Hi Guys,
I recently posted my summation of the mid-May MoneyShow held in Las Vegas. Within that summary, I reported that InvesTech chief James Stack finds little evidence that a significant equity market downturn is eminent. One of the primary drivers that informed Stack’s assessment is the four-year Presidential election market returns cycle.
Jim Stack is an engineer by formal training, and his research is unbiased, comprehensive, reliable, and, therefore, trustworthy. One issue I might raise with his analyses is that he assembles too many market direction indicators. But, too much is better than too few since it allows the client or analyst to make choices.
Since I was providing an overview of the Las Vegas event, I did not elaborate to support my brief recognition of Stack’s current forecast. Given the present market turmoil and downswing, perhaps a more complete description of Jim Stack’s analysis is appropriate for this forum.
Here it is. This is my interpretation of Stack’s market forecast position. I extracted all the data mentioned here from the May 11 issue of the InvesTech Research newsletter that was distributed at the Las Vegas meeting.
In general, Stack endorses the finding that most market rewards are realized in the November through April timeframe. In fact, he even acknowledges that some financial media might modify the “Sell in May, and walk away” axiom to “Panic in May and run”. Stack does not subscribe to that extreme vision.
He notes that the market reward cycle is a tale of two seasons. Since 1960, if an investor was only in the equity marketplace (the S&P 500 Index as a proxy) within the doldrums period (May through October), he merely doubled his wealth. However, if that same investor only committed his resources in the high rewards phase (November through April), he increased his wealth by almost 50-fold.
Such is the power of the sell-in-May rule. But the devil is always in the details, so be especially aware of those nasty details.
The Presidential four-year election cycle distorts this overarching trend. Stack has assembled election cycle data beginning in 1928; that subset of data shows a remarkable shift in the S&P 500 monthly returns, especially for the time span from May through election day. Since 1928 this electioneering period generated an average 5.3 % positive return. In this 21 year data set, negative returns were registered on only 4 occasions. This limited data suggests an 81 percent likelihood of a positive market outcome through election day. I like those odds.
Stack also presented a statistical average bar chart of quarterly returns in a year-by-year Presidential cycle format. He highlighted the year Four segment of that chart. That’s where we are today. That chart, which is historically based, clearly shows a negative return for the quarterly period just ending, and an exciting positive incremental gain for the segment into election day. Let’s hope this seasonal pattern for the Presidential cycle repeats itself.
Jim Stack reinforces his current positive market perspective with a plethora of other macro-level signals that are basically positive at this juncture. The bear market warning flags that he monitors includes items like investor optimism, the Fed yield spread probability model, the Conference Board’s US Leading Economic Index, market breath statistics, and his own proprietary Bellwether Index which is composed of stocks from economically sensitive areas.
Some of his macroeconomic indicators are approaching critical regions, but none have penetrated into the red flag zone. So continuing vigilance is necessary. Stack makes portfolio investment decisions in an incremental fashion. He moves cautiously, and adheres to a preponderance of evidence policy.
So do I; that’s probably why I admire his work and his investment discipline. My comments are totally based on Jim Stack’s research. He deserves full credit for his efforts; if errors were made in my interpretation, they belong solely to me.
I hope you agree with my assessment, but more importantly, I hope you can benefit from my representation of Jim Stack’s careful work and honest work ethic.
By all means, I encourage and welcome your comments. Please participate actively.
Best Regards.
Comments
Some questions…
What does Jim Stack sell – books, videos, a newsletter?
Does he manage money?
Or is he just a professional lecturer?
Did he show his track record?
What is his current position? And what portion is in equities?
You said, “Stack makes portfolio investment decisions in an incremental fashion.
He moves cautiously, and adheres to a preponderance of evidence policy.”
That sounds a bit vague to me… so on average, how often do you think he makes
these “incremental” changes?
CXO has the following, Track Record Missing, Not Available? with the short second paragraph telling me all I need to know.
I am familiar with Mr. Stack, have heard him speak; but if I can not obtain a track record with dates and data, well; I find little value with this. It is the equivalent of suppressing consumer reports and recall notifications on vehicles; and I am shopping for a new or used vehicle and need solid data.
May or pre-election cycles will not cause our portfolio adjustments. I find nothing in recent history that matches against what is set in place in the markets today; regardless of politics or the month. Although we all have our reasons or judgments based upon what we may find is critical to our investments.
MFO May 17
Funds Boat, May 19
Regards,
Catch
Thanks for participating in this discussion.
Understand that the singular purpose of my posting was to alert MFO members to significant statistical perturbations that exist for the Sell-in-May rule of thumb. None of these rules hold for all times and all circumstances.
The major perturbation introduced by Jim Stack’s research focused on the Presidential four-year election cycle. Given our present position in that cycle, I deemed that the Stack research was immediately appropriate, especially given the second quarter market reversal currently in progress.
My goal was to assuage panic fears which quickly gravitate, like the herd mentality, to extreme values. I did not intend to carry water for either Jim Stack or his financial enterprises. He is very successful at doing that for himself. Over the years he has received numerous awards from investment rating agencies such as Forbes and Barron’s weekly.
For the record, I do not subscribe to his newsletter service and do not invest with the Stack Financial Management service. I have attended about 15 of his presentations that are always carefully crafted and filled with statistical study results. I freely admit that I find that style of presentation attractive given my training, my experience, and my investment proclivities.
But my posting was not directed at selling Jim Stack; my objective was to emphasize his conclusions. My constant reference to Stack was to properly recognize his work. Allow me to stress once again since some of you missed my main goal: Stack is the source of the study. I do not necessarily endorse his fund management prowess.
Since you asked, Jim Stack publishes an investment letter, heads an investment management operation, lectures, and has appeared on countless media shows such as Wall Street Week and CNBC. He has been active in this field for over three decades. His newsletters contain specific portfolio recommendations that incorporate mutual fund, ETF and stock holdings.
Here is a Link to his financial management service:
http://www.stackfinancialmanagement.com/
Remember, I use his research and not his management acumen. I am a totally independent private investor; I have money placements across the entire United States to achieve even geographic diversification.
Like myself, Jim Stack adheres to an incremental philosophy when making investment decisions. I doubt that he remains 100 % equity invested for very long, and I know that even when the majority of his indicators are flashing red he retains a portion of his portfolio in stocks (maybe like 20 %). As his indicators gather momentum in either direction, he shifts the weight of his holdings to reflect these dynamic market signals.
I suspect we all do something similar, making adjustments in response to a changing economic, political, and market environment. As a consequence of this approach, James Stack usually scores best on a risk-adjusted basis.
I hope this clarifies.
Best Wishes.
To wit: during the steep sharp selloff in August through October 2011 his indicators continued to indicate that "we are in a bull market", even after the decline had reached minus 20%. The indicators he relies upon to declare that we are in a bear market or that some adjustment to his recommended portfolios needed to be made were not triggered. He certainly cannot be relied upon for short term calls nor does he try to be. However, he was behind the curve last year for the intermediate term as well, a surprise to me. To his credit, he recommended staying the course and eventually the sharp rally from October 2011 to March 2012 more than made up for any losses suffered during March through October 2011.
Hi DlphcOracl,
Thanks for your needed contribution. Nothing succeeds more than real world, hands-on experience when evaluating a product.
The commentary that concentrated on Stack’s portfolio management record surprised me since the primary thrust of my original post concentrated on his statistical research. In performing that study he was merely gathering and massaging uncontroversial numbers.
Numerous portfolio selections test his judgments and decision making; my main focus only requires unbiased data collection, accuracy, and completeness. Typically, engineers (Jim Stack was formally educated in that discipline) are very good at this latter task, but sometimes expose shortcomings in the former task which demands interpretive deftness.
Since MFO members expressed some curiosity In Stack’s performance as a portfolio manager, I retrieved a glossy brochure that his team provided at their workshop. That brochure summarized his recommended portfolio record for about 12 years ending in April 2012. He contrasted his performance against the S&P 500 Index as a benchmark.
For that roughly 12-year period, the Stack portfolio generated a cumulative return of 118.0 %; for that same timeframe, the S&P 500 produced a 19.5 % reward. Dividends were reinvested in the comparison. In general, the chart showed attenuated losses during equity market downturns, which is consistent with Stack’s claim to have a “safety-first” management style.
A separate bar chart illustrated that the Stack recommended portfolio outperformed the S&P benchmark for both 5-year and 10-year measurement periods, but his approach fell below the S&P 500 returns for the last 1-year period. I have no idea if his presentation material has been audited for accuracy, but I trust it is.
Jim Stack’s performance is provided net of fees. That’s fair. His fees seem modest. He offers a sliding fee scale that starts at 1.4 % for 600 thousand dollars and drops below 1.0 % at the 1.25 million dollar marker. The Stack Financial Management service minimum entry level is at the 600 thousand dollar threshold.
His most recent performance data seems to align well with your personal observations. So too does his incremental, slow moving decision-making approach. Jim Stack is definitely not a suitable advisor for a day trader, or even for a short-term market participant.
Given your 2-year experience with his newsletter service, do you plan to renew your subscription when it expires?
Once again, thank you for your meaningful submittal. It added an ingredient that is missing from my posts on this matter: actual experience with the Stack organization and product line.
Best wishes.