Coupeville, Washington
Bullish Percent Indicator data has not generated any purchase signals since late last December. Data this week is different as we have one definite purchase and a second that is so close I’m calling it a Buy. I’ve been eager for this day as it is the beginning of the critical Buy – Sell cycle for which the Sector BPI Model depends.
Follow the explanation below and watch for action on Monday when I will review the Carson and apply the purchase signals to the Franklin, Millikan, and Gauss portfolios.
Index BPI
With exception of the two Dow indexes, the data shows a slightly weak market over this past week. Overall, when the bullish percentage is in the 50% range I think the market is fairly valued as approximately one-half the stocks within an index are bullish and one-half are bearish. When we look at the right-hand section of the following table, the entire market is bearish or in a downward trend. Based on the percentage changes, the downward trend is modest.
We are still several months away from the U.S. running out of money to pay its debts. If the R’s don’t see the light and decide to push the economy over the edge, there will be a blood bath in the 2024 elections. Sane minds will most likely grasp this concept so I anticipate the debt limit to be raised. This still does not solve the problem of the huge debt in this country.
Sector BPI
Now we come to the critical table when it comes to managing Sector BPI portfolios of which there are four. They are: Carson, Franklin, Gauss, and Millikan.
Checking the left side of the following table or the percentage side, Utilities (VPU) is definitely a Buy. Energy (VDE) with a bullish percentage at 30.43% is sufficiently close that I am also calling it a Buy. On Monday, after the market opens, I will be adding VPU and VDE to the Sector BPI portfolios.
The percentage to add into each portfolio is calculated based on its three-year annualized volatility. I’ve built this calculation into the Kipling spreadsheet. When I last checked, VDE comes in at 25% and VPU at 15%. These are the percentages of the total value of the portfolio. One does not need to hit these percentages exactly, but the calculation provides guidelines for how much to invest in each of the sectors calling for a purchase.
If you hold VCR, VFH, VIS, or VNQ in any of your Sector BPI portfolios, and have not already set TSLOs, do so on Monday after the market opens. None of the ITA portfolios following this model hold shares in any of the over-bought sectors.
Explaining the Hypothesis of the Sector BPI Model
If readers have questions as to how the Sector BPI model works, place your questions in the Comment section provided below.
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Lowell,
Here’s another twist we need to evaluate. I’m still holding a position in VPU from back in October since it has never hit >70%. Do you think I should add to the position or just continue holding until it gets >70%?
Bob W.
Bob W.,
If you use the same percentages I do, I would check to see if the allocation is full. I also hold a few shares in the Carson, but will need to add more on Monday in order to bring the percentage up to 15% of the total portfolio.
Lowell
Lowell,
Actually I only have a position in one portfolio so I guess it should add it to the 2 portfolios it is not in:^ )
Bob W.
Bob W.,
It is my intention to add VPU to all four Sector BPI portfolios.
Lowell
I have started looking at these sector portfolios. There is some precedent for this line of thinking, and I’m sure you know these names, but I will post this information for others reading this post:
1) Sam Stovall, when he was at S&P came up with the idea of sector rotation, essentially tied to the business cycle. Stockcharts.com has a PerfChart dedicated to examining the relative behavior of these sectors;
2) Tom Dorsey of Dorsey-Wright has used Bullish Percent information (using a 3-box Point & Figure chart criterion) to advise clients. His books “Point & Figure Charting” and “Tom Dorsey’s Trading Tips” are essential elements for those who want to learn about these methods.
I hope many find this background information helpful.
Craig,
I remember the name, Sam Stovall, but did not recall he recommended sector rotation.
I have Tom Dorsey’s book and have read it. His work was the motivation to develop the BPI spreadsheet. Today’s post shows two screenshots from that SS.
Thanks for bringing this to all readers attention.
Lowell
I also saw over the course of the last few blog entries on these BPI portfolios that some readers were wondering what to do when you have more buy signals than you have allocation or capital to execute?
One thing that may work, though I don’t know if I have seen this mentioned, is to use a relative strength criterion, such as rate-of-change momentum measures over a fixed time period, (say, 3 or 6 months) as a way to perform such selections. Meb Faber used similar criteria in his 2010 white paper “Relative Strength Strategies for Investing”.
Since there is a history of such portfolio systems on this site, this might be one way to do it.
“I also saw over the course of the last few blog entries on these BPI portfolios that some readers were wondering what to do when you have more buy signals than you have allocation or capital to execute?”
Craig,
This problem has yet to arise, but it will eventually. I’m thinking I might prefer those sectors with the greatest volatility as they are most likely to rise quickly up to the over-bought condition.
Another method is to use the Kipling spreadsheet and use the BHS ranking values as the preferences.
Lowell