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posted on 01 September 2017

Technical Thoughts: Is The Bull Getting Tired?

Written by , A Dash of Insight

Our last Stock Exchange: “Buy the Dip or Abandon Ship?" took a closer look at market volatility and maintaining an opportunity-based mindset. If you missed it, a glance at your news will show that the key points remain relevant.

tired.bull


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This Week - Is the 8+ Year Bull Market Rally Finally Slowing?

To frame this week’s discussion, here is a look at the percent gain and loss for the stock market volatility index (The VIX, also known as the “fear index") and the S&P 500 (SPY) over the two weeks ending August 16.

Market volatility, as measured by the VIX, has gained over 63% during this period, an indication that fear has increased. However, for perspective, here is a look at the same chart since the depths of the financial crisis in March of 2009.

Market volatility has declined (-68.7%) and the S&P 500 has increased (+256.6%) during this impressive bull market rally. However, many investors are questioning how much longer the rally can continue considering the US Fed is less dovish (they’re expected to continue increasing interest rates) and market valuations are high. For example, the Shiller PE ratio sits at almost 30, far above the 1987 Black Monday level, and nearly as high as the 1929 Black Tuesday (but still far below the “Tech Bubble" level in 2000).

source

For some added perspective, Ben Carlson offers several interesting ideas about what could trigger an end to the ongoing bull market rally in this article: Prepare Now For The End of The Bull Market.

Also worth the read, Dr. Brett Steenbarger shares how he has learned to think in market cycles (both short, medium and longer term) in this article: What I’ve Learned From My Trading Setbacks. For example, Dr. Steenbarger writes:

“Think in Cycles - This has been one of the two greatest changes I’ve made in my trading. I stopped thinking about trends and ranges entirely, I don’t focus on chart patterns, and I don’t pretend to know what the “big players" are doing apart from noting volume patterns. Instead, I am identifying dominant cycles in the market at short, medium, and longer time frame and focusing on how those cycles interact with one another. I am focusing on cycles of volatility in the market, as well as cyclical price action. This has been a much more effective way to participate in directional market behavior, especially when implemented in event time."

Further still, here is an interesting chart from Charlie Bilello that puts the recent VIX spikes into perspective.

Expert Picks from the Models

This week’s article is being edited by our frequent guest: Blue Harbinger (also known as Mark D. Hines). Blue Harbinger is a source for independent investment ideas focused on value and income opportunities.

Road Runner: My most recent pick is Align Technology (ALGN), and this is not the first time I have recommended it. I also found ALGN to be attractive during the weeks of 5/25 and 6/29. I look for stocks that are at the bottom of a rising trading channel and if you look at the chart below you can see why I like Align (again). It’s been in a steady rising channel for months and may easily rise over $180 soon. I get in at opportune times, but only hold my position for so long.

Blue Harbinger: I see what you’re doing here, Roadrunner, with these Align Technology trades, and I think you’re pretty clever. This is a company with a lot of upward momentum, and you keep recommending it every time the price pulls back within its upward channel. I imagine you really like it now after its big 5.1% decline yesterday.

RR: My system is disciplined and repeatable, and yes - it’s attractive.

BH: Both revenues and earnings are growing significantly for Algin, and the company posted even stronger numbers than expected last quarter. The numbers were driven by the company’s Invisalign case shipments in North America that were up almost 28%, and shipments in the teenage segment that were up almost 38%. Plus the company raised guidance for next quarter.

RR: I really don’t care about fundamentals like revenues and earnings, but it’s nice to know you appreciate my pick. How about you, Holmes, what have you got?

Homes: This week I like Boston Scientific (BSX). This stock’s dip over the last month is the sort of set up I like to see. From the chart below you can see BSX is below its 50-day moving average, and reasonably priced relative to its 200-day moving average. It’s also received support just below $27 in the past. The price moving above the 50-day average at $27.43 would be encouraging. With limited downside and plenty of upside potential, I hope I’ve brought the humans a solid pick.

BH: To be completely honest with you Holmes, I don’t have a strong opinion on Boston Scientific either way. I suppose it’s nice the company finally returned to profitability last year (and it has remained profitable for the first two quarters of this year) after posting negative net income in 2012 - 2015 and 2007 - 2010.

Another positive for BSX is its diversified and differentiated product portfolio. And further still, if you believe demographics will continue to drive healthcare needs higher, BSX is in a decent position to benefit.

Holmes: It’s nice you pay attention to historical earnings numbers and product portfolios, but my style is dip-buying mean reversion, my average holding period is six weeks, I exit when my price target is achieved, and I control risks based on macro factors and stops.

BH: Well have you also considered that BSX is sensitive to the medical device tax of the Affordable Care Act? It’s probably helpful for BSX management to have some clarity from Congress (for now anyway) that the tax won’t be eliminated considering the “Repeal and Replace" efforts seemed to have stalled out.

Holmes: That’s all great, but my edge is based on quantifiable mean-reversion and dip-buying, and I’ll stick to that. How about you Oscar, what do you like this week?

Oscar: This week’s pick is the Video Game Tech ETF (GAMR). The pick feels appropriate considering the growing popularity of these games.

BH: That pick is a little concerning to me. It’s a small ETF with less than $30 million in assets. Such a small ETF size can create challenges. For example, there are days when the trading volume is only around 3,000 shares. You’re going to end up moving the market against yourself if you try to place any big trades.

O: That’s interesting, but I trade based on momentum, and my holding period is usually only about 6 weeks.

BH: Have you also considered the impact of the bid-ask spread on such a low volume ETF? Plus, I have to believe it’ll trade at a significant discount or premium to its NAV on a lot of days that may work against you too.

O: That doesn’t bother me. I’ve been able to successfully rotate in and out of sectors, and I control risk with stops. How about you Athena and Felix, any trades this week?

Athena: Felix and I have no new trades this week. We’ve learned not to reach when opportunities are not in our wheelhouse. Sometimes the wisest thing to do is nothing at all. We’ll certainly let you know when we’ve got something new and attractive.

Conclusion

Trading volatility spikes has special risks, but also special rewards. We continue to monitor the market for changing market cycle trends, and our models continue to indicate bullish market health in all time frames. Despite this being the second week in a row with a volatility spike (and another pullback in stock prices) we’re still finding attractive opportunities.

Stock Exchange Character Guide

Background on the Stock Exchange

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange." (Check it out http://dashofinsight.com/background-stock-exchange/ for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Getting Updates

We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com". We keep a running list of all securities our readers recommend. The “favorite fifteen" are top ranking positions according to each respective model. Within that list, green is a “buy," yellow a “hold," and red a “sell." Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

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