Dorsey Wright's Derosier on U.S. Stocks (Transcript)
2003-02-21 14:54 (New York)
Richmond, Virginia, Feb. 21 (Bloomberg) -- Tammy
Derosier, vice president and technical analyst with Dorsey
Wright & Associates, talks with Bloomberg's Christopher
Graja via telephone about the firm's technical analysis of
the U.S. stock market, her investment advice and the use of
hedged income portfolios.
(This is not a legal transcript. Bloomberg LP cannot
guarantee its accuracy.)
GRAJA: Welcome to the Bloomberg Forum. I'm Chris
Graja. My guest today is Tammy Derosier, vice president and
technical analyst at Dorsey Wright and Associates in
Richmond, Virginia.
Tammy, welcome back to the Forum.
DEROSIER: Well, thank you, Chris. Good morning.
GRAJA: Your firm's main technical indicator, your
coach, as you call it, is the New York Stock Exchange
bullish percent. And forgive me for trying to give a simple
explanation to listeners, but you do point and figure
analysis, basically rising actions pointed is charted as
X's, falling actions pointed in O's. Right so far?
DEROSIER: That's exactly right.
GRAJA: And then you take, for the whole New York Stock
Exchange, the percent that are on bullish patterns, the
percent that are on bearish patterns, and use that as your
coach for stock recommendations. And why don't you take it
from there?
DEROSIER: Sure, Chris. That's a great explanation.
You know, we look at the market kind of like a football
game. If you think about your favorite football team for a
second, there is a time to play offense and there's a time
to play defense. If they played offense 100 percent of the
time, they are going to be marginal at best.
And the same thing happens in the stock market. There
are times that we want to be on offense, which is when we
focus on wealth accumulation strategies, and then there are
times that we want to play defense, when we focus on wealth
preservation strategies. And certainly since the beginning
of the year 2000, when we entered a structural fair market,
those times of playing wealth preservation have become much
more important to us. Because if you allow your portfolio,
you know, to get hit for 25, 30 percent, you know, you've
got to have your portfolio rally 40-some percent to get back
just to even. So those times of playing defense become very
important.
And we have just moved into one of those times of
playing defense. Our indicators began to reverse down in
December, told us that risk was getting high, so you begin
to pull some chips off the table. And then in January, the
bullish percent reversed down into O's and told us to full-
fledge bring the defensive team on the field, we're going to
focus on wealth preservation strategies here, rather than
wealth accumulation strategies.
GRAJA: Let's backtrack for a second. You said
structural fair market, not bear market. Tell us what that
means.
DEROSIER: Well, you know, I like to look at it as a
structural fair market. And the reason I say that is
because there's something out there for the people who like
to go long and there's something out there for the people
who like to go short. So it's going to be a market in which
you're going to be able to play both sides.
It's going to be probably a range-down market. I think
you'll see that we'll continue usually to make lower tops
and lower lows, in other words, on each rally, just like
we've recently had from the October lows up until January.
We did not get back above our April 2002 high. And so on
corrections, we generally make lower lows. In other words,
in October of 2002, we made a lower bottom than what we did
on the previous correction of September 2001. So I think
that trend's going to continue.
And, you know, so the person who is willing to play
both the long side and the short side is going to have the
best opportunity. So it's a very fair market out there.
GRAJA: What are some of the sectors you like on the
long side right now?
DEROSIER: Sure. On the long side right now, one
sector that we're watching that has done very well. a broad
macro sector, is the raw material type of stock. I'm
talking about like precious metals, oil-type related stock,
your food-type stocks, and not like your Philip Morris names
or Kraft. Those stocks actually look right vulnerable right
now. But I'm talking about, like the ConAgra's of the
world, your raw producers, your chemicals, like the Georgia
Gulf, stocks. Those look very good.
If you look at a chart of the Oppenheimer Real Asset
Fund, symbol QRAAX, that chart has a very positive pattern.
So precious metals certainly one way to play that. I think
that you're going to be able catch some of those stocks on a
bit of a pullback.
Another group that we're watching in general would be
technology, believe it or not. That group, for the first
time in years, is beginning to show some positive relative
strength readings. For instance, the Internet sector is
back to what we call a favored status for the first time
since March of 2000.
You know, stocks like Yahoo! have a great looking chart
pattern. They're holding up very well in here. Again,
we're kind of dealing in a situation where these stocks look
good, but right now it's kind of like a cartoon. You know,
the character is walking along and the dark cloud, the rain
cloud, follows them wherever they go. So even though these
groups are positive, they're going to be - you want to put
them in your list of things to do once the overall
indicators reverse back up.
Telecommunications is another one. You know, a stock
like Nextel, NXTL, great looking chart pattern, nice strong
relative strength reading. So some of these groups that
have been out of favor, you know, that you couldn't even
think about getting people to buy, you know, that's
generally when you want to buy them.
GRAJA: So, backtracking again a little bit. So, would
you buy them now or is there a dip-your-toe strategy until
the main indicators turn positive?
DEROSIER: That's a great question, Chris, and, you
know, right now we have seen some correction since the
beginning of December. The rubber band's getting a little
stretched here towards the left-hand side, or oversold side.
So we could see some bounces back. And I think you're going
to see companies like the Nextel, some of these
telecommunications, some of the Yahoo, the Amazon, those are
going to probably be some of the ones that begin to bounce
off the bottom first.
So, you know, maybe if I had 1000 shares that I wanted
to buy of Yahoo, what I might do is I might put two or 300
on today, and then if both of the short-term indicators that
we follow, the percent of stocks above their 10-week moving
average, and the high-low reverse up, I might put another
two to 300 on, and then wait until the bullish percent
reverses up to put the last portion of my position on the -
of that on and complete my whole complement of the stock.
GRAJA: Let's talk about the other idea you introduced
in your introduction, and that is risk management. What are
some strategies that folks who are, you know, probably
inclined to remain fully invested, or have to remain fully
invested, might want to look at to reduce the risk of their
holdings?
DEROSIER: Sure, there's - you know, the markets
changed in the year 2000, and we have to change with them,
and that means using different types of strategies, pulling
some strategies out of the drawer that we hadn't used for a
while. And one of those strategies is the covered write.
And I can tell you personally the covered write has been
extremely helpful in my portfolios, and one particular
strategy being the in-the-money covered write, OK, which is
buying a stock and then selling the call that's slightly in
the money.
And the reason I like doing that is because premiums
have expanded a bit here. You look at the CBOE volatility
index. We've moved up from 27 to about 38 yesterday. So
you're seeing option premiums expand, so you can take
advantage of that. But it also gives me a lot of downside
protection. And one thing that you could do right now, in
this market, I think, is put on the five dogs of the Dow
stocks and do an in-the-money covered write.
In other words, the five dogs of the Dow are the five
lowest-priced of the 10 highest-yielding stocks. One of
those would be J.P. Morgan. So J.P. Morgan is priced around
$22 as we're speaking, and what I would do is I would buy
J.P. Morgan and then sell the January, 2004 20 calls against
the position, OK.
I'm going to - if the stock gets called away, I'm going
to reap about an 18 percent return, including the dividend
that I'm going to collect in J.P. Morgan. But at the same
time, I'm going to get about a 21 percent downside
protection. So, and that's about the average for the whole
portfolio if you do those dogs of the Dow. The average is
about 15 percent return if you get called away out of the
five stocks. And you're going to get about a 22, 23 percent
downside protection. So that's equivalent to the Dow Jones
falling to about $6300, or about 6300, and you're going to
be basically flat, back at break even.
That gives me a lot of comfort level in this market,
and that's what I'm looking for in terms of hedge
strategies.
GRAJA: Right, and the downside of course is that you
don't get a whole lot of upside.
DEROSIER: That's right. The downside is, if J.P.
Morgan rallies from $22 to 50, you know, I'm not
participating that. But, you know, as long as it stays
above $20, I'm getting a nice 18 percent return. And when
you look back over the last couple of years, and you say, if
I could get, you know, an average of 15 percent return, most
people should be elated with that, in a low risk type of
strategy.
So, I think a piece of your portfolio, you know, maybe
you take a block of 20 percent and do that strategy, and you
sit back and you wait until January. I think it's a great
strategy.
GRAJA: Another strategy you talked about that a lot of
people may not understand is a hedged income portfolio. Why
don't you talk about how you're setting those portfolios up?
DEROSIER: OK, that's a great question, too. You know,
there are a lot of different great new vehicles out there
that we can use in this type of market, and one of those
things is the inverse fund by some of the mutual fund
companies out there, like Rydex, for instance.
And they have not only - what an inverse fund does,
basically, is as the market falls, your fund price will move
higher. And they have what they call a one-to-one, so in
other words, if the S&P drops 5 percent, this fund
theoretically goes up 5 percent.
They also have what they call a double-beta fund, OK?
So, in other words, if the S&P drops 5 percent, the fund
would go up 10 percent. Now, these funds are not supposed
to be gun-slinging types of things, but what that double-
beta allows you to do is hedge twice as much of the
portfolio with less money.
So, in other words, if I wanted to hedge $100,000, I
would only have to buy $50,000 worth of the double-beta fund
and I could leave $50,000 in cash and now I've created
myself a market-neutral portfolio. So those are very
interesting products. And now, one thing that you can do,
many of these stocks have come down more than 50 percent
from their highs. That means yields are rising, OK?
GRAJA: Dividend yields?
DEROSIER: That's right. Dividend yields are rising.
You know, so if you want to put a positive spin on the
market, you can say yields are rising here. That means
prices have been falling. For instance, J.P. Morgan is
yielding about 6 percent. You've got GE yielding 3.5
percent, almost, here. So some good quality companies that
are making high yields.
But maybe you don't want to take the risk of owning
equities right now. Well, what you can do is take 20, 25
large-cap names within the S&P 500, do a diverse group of
cross-sectors. And let's say I have a $300,000 in my
portfolio. I would put $200,000 in these 20, 25 stocks,
high-yielding S&P 500 companies. And then I would put
$100,000 in the Rydex inverse fund, it's called the Tempest
Fund, OK.
So, now what I've essentially done is marked.
GRAJA: So that's inverse on the S&P?
DEROSIER: That's right. Inverse on the S&P 500,
that's right. And so what I've done is I've created myself
a market-neutral portfolio. In other words, if my stocks
drop in price, my inverse fund is going to rise twice as
much. So I'm staying flat the whole year across the way,
OK? And so I'm not - you know, my principal is not at risk.
There is a little bit of fluctuation in there, but to give
you an idea, last year, in the year 2002, you put together a
portfolio that we did, a model portfolio, and it fluctuated
on $300,000 from about 298 to about 304. And you think,
last year was a pretty wild ride in the market, you know, a
lot of ups and a lot of downs, but your equity stayed the
same.
So why would you want to do this? Well, you're going
to collect the dividend flow from these stocks, OK? So
that's going to probably get you about 3, 3.5 percent, risk-
free, almost, OK. Then you can sell options against your
positions and increase your yield to about 5.5 percent.
GRAJA: I suppose the only risk is that if, you know,
one of the stocks does substantially worse than the index,
then you're unhedged on that, but.
DEROSIER: Right. So your risk is exactly that.
You've got - maybe the fund doesn't move exactly as the S&P
500. That's why I say you want to do a diverse group. You
wouldn't want to put all REITs in there. That wouldn't make
sense. But you could put one REIT, and then, you know, have
one utility, and then a GE and a J.P. Morgan. You know, you
want to kind of look like the S&P 500. Another risk is that
the stock stops paying a dividend, so you could replace it
with something else. But I think it's a good strategy to
where you've got very low risk.
And, you know, you think about where can I go right now
to get 5, 5.5 percent yield. Well, I could go, I guess, to
bonds, but, you know, let's think about how far bonds have
come here. You know, that's a pretty risky area to be
initiating new positions in right now. What am I going to
do, buy CDs? I mean, you know, you can't even barely get a
5-year CD right now for 5 percent. You know, but here's a
very low-risk way that I can generate income for myself.
GRAJA: Tammy, thanks a lot.
DEROSIER: Thank you, Chris, enjoyed it.
GRAJA: For the Bloomberg Forum, I'm Chris Graja, and
my guest has been Tammy Derosier of Dorsey Wright and
Associates.
***END OF TRANSCRIPT***
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