Bloomberg News/Landov
There’s almost always some window dressing at the end of every quarter.
That’s a practice used by fund managers to dress up their portfolios before their quarterly statements are issued to clients. The quarterly statements show clients what the funds are holding, and if the funds are holding the best-performing stocks at the top of their list, shareholders are likely to be happy.
We can use this information to make money during and after window-dressing season too.
Window dressing does not always exist, and sometimes it exists in different forms. However, the consistency is clear when it does happen. Stocks that have increased the most are favored, while stocks that have lagged behind are not, as the final few days of the quarter come and go.
However, there is one more twist to this observation. For this practice to have any impact, the stocks also must be ones that are widely held and known by the average investor. This is important because one of the two markets that increased aggressively over the past couple of months has stocks with those qualities, while the other does not.
Popular tech stocks
The Nasdaq 100 increased about 6.8% during the second quarter, and the Russell 2000 rose about 8.5%, but the Nasdaq 100 comprises stocks that better suit the practice of window dressing.
Stocks such as Netflix Tesla Amazon and Apple are all widely held, appear in the news regularly and played a big role in the strength of the Nasdaq 100 this past quarter. Those stocks, and other technology stocks, are much more likely to be bid up until the quarter comes to an end.
Trouble brewing
However, as much as this practice could lead to some interesting near-term returns for the Nasdaq 100, the broader picture is not nearly as compelling for buy-and-hold investors. Longer-term resistance levels have already been tested in all markets, and a decline of 10% or more is expected from all of them if those longer-term resistance levels remain intact. Additionally, midterm downward sloping channels are developing, and that can spell trouble after window dressing has been exhausted.
Beyond the next few days, what should you do?
Adopt a proactive strategy that is proven to work in any market. Our Strategic Plan Strategy is a good example. It has beaten the S&P 500 by more than 80% since January 2009, which was the virtual low of the credit crisis, and it is up about 33% this year. It’s not buy and hold.
With that said, our Strategic Plan Strategy, which was holding ProShares UltraShort Dow30 and double short the Dow Jones Industrial Average from 25,403 points, secured 10% on Monday and moved to cash.
As much as the next few days may bring buyers of large-cap technology to the table again, beyond that a rules-based strategy should be adopted and maintained. The summer of 2018 may get ugly.
Thomas H. Kee Jr. is a former Morgan Stanley broker and founder of Stock Traders Daily.