently shopping for a large short volatility position unless market conditions deteriorate a little further. I may take small short positions here and there with very short-term trading objectives. Coming up you have the start of a Federal Reserve meeting that wraps up mid-week with a widely held notion that rates will be raised for the first time since 2006. The government shutdown is still on for the end of the week with a consensus that a deal will be struck before then. It doesn’t appear that UVXY is shutting down anytime soon due to the proposed SEC requirements. I wouldn’t panic and recommend you wait until more information becomes available. Have a great end to 2015 and thank you very much for reading.

GDXJ – Limited Downside And Great Upside Potential In A Rising Gold And Silver Price Scenario

A potential long term investment with limited downside and great upside potential. Diversity of holdings mitigates the downside risk. Virtually every component of the index would be on many people’s list of junior precious metals stocks to buy to take advantage of a rising price scenario. There are few sectors which have such a huge potential for massive gains as resource sector juniors, but to achieve these one not only has to pick a company which on its own has enormous potential in what is one of the riskiest sectors for any investor to dabble in, but also any gains may be doubly enhanced should the resource sector in which the chosen company operates also move from being extremely depressed into a strong recovery phase. Pick the right resource, and virtually any surviving junior will serve you well but, as was seen following the 2008 resource market crash, if you pick well gains could be massive – 1,000 percent or more. Arguably, now could be a really good time to buy into resource stocks. They have seldom been more depressed, particularly the precious metals, and industrial metals copper and iron ore. However the writer does not see any kind of sharp recovery ahead for either copper or iron ore in 2016, although looking further ahead one would still have to consider survivors in the industrial metals sector as being potentially very strong investments, but the fallout between now and then could be perhaps a risk too far. That leaves us with precious metals – perhaps the riskiest sector of all. However the collapse in prices has seen precious metals stocks come down dramatically over the past three years, since gold reached its top of around $1920 an ounce in 2012. Gold for example has fallen by 44% since, and has dragged the other precious metals down with it. Is now the time to climb back in? If one reads the mainstream media one could be forgiven for assuming that the gold price fall had been far greater – but a much bigger drop has been suffered by most precious metals mining stocks – and by the junior sector in particular – ‘so here there be bargains galore’ one would think. And so there most definitely are, but the risks in buying junior precious metals stocks can be enormous. Any prolonged continuation of gold’s fall, and that of the other precious metals could yet see some serious casualties in terms of corporate shutdowns, and/or sales at hugely below potential valuations, even for juniors who, on the face of things, have some really good potential projects, but do not have the wherewithal to progress them. Now we see the fundamentals for gold in particular on a supply/demand basis as being extremely strong, but it may still take time for the investment sector to come to terms with this. Demand for physical metal has been growing – particularly in Asia and the Middle East – and central banks have been net buyers further increasing demand for physical metal. Meanwhile gold inventories in the West have been declining drastically. Sales out of the Precious Metals ETFs, which kept the market well supplied particularly in 2013 when the price began to dive, are dwindling with the weaker holders already having exited. Low gold prices are beginning to see new mined production starting to fall back, while the same low prices keep the incentive for scrap sales low – so these have been dropping too. So here the prospects for junior gold and other precious metals miners look potentially strong. If there is a supply crunch coming ahead – see 2016 a crunch year for physical gold supply as we suggest – then precious metals, and precious metals juniors in particular should be a major beneficiary and we could see some dramatic stock price gains even on comparatively small upwards movements in the metals prices. The high risk investor is poised to climb back in given many feel the gold juniors are bumping along the bottom. So how does one mitigate the very serious risk element here. It’s all very well jumping into a junior stock, however good it seems on paper, but then some external black swan factor comes into play which completely wipes you out. This could be political, geological, financial, weather related, fire, flood, earthquake etc. – any number of things could bring an under- or tightly-funded project (the nature of most juniors) to a grinding halt. There is a way, though, of investing in this sector in a much safer manner, but still with phenomenal growth potential. As we noted above, if the metals prices rise the whole sector will accelerate – except perhaps a few players who get left in the wake. Consider here investing in an ETF which follows a major junior precious metals index. The diversity in the stocks followed helps mitigate the downside risk, but virtually all the individual holdings in the ETF have great upside potential in a rising precious metals market environment. OK, it also will mean that the whole is perhaps not as profitable as some key elements within it, but the overall potential remains massive. Such an investment is the Market Vectors Junior Gold Miners ETF (NYSEARCA: GDXJ ) (listed on the NYSE Arca Exchange) which seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Global Junior Gold Miners Index. It has been bouncing along what many see as the sector bottom of late. It peaked back in November 2010 at around 171.84 and those who invested in it at the time, and stayed with it, would have lost just short of 90 percent of their investment given it is now, at the time of writing at least, at 18.95. Many feel the chances of it falling lower are decidedly limited, while the potential for recovery, if precious metals prices pick up, is very large. If it gets halfway back to its former high that would mean a gain of around 350 percent from its current level. While this might be a tall order in 2016 it is certainly not outside the bounds of possibility should precious metals start to move. Interestingly trading volume has been high over the past year when the price has fluctuated from around 18.30 to 30.10 so it tends to be easily tradeable and there are obviously others out there aware of its potential. The Index on which the ETF is based is also not based on fly-by-night juniors with little or nothing to offer except hope and a prayer, but also includes some significant miners which are probably highly offended that they might even be classified as juniors, like Hecla Mining (NYSE: HL ), Pan American Silver (NASDAQ: PAAS ), Centerra Gold ( OTCPK:CAGDF ), Evolution Mining ( OTCPK:CAHPF ), Oceanagold ( OTCPK:OCANF ), Osisko Gold Royalties ( OTC:OKSKF ) etc. to name but a few. The top 10 companies held, which include all the above, account for 42.75 percent of the total holding. Note also these include some significant silver miners, and history tells us that if gold begins to move, silver moves too – but faster! Indeed running down the full list of holdings all of them would be on many people’s list of potentially strong performing juniors. They include Pretium Resources (NYSE: PVG ) (developing one of the world’s highest grade – underground gold mines), Detour Gold and Lake Shore Gold ( OTCPK:DRGDF ) – both Canadian junior gold high flyers, Silver Standard (NASDAQ: SSRI ), Coeur Mining (NYSE: CDE ), First Majestic (NYSE: AG ) (all three prominent in the silver space). So – do take a look at GDXJ as a long term punt on a turnaround in precious metals prices. It is a junior investment which nowadays offers what we see as very limited downside, but has great upside potential in a more favorable pricing environment.