Market Sentiment Still Says 'Go'

06/18/2013 5:45 am EST

Focus: MARKETS

Andrew Houghton

Partner, Delta Investment Management, LLC

Andrew Houghton and Nick Atkeson of Delta Investment Management says their bull market indicators are still flashing green.

Nancy Zambell: My guests today are Nick Atkeson and Andrew Houghton of Delta Investment Management. Thank you, gentleman, for joining me and welcome.

Andrew Houghton: Thank you, Nancy.

Nancy Zambell: I've known you guys for a long time, and you've always been very into options. Now you're telling me that you have eliminated options from your investment strategy. You're focusing on a safe investment strategy investing in stocks with insurance. Can you talk a little bit about that?

Nick Atkeson: Yes...actually, it's funny. We've always used options-even from the beginning-as a way to view stocks.

We're big believers in trying to find an edge in our investment strategy. We used what we call "Options Intelligence" to buy and sell stocks. But we've mostly, over time, been interested in stock investing. One of the reasons is that stocks generally don't go to zero. Options can close at zero.

In terms of our stock investing, we believe that there are times in the market when you really want to own stocks and participate in what we call intermediate-term bullish runs. Then there are other times when owning stocks is not as good.

In the 2008-2009 credit crisis, the markets dropped 55% from high to low. The best strategy during a time like that is just to get out of the market. It's too hard to find stocks that hold up during times like that.

We use all types of quantitative indicators to decide when to be in markets and when to be out. Our primary indicator is called the Delta Market Sentiment Indicator. We publish that in Barron's every week.

It has a 41-year history, starting in 1971. It has proven to be incredibly accurate at telling investors when to own equities and when not to. We actually have active money management where we've been managing customer portfolios using this indicator to know when to be in stocks and participate in bullish moves, and when to be out of stocks and avoid major bearish periods.

Nancy Zambell: You told me earlier that that indicator has been bullish since mid-December, right?

Andrew Houghton: Correct. December 14, it went bullish, and it has stayed bullish through this week. Basically, when that indicator is above 50, the market is bullish and below 50 is bearish. Last week, it was in the 60s.

In our view, a number close to 50 is a lot easier to decide whether to get in or out of the market. It always gets tougher when the indicator is above 80. When it's closer to 80 and 90, the market can be a little bit overbought, or is definitely extended. But right now at 60, we think it's very attractive.

Nancy Zambell: That's pretty healthy. Once you see that your market indicator is bullish, then you've got to obviously figure out what you're going to invest in. You use the quantitative methodology.

Nick Atkeson: Yes. What we like to invest in is high-relative-strength stocks. High-relative-strength stocks are those stocks that are showing the best price performance relative to all the other stocks in the group or the market.

We tend to look at a group of about 3,700 stocks, and we like the ones that are trading in the highest...showing the best price performance in that group. There are a bunch of studies—including from Investor's Business Daily, from Dorsey Wright of MIT—that indicate that high-relative-strength stocks have outperformed the broader averages by a significant amount during basically, all time frames that have been examined.

On Investor's Business Daily's Web site, Investors.com, they have posted the results of the IBD 85-85 Index, which is the top 15% highest relative strength stocks. They show the results from 2000 forward. Right now, the results are showing that high-relative-strength stocks are up about 300% since 2000, and the S&P is up about 20%.

Nancy Zambell: Yes, that's pretty healthy. When you look at high relatives, is it typical that you'll see a sector where most of the stocks in it are trading at better values?

Nick Atkeson: We like some diversification in a portfolio when we're long, so there'll be a few very strong sectors, clearly. But we try to have a group that's broadly representative of the market.

We currently are using an ETF that is 100 of the highest relative strength stocks, but people can use a smaller portfolio if they like. There are all kind of sources for high-relative-strength stocks. People can construct a portfolio of, let's say 20 or 30 stocks, and manage it that way, or they can use an ETF.

Nancy Zambell: So what are you seeing, sector-wise, right now, that you like?

Andrew Houghton: On the sectors, we're mainly going after broad exposure. We're not purchasing any sectors at the moment.

The ETF that Nick mentioned is PowerShares DWA Technical Leaders (PDP), is what Dorsey rates as 100 top-100 relative strength stocks. It's updated quarterly. It's an instrument that we think is an excellent way to get exposure to the market.

Nancy Zambell: OK. You also tell me that you're doing mostly long positions, or you're going to go into cash if your indicator turns bearish. You're really not doing much with options or short positions, correct?

Nick Atkeson: We do like US Treasuries when the equity market is bearish. People will think maybe that's for the interest income, but it's really not.

When the market's bearish, it is often it's a flight to safety trade. People run in and buy the Treasuries. Just to give an example, in the year 2008 the 30-year US Treasury was up 60%.

Another question that we're asked is, if you have an option about whether the market is bullish or bearish, why don't you short? One of the reasons is that you can actually, in some cases, get much better performance out of the 30-year Treasury then you can out of being short. If you had been short the S&P in 2008, you would have had a gain of 37%.

Nancy Zambell: Last question, tell me a little bit about your publication, Wealth Accelerator.

Nick Atkeson: You can go to DeltaWealthAccelerator.com. You can sign up there, and we'll send out a weekly publication that tells you whether we believe the market is bullish or bearish, and what to be invested in.

It gives you a running commentary about how we're viewing the market. It also provides a lot of educational pieces, in terms of how we look at the market, the history of it, and things like that. There's a weekly landscape piece—two, three, four pages long—that discusses what's going in the market today and our investment philosophy and outlook.

The other thing that is important for people to realize is, we're not talking about daytrading. We're talking about trading what we call intermediate-term trends, which are often just three major trades a year.

You don't have to be at your computer all the time, ready with your finger on the button. You can be checking in with us, getting a weekly newsletter, and do a tremendous job picking up a lot of insurance to protect your account from a major equity-market downturn, which is our primary goal. Our whole philosophy is based on if we don't lose the money, we'll probably make some.

Nancy Zambell: I love that.

Andrew Houghton: We failed to mention this, but McGraw-Hill approached us because that kind of approach to the market was unique. This idea—avoid the losses and you'll make the gains. They asked us to write a book on this.

We have, and it's called Win by Not Losing. That's coming out October 18. It's actually available on Amazon right now if you just type in Win by Not Losing. It's a book on tactical investing.

Nancy Zambell: Super. Well, I've got to put that on my reading list. Thank you so much for joining me Andrew and Nick. Nice talking with you.

Related Articles:

Portfolio Protection Made Easy

4 Ways to Summer-Proof Your Portfolio

3 Strategies for Huge Returns

Related Articles on MARKETS