Technical indicators are showing fledgling signs of a market turn, says advisor Andrew Horowitz, which makes him cautiously optimistic. He shares four names that he sees as flashing some signals of strength.
Kate Stalter: Today, I’m on the phone with Andrew Horowitz of advisory firm Horowitz & Company. Andrew is also host of the very popular podcast, The Disciplined Investor, which I have gotten a lot from, and I personally recommend that our listeners subscribe to that on iTunes.
Andrew, you recently sent out an e-mail to your list, and you were discussing something called the Spearman Indicator, which I found pretty interesting. Can you tell us a little bit about that?
Andrew Horowitz: Yeah, there are so many indicators out there to look at. There’s MACD, there’s various oscillators, there’s trending, but the Spearman Indicator is something that has been pretty interesting over the last, I think, one year or so, two years, because we’re in a little bit of a different market where things happen very quickly.
We see a movement to panic and then to absolute "thrilled with the markets" on a dime. We just see this spinning. So, the Spearman Indicator is a process, is an oscillator, and not to get too embroiled in all the details, but basically it looks for overbought and oversold conditions, let’s say in a market, the S&P 500.
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What I have found by looking back over history with it, when we get to an extreme position in the Spearman Indicator, there usually is the potential for a very quick turn in this market condition. You have to get somewhat into the oversold or the overbought range of this indicator and then see a turn. You have to see the turn first.
That happened, I guess, about a week ago. Or I should say it happened a week ago, and then it happened before that, three weeks before that, and then it happened four weeks before that. It’s been very quickly getting from overbought to oversold.
So, when we look at this—when you look at what happened, let’s say, back in the middle part of December, I think was the best one—you saw this situation where all of a sudden oversold became a turning point, and the markets just rallied. So, that was a signal to consider not being short and possibly getting long the market.
Kate Stalter: One of the things that I noticed in your e-mail is that you did have a bit of a caveat that it was perhaps not the strongest buy signal? Is that still the case?
Andrew Horowitz: Yeah. What happened was: On that buy signal we didn’t see such an extreme oversold situation where you’d say, “Wow, this has just gotten so out of hand. You just want to go in and really buy, buy, buy, back up the truck.”
It was more of a turning point, but it was conditioned on the fact at that time that there was going to be possibly an uptrend, but be careful. It really hasn’t seen the shakeout that you’d want to see to get a real big uptrend that’s long lasting at that point.
Kate Stalter: Given all that then, Andrew, is there anything on your watch list that you’re taking a look at these days as a possible buy candidate?
Andrew Horowitz: Here’s one thing, Kate, that’s going on. You probably noticed this—I’m sure you have—that there’s been a rotation in the markets lately.
We could say that some of the risk trades—today they call them risk trades, but they used to call them straight up, “go-go growth,” or something of that nature—have been a little bit out of favor, whereas value has been much more in favor recently. You know, we’re seeing things like health care and utilities. The staples do much better, even some of the financials the last part of the year, come into favor. That’s a rotation trade.
You have to be very careful because there are two things that could be happening. One thing is you could be in a market condition that’s just favoring more of a safer risk asset class. The second thing is you could be in an economic cycle that’s favoring that towards the end of an economic growth cycle, which definitely sees these kind of stocks moving.
So, we still favor growth-oriented stocks over value-oriented stocks. For example, recently we picked up MasterCard (MA), as an example of a big name that we really like for a lot of different reasons. We recently bought a company out of Europe that does a tremendous amount in the area of billing and credit card style. They’re getting into the near-field communications. They’re really just expanding dramatically, and there’s a great market for them.
Something in the area of health care, a Questcor (QCOR). These are companies, we’re going to need the health companies that are going to be there for the next generation of people that are getting older.
Some of the fertilizer companies are interesting. The technology companies have been questioned. You have to be careful, but we still like Baidu (BIDU) for example.
Also, for example, there’s a company called Akorn (AKRX). Akorn is another health-care company, in the ophthalmology, the eye care area, and they have just an amazing balance sheet, and great growth potential. A smaller company, but you can see the stock hitting an all-time high towards the end of the year in 2011.
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Kate Stalter: Those are a couple of names there that people may not necessarily hear about, and that’s great. That’s what we love to share with our listeners.
Let me ask you this Andrew: Given that a number of your clients at the advisory firm probably have long-term horizons, what are you advising those clients to do these days?
Andrew Horowitz: We have different styles, strategies, and portfolios that we run, and some of them more longer term, which, you’re not really doing a lot of turnover per se, and you’re trying to be much more strategic in an asset-allocation model.
We are saying that we want to have heavier than usual allocations toward bonds, for example. You could do that whether it’s going to be Treasuries or corporates—high grade.
You want to have less of an allocation to foreign in the area of Europe...and that may be changing. We’re starting to look at, as crazy as it may sound, European REITs as a possible candidate. That’s one of the first things that turned around in the US when they finally got some traction in saving the banks.
The second thing is that we like emerging markets, but if we are going to see a slowdown of any sort as we have, emerging markets are going got get just chewed up, and that’s a problem. One of the things that it looks like is going on—because the trend has been that the US markets have been outperforming dramatically—it looks like a lot of money is coming out of emerging markets and being put into US equity markets.
So, we still like large caps, and we still like mid-cap exposure, but I will tell you that we have underweighted our equity exposure across the board. We’re starting to look at—even though the times look a little questionable—that maybe we’re going to notch that up a little bit and take down TIPS, for example, which have been performing just dramatically.
Kate Stalter: Do you advise getting exposure to these asset classes through individual investments or via ETFs or mutual funds? How would you suggest people go about that?
Andrew Horowitz: That’s a great question. There are so many different options available.
If you’re looking for exposure to an asset class, like I mentioned TIPS, or I mentioned the emerging markets, our favorite way for a longer-term investor with an asset-allocation model is to do it through usually ETFs, and depending on the asset class, you want to uses a managed mutual fund.
We like institutional style mutual funds that have no load and are very low cost, but we want to have an active manager on there in certain asset classes. For example, in the emerging markets, I think it’s more important to have a manager that is active in the process than have a passive manager in TIPS, for example.
You don’t need it in certain classes—a large cap may not require an active manager. It’s okay to get an index-based ETF, but in some other classes like in microcap, you want to have a manager in there that understands the dynamics of that particular sector.
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