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Wimberley, TX 78676
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Understanding the Value of Identifying Investment Rotation

Investment rotation - whether between sectors, global regions, or stock, commodities, and bonds - is always a part of a secular bull market. It's honestly the glue that holds everything together.

During bear markets, when money rotates away from an area of the market, it usually just moves to the sidelines. Bull markets are different, however, as money typically finds its new home in another area.

Looking at pre-Covid investments to the anticipated post-pandemic investments has been a perfect example of how investment rotation works, but to a much greater degree. We've all heard the "rising tide lifts all boats" adage, but the bull market rotation that we've seen over the past year has been more like a tidal wave than a rising tide.

The following two chart illustrates how investment rotation works, with the technology sector going from strength to weakness - and financial stocks taking the lead in US sector performance:

Technology sector:

Technology, and its software component, have gone through the good, the bad, and the ugly. It's currently in the ugly phase.

And it doesn't matter whether you're a long-term investor or a short-term trader, you need to be aware of any investment rotation taking place. Long-term investors may not care in terms of buy/sell decisions as they tend to hold through everything, but they should at least be aware of the reasons why their portfolios are strengthening or weakening.

In a upward trending bull market, when one person's portfolio is doing well and another's is lagging, it's typically due to investment rotation. For short-term traders, it's much more important to recognize market shifts as soon as possible. Traders will want to deploy capital in different areas as the market winds change.

If you're trading technology stocks, as we see in the chart trends above, the opportunities to make money will vary greatly depending on whether it's 2020 or 2021. If you've been following technology these past few months, then you know quite well how impacted individual technology names have been in 2021.

Now let's look at the Financial sector: (XLF).

As the re-opening of our (hopefully) post-Covid economy has occurred, bond traders have been exiting the US Treasury market. That's sent interest rates surging ("surging" might be a bit dramatic considering how low they have been) and one sector that almost always benefits on a relative basis during a period of rising interest rates is financial sector.

Banks and life insurance companies typically benefit directly from higher rates. Let's look to see how the financial sector (and banks) have evolved over the past 18 months: 

At the very bottom of the above chart you can see the rise of interest rates as reflected by the 10 year US Treasury yield. Notice how the rise in the yield correlates almost 100% with the rise is the financial stock sector since the Fall of 2020?

Plus, if you look at the two charts above and think "mirror image", that's what we need to watch for when making investment decisions.

Keep in mind, however, that no investment system is perfect or guaranteed. And weak investment performance over a specific period of time isn't washed away by past periods of excellent relative performance.

Investing is a humbling experience and even the professional money managers like myself better be trying to learn and adjust every day. We NEVER know it all - and successful strategies change over time. Its a matter of having the tools to identify investment rotation before the mob and make money with that knowledge. 

Rocky Boschert

Our Investment Strategy for 2021 and Beyond

For most of our Fidelity IRA and brokerage accounts, our investment strategy will involve taking a roughly 8-10% positions in our most attractive ETFs (or mutual funds) and 5% position in "thematic" ETFs that are in upward momentum "industry" groups.

As far as performance results for our above described investment strategy, extensive back testing shows that our established buy signals described above have verified very positive historical growth results over many past years. 

The actual verified performance results has shown an 80-85% success rate over the 8-32 weeks following the investment buy signal trigger.

After the typical 8-32 week upward trending performance period, if the price of the investment is also hitting its own historic price highs, we will generally see a short pullback, or "consolidation" period, often followed by the price continuing higher.

With our strongest investments, we will hold it through a normal "correction" period and stick with the investment until we see the upward trend run out of steam, usually confirmed by a high volume of money flowing out of an investment.

However, to ensure consistent long-term investment profitability, our investment strategy will require some degree of short-term investment rotation if any of our owned investments "falter" sooner than expected.

To minimize potential losses, all our investments will be kept on a tight leash, if for some reason any portion of our investments do not continue their upward trajectory.

In other words, we will watch closely for sustainable long-term upward trends, hold those investments until the uptrend reverses, then, when appropriate, liquidate the investment when it is no longer performing well.

A practical shift in "new decade" investment choices 

Many of you probably consider our investment service to be focused primarily (or wholly) on the stock markets. Although historically true, as our client majority enters or approached retirement, our asset selection management will be tempered more and more toward risk aversion.

Due to the political economic dysfunction we are increasingly seeing globally - and especially domestically, it is incumbent upon our investment service to manage your money with intelligent and sensible risk-aversion.

Plus, while we will certainly use the most commonly recognized investment vehicles - which will include ETFs and traditional mutual funds, we may also move more toward individual bonds and "ETN's" that track the "price" of various commodities such as gold, silver, or even lithium (used in electric car battery production). We will not invest in the stocks of dirty energy or environmentally destructive mining companies.

To be both successfully profitable and risk-averse, our investment strategy cannot favor any one ETF / fund, investment asset class, sector, industry, or commodity. Individual stock selection is becoming even more complex, with almost all large company funds owning the same 10-20 stock companies.

We will focus our investing in high visibility investments that are in sustainable uptrends and endowed with high trading volume (I.e. liquidity) assuming they are attractive as a suitable investment given our specific risk tolerance.

During the Covid-19 pandemic US stocks were the global investment asset of choice for the most institutional and personal investors. In 2021, we will probably continue to witness that trend as long as it continues its positive money flow into US assets.

In other words, we will watch closely for any global investment trend changes by tracking large investor money flows - both in and out of macroeconomic investment classes, sectors, or world regions.

Fortunately, the quantitative money management strategy we have expertise in will tell us what the big investor money flow changes will be - as they unfold.

Financial Media "Noise"

It is important to understand that the investment "noise" we regularly see or read in the financial media is based almost solely on daily performance trends, economic projection marketing, and investment firm sales pitches.

These financial media "touts" have very little idea what is going to happen in one month or longer with the economy - or investments in general. Their advice may sound good short-term, but they do not en masse successfully identify long term investment trends (except when we are already near the end of a long-term bull market in stocks).

In fact, like television and cable news in general, so much of the financial media only exists to sell advertising to naive retail investors - or those viewers "gullible" to financial celebrity idolatry.

Of course, there are some investments trends that one can key on for valid information, such as the Federal Reserve Board's current monetary and interest rate policy - or other identifiable investment sentiment indicators such as a volatile dollar or shifts in inflation trends.

As such, it is my professional responsibility to as early as possible identify, track, and invest where the big Wall Street money managers are investing for their own institutional accounts.

Finally, I understand that my primary job is to grow and protect your financial nest egg so you can enjoy and live comfortably in your retirement - and sleep well without worrying about your money.

So be safe and be wise. And wear a mask until we all get our vaccinations for this Covid-19 nightmare.

Rocky Boschert

"Racial, religious, LGBTQ, and xenophobic hate will have no place in our investment portfolios."

Understanding Investment Technical Analysis

What is Technical Analysis?

Simply put, "Technical Analysis" is the forecasting of future investment price movements based on an examination of past price movements.

Like weather forecasting, investment technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time.

Technical analysis uses a wide variety of charts that show price over time.

Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of theoretical market supply and demand.

Current price movement (aka “market action”) refers to any combination of what happens between the market open or close, intraday highs and lows, and total trading volume for a given security over a chosen time frame.

The quantified time frame can be based on intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or monthly price data and can be used as a prediction for a few hours or many years.

At Arrowhead Asset Management, we only watch daily, weekly, and monthly price data for our investment decisions.

Key Assumptions of Technical Analysis

Technical analysis is applicable to an investment where the price is only influenced by the forces of supply (sellers) and demand (buyers). In order to be successful, technical analysis makes three key assumptions about the "securities" that are being analyzed:

  • High Liquidity - Liquidity essentially means the combined buy and sell volume (# of shares). Heavily-traded stocks allow investors to trade quickly and easily, without a minority of investors dramatically changing the price of the stock.
  • Below Average Fees and Charges - We also only invest in ETFs or other investments that are easily bought or sold and do not have gain-eroding hidden fees or charges. 

  • No Extreme News (noise!) - To be sure, technical analysis cannot predict extreme events, including business events such as a company's CEO dying unexpectedly, and/or political events such as a terrorist act or some bully leader attacking a vulnerable nation for its oil. When the forces of “extreme news” are influencing the price, technicians usually need to have to wait patiently until the investment's chart settles down and starts to reflect the “new normal” that results from such extreme news.

The Basis of Technical Analysis

Modern technical analysis works on three quatifiable assumptions:

  • The Price of a Security Accounts for Everything Good and Bad About the Investment
  • Investment Price Movements Are Not Totally Random - They Generally Represent "Factual" Supply and Demand
  • The “What Is Happening" Is More Important than the “Why It's Happening”

Price of a Security Reflects Everything

Technical analysts believe that the current price fully reflects all known information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis.

The market price of an investment reflects the sum knowledge of all participants, including traders, investors, portfolio managers, analysts, market strategist, technical analysts, fundamental analysts and many others.

It would be folly to disagree with the price set by such an impressive array of people with such professional expertise.

Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.

Prices Movements are not "Random"

Most technicians agree that prices are always in an upward or downward trend.

However, most technicians also acknowledge that there are periods when prices do not trend. If prices were always random, it would be extremely difficult to make money using technical analysis.

An investment technician believe that it is possible to identify an investment's trend, invest or trade based on the trend and make money as the trend unfolds.

Because technical analysis can be applied to many different time frames, it is possible to spot both short-term and long-term trends.

"What" is More Important than "Why"

The price of an investment is the end result of the battle between the forces of supply and demand for the company's stock (or the Fund's daily price). The objective of technical analysis is to forecast the direction of the future price. By focusing on price and only price, technical analysis represents a direct approach.

Fundamental analysis is concerned with why the price of an investment is what it is. For technical analysts, the why portion of the equation is too broad and many times the fundamental reasons given are highly suspect.

Technicians believe it is best to concentrate on what the price is and rarely on why the price is where it is. Why did the price go up? It is simple, more buyers (demand) than sellers (supply). After all, the value of any asset is only what someone is willing to pay for it. Who needs to know why?

General Steps to Technical Evaluation

Many market technicians employ a top-down approach that begins with broad-based macro analysis. The larger parts are then broken down to base the final step on a more focused/micro perspective. Such an analysis might involve one, two, or all three steps below:

  1. Broad market analysis through the major indices such as the S&P 500, Dow Industrials, NASDAQ and NYSE Composite.
  2. Sector analysis to identify the strongest and weakest groups within the broader market.
  3. Individual stock analysis to identify the strongest and weakest stocks within select groups.

The beauty of technical analysis lies in its versatility.

Because the principles of technical analysis are universally applicable, it does not matter if the time frame is 2 days or 2 years. It also does not matter if it involves a individual stock, an ETF, a market index or commodity. The technical principles of money flow, price support, price resistance, price trend, price trading range over time (and other aspects) can be applied to any chart analysis.

Technical analysis is by no means a panacea. But investment success requires serious study, dedication, and an open mind. Technical analysis expertise inceases our investment success rate substantially.

At Arrowhead Asset Management, we use technical analysis to try and take major risk out of our investment decisions. At least for our "buy" decision, It works 80% to 90% of the time.

"Sell" decisions are a little more complicated and beyond the scope of this article. Just know that "greed" can be a major problem for timely investment sell competence.

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