Ted Feight considers himself a sort of rebel asset allocator.
The Lansing, Mich.-based advisor and independent portfolio manager puts together portfolios using mainly exchange-traded funds. While he's a big advocate of asset allocation plans, "we don't stick to the same conventions normally used by most investors these days."
"A lot of people think that you come up with a plan and no matter what the market does, you stick with it forever," Feight said. "After 35 years in the business, I've seen that sort of strategy work. And I've also seen it work not as well as it could."
So while he believes in diversification, his client allocations can switch depending on what the market's signaling at any given time. The president of Creative Financial Design has three in particular he keeps a close eye on at all times.
One is to check bond yield curves. "I don't care about what they're saying about the relationship of stocks to bonds," Feight said. "What we're looking at is the overall economy."
He checks rates on three-month and two-year notes against 10-year Treasuries. Feight watches these trend lines daily and has records back to 1973. "Almost every time in the last 100 years when those short-term rates were higher than the 10-year interest rates for more than 30 days, we've had a recession," Feight said. "The lone exception was 1967. But we did have a lot of banks that went broke even though there wasn't a recession."
Starting in August 2006, short-term rates were higher than the long-term rates for 233 days. Feight responded by tightening his stops on ETFs. He uses stop-loss orders with all his funds. "So when we start seeing an inverted yield curve for more than 30 days, we warn our clients something's up and we need to set our stops a little tighter," Feight said.
He also tracks presidential election cycles. Two problem periods keep cropping up. One is when elections are taking place. Turbulence in markets usually takes place in the primaries, he says. "Once you get down to two candidates, the market usually takes off or does very well," Feight said. "It doesn't work all of the time, but it definitely represents a strong tendency to impact markets."
He also watches oil prices closely. "A professor once brought me a book called, ‘The Oil Factor.' It had a formula that predicted stock market prices based on correlations to oil trading," Feight said.
But he didn't think the numbers in the book looked entirely correct. So he double-checked the author's data with government records. "His numbers were off, but they were close enough," Feight said.
The book described a trend dating back to 1974. "If the price of oil goes up 80% on the first day of a month compared to a year earlier, sell everything you've got because you're in a bad time in the stock market," Feight said.
On the flip side, if oil prices go down 20% on the first day of a month, it's a strong buy signal. "These signals are few and far between," Feight said. "But the sell signals have been so perfect over the years that it's hard to ignore."