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The Market Peak Is In

Summary In April I wrote an article that predicted the conditions necessary for a market peak to have occurred. In August these conditions were met. I detail some investment options to consider if a peak has in fact been made. In this article, I will be explaining why I believe the market has peaked or will peak soon, which means this bull run is over. In an article I wrote in April titled ” Constructing A Market Peak Blueprint ” I detailed three metrics that when combined have predicted the end of the previous two market tops in 2000 and 2007. The metrics I looked at were the monthly S&P 500 (NYSEARCA: SPY ) Shiller PE ratio, high-yield bond spreads and interest rates. In the final paragraph, I noted, “While none of these metrics currently are near a point at which all three will align to predict a top, it is still something that investors can watch for in the future. Well, the future I talked about in my article is now! I never like being the bearer of bad news, however since I wrote my article, all three metrics have aligned to the specifications I laid out in my article. That is why I am predicting the market peak is in. Market Peak Conditions The conditions needed to be met to declare a market peak are the following conditions listed below. I collected Shiller PE data from Multipl.com , High-Yield Spread data from the St.Louis Federal Reserve and historical interest rate data from Yahoo Finance . [Note all data is monthly] As the data in the tables below show that in August, all of these conditions were met. Shiller PE of greater than 25 Shiller PE declines 4 Months in a row High Yield Spreads Increase 4 Months in a row 10-year Interest Rate decreases 3 Months in a row Shiller PE   High Yield Spreads   10-Year Interest Rate May 26.87   May 4.51   May 2.10 June 26.62   June 4.66   June 2.34 July 26.55   July 5.11   July 2.21 August 26.54   August 5.66   August 2.20 Previous Peaks There have been three previous times in the last fifteen years where these conditions have all aligned and those were in November & December 2000 and August 2007. This can be seen graphically in the following two monthly charts, which show the point at which the conditions were triggered. (click to enlarge) (click to enlarge) [Charts from ThinkorSwim Platform] What can investors do? -Don’t Panic! The number one thing is not to panic if the market peak is in. I am in no way saying to go out and panic selling. However, as I detail below, there are some investment actions investors can make to lessen the pain if a market peak has already occurred and a major correction follows. Investment Option #1: Get Defensive With ETFs, investors have a number of choices that are quality ETFs that own defensive equities. The PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA: SPLV ) is attractive because it holds stocks with the lowest volatility in the S&P 500. The Guggenheim Defensive Equity ETF (NYSEARCA: DEF ) is attractive because it holds fundamentally strong, dividend paying companies that have a history of outperforming according to its Fact Sheet . “DEF uses a rules-based quantitative approach, the index selects stocks based on fundamental characteristics such as a strong balance sheet, dividend payments, conservative accounting practices, and a recent history of out-performance during weak market days.” The Barclays ETN+ VEQTOR S&P 500 Linked ETN (NYSEARCA: VQT ) or the PowerShares S&P 500 Downside Hedged Portfolio ETF (NYSEARCA: PHDG ), which both dynamically allocate between stocks, VIX futures & cash. The following chart from the VQT prospectus shows that in late 2008, the allocation to volatility was increased which is shown by the steep increase in the index value. [Chart from VQT Prospectus] Investment Option #2: Add a short position to hedge downside risk The two main options for shorting the overall market are the ProShares Short S&P 500 ETF (NYSEARCA: SH ), which is the DAILY inverse of the S&P 500. The second option is the AdvisorShares Ranger Equity Bear ETF (NYSEARCA: HDGE ), which is an actively managed short ETF. Investment Option #3: Consider Adding Precious Metals During the large decline in the market two weeks ago, gold (NYSEARCA: GLD ) & silver (NYSEARCA: SLV ) performed quite well because of investors seeking safety. For those looking for investment choices in the precious metals space there is obviously the GLD or SLV or there is the broad ETFS Physical Precious Metal Basket Trust ETF (NYSEARCA: GLTR ), which holds physical gold, silver, platinum & palladium. Investment Option #4: Employ a barbell approach Investors can employ a barbell approach where they own short-term fixed income to preserve capital and generate some income and high quality growth stocks. The PIMCO Enhanced Short Maturity Strategy ETF (NYSEARCA: MINT ) is an actively managed ultra-short term bond ETF designed to generate above money market returns and is a good capital preservation tool. In addition, if you still want capital preservation but are looking for a higher yield, a quality choice is the Vanguard Short-Term Corporate Bond Index ETF (NASDAQ: VCSH ), which invests in short-term investment grade corporate bonds and currently yields just less than 1.90%. For the other end of the barbell, investors can look for high growth companies that have growth and have minimal debt. For example, earlier this year I wrote an article , where I determined it was the number one stock in the world was Visa (NYSE: V ). I determined Visa was the number one stock because they have $4.7 billion in cash, no-debt, they pay a dividend, is expected to grow earnings 17.74% over the long-term, is buying back shares and in 2016 they start their new deal replacing AMEX (NYSE: AXP ) at Costco (NASDAQ: COST ). Other quality stocks like Gilead Sciences (NASDAQ: GILD ), which have strong balance sheets and clear growth drivers, should be considered when using the barbell approach. Closing Thoughts If a market peak is in fact in, investors need to be mindful and give extra scrutiny to investments for their potential performance during a down market. If a market peak has occurred, as I highly suspect that it has, individual stock selection and/or tactical allocation to ETFs is something that will become extremely important. This kind of environment is where great investors shine. I do not know who said the following quote but it applies to this situation and it goes something like “Anyone can be a good investor in a bull market, however, what separates good investors from great investors is bear market performance.” Disclaimer: See here . Disclosure: I am/we are long SPLV, GILD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Duke Energy Is A Good Play In This Volatile Market

Duke Energy is an electric power holding company whose stock is a low-risk investment. Despite its poor return on equity, Duke Energy has strengths that will continue to make it a reliable dividend stock. The company has performed poorly during the most recent quarter, but this is expected to improve. Duke Energy Corporation (NYSE: DUK ) is the largest electric power holding company in the United States and it is expected to stand firm in the electric utilities industry. Recently, the company has underperformed the industry average in many respects, causing its stock price to decrease from $89 to $70 within the past half year. However, an improvement in both company performance and market performance is anticipated. Duke Energy’s faults may currently overshadow its strengths, so it is important to dig deeper into the company’s operations and history before making a decision to buy. Insider Monkey shows that Luminus Management held onto about 1.68 million shares of DUK after decreasing its position by 22%. Seminole Capital’s position in DUK was slightly higher with 630,534 shares, while Highbridge Capital added a new position of 350,000 shares in DUK. We follow these funds because as Insider Monkey shows ( read the details here ), they have a penchant for making good long picks, but their short picks usually eat into their overall returns. In total, Insider Monkey showed five funds adding new positions in the shares of DUK and ten exiting their stakes. We think those funds staying long will not regret their decisions. Duke Energy has struggled with a YTD return of -12.19% even though its shares outstanding have decreased by 2.8% in the same time. The company’s gross margin of 42% exceeds the industry average, but its revenue has decreased over the past year, and in turn, DUK’s EPS has hit a recent low of $3.46. These disappointing statistics are troubling to investors, but there is plenty of reason to still consider DUK as a worthy investment. While many have lost faith in Duke Energy as of the most recent quarter, the company remains poised to reaffirm its reputation and generate a steady source of income for its shareholders. As the largest electric holding company in the country, Duke Energy has shown that its strengths will continue to make it an attractive opportunity for investors. With $120 billion or more in operating assets and nearly 8 million customer relationships , the company can ensure consistent operating cash flows and dividends. Its dividend yield is currently 4.49%. Slumping performance metrics are expected to improve in the near future as well. According to TheStreet , the market expects EPS to increase by $1.00 in the next year. With this may come a decrease in P/E ratio all else equal, meaning DUK may be undervalued considering its forecasted EPS. Additionally, NASDAQ shows DUK will realize earnings growth of 2.4% on a year-end basis and 5.28% by the end of 2016. DUK is known for its relatively consistent cash flows, but an improvement in performance may also be around the corner. Perhaps most important to investors, DUK is a low-risk stock, even compared to most other dividend stocks with an ultra-low beta of 0.35 on a 5-year basis. Its generally consistent performance is why the dividend has increased every year and the yield now stands at 4.5%. DUK remains an attractive option for risk-averse investors in that they have generated predictable cash flows through out their 150+ year existence, and its stock’s fortunes are not entirely tied to the market and the company’s fortunes are not entirely tied to the economy. Duke Energy’s two biggest direct competitors, American Electric Power Company (NYSE: AEP ) and CenterPoint Energy (NYSE: CNP ), have underperformed even more so than DUK. According to Yahoo Finance , AEP and CNP trail DUK in quarterly revenue growth, gross margins, operating margins, and EPS. The electric utilities industry in aggregate, however, has outperformed DUK in terms of quarterly revenue growth, perhaps due to the emergence of utility-scale solar developers. Otherwise, DUK seems to be in a far better position than its two largest direct competitors and the electric utilities industry as a whole. Duke Energy is a low-risk stock that may not offer grand price appreciation, but the company can provide shareholders with a steady source of income through dividends. Its position in the electric utilities industry, including its enormous portfolio of operating assets, allows cash flows to remain relatively predictable. Despite the disappointment surrounding recent performance metrics, DUK is still a reliable investment opportunity and can provide some stability in an increasingly volatile market. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.