Stock Portfolio Updates: Cash Balance Grows as “Worst Months” Underway
By: Christopher Mistal
May 17, 2018
For the second day in a row, the Russell 2000 index of small-cap stocks closed at a new all-time high. However DJIA, S&P 500 and NASDAQ still have some ground to cover before doing the same. NASDAQ is closest followed by S&P 500 and then DJIA. Small-cap strength is encouraging, but absent the support and participation of the other indices the run could be short-lived. 
[Russell 2000 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[DJIA Daily Bar Chart]
DJIA and S&P 500 both found support at their respective 200-day moving averages (solid red lines in upper portion of above charts) earlier in the month before bouncing higher. That bounce ended when DJIA and S&P 500 ran into projected monthly resistance (red dashed line) last Friday. Both have been churning essentially sideways since then. Both will need to break through this level before making any run towards old highs.
NASDAQ’s chart is somewhat healthier than DJIA and S&P 500. This does not come as much of a surprise as NASDAQ typically enjoys a “Best Eight Months” that run November through June. As earnings season winds down and the three-day Memorial Day weekend nears, catalysts for the market to continue higher in the near-term are fading increasing the possibility of more sideways to lower trading.
Stock Portfolio Updates
Over the last four weeks, S&P 500 advanced 0.5% and Russell 2000 was higher by 2.1% as of yesterday’s close. The Almanac Investor Stock Portfolio’s blend of cash and long positions slipped 0.9% over the same time period excluding dividends and any trading costs. Our Mid-Cap portfolio was the best performer climbing 1.6%, but their success was erased by a 4.8% decline by Large-Caps and a 0.7% slip by Small-Caps.
With the Russell 2000 small-cap index logging new all-time highs, performance from our Small-Cap portfolio is rather disappointing. Global Brass and Copper Holdings (BRSS), the oldest holding in the entire portfolio, along with M/I Homes (MHO) accounted for the majority of weakness in the Small-Cap portion of the portfolio as both declined rather substantially over the last four weeks. Weak copper prices and the end of its seasonally favorable period weighted on BRSS. 
MHO’s decline appears to be the result of weaker margins and the potential negative impact higher rates could have on homebuilders. MHO is not alone as many other homebuilder stocks have sold off recently. Higher input and higher borrowing costs are likely to continue to weight on the builders. Sell MHO. For tracking purposes, MHO will be closed out of the portfolio using its average price on Friday, May 18.
Builders First (BLDR) is also connected to the housing sector and it was stopped out on April 24.
Speaking of input costs, cocoa prices have been steadily climbing putting pressure on Hershey Company (HSY) and Rocky Mountain Chocolate Factory (RMCF). HSY was stopped out on April 19 when it closed below $94.50 (position closed out the following trading day at $93.24). RMCF is down over the last month and should be sold. Sell RMCF. For tracking purposes, RMCF will be closed out of the portfolio using its average price on Friday, May 18.
In the Large-Cap portfolio First American Financial (FNF) and Huntington Ingalls (HII) were both stopped out over the last four weeks. FNF is also connected to the real estate market and was not spared from broad sector weakness. HII was sunk by an earnings miss.
As of today, the Almanac Investor Stock Portfolio holds fourteen positions and will lose two more tomorrow. There is also a sizable cash position. This is in line with our Tactical Seasonal Switching Strategy which calls for reduced long exposure and a more cautious posture. After we issue our Seasonal Sell Signal for NASDAQ (sometime on or after June 1), we will likely consider further defensive measures and look to take advantage of any seasonal weakness with a basket of short stock positions. Until that time, all positions not mentioned above remain on Hold. Please see table below for current advice and stop losses.
[Almanac Investor Stock Portfolio – May 16, 2018 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in BUSE, MHO and ORBK. They did not hold any positions in the other stocks mentioned in this Alert, but may buy or sell at any time.