Positive Signs Are Few for Stock Fund Investors
I made a call to Arms this past week searching for clues to the stock market’s direction.
Richard W. Arms Jr., that is.
He’s a leading “technical” stock market analyst who earlier this year started a new job as portfolio manager of a small capital-appreciation mutual fund.
I figured he and other defensive fund managers might have some insights as to what’s in store for the remainder of 1994, following a rough first half.
Arms’ investment-advisory firm, based in Albuquerque, N.M., on Jan. 1 took over the Investor’s Research Fund, a laggard $37-million portfolio formerly headquartered in Santa Barbara. Under his direction, the fund had a decent first half.
Investors Research did lose 3.4% during the January-June period, but that was less than half the 7.8% average decline for other capital-appreciation funds, reports Lipper Analytical Services. Domestic stock funds in general were off 5.8% on average.
As a technical analyst, Arms makes investment decisions after studying price and share-volume trading patterns in individual stocks and the market.
As a stockbroker in 1967, he developed the Arms index, also known as the short-term trading index, or Trin. This indicator measures the volume of rising stocks compared to the volume of declining stocks--a yardstick closely monitored by many active traders. (Should you happen to find yourself in Albuquerque, Arms is the guy driving the Mercedes with “volume” spelled out on the license plate.)
Currently, the indicator isn’t flashing promising signals for stock fund investors. Arms doesn’t believe the market’s downward phase is over yet, even with the Dow Jones industrial average off more than 200 points since late January.
“A decline of this magnitude has to end with heavy (selling) volume, a capitulation that we just haven’t seen yet,” he says.
Arms doesn’t think the current downdraft will end until a lot more investors throw up their hands in exasperation and sell.
Arms isn’t the only stock fund manager who thinks prices could move still lower from here. Though their rationales often differ, several other defensive-minded managers who fled to the sidelines earlier this year are still there.
Among them is Robert Meeder Jr., who runs the Muirfield portfolio at the Flex-Funds group in Dublin, Ohio. He scraped out a 0.7% gain during the tough first half, thanks to a decision to move to cash in early February.
Unlike Arms, Meeder rates overall investor sentiment these days as grim, which in Wall Street’s mind-set is a positive, contrarian sign. Meeder also takes heart from what he sees as a firming bond market.
But as of this past week, Meeder had the $80-million Muirfield portfolio entirely in cash. He expects to remain there until he sees such encouraging signs as a higher ratio of advancing to declining stocks, a greater percentage of upside volume and better performance by medium and small stocks, among other signals.
Robert Brody also started to move heavily to cash in February. He manages the $70-million American Growth Fund in Denver, which slid a modest 1.2% in the first half.
In explaining the fund’s 71% cash weighting, Brody cites the trend to higher interest rates as a drag. Also, he notes the typical bear market takes stocks down about 25%. At its April low, the Dow Jones industrial average was off only 10%, and it has rallied modestly since.
Brody isn’t attempting to fight the tide. “We’re not really trying to make money right now. We’re just trying to preserve it,” he says.
Though pessimistic now, Brody sees the bear market ending this year and then an advance that will take the Dow to 8000 within four years or so.
Rich Howard doesn’t try to time the market, but when he can’t find attractive stocks the effect is much the same. Howard manages T. Rowe Price Capital Appreciation, a $585-million Baltimore-based fund that surrendered just 0.6% during the first half. (Note: T. Rowe Price funds are listed under “P” in The Times’ mutual fund tables.)
Based on what he considers to be slim pickings in terms of bargains, Howard has about 25% of the portfolio in cash--a fairly defensive posture that he has maintained for nearly three years. Lately, he has been buying some oil companies and bad-news stocks such as Philip Morris, but prices in general might have to fall further before more issues catch his eye.
Most encouraging of the defensive-minded managers surveyed for this article was Kevin Wenck, who runs GT Global America Growth, a $180-million fund headquartered in San Francisco. Helped by a March 1 cash position of 40%, and some astute picks, the fund advanced 8.2% during the first half.
Like Howard, Wenck doesn’t try to time the market per se but allows cash to build up when he can’t find bargains. He looks for good-quality growth stocks that have been knocked out of favor for one reason or another.
“If we don’t find very inexpensive stocks, we won’t buy anything at all,” Wenck says. Lately, he has uncovered some good buys, and the fund’s cash position has dropped to 15%.
Yet even Wenck admits to being concerned by the market’s skittish behavior of late, as revealed by the tendency of investors to fixate on small negative “details” of a company’s operations and beat down its share price.
“I wonder if I’m a little early (making investments) because of all the negative sentiment out there,” Wenck says. “This is one of the strangest markets I’ve seen.”
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