AAII Journal Editor
Scott O’Neil discusses the trading rules he follows.
What to Watch in Your Portfolio
Strategies for monitoring your stocks, bonds and funds.
AAII Discussion Boards
How many Shadow Stocks do you own?
This week’s AAII Sentiment Survey results:
Bullish: 31.2%, up 3.0 points
Neutral: 35.0%, up 4.7 points
Bearish: 33.8%, down 7.7 points
April 12, 2012
April 5, 2012
March 29, 2012
March 22, 2012
March 15, 2012
March 8, 2012
March 1, 2012
February 23, 2012
February 16, 2012
February 9, 2012
February 2, 2012
January 26, 2012
January 19, 2012
January 12, 2012
January 5, 2012
December 29, 2011
December 22, 2011
December 15, 2011
December 8, 2011
November 30, 2011
November 24, 2011
November 17, 2011
November 10, 2011
November 3, 2011
October 27, 2011
October 20, 2011
October 13, 2011
October 6, 2011
September 29, 2011
September 22, 2011
September 15, 2011
September 8, 2011
September 1, 2011
August 25, 2011
August 18, 2011
August 11, 2011
August 4, 2011
July 28, 2011
July 21, 2011
July 14, 2011
July 7, 2011
June 30, 2011
June 23, 2011
June 16, 2011
June 9, 2011
June 2, 2011
May 19, 2011
May 12, 2011
May 05, 2011
April 28, 2011
April 21, 2011
April 14, 2011
April 07, 2011
March 31, 2011
March 24, 2011
March 17, 2011
March 10, 2011
March 03, 2011
A proper monitoring process focuses on the items that reveal whether a company’s underlying trends are positive or negative. Most of these can be reviewed on a weekly and quarterly basis. There is no need to pay attention to intraday price movements unless significant breaking news has been released and you are looking to buy or sell.
The weekly indicators I pay attention to in my portfolio are valuation, earnings estimates and relative strength. I keep an eye on current price-earnings and price-to-book ratios to make sure neither becomes excessive. Earnings estimate revisions reveal whether analysts are more upbeat or downbeat about a company’s prospects; I track the one-month change in profit projections for this year and the next. Relative strength shows how a stock has performed relative to an underlying index. I keep an eye on how a stock’s relative strength index (RSI) compares to its industry and sector peers. Comparative underperformance can be a tip-off that something is wrong, or at least that there is a perception that something has gone astray.
On a quarterly basis, I review a company’s earnings release, its conference call transcript and related filings with the Securities and Exchange Commission (SEC), including the 10-Q and the 10-K. I pay particular attention to whether the company generated free cash flow; how sales, margins and earnings compare to the prior year’s figures; and how the balance sheet has evolved. I also want to know what management says about current and expected business conditions. Finally, I want to ensure that the dividend is paid, and raised, as expected.
I do look at my stocks at a daily basis, but I mostly the scan the headlines. The reason is that the majority of the commentary published is a press release, a non-material event, or simply people posting their opinions as opposed to news that warrants paying attention to and monitoring. This is particularly the case for widely held stocks. For example, we hold Apple (AAPL) in our Stock Superstars Report portfolio and the amount of headline noise surrounding the stock is high.
I also intentionally go to the source whenever possible. An example would be Tuesday’s headlines about Warren Buffett being diagnosed with prostate cancer. After hearing the news, my first stop was Berkshire Hathaway’s website to read Warren’s letter to shareholders. (I hold BRK.B in my portfolio and was very cognizant of the management succession risks when I bought the stock.)
All of this is not nearly as time-consuming as it sounds. I have a report set up in our Stock Investor Pro stock screening program that allows me to review the weekly quantitative data in far less time than it takes to finish a bowl of cereal. The daily review of news takes just a few minutes, unless there is something worth reading. The quarterly analysis does take more time, but it’s a small price to pay to make sure I am properly managing my stocks.
If this does sound like too much work, then I would encourage you to reconsider whether you want to own individual stocks. Not everyone has the time or interest to research and analyze individual stocks—and there is nothing wrong with that. A mutual fund or an exchange-traded fund still gives you exposure to stocks, but requires less time to analyze. One key to successful investing that isn’t stressed enough is the importance of knowing what your limitations are and staying within in them.
Model Portfolios Updated on AAII.com
As you might have noticed on Tuesday, we have a created a new monthly email specifically for the AAII model portfolios. If you did not receive the newsletter, visit this page to manage your email preferences.
There are no new transactions in the model portfolios.
During March, the Model Shadow Stock Portfolio gained 1.6%. The Model Shadow Stock Portfolio lagged both the Vanguard Small Cap fund (NAESX), which gained 2.3% and the DFA US Micro Cap fund (DFSCX), which gained 3.0%. For the year, the Shadow Stock Portfolio is now up 19.1%, outpacing the 12.9% gain achieved by the Vanguard Small Cap fund and the 12.3% gained by the DFA US Micro Cap fund.
The Model Mutual Fund Portfolio gained 2.0% for the month. This compares to the Vanguard Total Stock Market fund (VTSMX), which gained 3.1%. For the year, the Model Mutual Fund Portfolio is up 10.0%, while the Vanguard Total Stock Market fund is up 12.9%.
The Model ETF Portfolio gained 1.7%, which compares to the 2.5% gain for the 80% SPDR S&P 500 ETF (SPY) and 20% iShares MSCI EAFE Index ETF (EFA) comparison. For the year, the Model ETF Portfolio is up 10.9%, while the 80% SPY/20% EFA comparison is up 12.1%.
More on AAII.com
- Rules-Based Investing Essential for Stock Investors – Scott O’Neil discusses the sell signals he looks out for and explains how following portfolio rules helps boost returns.
- What to Watch in Your Portfolio – Portfolio monitoring goes beyond just analyzing your stocks; you also must pay attention to your bonds and funds.
- How Many Shadow Portfolio Stocks Do You Own? – After I asked this question last month, several members responded with comments about what they own and how they use the portfolio.
- Don’t forget to take the Sentiment Survey.
The Week Ahead
More than 150 members of the S&P 500 are scheduled to report earnings next week. Included in this group are several Dow components: 3M Company (MMM), AT&T (T) and United Technologies (UTX) will report on Tuesday; Boeing (BA) and Caterpillar (CAT) will report on Wednesday; Exxon Mobil (XOM) will report on Thursday; and Chevron (CVX), Merck (MRK) and Procter & Gamble (PG) will report on Friday.
The Federal Open Market Committee will hold a two-day meeting starting on Tuesday. The statement will be published two hours earlier than usual at 12:30 p.m. on Wednesday. A summary of the committee members’ economic forecasts will follow at 2:00 p.m. and Federal Reserve Chairman Ben Bernanke will hold a press conference at 2:15 p.m. (All times are Eastern.)
Elsewhere on the economic calendar, March new home sales, the April Conference Board consumer confidence survey and the February S&P Case-Shiller housing price index will be published on Tuesday. Wednesday will feature March durable goods orders. March pending home sales will be published on Thursday. Friday will feature the first estimate of first-quarter GDP growth and the final University of Michigan April consumer confidence survey.
The Treasury Department will auction $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday.
AAII Sentiment Survey
Neutral sentiment rose to a four-month high in the latest AAII Sentiment Survey. Pessimism about the short-term direction of stock prices topped optimism for the second consecutive week.
Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded to 31.2%. Despite the three-percentage-point rise, bullish sentiment stayed below its historical average of 39% for the second consecutive week.
Neutral sentiment, expectations that stock prices will stay unchanged over the next six months, jumped 4.7 percentage points to 35.0%. This is the highest neutral sentiment has been since December 22, 2011. It is also the third time in four weeks that neutral sentiment has been above its historical average of 31%.
Bearish sentiment, expectations that stocks prices will fall over the next six months, fell to 33.8%. Even with the 7.7-percentage-point plunge, bearish sentiment stayed above its historical average of 30% for the second consecutive week.
The difference between bullish and bearish sentiment, the bull-bear spread, narrowed to -2.6 percentage points. This is the first time the spread has been negative for two consecutive weeks since December 1, 2011.
Neutral sentiment readings at the current level have been unusual over the past few years. Since the bear market ended in March 2009, neutral sentiment has only registered 35% or higher six times. The recent return of volatility to the market combined with conflicting signals about the U.S. and the global economy are having an impact on individual investor sentiment.
This week’s special question asked AAII members whether gasoline's rise to a national average of nearly $4 per gallon has changed their short-term outlook for stocks. The majority of respondents said it has not. A minority, however, said they have become more bearish on stock prices.
Here is a sampling of the responses:
- “I think the relationship between the price of gas and stock prices is overblown. Gas is just one of many metrics affecting sentiment.”
- “It has not affected my sentiment. I am carefully watching earnings reports and cash flows.”
- “The short-term price of gas will just add some minor volatility to a market driven by other, more serious issues.”
- “No change. I feel the price hike is temporary.”
- “The rising price of gasoline is eating into discretionary spending for many.”
- “At some point, the expenses for fuel will affect the purchase of other items.”