Stock Portfolio Updates: Fed & Brexit Rattle Market
By: Christopher Mistal
June 14, 2016
In the last two days the CBOE Volatility index (VIX) spiked to its highest level since early February. This spike could be the result of another failed attempt by the market to break out to new highs, uncertainty about the Fed, interest rates, inflation and/or the growing possibility that the United Kingdom will leave the European Union.
The Fed’s two-day meeting concludes tomorrow and it is widely expected to do nothing. May’s jobs report was significantly weaker than expected and was accompanied by downward revisions to March and April numbers. When that data was released, the U.S. dollar tumbled and the CME Group’s FedWatch Tool, that calculates the probability of rate increases at upcoming Fed meetings, also tumbled. Today, the tool indicates just a 1.9% chance of a rate hike tomorrow. So there will most likely be no increase tomorrow.
Prior to today’s FOMC meeting, there have been 67 scheduled meetings since January 2008. Of those previous 67 meetings, S&P 500 finished the announcement day down 26 times and up 41. The worst S&P 500 decline of 2.94% was on September 21, 2011 and the best day was a 5.14% gain on December 16, 2008. S&P 500 average gain on all 67 days is a respectable 0.5%. Considering the recent history of FOMC meeting announcement days, there is a clear bullish bias.
[S&P 500 30 Days Before & After Fed Meetings since 2008 Chart]
In the above chart S&P 500 performance 30 trading days before and 30 trading days after the last 67 FOMC meetings has been plotted alongside the last 30 trading days performance. The baseline is all 67 meetings with all positive announcement days and all negative announcement days grouped separately for comparison. S&P 500 has followed the path of “Up” announcement days prior to the last few trading sessions which suggests further weakness could follow tomorrow’s announcement. 
Regardless of what the Fed does or does not do, the Brexit vote on June 23, 2016 is also likely to keep the market on edge. One of many potential negative outcomes is a stronger U.S. dollar as a result of a weaker euro and a weaker pound. The reason for this is the euro and pound are apparently being supported by the union. A stronger U.S. dollar would dampen commodity prices, U.S. exports would become more expensive and overseas corporate earnings would shrink.
Portfolio Updates
In the nearly four weeks since last update, S&P 500 was up 1.5% and Russell 2000 gained 4.3% as of yesterday’s close. The Almanac Investor Stock Portfolio’s sizable cash position and short positions held its performance in check. Overall, the Stock Portfolio inched a meager 0.04% higher over the same time period. Large-cap positions, up 1.7%, in the portfolio were responsible for the majority of the overall gain. Small-cap contributed to the advance climbing 0.3% higher. Mid-caps however, were a drag, down 1.8%. Sunoco Lp (SUN) accounted for the bulk of Mid-Cap losses.
The basket of Select Seasonal Shorts on April 21 are all still profitable, just not as much as last update. Late May and early June strength did take a bite out of gains and three out of the five short positions were stopped out. Knight Transportation (KNX), Methanex Corp (MEOH) and Invesco LTD (IVZ) were all closed out of the portfolio when they closed above their respective stop losses over the past couple of weeks. All were profitable and MEOH was best returning 9.7% in about a month. Remaining short positions, Virtus Investment (VRTS) and Lindsay Corp (LNN) are on Hold. 
A quick scan of the 15 remaining positions held in the portfolio finds just four that are currently in the red, Sunoco Lp (SUN), CVS Health Corp (CVS), Hanesbrands Inc (HBI) and Starbucks (SBUX). SUN was downgraded to underperform from hold last week by a sizable firm accounting for the majority of its recent losses. Prior to this, SUN appeared to be merely treading water even as other energy concerns were rallying with crude oil. Sell SUN despite it’s sizable dividend, as further weakness is likely. For tracking purposes, SUN will be closed out using its average price on June 15. CVS, HBI and SBUX are on Hold.
Even prior to yesterday’s NASDAQ Seasonal Sell Signal triggering, the Stock Portfolio was largely defensively positioned. There was an ample cash position and a few outright short positions. In response to that signal, please note stop losses for several positions have also been increased. All other positions not previously mentioned are on Hold. Later this month we anticipate offering up a second basket of stocks to short as well as possibly a basket of new defensive longs for consideration.
[Almanac Investor Stock Portfolio – June 14, 2016 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in CNC, CVS, HBI, SMG and TSCO.