Archive for the ‘Stocks - U.S.’ Category

A Logical Approach To Investment Strategy Development

Monday, September 18th, 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!”

Five Important Tells For Stocks

Friday, September 15th, 2017

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Breadth Indicator Foreshadowed And Confirmed Today’s New High

Monday, September 11th, 2017

Posted New High Last Week

While the S&P 500 struggled last week, NYSE New Highs - New Lows quietly said “be open to a rally in stocks” by making a new high on Wednesday, September 6 (see chart below). The S&P 500 followed on Monday, September 11, 2017 with a new all-time closing high (bottom portion of chart below). NYSE New Highs - New Lows also posted a new closing high on September 11.

What Can Hurricane Tracking Methods Tell Us About Stock Market Risk?

There are numerous similarities between the methods used to track hurricanes and those used to build/maintain probabilistic investment models. What can we learn from hurricane tracking that can assist us with the stock market’s present-day health? How does September 2017 compare to the day before Lehman Brothers filed for bankruptcy?

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Long-Term Means Long-Term

Even when markets are trending in a bullish manner, normal volatility is to be expected and should come as no surprise. If the evidence shifts in a material manner, we are happy to make some adjustments to our portfolio allocations.

What Are Probabilistic Models Saying About The Stock Market?

Friday, September 8th, 2017

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Is Improving Productivity Pushing Stocks Higher?

Thursday, September 7th, 2017

One Possible Explanation

A common and logical question often posed by investors in recent months is:

What is driving the stock market?

One possible explanation was covered by BloombergView:

“It’s the puzzle perplexing central bankers, investors and financial writers: How has the U.S. economy accelerated its expansion in recent months without a big drop in unemployment and with core inflation falling? The logical conclusion is that productivity growth has finally picked up, a development with big implications for the economy…Accelerating growth with stable or falling inflation and employment implies that productivity growth is increasing, allowing the economy to do more with less. Companies that want to hire but can’t find workers are simply forced to innovate and invest in labor-saving resources.”

Last Time This Happened, Stocks Moved In A Big Way

This week’s stock market video looks at long-term demographic trends and their possible impact on the stock market.

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Bullish Sentiment Remains Below Average

If you monitored the markets closely near the bubble peaks in 2000 and 2007, you know sentiment in the present day is much more skeptical. Bubbles are typically highlighted by irrational optimism, which is not present in this week’s American Association of Individual Investors (AAII) survey. Instead of being wildly optimistic, present day bullish sentiment is below the historical average dating back to 1987.

Most Recent Comments Via Twitter

Tuesday, September 5th, 2017

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

Stocks: Demographic Boom or Bust?

Friday, September 1st, 2017

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Red Flags Coming From This Breadth Indicator?

Monday, August 28th, 2017

Volume-Based Indicator Still Constructive

The chart below shows up/down volume for the NYSE Composite Stock Index, along with its 50-week moving average (thick blue line). The chart is dated August 28, 2017.

Some Historical Perspective

Notice how all-things-being equal, the probability of bad things happening increases when the 50-week moving average is flat or negative (see orange and red arrows below). Conversely, the probability of good things happening increases when the 50-week moving average turns back up in a bullish manner (see green arrows below). The S&P 500 is shown at the bottom of the image below for reference purposes.

Trend Flipped In Favor Of The Bulls In 2016

In simplified terms, volume patterns shifted from favoring declining issues in early 2016 to favoring rising issues in the second half of 2016 (see green arrow below). The constructive look of the chart is still in place as of August 28, 2017.

The Long-Term Outlook For Stocks

This week’s video updates numerous long-term signals covered over the past year. The video covers facts rather than opinions or fears of what may or may not happen in the future.

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A Foolproof Signal?

Since there is no such thing as a foolproof indicator or signal in the financial markets, the recent bullish shift in up/down volume assists us with probabilities. As long as the slope of the 50-week remains positive, the odds of good things happening will be higher.

Long-Term Means Long-Term

The facts covered above relate to longer-term outcomes, meaning weeks, months, and years. For this data to be used effectively, we must have realistic expectations about normal volatility within the context of a rising trend.

The Long-Term Outlook For Equities

Friday, August 25th, 2017

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How Concerning Are These 7 Bad Signs For Stocks?

Monday, August 21st, 2017

Scary Things About The Stock Market

There is never a perfect time to invest in the stock market. There is always something concerning on the technical, fundamental, and political fronts…. always. There are many “reasons stocks are in big trouble” lists floating around in 2017, including 7 signs the stock market is ready to run smack into a wall.

Let’s Examine The Bullish Side Of The Argument

Given the article outlines logical and rational bearish arguments, our objective is not to criticize the “7 signs” MarketWatch piece, but rather to provide an alternative, longer-term view.

Small Caps Drop Below 200-Day

How concerned should we be that the Russel 2000 Index dropped below its 200-day moving average? Since the S&P 500 bottomed in March 2009, small caps have dropped below their 200-day 23 other times. Despite the 23 pieces of bearish evidence, small caps have gained more than 300% over the same period. In the chart below (2009-2017), the Russell 2000’s 200-day moving average is shown in red.

Correlation Breakdowns

How concerning is the present-day correlation between the S&P 500 and the German DAX? The chart below shows the correlation between the U.S. stock market and German stock market dating back to the major bottom in equities that occurred in March 2009. Notice how the present-day correlation remains in the same range that it has been in since March 2009; a bullish period for stocks. Is it possible a weaker correlation could be followed by a pullback in the S&P 500? Sure, but in each case since March 2009, the S&P 500 went on to post a new high (it did not derail the long-term trend in stocks).

VIX Pops Above 200-Day

How concerning is it when the VIX Fear Index moves above its 200-day moving average? The chart below shows the VIX since March 2009; its 200-day is in red. The S&P 500 is shown below for comparison purposes.

Gold’s Rally

When gold is moving higher, does that mean stocks will move lower? The long-term correlation between the S&P 500 and gold is all over the place (see below). Sometimes gold zigs and the S&P 500 zags; other times gold zigs and the S&P 500 zigs in unison. In short, gold is not a reliable tool to monitor the long-term health of the stock market.

Transportation Weakness

Given the Transportation Average made a new all-time high in July, it may be too early to say much about the current pullback in terms of the longer-term trend. Since making the new all-time high, no significant new low has been made.

Hindenburg Omen/Market Breadth

Regarding the often cited as bearish evidence Hindenburg Omen, Barron’s sums it up this way:

“Don’t freak out just yet. The Omen does not have a very good track record for being right.”

Trump Agenda

While it is possible the lack of progress in Washington may be starting to weigh on the markets, it has not shown up on the long-term charts yet, as outlined in detail in this week’s video. The video compares the tops in 2000 and 2007 to August 2017.

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Long-Term Means Long-Term

The well-written MarketWatch article lays out some legitimate concerns; however, most of them speak to increasing odds of a possible short-term stock market pullback/correction, rather than a major trend change/new bear market.

The issues above could spill over into the longer-term charts, meaning it is always important to remain flexible and open to all outcomes, including wildly bearish outcomes. We will be monitoring the evidence day by day with an open mind.