Written by Jeff Miller, A Dash of Insight
— this post authored by Mark D. Hines
Our previous Technical Thoughts asked the question: Is Twitter The Blueprint for Success? We noted the company’s differentiated strategy as well as its lower correlation with the market. We noted also that lower correlated differentiated strategies can be the key to success in challenging markets.
This Week: Are There More Unnerving Face-Rippers Ahead?
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Here is a look at what the Dow Jones did intraday on Thursday December 6 (i.e. it was down more than 2.8%, before paring most of its losses).
These types of face-ripping moves are increasingly unnerving to many investors considering the Dow was already down 5.3% this quarter as of December 6 and has fallen more than that again since.
The questions many investors are wondering are
- what is causing this volatility? and
- is it going to get worse?
With regards to what is causing the heightened volatility (which by the way volatility has increased, as measure by the S&P Volatility Index, but it’s still not high by historical standards, as shown in the following chart), here are a few popular narratives.
Trade War: JP Morgan’s CEO, Jamie Dimon, says the trade battle with China is behind the market volatility. And the rumors of a trade truce, followed by news to the contrary, seemed to add upside, and then downside, volatility to the market this week.
Inverted Yield Curve: An inverted yield curve has some investors spooked. However, according to Guggenheim Partners CIO, Scott Minerd, an inverted yield curve is a necessary indication for a recession, but is not sufficient by itself.
Precipitous S&P 500 Technicals: According to Jesse Colombo, the S&P 500 is just above a major support level, and traders should expect “face-ripping” short-covering.
And those are just a few of the narratives behind this jittery market.
For your entertainment… before getting into a brief review of our views on current market conditions, here is a collage of sad market traders from the always entertaining Sad Guys On Trading Floors and the often overly-dramatic CNBC.
(image source: Sad Guys On Trading Floors)
(image source: CNBC)
(image source: CNBC)
(image source: Sad Guys On Trading Floors)
What comes next… Of course no one has a working crystal ball, but we do have a view on current market conditions. As described in Jeff’s recent “The Week Ahead,” short-term trading conditions remain at high alert, long-term trading has moved to the highest risk level, and fundamental analysis remains strongly bullish.
Before getting into our specific trades for this week, our models had strong performance this past week, as shown in the following section.
Model Performance:
We are sharing the performance of our proprietary trading models, as our readers have requested, as shown in the following table:
Worth noting, the model results look weak in various time frames, but it is actually a reflection of only the last month or so. Our system of exits is more complex (and more effective) than most simple, price-based methods. Without going into the details, it is a bit more “patient” than most. For perspective, the models do well in up markets and flat markets. In large declines they outperform the general market via a complete exit. For more than a month we have been operating on the edge of the effective range – something that we report in the indicator snapshot each week on TWA. The recent market action illustrates the effectiveness of our approach, which will start to show up in next week’s table. Unlike our models, systems that use aggressive stops have difficulty in re-entry. Our models are less likely to miss the subsequent rebound after the market sells off.
For more information about our trading models (and their specific trading processes), click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.
Expert Picks From The Models:
Note: This week’s Stock Exchange is edited by guest contributor Blue Harbinger, a source for independent investment ideas.
Road Runner: This week I bought NRG Energy (NRG). I like to buy things in the lower end of a rising channel, as you can see in the following chart.
Blue Harbinger: Interesting trade, Road Runner. This is an electric utility company. I’d say you were being a chicken amidst all the volatility by buying a utility company (utilities are usually lower volatility) but NRG has a historical beta greater than one and only a small dividend yield. I can see the trend you’re talking about better in this longer time range chart.
RR: Thanks for the longer-term chart, but my typical holding period is only 4 weeks.
BH: Without knowing much about this company, I can see in the following Fast Graph that EPS is rising, but the PE is somewhat high for a utility company, and the credit rating is a little low.
Road Runner: Thanks for the data points, but I am a shorter-term trader, and those fundamental metrics are less important to my thesis. I typically get in, and then get out, long before the long-term story plays out.
BH: Suit yourself Road Runner. And how about you, Felix – anything to share with us this week?
Felix: Well first off I’d just like to brag a little. I continue to own Restoration Hardware (RH), and the shares are up big in the last week despite the overall market’s recent challenges. Here is a look at the price.
BH: Gee Felix, how humble of you to share that info. I’d give you a hard time about your bragging, but I gave Road Runner a free pass when he bragged about repeatedly generating big profits in RH is this article: Despite Fundamentals, We Nailed RH, Again. Nice job, Felix.
Felix: Thanks, and just so you know, Road Runner’s typical holding period is only 4 weeks, mine is 66 weeks. And I am into more pure “momentum” than him too.
BH: Ok. thank you. Anything else to share?
Felix: Yes. This week I ran the stocks of the S&P 500 through my technical model, my top 20 are shown below.
BH: That is interesting, Felix. I enjoy the rankings. Road Runner would be happy to see NRG on your list.
RR: Great minds think alike.
Athena: While you guys are busy patting each other on the back, I will share a trade. This month I purchased Overstock (OSTK) at a lower price on 12/4.
BH: Ok. Any particular reason? Or do you just like to buy cheap stuff online?
Athena: As you know, I run a “king of the mountain” type strategy, and it takes a lot to get into my “best ideas” portfolio. I am also big on momentum too.
BH: Wouldn’t it be a “queen of the hill” strategy?
Athena: First you imply that I like to buy things online, now you question the naming of my strategy. You have issues.
BH: Jeesh – sorry! I know you typically like to hold for around 17 weeks. And you use price targets and stop orders as part of your strategy. Here is a look at some of the fundamental data in the Fast Graph. And thanks for sharing, Athena.
Holmes: This week I sold my shares of DexCom (DXCM) at above $136.
BH: Not bad in this market. I recall you purchased those shares at around $126 back on 11/19.
Holmes: That’s right. I am a dip-buyer, and the charts shown above tell the story. I typically hold for around six weeks, but this one was a little shorter because of market conditions.
BH: I realize you are a technicals-based trading model, Holmes. But are you even aware that DexCom is a medical device manufacturing company? Here is look at some of the fundamentals in the following Fast Graph.
Oscar: I have some info to share. This week I rank the Comprehensive and Diverse ETF universe through my model, and the top 20 are ranked below.
BH: Thanks for sharing, Oscar. I know you also use a momentum strategy, but you implement it through sector rotation. It’s interesting to see you have Natural Gas (UNG) ranked at the top of your list.
Conclusion:
The markets remain volatile, and the common narrative explanations range from trade wars, to Fed policies, to market valuations; and each of these may have some merit. However, we cannot say where the market is going next, but we can remind you to stick to a trading/investing plan that meets your needs and tolerance for volatility. We have positioned our trades according to our models, which take into account our current and long-term views on the market. Like all strategies, our models can have periods where they perform differently, but the return streams can be differentiated from the overall market (a valuable characteristic for diversification reasons/benefits) and the models continue to successfully deliver as they are designed to do.
Getting Updates:
Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.
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