Alpha Power Investing Newsletter

August 17, 2011

Stay Put

With the recent panic decline in the stock market, I have been getting some calls from clients expressing concern about their exposure to the market. I've decided to devote this newsletter to a review of the three Alpha programs that are fully invested in the market.

Clients in the Alpha Seasonal Strategy, the E-System Portfolio and The FormulaTM currently have an identical asset allocation to the stock market: 50% S&P 500/50% NASDAQ 100. These strategies have taken a hit in August. The chart below shows the long-term behavior of these strategies over the past two bear market cycles.

As you can see, all three strategies were successful in protecting assets during the bearish part of the cycles and also successful in capturing returns during the bullish parts of the cycles.

The Seasonal Strategy is programmed to remain in equities until the end of September, when it will move to money market/cash. During the fourth quarter, this strategy will take three short-term "power period" trades totaling 20 days. These trades will be leveraged by 1.5x the Russell 2000. Over the past 32 years, these trades have been profitable 94% of the time, registering just two losses over that period, none more than 2%. The average quarterly return of these trades has been 9.8%. In the next newsletter, I will detail this history.

Since the Seasonal Strategy has just a bit more than a month remaining in the market, and since waterfall declines such as we have just witnessed tend to be followed by worthwhile rallies, the remaining market risk is manageable and clients should stay put.

The E-System Portfolio is programmed to remain fully invested in equities until year-end. At that point, the allocation shifts to 100% bonds using PIMCO funds. This program has equity exposure just 15 months every four years during the presidential election cycle "power zone", which begins one month before the mid-term elections. Beginning in 2012 and continuing for the next two years, the E-System strategy will supplement bond returns with two short-term trades in the fourth quarter totaling 16 days using the Russell 2000 index as the trading vehicle. These trades have averaged a 4.4% return per year for the past 32 years with a 94% win rate.

Clients in this program should also stay put since November and December are historically two of the best months of the year because they are often recovery months from late-summer declines. My guess is that this is what will happen this year.

The FormulaTM also stays fully invested in equities until year-end, and then shifts to mid-cap stocks using the S&P MidCap 400 Index. This strategy holds the mid-cap index for the first five months of 2012, then shifts to bonds until November, when it moves back to the mid-cap index for seven months. I expect that this strategy will also enjoy strong returns in November and December.

The bottom line is that it is not advisable to abandon a winning strategy because of a panic sell-off precipitated by a surprise news event. My own view is that the S&P downgrade of the U.S. debt rating will have a long-term positive effect because the political class will attempt to regain AAA status - which will happen only if serious moves are made to reduce the national debt.

Alpha's philosophy has always been that the best, most reliable way to manage risk is to exploit the periodic shifts in investors' "animal spirits" which are caused by predictable factors in the investment equation, such as the four-year election cycle and the annual forecasting cycle. Attempting to manage investment risk based on insights into economic changes is an extremely difficult proposition long-term. While I believe that there are rare minds that can do this, I am quite confident that I am not among them. Besides, their views are always contrary to popular opinion and, therefore, ignored until later on when they are proven right.

For more details about the Alpha Seasonal Strategy, the E-System Portfolio and The FormulaTM, go to the Programs and Performance section of our website at and click on the corresponding links to read the brochures.

If you would like to discuss these, or any of our investment programs, please call me at 1-877-229-9400.

Jerry Minton, Ph.D.
1-877-229-9400, Ext. 11

Past performance is not a guarantee of future performance.

© 2011 Alpha Investment Management, Inc.
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