Since the inception of FatAlpha, this is the 11th month the S&P has had a down month. Once again the strategy outperformed as the portfolio dropped only 3.93% vs 6.13% for the market. It is the 9th time out of 11 that the strategy has done this. This puts year to date return at -1.7% vs -2.7% for the benchmark.
Month on month only Cooper Tires and Avnet appreciated at 17% and 2% respectively, while the largest losses came from Kohl’s and Chicago Bridge and Iron at -17% each.
Last month I had warned that several stocks in the market were fully valued and hence the correction was only natural. Many like to point to China, however it had more to do with valuations, lack of earnings growth (FactSet reported blended earnings down -0.7% yoy), and the beginning of rate hikes. My biggest concern remains earnings growth as this is the first time since Q3 2012 that earnings declined. Without further growth it is difficult for valuations to expand.
Having said that, time and time again, the market has historically both overshoot and undershoot and so while I keep all the bearish views in mind, I look for market confirmation. We can view this via big picture charts. Please see my article for Seeking Alpha that I published a few days ago: http://goo.gl/RCZRxQ
If history for the last 25 years holds then the market needs to break on the monthly before we enter a bear market. Until then, I believe we remain in a grinding uptrend. One RIA looked at August lows and supports that the odds favour a year-end rally (see 3rd link on page 3). In any case, we must all be prepare for what will eventually come. Personally, I am working on improving my shorting models and approach and reading an interesting book by ex-CLSA’s Russell Napier entitled “Anatomy of the Bear”.
Historically September and October are difficult months so hold on tight!
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