Stocks Still Have Strong Low-Inflation/Low-Rates/Improving-Economy Tailwind

October 16, 2017

Lower Rates Longer

When interest rates are low and economic data is improving, stocks typically get an added opportunity-cost boost relative to bonds. From The Wall Street Journal:

“Leaders of the world’s largest central banks indicated that weak inflation in advanced economies could prolong the post-crisis era of easy-money policies. Despite a broad-based improvement in the global economy, wages and consumer prices remain stubbornly low, making central bankers wary of removing their stimulus measures too quickly, they told a Group of 30 banking conference here on Sunday.”

The Voice Of Experience

Given the favorable tailwinds for equities, this week’s video explores a prudent question:

What Advice Would Jesse Livermore Have For Investors In 2017?

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Valuations Impacted By Low Rates

Even though the facts question the utility of valuations from a stock market timing perspective, PE ratios are still widely followed on Wall Street. It is difficult to get overly concerned about stock valuations when the world’s greatest value investor uses terms such as cheap. From Forbes:

In his characteristically unshakeable manner, Buffett opines on the elevated market with CNBC’s Becky Quick: “We’re not in a bubble territory or anything of the sort.” In fact, he argues, “measured against interest rates, stocks actually are on the cheap side compared to historic valuations.”

What Would Jesse Livermore Tell Investors In 2017?

October 13, 2017

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Is Market Breadth Confirming The Stock Market’s Recent Highs?

October 9, 2017

Volume-Based Breadth Indicator

The monthly chart below shows the NYSE’s volume associated with advancing issues minus volume associated with declining issues. As of October 9, 2017, the indicator has been making new highs along with the market.

Fact or Fiction?

This week’s stock market video water tests three widely held beliefs about bull and bear markets, including:

Stocks have been going up for over eight years, which means a major bull market peak is coming soon.

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New Highs - New Lows

The chart below shows the number of NYSE advancing issues minus declining issues. The indicator has been making new highs along with the major indexes. There are no yellow flags as of October 9, 2017.

BULL AND BEAR MARKET MYTHBUSTERS

October 6, 2017

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Has This Important 2016 Stock Signal Flipped?

October 2, 2017

Signal Said Be Open To Bullish Outcomes

Posts dated September 6 and November 30 of 2016 outlined a rare bullish signal that was flashing based on movement in S&P 500’s monthly Bollinger Bandwidth. From the September 2016 analysis:

“When Bollinger Bandwidth readings hit extremely low levels, it tells us to be open to a big move. The S&P 500’s daily Bollinger Bandwidth has never been lower than it is today, using data back to 1982, which means a big move could be coming soon in stocks.”

From the November 2016 analysis:

“The purpose is not to predict the outcome in 2016, but rather to help us keep an open mind about better than expected outcomes, especially relative to the frustrating and short-lived trends of the past three years.”

Testing The Bullish Theories From 2016

To date, the markets have followed the bullish script outlined by the movements in the S&P 500’s monthly Bollinger Bandwidth in 2016. Therefore, it is prudent to understand the range of historical outcomes from past periods that featured similar setups.

“Take a theory and stick with it. But you also have to be open-minded enough to switch tracks if you feel that your theory has been proven wrong.”

Tony Saliba
Market Wizards

How Long Did Similar Rallies Last?

If we look at the chart that was presented in November of last year, we see three similar periods based on extremely low Bollinger Bandwidth readings: 1984, 1995, and 2005. After a similar signal in 1984, the S&P 500 rallied for almost three years posting a gain of 99%.

1995 Case

We have noted similarities between 2016-17 and 1994-95 numerous times over the past year, including in a December 2016 post. Bollinger Bandwidth also was flashing a “be open to better than expected outcomes” signal in early 1995. After the bullish setup, the S&P 500 rallied for over five years and tacked on 225%.

Is A Bear Market In Stocks Overdue?

You may have read stocks are currently in the 2nd longest bull market ever, which implies stocks are overdue for a pullback of 20% or more. Are we really overdue for a bear market? What do the facts say? You can decide using the data presented in this week’s video.

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2005 Case

A similar Bollinger Bandwidth setup and bullish turn occurred in 2005. After the “be open to more upside” signal, the S&P 500 rallied for over two years gaining 27%.

How Can All This Help Us?

The purpose is not to predict the outcomes in 2017-2018, but rather to help us keep an open mind about better than expected outcomes, especially relative to the frustrating and short-lived trends that were present in the 2014-2016 period.

The charts above simply review the history of low/rare Bollinger Bandwidth readings; nothing more, nothing less. It should be noted we are reviewing a very small sample size.

If 2017 and 2018 fall into the bullish camp, the major U.S. stock market indexes will remain above their recent long-term consolidation boxes, asset class behavior will continue to align with risk-on outcomes, and the current bullish trends will remain in place. If the bears start to work on the previous list, the odds of “bad things happening” will improve. We will continue to take it day by day.

Is A Bear Market Overdue?

September 29, 2017

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Why 2017 Looks Nothing Like 1929 Or 1987

September 28, 2017

Hard Data Can Remove Bias

Trends take all factors into account, including valuations, earnings, Fed policy, and geopolitics. ADX is a technical indicator developed by Welles Wilder to monitor trends. From stockcharts.com:

The Average Directional Index (ADX) measures trend strength without regard to trend direction. The other two indicators, Plus Directional Indicator (+DI) and Minus Directional Indicator (-DI), complement ADX by defining trend direction. Used together, chartists can determine both the direction and strength of the trend.

Extended Trends Are More Vulnerable

Monthly ADX figures for the S&P 500 since the mid-1920s have all fallen between 10 and 75. According to Wilder, a sleepy or trendless market is in place when ADX is below 20; a strong trend is in place above 25. As shown in the table below, very high ADX readings tell us a market is extended and it is time to pay closer attention.

A Detailed Look At ADX: 1929/1987 vs. 2017

This week’s stock market video describes ADX in more detail and asks what can we learn about the market’s long-term risk-reward profile.

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ADX Helps Us Assess Odds

Like any technical indicator or data point, monthly ADX should not be used in isolation. In bull markets, ADX helps us answer the question, is the market currently trendless, trending, or extended? If the answer is “extended”, ADX tells us to focus on shorter-term measures of market health and to have a prudent exit strategy in place.

CCM Interview With Forbes

September 25, 2017

Numerous timely topics are covered in a recent interview with Forbes. The charts below provide some additional insight into the Q&A.

Is A 1929/1987-Like Crash Imminent?

September 22, 2017

This week’s video can be found here on See It Market.

A Logical Approach To Investment Strategy Development

September 18, 2017

Professional Coaches Study The Game And Their Opponents

Successful coaches in any sport break down film to better understand the small details that lead to long-term success. The same principles can be applied to the financial markets, trading, and investing.

Michael Lombardi, who worked with NFL coach Bill Belichick for five years in Cleveland, and then during the 2014 and 2015 seasons in New England, on attention to detail via The Ringer:

Belichick treats every game like a Super Bowl; no detail is too small, no possible scenario or situation goes overlooked. No Patriots opponent is underestimated or taken lightly - ever.

Backtesting: One Form Of Market Study

One of the great things about the financial markets is there are countless ways to skin the risk-management cat. One approach involves breaking down “stock market game film” into minute details via a process known as backtesting.

We are currently in the process of backtesting some new front-end screens for our market model. To many, the level of detail being meticulously studied may border on insane, but studying market movements is very similar to reviewing game film; it provides extremely valuable insight and allows investors to be better prepared for countless scenarios. A small portion of one of our backtesting spreadsheets is shown below.

Film Study: Five 2017 Market Tells

This week’s video is based on numerous market tendencies that provide insight into the present day risk-reward equation, ranging from resiliency to skepticism.

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Markets, Like Teams, Have Tendencies

Those who have taken the time to review market film know bullish and bearish tendencies exist just as they do in the world of sports. If history was irrelevant, studying game film would be a waste of time. From The Ringer on Bill Belichick’s preparation before facing offensive coordinator Kyle Shanahan in the Super Bowl:

Don’t underestimate history on Sunday. I suspect Belichick watched every game that his defense has played against anyone named Shanahan, whether it’s Atlanta’s offensive coordinator Kyle or his father (and an old Belichick rival) Mike. Those games will become his compass.

An Open Mind Allows For In Game Adjustments

An important part of any investment strategy or system is remaining flexible and open to changing conditions, a concept that applies to sports as well. From The Ringer:

Of course, adjusting quickly during any football game is just as important. Belichick operates like General George S. Patton, who spent weeks studying the writing of his German adversary, Field Marshal Erwin Rommel, then used that found knowledge to crush him in their epic tank battle in Tunisia. On Sunday, imagine Belichick growling his version of “Rommel, you magnificent bastard. I read your book!”