The DoD strategy is a popular one.  I talk about it here from time to time but don't actively practice it.  It's one of those things that's simply on my radar.  It does have a knack for outperforming the broader Dow index most of the time, but as of late, it has not.  In a previous Dogs of the Dow post, I outlined that the small dogs are nothing more than volatile stocks in the Dow.  As the market has surged upward over the last couple of months, I wanted to see if the DoD responded in kind. Let's compare the DIA vs. DoD and see. 

(click to enlarge)

This chart slightly resembles leveraged funds where the dips are pretty deep and the recovery fairly swift, but when all is said and done, it's still underperfoming a bit.  The point here is that volatility is most likely the reason for the DoD's outperformance in some years.  You're taking on more risk to get more gain.  If that's all it is, maybe you're better off diversifying using small or mid cap indexes instead.  So let's not be fooled into thinking that there's some sort of magic going on with the Dogs of Dow.  It's simply a more volatile sampling of stocks within an index, not the work of superior stock picking. 

Covered call ETFs are a relatively new product.  I've disclosed that I'm heavily in PBP.  In fact, most of my broad based U.S. holdings are divided between PBP and BEP (which is a CEF).  I find that historically they seem to offer the same returns with less drawdown (i.e. risk).  I've demonstrated in previous posts that these covered call funds are acting like they're "supposed to".  They were down less during the crash and are currently outpacing their tracking indexes year to date.

Sounds perfect, don't it?   It's nearly perfect except for one thing.  CC ETFs are long stock and short out of the money calls.  At least they're out of the money whenever the ETF establishes a position.  What happens in a 'crash up' when the market socks away solid gains?  Now is a great time to cherry pick a timeframe. The last two months have been up 20%+ on the S&P 500.  How did PBP do?

Today's blast up is nearly uniform.  This was after the first down week in over a month.  As I like to speculate, small caps lead big ones into the next up cycle.  So I've been paying special attention to IWM.  IWM was one of my last purchases on the way down because the smaller guys usually crash further and longer than the defensive names.  But what goes down, must come up.  Everything played out according to plan with the exception of the last downturn.  I expected that with the mid term trend being up and the short term trend (i.e. last week) being down, that the IWM may outperform (lose less) than the bigger boys.  Not so.

Here's the perf of IWM vs. SPY month to date.

I'm reading a recent article on marketwatch.com questioning the stocks as a good investment.  It's true, the last decade has introduced something that we haven't seen recently, down 50% twice in a decade.  Meanwhile, during the last 50% down run, government bonds are up 20%.  The author is right, but what if you're an investor looking at entire the market today.  Over the very long term, stocks have outpaced bonds by a wide margin.  Does it mean that this trend will continue 5 years, 10 years, or 20 years into the future?  Who knows.  Based on historical information beyond this last crazy decade, it would seem that stocks have suffered an unusual setback and for 'buy low, sell high' folks, this might be a good time to get in low.

I'm not advocating any particular strategy (there I go, out on a limb again), but this may be a good time to be overweight stocks.  I say overweight because being in government bonds is never a bad thing, a balanced portfolio should have both.   This is where asset allocation might be a cue.  If you have a balanced portfoilio, your bonds are relatively high, your stocks are relatively low.  In this case, you should be putting more into stocks and less or nothing into bonds to get your predefined allocation back to your 'ideal' allocations.  With an allocation defined in advance, you can probably safely ignore what the front page news is and invest mechanically.  This is what I like about asset allocation.  You don't have to think too much about what the market is doing, you just need to continue to follow your plan.  Sometimes stocks are up, sometimes bonds are up.  Think about the late 90's where stocks were to the moon, hopefully your allocation strategy told you to put less into stocks and more into bonds.  It would've seemed counterintuitive at the time when your cab driver was recommending stocks, but you knew better. Not because you're smarter than your cab driver, but because you looked at the math.

What am I doing?  Following my allocation.  My current bond portfolio looks a bit rich.  While personally I'm looking to pay off my house with free cash, if the house were paid for, I'd be putting it into stock.  My allocation over the last few years has looked a bit toppish for both, which is why I took to paying off debt.  However, when stocks got really cheap in late 2008, I went for stocks because my portfolio was very imbalanced.  Then stocks and bonds went south.  Now bonds went north. I've placed a lot of 'pent up cash' into stocks and my asset allocation is looking a little lopsided.  Meanwhile, bonds have gone up, so that's not looking like a great place for the long term either.

The long winded point, as I do so often, is that your situation may vary.  I don't known what your tolerance is and I don't what allows your to sleep well at night, but if you're a risk taker and stock lover, it sure does seem like a great time to be long stock.  So if you're still with me and you want to invest some hard earned money into stocks, where do you go now?  Well, you have many options to consider.  My recommendation is NOT to invest soley in the United States.  Investing in foreign and emerging markets is a worthy consideration.  For emerging markets, I like VWO.  I own it.  Is it cheap now?  I don't know.  Is it cheap relative to the past, absolutely.  Are there other developed markets to consider?  Absolutely!  Latin America and Asia are two places I have my eye on.

So I'm stressing that we're in a fairly unique situation.  What you do in this situation is up to you and it should make sense for your risk tolerance and you're outlook on things bonds, stocks and foreign.  Please, please, please, as always consider risk before return! 

I mentioned last week that I opened up a bearish calendar spread using SPY call options (strike 85).  This makes my sweet spot between 84 and 85.  I'll take 86'ish, but fear assignment moving into expiration month.  I needed to basically have three things right, price, vol and time.  So far the price and volatility are cooperating, but the time isn't.  It's been less than a week and I'm nearly at my profit target (happened too fast!).  As a result, the spread is showing a ho-hum gain of about $15 per spread.  If we have another couple of big down days I'll be at the profit target and will settle for my profit, but it will be small relative to this price point being hit in June.

Hopefully this outlines in real time some of the nuances of options and in particular, the calendar spread.

I don't know why I do it to myself, but I will occassionally scroll past the article text and read some of the comments on marketwatch.com.  It is so overwhelmingly negative all of the time, that I usually stop after just a couple.  These people have to be some of the most miserable people on Earth.  There is one recurring theme. For some reason relativity is lost on these folks and many others when it comes to news.  You'll notice lately that the news from a historical perspective is relatively bad.  Unemployment at 8.9%, payrolls falling another 539,000 ... this is not good.  However, the futures are up sharply and the MW wobegone are confused as to why. I don't want to push it entirely on those folks, it permeates most of the casual observers of the market.  The market is relative, news is relative.  The market is also considered a "leading indicator" by some.  You'll find over and over again that prices may fall on good news.  A good example of this is a company that exceeds earnings expectations, yet falls on the news. The news is good, but relative to either a) what it should've been or b) how well it did against the past, the price may still fall.  The same goes for bad news.  In fact, the news is usually the worst as the market turns around.

This is how some people begin getting defensive or aggressive on a long term horizon. The market downturn while the news was still good was an indication for some folks to get out in 2007.  While the market looks a bit frothy at the moment, this might be a good indication to get long for the long term.

Me, I loaded up all the way down, so I'm a bit cash poor at the moment.  I expect to have a reasonable inflow in the next 2 months, so it will be very interesting to see where we're at then.  Until that point, I'll protect what I have and add a smidge here and there to keep my allocations on target. 

A lot of green yesterday, especially for the big S&P 500.  The S&P 500 turned positive for the year.  I guess this is a good line of demarcation for the media, but I don't suspect it means a whole lot to people's account statements overall.  I look at my cost basis overall to determine when something is positive. :)  For me yesterday, I did have something turn positive, my emerging markets holdings I have in VWO.  Admittedly, I didn't jump in much in 2007 and 2008 because I felt that emerging markets were frothy.  But as they really started to scream down lower, I held my nose and bit.  I did get scared when it briefly dipped below $20.  I later put in a limit order for $19.99 but the VWO never returned.

I'm pretty excited about this holding in particular because I feel that real economic growth is likely to occur outside of the United States moving forward.  I think the US will still be a place of great innovation and economic activity, but I attribute it to a Wal-Mart type stock.  Relatively steady, no room for sustained double digit growth.  I'm heavier on emerging markets than most recommend I believe.

However, it isn't all roses.  I did start dipping my toe into international small and large cap stocks at various times during 2007 and 2008.  Those are still down relatively hard with my worst holding in GWX down 20.53%.  My second biggest loser is down 20.52% and that is DLS which I classify as an international small cap value ETF.  I pay close attention to this one because value has lagged growth and when things turn around, I fully expect that trend to reverse.

I've been asleep at the wheel recently with regard to option plays.  Honestly, the volatility was just a little too much for me to feel that I wasn't simply gambling. While things are still a little wild (but now in the +ve direction), I'm eyeballing some neutralish ideas and maybe some vol plays.

I'll share when I initiate them.