Research, The Risk Manager Report

The Risk Manager Report: 1/13/16

The first step to successful investing is to identify the Market’s “Big Picture” Environment in terms of risk versus reward. This is critical to success over the long term because different “environments” require different strategies. For example, in Bull Markets the objective is to maximize returns, while success in Bear Market Environments demands an emphasis on capital preservation. By reviewing the Environment every single week, we are assured that we will remain “in-tune” with conditions and not be surprised by environment changes.

At the center of our risk management work are our Exposure Models (see below). The models detail the current conditions for the Trend and Momentum of the Market and help guide us to the proper exposure to market risk.

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Executive Summary For: January 13, 2016

  • Current Environment:

    Stocks are taking a breather this morning following the worst start to a calendar year in history. The main concerns in the macro landscape are the ongoing yuan devaluation debacle in China, oil prices falling (still), and geopolitical tensions in the Middle East. However, it is important to note that the recent swoon has nothing to do with the U.S. economy, which is in decent shape at the current time. This decline is more about the potential contagion risk out of China than anything else. With the Chinese government intervening heavily this week to try and stop the bleeding, we will have to wait and see how U.S. markets react.

    S&P 500 – Last 3 Months

Risk Management Models Summary

Our disciplined approach to managing risk is designed to keep our Portfolios “in-line” with the major trends of the market. We strive to keep portfolios mostly invested during Positive Environments and to Reduce Exposure to Market Risk during Bear Markets and severe corrections.

We focus on our two proprietary Risk Management System Models. Both systems are robust market models incorporating the entire spectrum of market indicators. In short, our disciplined systems act as our primary guide to exposure to market risk. (For more details on each risk management system, see model summary below)

Current Readings – Risk Management Systems

  • Graduated Risk Management System
    Recommended Exposure to Market Risk (Short-Term): 30.00%
  • Long-Term “Big Picture” Trend Management System
    Current Signal: Neutral

    Graduated Exposure System (Intermediate Term Time Frame)

    The Graduated Exposure Risk Management System is our guide to determining the appropriate exposure to market risk.

    The system is a “Model of Models” comprised of of 10 independent Models. Each model includes has proved successful in its own right and gives separate buy and sell signals, which effects a percentage of our exposure to the market. Our Trend models (Short-Term Trend, Intermediate Term Trend, Trend & Breadth Confirm, and Sentiment) control a total 40% of our exposure. The 3 Momentum Models and 3 Environment Models each control 10% of the portfolio’s exposure to market risk. The model’s “Recommended Exposure to Market Risk” reading (at the bottom of the Model) acts as our longer-term guide to exposure to market risk.

    Risk Management Models
    (Our Guide to Intermediate-Term Market Exposure)
    Trend Signals (40%) Signal Portfolio Exposure Rating
    S.T. Trend Outlook Model Sell 0.00% Negative
    Int. Trend System Sell 0.00% Negative
    Trend and Breadth System Sell 0.00% Negative
    Investor Sentiment Hold 5.00% Neutral
    Momentum Signals (30%)      
    Market Diffusion Index Sell 0.00% Negative
    A/D Thrust Sell 0.00% Negative
    Long Term Momentum Sell 0.00% Negative
    Market Environment (30%)      
    Monetary Conditions Hold 5.00% Neutral
    Economic Model Buy 10.00% Positive
    Valuation Model Buy 10.00% Moderately Positive
    Recommended Exposure to Market Risk:   30.00%  


    Long-Term “Big Picture” Trend System

    Designed for Long Term Investors who do not wish to make a lot of adjustments to their holdings (i.e. 1 to 2 adjustments per year), our “Big Picture” Trend System focuses on the overall Environment of the market. The goal is to identify the “Major Trend” of the market and keep portfolios on the “right side” of the market’s current cycle. The Model includes hundreds of indicators (both long term and short term) in the areas of “the tape,” monetary conditions, investor sentiment, economics, valuation, overbought/oversold conditions, and industry leadership.

    When the Environment is rated as “positive” (about 32% of the time) our studies have shown that the S&P has advanced at a rate of +38.4% annually. However, when a negative environment exists (about 20% of the time) the S&P loses almost -21% per year. The Model recently switched to a “Neutral” signal on January 13, 2016 in response to the model registering a low neutral condition from a positive condition.

    “Big Picture” Trend System
    Signal Analysis  
    Current Signal Hold
    Date of Last Signal 1-13-16
    Price (S&P 500 Index) 1938.68
    Current Price (S&P 500 Index) 1938.68
    Gain/Loss N/A
    Model Analysis  
    Model Score (out of 10) 4.7
    Rating Negative
    Projected Annual Return -25.90%
    Model History (From June 1982)  
    % of Trades Profitable 87%
    Model Gain Per Year +16.7%
    S&P 500 Per Year +10.0%
    Recommended Exposure to Market
    (For Long Term Accounts Seeking Minimal Trading)


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    The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of ‘State of the Markets’ and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Stocks should always consult an investment professional before making any investment.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    The information contained in our websites and ‘State of the Markets’ publications is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

    Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Returns for the Big Picture Trend System are a hypothetical implementation of the model signals. When a signal is given, the closing price for the S&P 500 is used. Hypothetical returns do not reflect actual trading. Please note that hypothetical test results do not take into account market conditions which could adversely affect management decisions.

    Index returns are price only and do not include the reinvestment of dividends. The S&P 500 is a stock market index containing the stocks of 500 large-cap corporations, most of which are US companies. The index is the most notable of the many indices owned and maintained by Standard & Poor’s, a division of McGraw-Hill. S&P 500 is used in reference not only to the index but also to the 500 companies that have their common stock included in the index.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

    © 2016 – does not provide investment advice. All rights reserved.


About the Author

Donald B. Moenning is the head of equity research at Heritage Capital Management, a Chicago-based investment management firm founded in 1989, as well as Don holds degrees in Economics and Business Leadership from the University of Puget Sound, lives in Denver, Colorado, and is an avid snowboarder.