S&P's Stovall Says Better Off Rotating Than Retreating (Audio)

earnings reports. The health ensure Molina Healthcare cut it's full year guidance because of higher medical care costs in Ohio and Texas and because of pharmacy costs. We check the markets every fifteen minutes throughout the trading DAYWN Bloomberg Radio down. Industrial leverage is currently down twenty seven points. It's narrowing

its earlier losses. That's an eighth of a percent down right now, trading at seventeen thousand, eight hundred three, SMP five hundred down seven points, a third of a percent trading at two thousand, sixty eight, and then as DOC is down twenty five points, that's a loss of half a percent. Trading at forty seven seventy nine. West Texas intermedi a crude holding study at forty six oh three of barrel spot gold is up twenty eight dollars and ounds at twelve and the tenure tragedy of one thirty

second yield one eight two percent. And that's a Bloomberg business flash. Thank you very much, Catherine Calgary. It is time now for the e t F report. It is brought to you by Columbia University's Executive Technology Management Graduate Program, which prepares technology professionals to drive business performance information at SPS dot Columbia dot e d U slash tech. Let's go to Catherine Calgary. The Bank of Japan's decision is stan pat has reverberated an e t F that focus

on that country and its currency. The currency shares Japan's end trust rallied three point three percent, while the Wisdom Tree Japan Hedged Equity Fund dropped seven point six What to do? Here's David Kotuk, chief investment officer of Cumberland Advisors. I think Japan itself is a huge bullish stock market story co tux. As Cumberland Advisers uses ets to invest in Japan, we actually use five different ETFs to get

to various combinations of things in the Japanese market. Japan is our largest overweight in the international et F strategy we apply. Kotak and why he's optimistic about Japan's outlook. I look at the Japanese market. I see an equity risk premium double lad of the United States, with a central bank that's stimulative, and with an economy that is going to get an additional injection of defense spending. Ko tax says defense spending in Japan could more than double.

That's your Bloomberg et Ever report. I'm Katherine Cowlery. This is taking stock with Kathleen Hayes and Pin Box on Bloomberg Radio. Sell in May and go away. Well, so far this year, if you invested in the S and P five hundred, you've made about nine tenths of a percent. Compare that to the Dow Jones industrial average, a gain of about two Here to tell us how to improve that performances. Sam Stobol is us equity strategist for SNP Capital i Q, and he is also the author of

the book The Seven Rules of Wall Street. Sam Stobo always a pleasure. Hey, Pam, good to talk to you. Tell us about the SNP five and the selling May go away strategy. Well, obviously I've heard about the selling May ever since I've picked up my first copy of the Stock Traders Almanac, talking about how November through April was the strongest six month period of almost seven percent. It's going back to World War two, whereas May through October was the weakest six month period with an average

increase of less than one and a half percent. But my thought was, well, g one and a half percent annualized, there is a lot better than you would get in cash. There must be a better way than actually selling in May and going away. And I actually own that you are better off rotating than you are retreating. Um. So

I looked at five different strategies. Being in the market all year long, um being in stocks from November through April, but then selling and going into cash, being in the market November through April, but then being in the Barclays agg made through October, the SMP, low volatility, and just a second, when you talk about Barkley ZAG, I just want to make sure that we're talking about the Barkley's

Aggregate Bond Index right, That is correct. So if an investor wanted to follow along with an e t F it would be a g G that would replicate that. And then finally you talked about the smart beta shift. I'll have to ask you about that. And then you said sector rotation. What what did you discover for strategy number one? The idea of staying the course. Staying the course was not as bad as you would think. The compound annual total return since was nine point nine um.

You ended up getting your standard deviation of eighteen um. You had a very good year up thirty eight percent, and also a very bad year down thirty seven percent, being in two thousand and eight. So that was the benchmark, the hurdle against which the other strategies were measured. All right, tell us now about cashing out. Let's say you actually cashed out and sold everything in May and then we're

fully invested from November the first of the following year. Well, indeed, you saw your volatility go down, the standard deviation went from eighteen down to ten and a half. Your worst year went from thirty minus thirty seven percent to minus ten percent. But you paid for it because instead of getting a nine point nine percent compound total return, you've got eight point nine percent. Uh. And so as a result. Yes,

you you get for what what you pay for. And if you're looking for low volatility, then you took a lower return. So Sam, if you're planning to organize a Memorial Day holidaying, before you do so, you say, you know what I'm gonna put my cash, I'm gonna take it out of the stock market. I'm gonna put it in the Barkney's Aggregate Bond Index. How do you do? Then? Um? The Then actually the number start looking pretty good. The instead of nine point nine for the SMP all year long,

you've got eleven point three percent. By engaging in this semi annual rotation, UM, you ended up seeing a fairly low volatility reading, going from eighteen down to twelve. Your worst year, instead of being minus thirty seven for the SMP, was minus fourteen. UM. But you still only beat the market percent of the time, so you still in a sense had a batting average that was less than fifty. All right, So we move on from the bond index

to what is called smart beta. What is smart beta? Well, smart beta is when you engage in different screening technique to try to come up with returns that exceed that for the S and P file five hundred, while at the same time probably having lower volatility. Sp l V is the S and P five hundred Low Volatility Index, which contains the one hundred stocks with the lowest trailing twelve month volatility, and this grouping gets reviewed every quarter, so it in a sense is a defensive approach of

owning equities. And by using that in place of bonds or cash in then May through October period, you ended up with a near twelve percent compound total return. You beat the market fifty six percent of the time. You still had lower volatility. Uh and instead of getting in minus thirty seven in two thousand and eight, you've got a minus twenty five, so second best but not the top of the heap. How about if you just let

it rotate into such industry says Consumer Staples and Healthcare. Well, interestingly enough, I guess when the going gets tough, the tough go eating, smoking, and drinking, and if they overdo it, they have to go to the doctor. Works perfectly made through October because this rotationary strategy gained more than thirteen percent, It beat the market six of the time with also a very low standard deviation. And amazingly, this stock portfolio

over the past twenty five years. Its worst year was two thousand and eight, down twenty one versus thirty seven for the stock market as a whole. What's the most efficient way to employ that strategy? It would be using UH the e t s of x LP for consumer staples, x l V for healthcare UH, and then using sp

Y for the sm P five hundred. What's also interesting is that this selling may strategy rotating to different sectors is not only a good strategy for large tap stocks, but for the equal weight SMP five hundred the small cap six hundred UM. So you could look to those indices from Googgenheim as well as from power Shares UH to get the ticker symbols, and the rotation effect has a similar three to four hundred basis points about performance

per year. We're speaking with Sam stoval. He is US equity strategist SMP A Global Market Intelligence also the author of the Seven Rules of Wall Street. Sam Stovall looking at the performance as we started this segment, looking at the SMP five hundred, a gain of nine tenths of a percent. If you've yet to hit your benchmark as an investment manager so far, this year. What are the chances do you believe that you'll actually accomplish that by the end of Well, I think this is definitely going

to be a challenging year. It is the eighth year of this bull market since World War Two. What I did was I counted up the number of one percent days in counting in bullmarket years, and on average, we've got sixty five in the year that we just concluded, Well, we have eighty five to look forward to as the average for this year, so high volatility. I think we need to see an improvement in earnings expectations. We started the year thinking that the SMP would post a seven

and a half percent increase in operating earnings. Now that estimate is less than one half of one percent, So I think things need to turn around. We need to see an improvement in the earnings projections because while inflation remains fairly low, valuations remain fairly high, and you can only have high valuations when inflation remains low and earnings

are on the rise. Thank you very much. Sam Stovall is u S Secuity Strategist for SMP Global Market Intelligence, SMP Capital i Q, also the author of the Seven Rules of Wall Street. If you're listening to taking Stock on Bloomberg Radio, I'm pim Fox to take it through to the close. Next on Bloomberg Radio,