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Guest Column: Bond Investing

Editor’s Note: The following guest column is written by my friend Jim Oswald.  Jim is a very smart, self-made guy that understands the bond market as well, if not better, than anyone I know.  Although the information in Jim’s column is much more bond market-specific than the financial market analysis and directional forecasting that we do at Asbury Research, I think many managers and investors will find it both educational and useful. 

Comments welcome!

John Kosar

Bond Investing

By James Oswald, CFA

Asbury Research and I share a common goal; provide what’s best for the investor.  John Kosar, from Asbury, and I have had many conversations pertaining to markets, business, analytical methods, shared values and sometimes politics (we’re only human.)

I have been involved with investments since the late 1970s.  My grandfather and a close neighbor were two of my mentors.  My neighbor introduced me to charting and many investment concepts.  My grandfather shared his knowledge of business and investments.  During the summer I was charting on paper, watching a local Chicago daily broadcast from the Chicago Board of Trade and reading the business section while my brother focused on the sports section and baseball.  During those years, my passion and interest motivated me to attend university at night, earn a Bachelor’s degree in finance and obtain the Chartered Financial Analyst (CFA) designation.

John Kosar and I thought sharing my fixed income expertise would be beneficial to many of his clients.  I hope you find these guest articles useful.

Introduction to Bond Ladders

An investment portfolio should be constructed to achieve a series of cash outflows either to be withdrawn or reinvested.  Withdrawals are based on specific cash needs and can be periodic or onetime.  Reinvestments provide a form of dollar-cost-averaging since future returns are unknown.

Unlike most other investments, bonds contractually state the amounts and dates of each cash flow.  A bond ladder composed of individual bonds takes advantage of this unique bond characteristic by purchasing a portfolio of bonds designed to achieve specific future cash flows.  The ladder can be constructed as a distribution strategy or as an accumulation strategy.  A distribution strategy is used to replace or supplement other income such as social security benefits.  An accumulation strategy is used to mitigate interest rate risk and provide reinvestment flexibility.

 

This is a simple example.  The ladder can be customized based on an individual’s cash needs and/or time horizon.  In a distribution strategy the total cash is withdrawn for spending.  For an accumulation strategy in each year the total cash is reinvested into a new bond with a maturity one year greater than the longest.  For example in 2018 the $125,050 will be used to purchase a bond with a maturity year of 2031.

Starting to Build

Credit risk tolerance and tax considerations determine the allocation to the type of bonds i.e. U.S. Treasuries, CDs, corporate bonds, municipal bonds, etc.  The amount invested in a bond ladder is dependent on whether the investor chooses a distribution or accumulation strategy.

A distribution strategy prioritizes certainty of cash flows and this need determines the bond ladder allocation while the stock allocation is a residual.

An accumulation strategy’s bond ladder and stock allocation is a function of the normal asset allocation strategy based on time and risk tolerances.  The bond ladder provides portfolio diversification and is designed to mitigate interest rate risk of the bond allocation, especially during periods of rising rates.

Most individual investors utilize commingled investment products (open-end and closed-end mutual funds, exchange traded funds “ETFs”) in order to diversify their portfolio and set their bond allocations based on risk, time to cash need etc.  These products are generally managed in order to produce similar risk and return of a specific index such as the Barclays Aggregate Bond Index.  These products are designed to be easy to use and try to overcome the comparative illiquidity of individual bonds.  However, allocations to these products do not take full advantage of the unique predictable cash flow characteristic of bonds.

It takes a significant amount of time, oversight and expertise to analyze individual bonds and price a bond relative to other investment options.  This is one reason it is recommended that individual investors only utilize U.S Treasuries and FDIC insured certificates of deposit “CDs” when building a bond ladder.  For more complex portfolios it might be beneficial to utilize an investment advisor that has bond expertise to help an investor determine the strategy, build, and maintain a customized bond ladder.

In my next articles I will address the details into customizing, building and maintaining a bond ladder, execution and trading issues.

James Oswald, CFA

Senior Investment Advisor T2 Asset Management
Oakbrook Terrace IL

Jim currently designs and manages financial plans for individuals.  He has more than 25 years of professional investment management experience as a trader, portfolio manager and strategist for individuals and large institutional fiduciaries including pension funds, insurance companies, mutual funds, and corporations.  Jim earned a B.S. in Commerce with an emphasis in finance from DePaul University.  He is a Chartered Financial Analyst and a member of the CFA Institute and the CFA Society of Chicago.

Disclaimer: Information presented is for educational purposes only and the author does not intend to make an offer or solicitation for the sale or purchase of securities.  Investments involve risk and are not guaranteed.


Upside Target Met In Nisource (NI)

NiSource, Inc. (NI) traded as high as $25.33 per share this morning to meet our $25.25 initial upside target, first mentioned in our April 24th Asbury Alert entitled Nisource, Inc. (NI) Resuming Its November Advance (access requires subscription), capturing a 4% gain in just about 1 month.

During the same period, NI also outperformed the S&P 500 by 3.2%.

Here is the chart from our April 24th report.

Nisource (NI) daily from Q4 2016 through April 24th

Here is the updated version of that chart as of this morning.

Nisource (NI) daily from Q4 2016 to May 23rd

 

Asbury Research subscribers can view our current research on the US stock market, market sectors, US interest rates, ETFs and commodities, as well as a table that includes our current and recent stock picks like NI, plus our picks in ETFs and global indexes, by logging into the Research Center via the big gold button in the upper right corner of the screen.

Subscribers and interested investors can view our 35 most recent closed out trade ideas by Clicking Here.

To non-subscribers:  Request more information about us, including service and pricing options, by visiting our Contact Us page or by calling 888-960-0005.


Upside Target Met In Hong Kong Hang Seng Index (HKHS)

The Hong Kong Hang Seng Index (HKHS) has traded as high as 25,386 today, meeting our 25,200 upside target first mentioned in the July 25th 2016 Keys To This Week report (access requires subscription), to capture a 3,207 point, 15% advance in a little less than 10 months.

Our primary interest in HKHS was its tight and stable long term positive correlation to the S&P 500 (SPX), which we viewed as being indirectly positive for the US broad market.

During the same 10-month period, HKHS outperformed the S&P 500 (SPX) by 4.1%.

Here is the chart.

Hong Kong Hang Seng Index daily: 2016 through May 15th

 

Asbury Research subscribers can view our current research on the US stock market, market sectors, US interest rates, ETFs and commodities, as well as a table that includes our current and recent global index picks like HKHS, plus our picks in US stocks and ETFs, by logging into the Research Center via the big gold button in the upper right corner of the screen.

Subscribers and interested investors can view our 35 most recent closed out trade ideas by Clicking Here.

To non-subscribers:  Request more information about us, including service and pricing options, by visiting our Contact Us page or by calling 888-960-0005.


Upside Target Met In Equity Lifestyle Properties (ELS)

Equity Lifestyle Properties (ELS) traded as high as $83.26 per share this morning  (May 15th), meeting our $83.00 target first mentioned in our April 17th Asbury Alert entitled Equity LifeStyle Properties, Inc. (ELS) Resuming Its November Uptrend (access requires subscription) to capture a $3.25 per share, 4.1% gain in slightly less than one month.

During the same period, ELS also outperformed the S&P 500 by 1.8%.

Here is the chart from our April 17th, 2016 report.

ELS daily: November 2016 through April 17th

Here is the updated version of that chart as of this the close on May 2nd.

ELS daily: November 2016 to May 15th

 

Asbury Research subscribers can view our current research on the US stock market, market sectors, US interest rates, ETFs and commodities, as well as a table that includes our current and recent stock picks like ELS, plus our picks in ETFs and global indexes, by logging into the Research Center via the big gold button in the upper right corner of the screen.

Subscribers and interested investors can view our 35 most recent closed out trade ideas by Clicking Here.

To non-subscribers:  Request more information about us, including service and pricing options, by visiting our Contact Us page or by calling 888-960-0005.


John Kosar’s May 12th, 2017 Interview: Financial Sense

Jim Puplava of the popular Financial Sense website welcomes back John Kosar CMT, Chief Investment Strategist at Asbury Research LLC.

In his latest interview by Financial Sense, which took place on Friday May 12th, John discussed Asbury Research’s outlook for the US financial landscape, as well as specific areas of the economy including:

  • the US stock market, market sectors, and industry groups,
  • US interest rates,
  • key commodities like silver, gold. and crude oil, and
  • the US Dollar.

 

 

Asbury Research subscribers can view our current research on the US and global financial landscape, and our  current stock and ETF picks, by logging into the Research Center via the big gold button in the upper right corner of the screen.

Interested investors can request more information about us, including sample research, services and pricing, by visiting our Contact Us page or by calling 888-960-0005.

Thanks to Jim Puplava and his staff for the invitation and another opportunity to speak to his large and loyal following of professional and individual investors.


Upside Target Met In Master Card (MA)

Master Card (MA) traded as high as $119.71 per share yesterday (May 2nd), essentially meeting our $120.00 target first mentioned in our September 29th 2016 Monthly Investment Compass report.  Under these circumstances we suggest that investors consider taking profits on long positions which, considering MA’s current level of $117.85, would capture a $17.24 per share, 17.1% gain in about 7 months.

During the same period, MA also outperformed the S&P 500 by 5.6%.

Here is the chart from our September 29th, 2016 report.

MA daily through Sept 29, 2017

Here is the updated version of that chart as of this the close on May 2nd.

MA daily through May 2, 2017

 

Asbury Research subscribers can view our current research on the US stock market, market sectors, US interest rates, ETFs and commodities, as well as a table that includes our current and recent stock picks like MA, plus our picks in ETFs and global indexes, by logging into the Research Center via the big gold button in the upper right corner of the screen.

Subscribers and interested investors can view our 25 most recent closed out trade ideas by Clicking Here and then clicking the gold Individual Stocks & ETFs tab.

To non-subscribers:  Request more information about us, including service and pricing options, by visiting our Contact Us page or by calling 888-960-0005.


John Kosar Speaking At The 2017 NAAIM National Conference In San Diego Tomorrow

John Kosar, CMT will be speaking tomorrow morning at the National Association of Active Investment Managers (NAAIM) 2017 Annual Conference

What: National Association of Active Investment Managers (NAAIM) Annual Conference
When: Tuesday, May 2nd 2017
Where: Hilton San Diego Resort and Spa, 1775 East Mission Bay Drive, San Diego, California 92109
Topic: Investing During The Trump Administration: Finding Opportunity And Avoiding Danger In Global Markets

 

Click Here For John Kosar’s Upcoming 2017 Speaking Dates


“Jenga Market” Could Trigger An Overdue Decline

One of the many reports we produce for subscribers is called What We’re Watching Today (WWWT).  WWWT’s are typically short, 1-2 chart reports that are emailed to subscribers before the market opening.  Their purpose is to identify important, potentially market-moving changes in  market conditions as they occur.

We have included below the entire WWWT from the morning of March 3rd, 2017. entitled Jenga Market” Could Trigger An Overdue Decline.

 

The report featured our extensive database of ETF asset flows data, which allows us to “follow the money” on virtually any financial asset that can be traded with an ETF.  It helped to identify the current March 1st peak in the benchmark S&P 500 just 2 days after it was put into place, and long before there was really any other tangible evidence that the US market was peaking.  SPX has since declined by an additional 61.oo points or 3%.

 


What We’re Watching Today:  Friday March 3rd, 2017

Conclusion, Investment Implications, Strategy

The total net assets invested in the SPDR S&P 500 ETF (SPY) expanded by a huge amount over just the past two sessions, by $12.9 billion or 5.5%, which creates a near term top-heavy condition that we call a “Jenga Market” after the popular block stacking game.  Moreover, the S&P 500 (SPX) is currently edging below 2380, which defines the lowest possible index level that this 5.5% of new investor assets could have been added.  This means that a sustained move below 2380 would quickly put all $12.9 billion of these newly-added invested assets into the red, which could at least trigger some quick long liquidation and perhaps even an overdue corrective decline.

Analysis and Rationale

The highlighted areas in Chart 1 below show that the total net assets invested in the SPDR S&P 500 ETF (SPY) expanded by a huge amount, $12,946,505,728 or 5.5%, just over the past 2 trading sessions (March 1st and 2nd), and that all of these new assets were added at S&P 500 2380 or higher (SPX, upper panel).

Chart 1

This quick and aggressive performance chasing has resulted in a Jenga-like, top heavy broad market index in which a relatively small index decline, below SPX 2380, would quickly and immediately put 5.2% of the total assets invested in SPY into the red. 

We have seen similar “Jenga Markets” trigger larger, multi-week corrective market declines so, although this is in no way a sell signal at this point, it is something important to be aware of.  Specifically, we will be watching closely to see if  a sustained move below SPX 2380 triggers enough investor fear, according to metrics like the VIX and high yield corporate bond spreads, to fuel a deeper broad market decline.


Asbury Research subscribers can view our latest analysis of ETF asset flows, along with the rest of our investment research, by logging into the Research Center via the big gold button in the upper right corner of the screen.

Non-subscribers can request more information about us, including service and pricing options, by visiting our Contact Us page or by calling 888-960-0005.

 


Investor Asset Flows Warn Of Market Pullback

The following is Slide 15 of a 29 slide presentation that John Kosar, CMT, made on April 12th to the Pittsburgh Chartered Financial Analyst (CFA) Society.  

The chart highlights contracting investor assets in two key US stock market ETFs: The ProShares QQQ which tracks the market leading NASDAQ 100 and the SPDR S&P 500 (SPY) which tracks the S&P 500 (SPX).

Algorithmic and high frequency trading has greatly increased intraday volatility in many financial asset prices so that making investment decisions solely on the price of an asset isn’t good enough anymore.  The big breakout that you saw in a particular stock or index two days ago can quickly disappear, and even violently reverse, as these trading programs take advantage of our own fear and greed, enticing investors to make the wrong decisions at key market turning points.

Because of this new obstacle for investors to deal with, Asbury Research has accumulated a large and growing database of difficult-to-get ETF asset flows data.  Unlike trading volume, which just measures day-to-day investor urgency, total net assets show investor conviction in a price move as it indicates positions actually being held overnight.

Accordingly, we use these ETF asset flows data as a kind of lie detector test for the market, to separate these erratic, and often meaningless, algorithm-generated day-to-day movements in price from real trend changes that provide intermediate to long term opportunities for investors.

Asbury Research subscribers can request a copy of the entire April 12th CFA Society presentation by emailing us or by calling 888-960-0005.

Non-subscribers can request more information about us, including service and pricing options, by visiting our Contact Us page or by calling 888-960-0005.


John Kosar Speaking At The Pittsburgh CFA Society Luncheon Next Week

John Kosar, CMT will be speaking next week at the
Pittsburgh Chartered Financial Analyst (CFA) Society’s Monthly Luncheon

 

Date:  Wednesday, April 12th 2017

Time: 12:00 PM to 1:30 PM

Topic:  A Quantitative, Technical, and Behavioral View of the Markets

John Kosar, CMT, Asbury Research’s Chief Market Strategist, will discuss from a strategic standpoint what Asbury Research believes is in store for the US financial markets during the rest of 2017, and how a Trump Presidency may influence the direction of specific asset prices. John will also go through Asbury’s unique blend of standard and proprietary market metrics to determine, from a tactical perspective, which stock indexes, sectors, industry groups, and individual stocks and ETFs are currently poised to make the biggest moves into the summer months.

 Presenter:  John Kosar, CMT

Location:  The Omni William Penn Hotel

                       530 William Penn Place, Pittsburgh, Pennsylvania 15219

Registration: Members: $20, Non-Members: $40, Candidates $20

This chapter meeting qualifies you for 1.5 CE Credits, 1.5 SER Credits

Click Here To Register

Click Here For John Kosar’s Upcoming 2017 Speaking Dates


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