Below is a screenshot:

I have also decided to add additional price signals based on unadjusted dividend/split data from Yahoo.  The difference is that the 10 month simple moving average for the data below is calculated using unadjusted historical price data.  Thus, you may see different signals from time to time and small differences in percentages above/below a moving average depending on whether an ETF has paid a dividend in the past 10 months.

I often get questions from people who are looking at a moving average on a charting system which does not exactly align with the signals listed on this site. In most cases the charting system is basing moving averages on unadjusted data.  Therefore, I have decided  to add these unadjusted signals in order to help users see any potential differences in signals based on the nature of the historical price data.

The data is provided on an as-is basis. It is up to users to determine how to use it and to always do your own research. However, regardless of whether you invest in your own “Ivy Portfolio” it is important to remain consistent in your approach.

Below is a screenshot:

Follow me on Stocktwits and Twitter!

Gold can act as a hedge against quantitative easing  and currency debasement because it is viewed as an alternative to fiat currencies.  Looking at the chart below, courtesy of Chris Vermeulen via the St Louis Fed, we see the long-term expansion of M2 money supply is in a long-term uptrend:

A decline in a velocity of M2 money stock as shown below tells us in simple terms that the M2 money supply is not turning over as quickly as it was at its peak in the mid 90s:

Vermeulen argues regarding gold and silver (SLV) “the intermediate to longer term it is unlikely that we have seen the highs of this bull market for either metal. As long as central banks around the world continue to print money and expand their balance sheets gold and silver will remain in a long-term bull market.”

I would tend to agree with the intermediate to long-term picture. Nothing goes up forever and it is important to remain flexible and open-minded as conditions change and new evidence presents itself. However I do not think the bull market in gold has run its course, especially with the Federal Reserve stating it will keep rates at low levels for the foreseeable future.

In the short-term we can use technical analysis to guide us. Gold and GLD struggled mightily in December  but rebounded in January.  With the strong sell-off in December Gold’s long-term uptrend looked to be in trouble, however the January rebound, albeit on lighter volume, staved off a complete breakdown.  This trend has continued in February, with GLD up 12.52% year-to-date.

I continue to monitor the upward channel in GLD that began in 2008. Of note is the brief breakout of the channel in 2011, which resulted in a strong sell-off the subsequent month, bringing GLD back within the channel. In December 2011 there was a serious threat of a breakout below the channel, but GLD regained its footing in January and has gravitated closer to the top of the channel this month:

Since 2009 the 10 month simple moving average (in blue) has closely aligned itself with the bottom of the channel.  GLD currently resides above the 10 month moving average, although the break below the 10 month SMA in December was the first significant break below the average since 2008.

In the short-term today’s move in GLD was noteworthy and we could be near a short-term breakout depending on Wednesday’s action. February’s high is $171.23 and GLD is touching the trendline (yellow line) that includes February’s high. We actually closed just above this line today (Tuesday), so tomorrow we could be set for a higher move this week if resistance at $171.23 is broken. The next price target would be the resistance level (red line) around $175. Price support (green) in the daily chart is in the $166.50 – $166.60 range:

No current position in GLD

Less than meets the eye at Facebook – Barry Ritholtz

Simple Index Funds May Be Complicating the Markets – Jason Zweig

Fed Sloshing the Liquidity Pool – Tom McClellan

ECRI’s Controversial Recession Call: Fifth Consecutive Improvement in the Growth Index – Doug Short

A Long-term Look at Inflation – Doug Short

The Cancer of Debt and Deficits (pdf) – John Mauldin (interesting tax reform proposal worth reading in this article)

 This is Still the Most Glaring Anomaly in the Market – Money Game

Follow me on Stocktwits and Twitter!

I created a second Harry Browne Permanent ETF Portfolio in ETF Replay and then used their platform to test the results.  The portfolio consists of a 25% equal allocation to EEM (MSCI Emerging Markets Index Fund), TLT (iShares Barclays 20+ Year Treasury), SHY (iShares Barclays 1-3 Year Treasury Bond Fund), and GLD (SPDR Gold Trust).   This allocation is identical to the portfolio in my “original” Harry Browne portfolio with one exception: EEM has been substituted for SPY (SPDR S&P 500 ETF).

If an investor bought the Emerging Markets Permanent Portfolio on January 3rd, 2005 and held until February 17th, 2012, the total return was 128.4% (12.3% CAGR) and 12.7% volatility (all returns discussed exclude commissions, taxes, and slippage). The original Harry Browne Portfolio (SPY/SHY/TLT/GLD) would have returned 105.6% (10.7% CAGR) at 9.3% volatility:

The max drawdown on the Emerging Market Permanent portfolio was 26.15% versus 16.17% for the original version.  The increased volatility and drawdown of the Emerging Market version is not surprising since emerging market equities have traditionally had higher volatility than large cap US equities.

In my original article I also tested the 10 month moving average system popularized in recent years by Mebane Faber in The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. When an ETF in the portfolio was below its 10 month moving average at month-end, the position was sold and held in “cash” (SHY was used as a substitute for cash). When it closed the month above its 10 month moving average, the ETF was purchased at the stated allocation.

To properly test the moving average system I had to begin the test at the beginning of 2006 since GLD did not have adequate trading history to generate a 10 month moving average in 2005.  In order to properly compare strategies (moving average vs. buy and hold) we first need to show the results for buying and holding the portfolios over the same time period of 2006-present (portfolio A is the Emerging Markets version, Portfolio B is the original):

We see that the Emerging Markets version had a total return of 90.5% (11.1% CAGR). .63 sharpe ration, and 12% volatility. The original version had a total return of 81.1% (10.2% CAGR), .73 sharpe ratio, and 9.2% volatility.

For the first 10 month moving average test we will revisit the original Harry Browne ETF Portfolio (SPY/SHY/TLT/GLD). When we test the 10 month moving average system we see is that the moving average system decreased volatility and returns while increasing the sharpe ratio:

Below are the annual performance statistics which include no down years (2012 is down year to date):

When we apply the 10 month moving average system to the Emerging Markets version(EEM/SHY/TLT/GLD), we see the same impact, a decrease in returns and volatility and an increase in the portfolios sharpe ratio:

The annual statistics include no losing years (2012 is down year to date):

The table below summarizes the returns of each strategy for comparison purposes:

There are some important caveats in these tests. The time period covered is relatively short by historical standards so it is difficult to draw significant conclusions.  The period tested includes 2008, a particularly volatile period for equities and fixed income securities. Commissions, taxes, and slippage (the price you would actually get filled at when placing a real order versus the historical data used for the tests) will impact results.

Benjamin Graham is known as one of the greatest value investors in American history. He wrote such classics as Security Analysis and The Intelligent Investor: The Definitive Book on Value Investing, which, while both written in the first part of the 20th century, still remain relevant today.

The screen was created by the founders of Stockscreen123 (“SS123”). The full description from Portfolio123, their affiliated site, is below:

This model is one of our all-star series. It draws inspiration from the work of a well-known investor: in this case, Ben Graham. These screens cannot precisely mimic what the all-star would actually do. Many depend heavily on qualitative considerations that do not lend themselves to screening or ranking, and even where models are quantitative, most offer only limited public disclosure of details. Our model is designed to stand on its own, to have validity even if it were inspired by John Doe. The connection with the all-star is philosophical. The core of our model is consistent with one or more vital aspects of the all-star’s philosophy. The hallmarks of our Graham all-star model are: value and company fundamental strength with an emphasis on survivability and stability.

The actual screen factors are below:

•  Liquidity filter: No OTC Stocks
• Eliminate companies classified in the Miscellaneous Financial Services Industry, most of which are investment companies and funds and not the kind of stocks this all-star tended to seek
• Current ratio must be at least 1.5
• Long-term debt must be no higher than 10% above working capital
• EPS must be above breakeven in each of the last four quarters and in each of the last five annual periods
• Trailing 12 month EPS most be above EPS in the latest annual period
• EPS in the latest annual period must be above EPS in the prior year and five years ago
• The company must have paid common dividends in the last 12 months

The ranking system used as a basis for selecting the top 15 based among those stocks that pass the Graham screen are below:

• Valuation – 60% of total
• Trailing 12 month P/E (15% of this category)
• Price-to-Book (15% of this category)
• Price-to-Tangible Book Value (35% of this category)
• Operating P/E, defined as Market Capitalization divided by Business Income, which is Sales minus Cost of Goods sold minus Selling, General & Administrative Expense and omits unusual items (35% of this category)
• Earnings – 40% of total
• 5-year EPS Growth Rate (50% of this category)
• EPS Stability, defined as the standard deviation of EPS over the past 16 quarters, lower being better (50% of this category)

The historical results for the 3, 5, and 10 year period are below and updated through February 15th, 2012. Results exclude commission, taxes, and slippage. The portfolio was rebalanced every 4 weeks in the backtest:

I began tracking this portfolio real-time on January 13th, 2012. I manage a hypothetical portfolio of 15 stocks using the criteria listed above.  The portfolio is up 5.94% (includes dividends) for the first month of its existence but keep in mind that equities in general have done quite well in 2012. SPY (SPDR S&P 500 ETF) was up 5.45% over the same time period.

This month there is turnover in 5 of the 15 positions.  I choose to update these holdings monthly, however, a quarterly or longer timeframe could be used as the rebalance point for those looking to lessen turnover.

Follow me on Stocktwits and Twitter!

The current positions are listed below, along with the 5 positions being sold from last month and their hypothetical gain/loss percentage. New positions are italicized:

No current positions in stocks mentioned