Time for Caution! The Issachar Fund (LIONX) holds 73% in two Floating Rate Funds and 27% in CASH as of Friday, October 12, 2018. I added another Floating Rate Fund to LIONX because they have both been growing at high single-digit rates of return and experienced little draw-dawn while the stock market slides into correction territory. I say, “Don’t Feed the Bears by buying these dips and instead let the institutions form the bottoms and build the bases. When the market does bottom, and stocks begin to break out of sound bases, I expect to have the option to use Stock SWAPS (leverage) or sell the Floating Rates to buy stocks. LIONX can get 100% exposure with only 20% of cash using SWAPS if needed. If the bottoming process and uptrend takes longer than anticipated, I may sit patiently in Floating Rates until the next opportunity.
Stocks took a beating last week! US 30-Year Yields tried to recover from the 3.4% Yield spike on October 8th but that did not stop the S&P 500 from falling 5.28% last Wednesday and Thursday. The S&P 500 is now up 5.06% YTD with a 10.10% Maximum Draw-Down (MDD) while LIONX is up 3.11% with an MDD of 4.43%. LIONX has an Ulcer Index (UI) of 2.25 which is less than the 3.23 UI for the S&P 500 Index (less is better) since inception (2/28/14) and that is the key point. LIONX may not beat the S&P 500 in a bull market because it is designed to capture most of the uptrend and avoid the major Bear Market declines. Many people would argue that this Bull Market is “long in the tooth” and due for a rest and I would agree. My motto is, it is not what you make in a Bull Market, it is what you keep in a Bear Market that counts.
The Fed wants to raise rates! It makes no sense to me why the Fed insists on raising short-term interest rates. The market appears to be saying that now is not a good time to normalize rates. I believe the Fed wants to raise rates so that they will be able to lower them to hopefully get us out of the next recession that they will likely create. If that seems a little messed up, it may be! After the financial crisis in 2008, the Fed inflated its balance sheet to over 4 trillion dollars, out of thin-air and it kept interest rates near zero. They are now unwinding their bloated balance sheet by selling bonds (causing yields to rise) they accumulated under the Obama administration. The stock market could have done a lot better under Obama, but his policies of increased regulations and taxes seem to have dampened the enthusiasm of the Bulls. Trump continues to reduce taxes and regulations and I believe that is why the stock market has been doing spectacular, until last week.
The Chinese are not stupid! When the balance of bond sellers overwhelms bond buyers, bond prices tend to fall, and yields rise as we have just witnessed. I believe the Chinese are trying to retaliate against the Trump Tariffs by buying less of our bonds. That might be what is really causing our long-term bond yields to rise. Rising bond yields create less demand for stocks which ultimately can cause stock prices to decline. I believe that the Chinese need us more that we need them, and they will eventually cave into the demands of Trump. We finally have someone in the White House who wants to put America first and make America Great Again!
November Elections could send the market lower! If the market perceives that the Republicans might lose control of the House, stocks could slide into a steeper decline than we witnessed last week. I am convinced that the Democrats will do everything they can to obstruct and delay the Trump agenda. However, if the market perceives that the Republicans will maintain control of both the House and Senate then I believe the market will resume its uptrend. I try to invest based on what I know rather than based on what I believe.
Market in Correction! Investors’ Business Daily (IBD) labeled this period a “Market in Correction” last Wednesday. IBD says that making new buys in a correction is risky, since most stocks will follow the market’s downward trend. I sold all LIONX equity positions Friday before last as the stocks we held began to cross my “line in the sand”. Do you have a “line in the sand”? At what point will you sell a position? If you don’t know, that is likely not a good answer. I believe, investing for the long-run is not a sprint, it is a marathon so develop a plan and stick to it. It may not be a good idea to fall in love with a stock that you eventually get married to. It is perhaps a better idea to “date” a stock and sell it when it hits your sell criteria. We can not control the market, but we can control how we respond to what it does.
Bottom Line: I believe risk levels are high! Try to stay in phase with what the market is doing and not what you hope it should do or what other people think it should do. Try not to let hope over rule your sell rules. Raising cash may be prudent and cash can be a profitable position. Trust your rules so you can live to invest another day.
(Portfolio holdings are subject to change at any time and should not be considered investment advice. There is no guarantee that any investment will achieve its objectives, generate positive returns or avoid losses.)