In part one of our interview with John Benedict of J2 Capital Management , the Michigan-based advisor described his proprietary Risk Controlled Indicator, a long-term gauge of market direction. Today, the interview concludes with Benedict telling Kate Stalter what the RCI is telling him about current market conditions, and about some investment ideas.
Kate Stalter: That leads us nicely into the question about what you are seeing in the market these days.
John Benedict: What we’re seeing right now is quite interesting. We went to a sell signal on August 5 of this year. And that’s when the market broke below the 200-day moving average.
It was going down quite substantially very quick. And I’ve got to tell you, in a lot of ways, this recent downdraft that we experienced is probably much worse than what we experienced even in 2008, because of the speed and acceleration that it had.
So, when things like that happen, that’s a very big indicator to you, too, that a potential looming bear market could be there.
Now, what’s happened recently is: We actually flipped back into a buy signal here on October 27, which is quite fascinating to me. Now, no indicator is perfect, and not ours. Going back to 1996, there have been a few that I would call false buy signals or false sell signals.
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What you try to do there is, you try peek into them and say, “Well, what caused this to go into a buy and quickly reverse back into a sell?” And what we notice is, and this is where we’re at right now in this market. If you look at my signal, it’s telling me that there is a potential for, let’s say, a continuation of the bull market that we experienced coming out since March 2009.
So, it’s possible that we could continue this, and if we are, we’re very early into it and that’s very positive. However, the momentum signals that are used in this are not that overwhelming to me, and you couple this in the face of the tremendous macro headline risks that are out there right now, the numerous land mines that are waiting out there that may or may not ever happen.
But you look at whether it’s Europe out there, or even at home, domestically, and some of the debt problems that we experience globally…What this indicator is telling me right now is, proceed with caution.
Maybe what you could do is step into this market right here, have an exit plan if it doesn’t work. You could potentially even buy on pullbacks like we’re experiencing here in the past week, and even today, but I don’t know that anybody needs to be fully invested or even half invested at this point right now, until these momentum indicators that I have truly signal real market strength to me.
The volatility that we have experienced in the past 60 days in this market is a huge warning sign. So, it’s telling me one of two things. Either volatility like this only comes in bear markets, or it’s telling me there is a change of character into a bull market, but you have to proceed with caution here.
Kate Stalter: All right, well given all of that then—and I know you stuck a lot of “ifs” in there—what are some of the investment ideas that you see as having some potential at this time?
John Benedict: So even though there are a lot of “ifs” in there, my primary advice would be to proceed with caution, like I said. Given that, what we’re seeing that looks somewhat positive here—that I wouldn’t mind buying a little bit more of on pullbacks, and if the market can show underlying strength internally—is US stocks.
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US stocks right now are taking a leadership role, specifically large cap. It does concern me a little bit that small cap is underperforming here, but large-cap stocks, specifically defensive, I think is where somebody wants to be.
At this stage, I would probably steer clear of some of the more growth-oriented names out there, or we say high-beta names, and the reason for that is because volatility is so large.
You have the current VIX [Volatility Index], which is the implied volatility of the next 30 days in the market, over 30. Times like this, high-beta stocks tend to have great difficulty.
So some of the more equity-income, high-quality names might be a good place to stick. Gold is still in a bull market. It’s one of the few asset classes over the past decade that’s in a bull market.
And then if you do want to get a little riskier, emerging-market stocks have some interest to me, but all of these in very small amounts here, a quarter position, a third position, with an exit strategy.
Coupled with that, I do want to say that what I feel is one of the best investments out there for anybody who wants to play the equity markets is actually derivative equities, and that would be a high-yield or junk bond.
Typically mutual funds is where we are looking at quite substantially right now for really one reason, and those tend to trend better with a lot less risk, so you know you can have market-like rate of return on high-yield-bond mutual funds with historically a third of the downside risk of the markets. So, I think there is a good opportunity in high-yield bonds.
Kate Stalter: You’ve mentioned a few asset classes that you see as showing some possible strength. Any particular stocks or funds that you can name at this moment?
John Benedict: Particular stocks that we like? I could pull up a list, but there are some stocks like Philip Morris (PM) that I do like right now. Conservative names.
If one must jump into more growth names, I would probably stick to something that has good earnings, but low volatility, too. And there are a few out there.
But generally speaking, if these are individual investors that are interested, I think stick with mutual funds probably, or an ETF. You can buy the SPDR S&P 500 (SPY), an ETF. You know we’re big ETF people here. I’d probably stick with something like that.
Or there are two equity income ETFs I like a lot right now, and that is iShares Dow Jones Select Dividend Index (DVY) and then Vanguard Equity Income ETF (VYM). I think these are very reasonable choices for investors to make right now.
Both DVY and VYM do carry a dividend yield, and they do look some of the strongest in the market right now that I see.
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