Schwartz is Bullish
From Note 4, Sent 1/28/18

Marvin Schwartz, one of Neuberger Berman’s leading lights since joining the firm’s research department in 1961 at an hourly wage of $1.25, told Barron’s this weekend that no other country is shrinking its equity base as much as we are:

“We’re now in our ninth year of share buybacks equal to 3% of the market value of all S&P 500 stocks, based on Laszlo Birinyi’s work. For 2017, he estimates buybacks of $630B and for 2018, $750B.”

On top of that bullish factor, he’s not worried about valuation:

“For 20 years, the average price/earnings ratio has been 19.3. If you go back 50 years, it’s 15.6 times. In periods where inflation grew 3% or less—which is 22 of the past 50 years—the P/E of the market was 19.7. Now, at 17 for 2019 and 15.9 for 2020, P/Es don’t look particularly stretched.

“If earnings are rising 16% this year and a minimum of 8% next year, and if companies buy back 3% of shares, and M&A reduces them by another 4%, then I don’t see why the market can’t rise 10% to 15% this year and another 10% or so next year.”

From Note 37, Sent 10/8/17

One bit of bearish evidence on parade is the VIX reaching a 24-year low.

Off the top of your head, when would have been one of the best years in recent decades to have invested everything you had in the stock market? How about before the tech boom of the 1990s, say, 1993?

That would have put you in with the S&P 500 at about 440, before it took off in 1995 to its peak at around 1,500 in August 2000, for a 241% gain before dividends.

Yet, 1993 was 24 years ago and the last time the market saw a VIX as low as it is now. Why don’t analysts and journalists notice such obvious evidence that the measures they fixate upon are unreliable? The VIX is a sideshow.

From Note 26, Sent 7/9/17

It’s encouraging to see Gluskin-Sheff’s David Rosenberg (bearish and wrong for the past nine years running) remaining stubbornly bearish, warning that he sees rain clouds and asking, “When do you want to make sure you’ve got an umbrella? When rain is in the forecast or after it’s already started pouring?”

Never mind he’s been forecasting a financial downpour throughout one of the best recoveries on record, and that anybody hiding under his umbrella for the past nine years has missed enough sunlight to power Vegas for days, he’s still handing out umbrellas: “I can’t tell you when it is going to happen,” he said last week, “but the economic cycle has not been abolished, and the chances of a recession are rising.”

Sure thing, Dave.

From Note 14, Sent 4/7/17

Pundit warnings of bond-fund trouble in the face of rising interest rates were wrong. According to Morningstar’s first-quarter recap: “Although the Fed hiked rates for only the second time in more than 10 years, all fixed-income Morningstar Categories were in positive territory over the first quarter.” Yes, all.

Low inflation and a low neutral real rate of interest have created a near-zero world. Probably the last thing to worry about is a bond crash due to soaring inflation and interest rates.

The Effectiveness of my Signal System

In this video, you’ll see the effectiveness of my Signal system.

Starting with $10,000 in 2001 and making employee contributions to a 401(k) account, The 3% Signal system (3Sig) returned far more than dollar-cost averaging into the S&P 500 (SPY), and dollar-cost averaging into a portfolio of Morningstar medalist actively-managed funds, as follows by year-end 2016 balance:

$332,091 in 3Sig
$263,874 in DCA SPY
$209,070 in DCA Medalists

This shows 3Sig beating both the unmanaged stock market and top-quality managed funds…

Week 15 to 4/13/18
Year-to-Date Performance

S&P 500 -0.1% | Kelly Letter +1.0%
3Sig +1.7% | 6Sig -2.0% | 9Sig +3.5%

Our quarterly rebalance happened at a good time, guiding us to buy ahead of a rebound. The buying of tech weakness ahead of tech strength in 9Sig was particularly gratifying, as both moves were bigger than the S&P 500’s.

Tech fell more sharply than the broader market, then spiked more sharply, in the middle of which we bought more leveraged exposure. Thanks to this, our 9Sig plan rose 5.3% last week, and with $65K more riding the tech rebound than rode the tech fall. By comparison, Facebook (FB $165 -6.8% YTD) rebounded just 4.7% last week.

Hard as it is to remember during pleasant rebounds, we would do better in the longer run with another quarter or two of declining prices to draw in more of our capital. For now, it’s good to see a price rise shortly after we committed more to stocks.

Week 14 to 4/6/18
Year-to-Date Performance

S&P 500 -2.1% | Kelly Letter -1.8%
3Sig -0.0% | 6Sig -4.3% | 9Sig -1.7%

Our quarterly orders filled on Monday, putting more of our safe bond capital to work in the current stock market weakness. It’s unfortunate that last week’s drop couldn’t have happened a week earlier, but that’s how the ball bounces.

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Week 13 to 3/29/18
Year-to-Date Performance

S&P 500 -0.8% | Kelly Letter +0.2%
3Sig +0.3% | 6Sig -2.1% | 9Sig +2.8%

We wanted buy signals across the board this quarter, and we got them. They didn’t come in perfect, due to last week’s rise in stock prices, but we’re still moving a substantial new chunk of capital into stocks at prices lower than the ones we sold at in January.

Week 12 to 3/23/18
Year-to-Date Performance

S&P 500 -2.8% | Kelly Letter -2.0%
3Sig -1.5% | 6Sig -5.3% | 9Sig +1.1%

It was the biggest weekly price decline since January 2016. We’re getting exactly what we wanted this quarter, and on our preferred schedule.

The buy signals in all three Sig plans are substantial this weekend: $53K in 3Sig, $89K in 6Sig, and $73K in 9Sig. Their three stock funds are below their quarterly target prices by the following respective percentages: 5.5%, 15.5%, and 17.0%.

For people with buying power, like us, this is great news.

Week 11 to 3/16/18
Year-to-Date Performance

S&P 500 +3.3% | Kelly Letter +5.7%
3Sig +2.9% | 6Sig +1.6% | 9Sig +14.8%

Our preferred smaller-company indexes are holding up better than their large-cap peers in the focus on US trade policy.

Tariffs, withdrawal from multilateral agreements, and the resulting higher price of imported goods make business harder for large American multinationals. Smaller companies tend to be domestically centered and therefore less sensitive to changes in trade policy.

Week 10 to 3/9/18
Year-to-Date Performance

S&P 500 +4.6% | Kelly Letter +6.7%
3Sig +3.0% | 6Sig +2.6% | 9Sig +17.1%

Our rebound from a recent balance low of $2,434,604 in Note 6 sent February 11 has taken us 10.6% higher, nearly back to our recent balance high of $2,735,894 in Note 4 sent January 28. Another 1.6% tick up will do it.

We are ahead of the market, which is good, but continue wishing that prices would decline one of these quarters to generate a big buy signal to pull in capital from our bond funds.

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Week 9 to 3/2/18
Year-to-Date Performance

S&P 500 +1.0% | Kelly Letter +1.6%
3Sig -0.5% | 6Sig -2.3% | 9Sig +9.2%

We may get our healthy buy signal this quarter yet, which is what we’ve been wanting. A week ago, it looked like the correction was going to disappear in the rearview mirror, but last week’s action kept some of its benefit tantalizingly still-at-hand for us.

February’s price decline ended a 10-month rising streak for the Dow and S&P 500, while the Nasdaq moved lower for the first time in eight months.

It’s inappropriate to refer to rising prices as “winning” and declining ones as “losing,” because both are part of a profitable process.

The metaphor I like is respiration. Neither inhaling nor exhaling is preferable, but part of the necessary package. Just as we don’t think of inhaling as winning and exhaling as losing, nor should we assign those labels to price movement. Hence, February showed a decline, that’s all, and one we hope persists another month.

Week 8 to 2/23/18
Year-to-Date Performance

S&P 500 +3.1% | Kelly Letter +3.3%
3Sig +0.8% | 6Sig -0.5% | 9Sig +11.8%

The rebound continued at a much more modest pace than in the previous week, when the S&P 500 rose 4.3% and our portfolio rose 6%. The Nasdaq 100 remains the leader, having risen 5.6% in the previous week and 1.9% last week, the best of our six tracked indexes in each week. Our fund in 9Sig rose 18.2% in the previous week and 5.6% last week.

The recent correction is looking like a blip, and a v-shaped one at that. From 2873 on January 26, the S&P 500 fell 10.2% to 2581 on February 8, then rebounded 6.4% to its current 2747. Another 4.6% gain by the big index will make it seem as if nothing happened.

Older Performance Notes

I’m Jason Kelly.

You probably know me through one of my books, such as The Neatest Little Guide to Stock Market Investing or The 3% Signal. I also write The Kelly Letter for subscribers every Sunday morning. It runs an automated portfolio that reacts to stock price changes alone using my 3Sig, 6Sig, and 9Sig plans. It beats the market with no stress from indecision.

This page collects excerpts from letters, along with helpful information. For more from me, join the free list at the top left of this page. To turn your portfolio into an efficient quarterly machine running my 3Sig, 6Sig, and 9Sig plans, join The Kelly Letter.

How My Signal
System Works

In this video, you’ll learn how my signal system works to change the way you see the stock market.

Instead of listening to pundits commit the narrative fallacy of weaving news into a story explaining why the market went where it went or, worse, why they think it will go a certain way in the future, you’ll come to see the market as a meaningless series of changing numbers.

This controls emotion and allows for rational reaction to price changes. You won’t care why the numbers went up or went down, you’ll just react in a predetermined manner to the change by selling fluctuations above a signal line and buying fluctuations below it.

In this manner, you will beat the market with no stress from indecision and no more time wasted listening to pundits make up stories from the news.

From Note 37, Sent 10/8/17

Bears love pointing to market sentiment, usually to warn that retail investors are getting too greedy, setting the market up for a crash. But like all the other metrics they love, this one is an unreliable timing indicator.

Sentiment is an oscillator, fluctuating in a wave pattern between fear and greed through long price cycles. In most time frames, the S&P 500 rises along a line from lower left to upper right on a chart. If you put a sentiment oscillator at the bottom of the chart, you’ll see it going through its waves the whole time, exerting inconsistent influence on the rising price line above.

Zeroing in on CNN’s Fear & Greed Index, we find the following over the past two years, defining greed as a measure of 80 or higher and fear as one of 20 or lower:

2015: Greed > Fear > Almost Greed
2016: Fear > Greed > Fear > Greed
2017: Greed > Almost Fear > Greed > Fear > Greed

Through the emotional turmoil, the S&P 500 rose 24% from 2058 on 12/29/14 to 2549 now.

From Note 14, Sent 4/7/17

Almost all market movement is clustered around the no-change line. The media and our collective psyche are fixated on famous moments of short, sharp price change, but they are not the norm.

We will experience them again, though, and our plans will manage them as specified. Both 6Sig and 9Sig will do their jobs when run correctly.

The biggest risk to their performance is not from the market or their predefined responses to it. The biggest risk is an emotional mistake, such as abandoning them at the very moment they’re about to deliver their greatest over-performance. When is this? From the bottoms of crashes.

From Note 44, Sent 11/26/17

I’ve been pleased to see small caps reenter the competition from their low in August, just about when people had all but forgotten their fabulous performance in last year’s fourth quarter and were ready to abandon them for other asset classes.

This is par for the course. I’ve found from watching investors over the years that “patience” means two quarters. Somewhere during the third quarter of lagging performance, in the eighth month in this case, they start feeling like the current trend has lasted forever and get antsy. This explains why two-year bear markets leave such a deep scar in the emotional make-up of investors. Even the more rational variety, such as ones who run my Signal plans, fairly quickly begin second-guessing what’s known to work. We are emotionally ill-equipped for this business.

At least in this case, few people made moves before the historical strength of small caps reasserted itself. For the year through August 21, [our small-cap ETF] returned -2.4%. Since August 21, it’s returned 13.5%. During the lackluster first half, our 3Sig plan took advantage of the appealing prices to move capital from bonds to small caps, and it’s paying off. Nobody’s tired of small caps anymore.

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