Christopher Neubert – March 27, 2014

Christopher J. Neubert, Founder and President of MONECO Advisors, a boutique financial planning and portfolio management firm headquartered in Fairfield, spoke on technical analysis/trend identification as a tool to protect your portfolio in downturns and participate in upturns.

Mr. Neubert said that in 2008, we had no place to hide in the broad and deep decline in markets that occurred. Equity markets declined 55% and bonds, other than Treasuries, also experienced a steep decline. He said that he was inspired by this experience to develop a system of analysis to protect against such losses and to participate in growth opportunities. From this effort, he developed his Growth Protection Strategy, a technical analysis tool to help identify significant market moves.

Mr. Neubert explained that fundamental value analysis is based on detailed analysis of a security using a broad array of metrics (earnings per share, cash flow, earnings growth and the like) to identify companies that may be undervalued or hold the promise of significant growth.  Technical analysis looks at price movements, relationships and trends in the market. He explained that he looks at four key features: price and price movement, price trends over time, the tendency of history to repeat itself over time, and the existence of market cycles. For example, market prices have been recovering for five years; we might expect a dip.

 A frequent Wall Street argument is that it pays to stay invested over time because if you miss the best up days, you will lose out.  They present studies that show that if you miss a number of best days over a period, your portfolio results will lag well behind what you would have earned had you stayed in the market.  What they don’t tell you is that if you miss the worst days, your portfolio results would be all the better. It is worthwhile to miss at least some of those worst days.  Keeping an eye on the downside is important.

An objective of technical analysis is to identify technical triggers to help the investor decide when to invest and when to sell. He explained his approach of analyzing movements and trends (i) in 50-day and 200-day moving averages, using closing prices, and (ii) in the conversion/diversion of such moving averages to identify break points that may indicate a significant market move. These analyses can be performed on single securities, indexes of industry groups, and broad market indexes such as the S&P 500 and the Russell 2000 (small cap). “The price is the story,” said Mr. Neubert, “the market is efficient.”

He showed a number of charts indicating situations in which break points in the relationships indicated a sharp decline (in 2008) and a turnaround (in 2009.) In other cases, one of the portions of the chart might indicate a break, while the other did not, indicating that the market was not ready for a major move. Mr. Neubert said that in developing his model, he went back to ten years of data and he believes it tested well.

He said that he still relies on fundamental analysis because there is much value there. For example, he is reluctant to invest in a company with a P/E ratio of 50, such as Tesla. However, the technical model can give clear guidance as to when to get in and when to get out. There are times when fundamental analysis conflicts with what the charts seem to be telling you. Also, when things are heading south, they tend to head south for everybody.

As to where we are today, Mr. Neubert said that he believes that if you are in the market, stay in. There are not yet clear signals to get out. On the other hand, valuations are a bit high and there does not appear to be a lot of upside room. If the markets experience a 5-6% decline, it may be time to get out.

In the Q and A, Mr. Neubert made the following comments:

There does not appear to be a clear signal to get out of the bond market, if you are in it.

On being told that Warren Buffet was quoted as saying that he had instructed his executor that if he dies, the executor should invest 90% in the S&P and 10% in tax free municipals, Mr. Neubert commented that Mr. Buffet is a firm believer in index funds – most fund managers do not outperform the indexes – and a strong believer in the American capitalist system and the appeal of equity securities. Mr. Neubert had nothing to say about munis.

With somewhat high valuations, if market psychology turns, we could see a significant downside move.