By and large, the stock market is correlated with consumer sentiment

I’ve shared some observations about investor sentiment this past week as sentient indicators and surveys have reached an extreme level of optimism.

When sentiment reaches an extreme, we should prepare for it to swing the other way, at least temporarily.

Why?

Because that’s what it does. Most financial and economic data cycles up and down, swinging like a pendulum as investors oscillate between fear and greed. Or, as I like to put it: oscillating between the fear of missing out and the fear of losing money.

What about consumer sentiment?

The US Index of Consumer Sentiment is another sentiment survey, but it measures consumers instead of specifically investor sentiment about the stock market trend. The US Index of Consumer Sentiment (ICS), as provided by University of Michigan, tracks consumer sentiment in the US, based on surveys on random samples of US households. The index aids in measuring consumer sentiments in personal finances, business conditions, among other topics. Historically, the index displays pessimism in consumers’ confidence during recessionary periods, and increased consumer confidence in expansionary periods.

US Index of Consumer Sentiment is at a current level of 95.70, an increase of 0.20 or 0.21% from last month. This is a decrease of 1.80 or 1.85% from last year and is higher than the long term average of 86.64.

US consumer sentiment is near the top of its historical range going back decades. There are only two times since its inception the level was high than it is now, such as the euphoric bubble of the late 1990s.

Consumer sentiment has been trending up the past decade until 2015 and has been drifting sideways at the historical peak range the past four years.

The art of contrary thinking suggests when everyone thinks alike, everyone is likely to be wrong. However, in recent years the crowd has been right. For example, US GDP (Gross Domestic Product) is the total value of goods produced and services provided in the US. It is an indicator to analyze the health of the US economy. GDP is calculated as the sum of Private Consumption, Gross Investment, Government Spending, and Net Exports. Two-quarters of consecutive negative real GDP growth is considered a recession. GDP is also used by the Fed (FOMC) as a gauge to make their interest rate decisions. In the post World War II boom years, US GDP grew as high as 26.80% in a year, but by the late 20th century 2-7% nominal growth was more the norm.

US GDP is at a current level of 21.53 trillion as of September, up from 21.34 trillion in the last quarter. This represents a quarterly annualized growth rate of 3.48%, compared to a long term average annualized growth rate of 6.26%. Although it shows the US economy has grown less than the long term average, the United States is now a developed country and long past the emerging country stage pre-WWII boom years. So, in the chart below we observe a correlation between consumer sentiment and GDP. Up until recently, they are trending in the same direction, but keep in mind GDP doesn’t necessarily have an upside limitation, while the consumer sentiment is a survey that can be more range-bound. Sentiment surveys tend to oscillate up and down in response to changing economic conditions.

Another note about GDP before I get a thousand emails from my economics friends and other global macro funds managers, US Real GDP Growth is measured as the year over year change in the Gross Domestic Product in the US adjusted for inflation. To make my point and keep it simple, I used the base GDP.

So, how does overall consumer sentiment correlate with the stock market trend and how do they interact with each other?

Below we chart the US Index of Consumer Sentiment overlayed with the S&P 500 price trend for general visual observation. By looking at the lines, we can observe they are correlated. Up to 2000, the stock market and consumer sentiment trended up. The stock market and consumer sentiment trended down from 2000 to 2003 or so.

But, from around 2003 to 2008 it would appear consumer sentiment was non-trending as it drifted sideways as the stock market trended up, however, the sentiment was just staying at its peak level. When I highlight the peak range below, it’s more obvious that sentiment remains at a high level for years and occasionally swings down. Americans are mostly optimistic about America! and we should be.

consumer sentiment correlation with the stock market intermarket analysis

Continuing to review the trends, the period from 2007 on is correlated again to the downside as stocks and consumer sentiment dropped sharply. Recall this stock index declined -56% from October 2007 to March 2009 and then took four years to reach its 2007 high again in 2013. We can see the bottom chart above is the correlation coefficient of these two data. Although the correlation oscillates up and down, it has remained in the upper range signaling it is more correlated that not.

The larger declines in consumer sentiment are related to recessions. We’ve only had two recessions since 1991. The 1990s was the longest period of economic growth in American history. The collapse of the speculative dot-com bubble, a fall in business outlays and investments, and the September 11th attacks, brought the decade of growth to an end. Notwithstanding these major shocks, the recession was relatively brief and shallow compared to the one we would see seven years later. I marked the recessions in gray to show how they fit into the big picture.

“As a general rule, it is foolish to do just what other people are doing, because there are almost sure to be too many people doing the same thing.”

William Stanley Jevons (1 September 1835 – 13 August 1882) was an English economist and logician. Irving Fisher described Jevons’s book A General Mathematical Theory of Political Economy (1862) as the start of the mathematical method in economics.

This is really about human behavior.  Emotions and sentiment rise and fall with events.

To be a successful investor over the long term, we must necessarily believe, feel, and do differently than the masses at the extremes. So, I monitor the extremes to see when they change. At the extremes, I hope to be doing the opposite of what our investment management clients and everyone else believe I should be doing. 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The use of this website is subject to its terms and conditions.

The week in review

The week in review.

Periods of low volatility are often followed by volatility expansions

I like uptrends, until the end when they bend.

This uptrend in U.S. stocks hasn’t seemed ready to bend, but we are observing signs a reversal down could be soon. I’m not necessarily talking about a market crash of -50%, but instead a decline of around -5% or so that we typically see a few times a year as we’ve seen twice this year.

The “long term” investors may wonder why it matters?

All big waterfall declines begin with smaller downtrends. Few stay “long term” investors after large declines. After -30% declines or more, most anyone’s financial plans become negatively impacted. It’s especially true since we don’t know how long it will take to recover and there is no guarantee it will.

So, as a tactical risk manager, I necessarily prepare and apply situational awareness. If we want to manage our drawdowns, we want to do it sooner than later. Everyone is always giddy at all-time highs, then regretful if they don’t derisk or hedge after a downtrend.

Below is an example of a measure of realized volatility charted with the stock index. The top line is the 20-day average true range of the S&P 500 (SPX) and the lower is its price trend. I marked it up to show the average true range indicates a volaltity contraction like we’ve seen twice this year. The point is it preceded a volatility expansion and price declines.  I also added the blue bands around the price trend that reflect two times the average true range of the price trend. When the price trend moves outside this volatility band, I consider it simply outside its recently normal range. As you can see, it can stay outside its range for a while, but the price trend mostly oscillates inside this range. When it swings outside the range, it means reverts or swings the other way.

Average True Range ATR use in portfolio management trading volatlity

We can say the same for expected volatility, as measured by the CBOE Volatility Index, which measures implied volatility on the S&P 500 stocks. The VIX has declined to the 12 level, the low level of its historical range.

VIX $VIX #VIX IMPLIED VOLATLITY

Periods of low volatility are often followed by volatility expansions.

The SPX trend can trend higher, and volaltity can drift lower, but in the short run, it’s a good time to check thy risk.

Investment management is all about probabilities and possibilities, so you can probably see the direction is most probable, though anything is possible.

Why does any of this matter? read Why we row, not sail.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The use of this website is subject to its terms and conditions.

Can an optimistic investor sentiment measured by the AAII Investor Sentiment Survey trend higher?

Someone asked:

Can an optimistic investor sentiment in AAII Investor Sentiment Survey trend higher?

Another commented:

The AAII Investor Sentiment Survey is just over its long term average, so it has room to run.

Of course, bullish investor sentiment can trend higher. That is especially true when looking at just one survey measure like the AAII Investor Sentiment Survey.

Below I charted the Investor Sentiment, % Bearish and % Bullish using the AAII Investor Sentiment Survey data. Looking at the extremes, the end of 2017 was the highest % Bullish and the lowest % Bearish. If you recall, it was a very euphoric period with stocks trending up.

For another less noisy visual of this observation, I then chart the % Bullish – Bearish Spread. When it’s higher, more investors taking the survey are bullish. When it’s lower, more are bearish.

The peak optimism is clearly shown at the end of 2017 after the stock market had trended up with abnormally low volatility.

The peak cycle in pessimism was last December 2018, after stock prices had a waterfall decline.

To be sure, next, we overlay the % Bull-Bear Spread over the S&P 500 stock index. We can see visually the % Bullish reached an extremely high level in the last month of 2017 as the stock index trended up.  But, what happened afterward? aaii investor sentiment survey research backtesting

We see its lowest level over the period was the end of 2018 as stocks were in a waterfall decline.

The key is; what happened after the extreme level of bullishness?

It continued for a while, but I warned about it on January 24, 2018:

By the way, this past year is vastly different than the low volatility period I highlighted above. I was pointing out the stock index hadn’t dropped more than -4% in over a year and that was an unusually quiet condition. This past year has been more normal-looking from that perspective, with tow -5% – 7% drops after the waterfall.

Below is the trend from 2015 to 2018 to put it into perspective. Preceding 2017 were those two declines in 2015 and 2016. The beginning of which was considered a “flash crash.”

After stocks reached the second low, the trend up became smoother and smoother. Oh yeah, another blast from the past; I pointed that out, too, in November 2017.

Below is the trend from the January 26, 2018 peak through December 2018. The S&P 500 stropped -18% and more like -20% from the recovery high in October 2018 before the waterfall decline.

Here is the trend from January 1, 2017, to December 25, 2018. It’s what happened after the euphoric period. It was all but wiped out just a few months.

Can the investor sentiment get even more optimistic and drive stock prices even higher? Of course, it can! It has before! The Bull-Bear Spread is elevated, but not at its historical extremes.

But the AAII Investor Sentiment Survey isn’t necessarily a timing indicator by itself. It’s just a gauge. But, when combined with other observations I’ve discussed this week, the weight of the evidence suggests it’s a better time to reduce risk and hedge than to take on new risks as these surveys show investors are doing.

Those who forget the past are doomed to repeat it. 

Those who learn from the past have the potential to gain an edge from it.  

Have a great weekend!

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The use of this website is subject to its terms and conditions.

Investor optimism is reaching extremes

Ok, so this isn’t anything new. I just discussed it last week in “Investor sentiment signals greed is driving stocks as the U.S. stock market reaches short term risk of a pullback.” The sentiment indicators keep confirming the same signal: that investors are very optimistic about future gains.

It’s the kind of sentiment we often see before a decline.

The Fear & Greed Index is a simple combination of seven different indicators that are considered investor behavior measures. It includes the Put/Call Ratio, the net new 52 week highs and lows, stock price breadth, market momentum, the yield spread between junk bonds and investment-grade, and market volatility.  It’s a useful gauge to monitor against your own sentiment and behavior. The Fear & Greed gauge remains at a high level, signaling “Extreme Greed” and excessive optimism.

Fear & Greed Index What emotion is driving the market now?

Just as the stock market cycles up and down over time, so does investor sentiment. In fact, I believe investor sentiment oscillating between fear and greed is what drives stocks in the short run.

We measure this investor behavior with these different indicators. For example, the number of stocks hitting 52-week highs exceeds the number hitting lows and is at the upper end of its range, indicating extreme greed. The S&P 500 is 4.90% above its 125-day average is another above the average than has been typical during the last two years and rapid increases like this often indicate extreme greed.

The Put/Call Ratio shows during the last five trading days, volume in put options has lagged volume in call options by 50.13% as investors make bullish bets in their portfolios. This is among the lowest levels of put buying seen during the last two years, indicating extreme greed on the part of investors.

Stocks have outperformed bonds by 4.50 percentage points during the last 20 trading days. According to the Fear & Greed Index, this is close to the strongest performance for stocks relative to bonds in the past two years and indicates investors are rotating into stocks from the relative safety of bonds.

Junk bond demand shows investors in low-quality junk bonds are accepting only 1.84% in additional yield over safer investment-grade corporate bonds. This spread is down from recent levels and indicates that investors are pursuing higher risk strategies.

Investors tend to feel the wrong feeling at the wrong time as they oscillate between the fear of missing out and the fear of losing money.

Another useful gauge I follow is the AAII Sentiment Survey. Since 1987, AAII members have been answering the same simple question each week. The results are compiled into the AAII Investor Sentiment Survey, which provides insight into the mood of individual investors. Today’s AAII Sentiment Survey shows Investors are optimistic again. Optimism is above 40% on back-to-back weeks for the first time since August 2018.

AAII Investor Sentiment Survey

The investor misbehavior of thinking, feeling, and doing the wrong thing at the wrong time doesn’t just include individual investors, but also many professional investment managers.

‘Fear of missing out’ triggers huge fund manager shift from cash to stocks,

The latest Bank of America Merrill Lynch investment fund managers survey shows fund manager cash levels are lowest in six years  and

“Investors are experiencing Fomo—the fear of missing out—which has prompted a wave of optimism and jump in exposure to equities and cyclicals,”

According to ‘Fear of missing out’ triggers huge fund manager shift from cash to stocks, Bank of America Merrill Lynch says:

The survey of 230 managers running $700 billion of assets found cash levels dropped 0.8 percentage points to 4.2%, the biggest monthly drop since Nov. 2016 and the lowest cash balance since June 2013.

Like individual investors, many investment managers also oscillate between the fear of missing out and the fear of losing money. This may be especially true for relative return mutual fund type active managers who aim to beat an index benchmark. If they are underperforming their index after an uptrend, they may feel the fear of missing out and increase their exposure. If they lose as much or more on the downside, they may tap out after the fact to avoid further losses.

An objective of absolute returns necessarily requires seeing, believing, and doing things differently as an independent thinker.

As investors seem to be taking on more risk, I see indications that stocks may be near a point of buying exhaustion. Keep in mind, these investor sentiment surveys are on a lag. It was probably this very optimism that pushed stocks to this higher level.

If there is enough enthusiasm left to keep driving prices higher, the uptrend will continue as long as optimism prevails. If instead these indicators and surveys are a signal of buying exhaustion, we’ll see prices fall at some point from here.

I focus on these extremes in investor sentiment.

So, it may be a good time to reduce or hedge off some risk.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The use of this website is subject to its terms and conditions.

Active management and tactical allocation isn’t the only method with “strategy risk” as global asset allocation can get off track, too

Most investors, individual and institutional, apply some kind of asset allocation method to a portfolio mix of cash, bonds, and stocks. The most diversified also invest internationally,  so their portfolio is global. The most common method is strategic asset allocation, which allocates capital to funds that represent different parts of the stock and bond markets based on some prediction of future exected returns or historical returns along with variance. There isn’t much skill to it unless you can predict the future better than others.

That’s Global Asset Allocation and it’s especially what large institutional investors like pensions and endowments do.

Since around 2002, most financial advisors have adopted it as well. I say 2002 because that was when I remember even the large Wall Street brokers like J.P. Morgan and Merrill Lynch starting to teach their financial advisors to use Modern Portfolio Theory to create Global Asset Allocation portfolios. Although in many cases, these investment brokers and banks don’t necessarily allow their brokerage salespeople to create their own models, instead, they sell models the firm creates. After all, financial advisors at a brokerage firm or investment bank aren’t analysts or portfolio managers, their job is to sell the firms’ products and services. So, most individual investors who have a financial advisor at a large brokerage firm probably find themselves in some kind of Global Asset Allocation.

In The stock market has made little progress in the past two years which is a hostile condition for trend following I pointed out the U.S. equity market has made little progress in the past two years. I also showed a simple example of how and why it’s a hostile condition for trend following methods.

The past two years haven’t been any better for allocation to global stocks and bonds, no matter how you sliced it.

To illustrate this observation, we use the S&P Target Risk Index Series. Below is the chart of all four “target risk” allocations between global stocks, bonds, and cash.

An index isn’t a physical basket of securities, but a mathematical construct that describes the market. So, we can’t invest directly in an index. But we can invest in securities like ETFs that track indexes and which provide exposure to the markets they reflect. In the case of S&P Target Risk, BlackRock iShares has ETFs that aim to track each of the four indexes.

The S&P Target Risk series of indices comprises multi asset class indices that correspond to a particular risk level. They measure risk level based on exposure to cash and bonds (for lower expected risk) to stocks for higher risk and expected return. So, the four indices each measure the performance of specific allocations to equities and fixed income. Each index has varying levels of exposure to equities and fixed income and are intended to represent stock and bond allocations across a risk spectrum from conservative to aggressive.

Something unique about these indices is each index is composed of exchange traded funds (ETFs), rather than an index allocation to other mathematical indices.

Again, the indices represent stock-bond allocations across a risk spectrum from conservative to aggressive. The assigned risk level of the index (conservative, moderate, growth, and aggressive) depends on the allocation to fixed income.

S&P Target Risk Conservative Index. The index seeks to emphasize exposure to fixed income, in order to produce a current income stream and avoid excessive volatility of returns. Equities are included to protect long-term purchasing power.

S&P Target Risk Moderate Index. The index seeks to provide significant exposure to fixed income, while also providing increased opportunity for capital growth through equities.

S&P Target Risk Growth Index. The index seeks to provide increased exposure to equities, while also using some fixed income exposure to dampen risk.

S&P Target Risk Aggressive Index. The index seeks to emphasize exposure to equities, maximizing opportunities for long-term capital accumulation.

We can refer to Index Construction for details on each index’s allocation to equity and fixed income.

Index Construction Target Risk S&P global asset allocation index

The short version is there is a 10% to 20% difference between the allocation between bonds and stocks.

So, how has Global Asset Allocation performed in this very volatile two years that’s had a hard time gaining enough momentum to stay at new highs?

The Aggressive allocation participated in the downside but not the upside.

Active management or tactical allocation isn’t the only method with “strategy risk” as sometimes asset allocation can get off track. 

I don’t offer this kind of asset allocation that allocates capital to fixed buckets of stocks and bonds and then rebalances them periodically. As a tactical portfolio manager, instead of allocating to markets, I rotate between them based on asymmetric risk-reward. We don’t want to have too much exposure to falling markets and we prefer to focus on up trending markets. So, I prefer to limit my downside by predefining my risk and the upside takes care of itself as we let profits run. For me and our clients, our portfolio a replacement to this kind of asset allocation. Frankly, if I didn’t think I could achieve a better asymmetric risk-reward profile over full market cycles including drawdown control that we are better willing and able to tolerate, I wouldn’t bother doing what I do. If you can’t beat ’em, join ’em. But, from what I’ve seen so far, many investors in global asset allocation tapped out in the last bear market as both stocks and bonds experienced waterfall declines. Do you know what didn’t? cash and shorts.

To me, that’s tactical.

The bottom line is, all investments and investment strategies involve risk, including the potential loss of principal an investor must be willing to bear. Which one is right anyone is a function of their personal preferences toward someone actively making decisions or passively holding exposure to market risk, their risk tolerance for drawdowns, and their desire to pursue asymmetric risk-reward. None of it is a sure thing.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The use of this website is subject to its terms and conditions.

The stock market has made little progress in the past two years which is a hostile condition for trend following

Until the recent breakout to new highs, the stock and bond markets have made little progress in the past two years. Below are the price trend and total return chart of the S&P 500 stock index (SPX). The price trend of SPX has trended in a range of 20% to 30% since the first of 2018, but until this month, it had made very little progress.

The price return through today is 7.45%, and the total return, including dividends, is 11.38%. At the end of October, it was only 5.73% and 9.5%.

So, this has been a long non-trending volatile period similar to 2015 and 2016. From January 2015 to November 2016, the percent change of the SPX was near zero. Finally, in December, it trended up and broke out to a new uptrend. Still, over two years, the price trend change was only 8.74%.

I define market trends as volatile and non-volatile, trending, and non-trending. When we understand the current condition, it helps with tactical decisions of which type of system to focus on.

When markets are trending, and quiet, directional trend following systems enjoy the ride.

When a market gets choppy and volatile, the trend following systems have difficulty as they may exit the lows only to miss out on the price trend reversal back up. Then, by the time they reenter, the trend reverses back own again. A straightforward observation is the 200-day moving average, which got whipsawed several times in the 2015 to 2016 period.

I don’t trade moving averages. But, if we did over this period by entering the signal above the moving average and entered/exited at the close the day it was crossed, we’d have experienced these whipsaws. Of course, just thinking back to the past isn’t nearly as exciting as experiencing market action in real-time.

But, applying the moving average would have resulted in approximately -2.2% in 2015 vs. a small gain of 1.25% in the SPX.

In 2016 executing the signals resulted in a gain of 8% vs. 12 for the SPX.

Only looking at the upside leaves out the downside we have to experience to achieve it. Below are the drawdowns of this method applied to the stock index (blue line) vs. the stock index itself (red line.) This simplified example using a moving average for trend following missed most of the first decline with a drawdown of only -3% when the SPX dropped -8%, but then it participated in the next decline. Also notice it took a while to regain exposure, so it “missed out” of the sharp uptrend reversal April 2016 to July.

moving average drawdown whipsaw risk

When it’s one sharp declined after an uptrend, trend following methods usually exit and avoid some loss. It’s when the price swings up and down over a period we see the whipsaws of non-profitable entries and exits.

Over the past two decades, I’ve spent a lot more time and resources studying what causes entry and exit systems to fail than data mining for those that were historically successful. My heavy emphasis on what doesn’t work helped me to discover what does. Of course, this isn’t an example of a method that doesn’t work just because it didn’t achieve a perfect result of a hostile period. The other side of its results over this period was the smaller drawdown. To many investors, it’s worth missing some upside if the downside is limited.

If we want to manage the downside loss, we must be willing to miss some upside gain as there is no free lunch in active risk management.

These periods that are hostile for some methods signaled for me to have other weapons in the arsenal. For example, while trend following methods can do well in trending, non-volatile markets by catching the trend and riding it to the end, my countertrend systems are shorter-term and aim to enter and exit the swings. So, my countertrend systems actually consider the swings a friendly condition as they want to enter the shorter term countertrends down and exit to take a profit after it trends up.

Applying both of these systems is a bit of a shell game. But hey, that’s my name, so it may as well be my game. I say it’s a shell game because trend following and countertrend systems are in direct conflict with each other, so we necessarily need to decide which to use, when. It’s another tactical decision. It requires me to determine which market condition we’re observing and then apply the method that seems to best fit the situation. Nothing is ever perfect, and it’s far from easy, but when executed well, we have the potential to take advantage of different conditions. Or, more importantly, to avoid the hostile conditions of the single strategy.

It’s all easier said than done.

I have spent much effort in developing systems and skills for the execution of them. I am well aware of the challenges I face. But, I embrace the challenges, accept them, and deal with them.

By the way, the same 200-day moving average trend following method once again had its share of whipsaws since the beginning of 2018.

So, anyone applying trend following like this is happy to see the new breakout and hoping it will continue. If it doesn’t, the moving average exit signal is about -6% below the current price, so it would result in a -6% drawdown if the price falls from this point.

My countertrend systems, on the other hand, are signaling a short-term exit for this same stock index and entries on sectors like Utilities and Real Estate. You can see why in the chart.

They are in an overall uptrend, but their prices have dropped recently, offering a potentially asymmetric risk/reward if the uptrend resumes back up. That is, the downside is limited by predefining an exit if they continue to fall, but it’s more probable they may reverse back up and continue their uptrends. If they do, it becomes a trend-following trade. Of course, the indexes cannot be invested in directly, and this isn’t advice, but an example of how a countertrend system may look.

So, the bottom line is this has been a non-trending, very volatile two years for U.S. stocks and it’s a state that is hostile for simple directional trend following methods. If the recent breakout to the upside continues, the market state shifts to trending and maybe less volatile, but as I pointed out in Quantitative trend and technical analysis indicators signal strong U.S. equity participation in the uptrend but it may be nearing exhaustion it seems more likely we’ll see some countertrend or at least a stall even though this is a historically seasonably strong period.

The trick is to be prepared for whatever may happen next, and I am.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The use of this website is subject to its terms and conditions.

 

 

 

 

Happy Veterans Day: The land of the free, because of the brave. 

“A veteran is someone who, at one point in their life wrote a blank check made payable to ‘The United States of America,’ for an amount up to and including their life.”

We are the land of the free, because of the brave.

Veterans Day Marines #Veterans #VeteransDay #SemperFi

“Honor never grows old, and honor rejoices the heart of age. It does so because honor is, finally, about defending those noble and worthy things that deserve defending, even if it comes at a high cost. In our time, that may mean social disapproval, public scorn, hardship, persecution, or as always, even death itself. The question remains: What is worth defending? What is worth dying for? What is worth living for?” – William J. Bennett

Happy Veterans Day to my fellow Veterans.

Semper Fi

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The use of this website is subject to its terms and conditions.

Quantitative trend and technical analysis indicators signal strong U.S. equity participation in the uptrend but it may be nearing exhaustion

I focus on the directional price trend of my individual positions for my entry and exit signals. However, I also systematically monitor a range of indicators like investor sentiment and breadth that measures the participation of individual stocks in uptrends and downtrends. These quantitative indicators look at the directional movement of the stocks inside an index. The price trend is the final arbiter, but we can get a better observation of what is really going on by looking at the rate of change in the participation of stocks.

Another advantage of these indicators is they are not capitalization-weighted like the stock index. For example, the S&P 500 stock index weighs the larger company stocks more than smaller company stocks. The index includes 500 leading companies and covers approximately 80% of available market capitalization. The cap weighting methodology results in asymmetry between the sector and stock weighting. Out of 500 stocks, the top 10 are 22% of the S&P 500. So, exposure from only 0.01% of the stocks in the index drives 22% of the index trend. They are the largest companies in America.

Apple Inc. 4.30 %
Microsoft Corporation 4.30 %
Amazon.com Inc. 2.90 %
Facebook Inc. Class A 1.79 %
Berkshire Hathaway Inc. Class B 1.70 %
JPMorgan Chase & Co. 1.62 %
Alphabet Inc. Class C 1.54 %
Alphabet Inc. Class A 1.53 %
Johnson & Johnson 1.35 %
Exxon Mobil Corporation 1.21 %

Why does it matter?

See for yourself. The equally weighted S&P 500 index has gained significantly more since inception, although there have been long periods when it lags. Of course, the performance divergence is driven by the smaller company stocks that get more weighting in the S&P 500 Equal Weight Index. When small stocks are trending strong, the equal weight wins.

As always, looking at a historical price isn’t complete without observation of the ASYMMETRY® Ratio. The drawdowns between both indexes are similar, except for a notable divergence from 2000 to 2005. The large cap-weighted index actually declined more. The divergence was driven by heavier weighting in the large-cap growth stocks which were mostly technology.

So, you can probably see how an equal weighting of stocks may be a better guide for the quality and participation of a market trend.

That leads us to the indicators, which are also size agnostic. One stock is one vote.

The High-Low Index is a 10-day moving average of Record High Percent, which equals new 52-week highs divided by the sum of new 52-week highs plus new 52-week lows. This breadth indicator shows when new highs outnumber new lows and when new highs are expanding. So, new highs outnumber new lows when the indicator is above 50. We can also say new highs are expanding when the indicator is above 50 and rising, or contracting when it’s falling. Many stocks in the S&P 500 have been reaching new highs and it’s reached the high level that, in my opinion, suggests the market could become exhausted. I say that because after most stocks have already reached a new high, the enthusiasm to buy may have run its course. At this point, we start to monitor for a trend reversal. When individual stocks start to break down, we’ll see them in their individual price trend charts, but also in indicators like the High-Low Index. In the chart below I marked the extreme level in red and the peaks are also colored. Below the indicator, I include the stock index. The signal is not perfect, none are, but we can observe how it tends to interact with the price trend. This is admittedly a small sample size, but you probably see the point.

Hi Lo Index S&P 500 SPX SPY

Next is the S&P 500 number of stocks above their 200-day moving average. It is of no use to apply too many indicators if they reach the same conclusion or drive the same signal. The percent of stocks indexes are based on the status of price trends in the stocks, not the number making all-time new highs or lows. My observation here is once again, the number of stocks trending above their 200-day moving average is on the high end right now. This indicator cycles up and down as the stocks trend up and down. It’s at a peak, so we shouldn’t be surprised to see some exhaustion in buying pressure and the price trends stall or turn down at least briefly. Of course, it’s an imperfect indicator, so the stocks can remain in uptrends for months after this high level of participation has been reached. We see an example in the middle of the chart.

Percent of S&P 500 stocks above 200 day moving average $SPXA200

Next, we zoom in to the shorter-term trend, using the 50-day moving average. For no reason whatsoever, I’m also showing his chart as the percent of stocks above their 50-day moving average, rather than the number. Here we see something interesting. As 74% of stocks are in a longer-term uptrend as measured by the 200-day moving average, the percent of stocks in shorter trend uptrends is only 66%.  The trend is also down, showing less participation in the shorter-term trend.

percent of stocks below 50 day moving average S&P 500 index SPX SPY

My interpretation is the stocks inside the index seem to be getting weaker looking at 50-day trends. It signals about 35% of stocks are presently in 50-day downtrends and we may see that number expand.

It’s also concerning to observe fewer and fewer stocks have participated in uptrends since July.

I could go deeper and look at the breadth of the individual sectors. The short version is, the Financial, Industrial, and Utilities are participating most in uptrends and Energy, Consumer Staples, and Telecom are not.

bullish percent sector

I enjoy looking at charts for visual observation of what is going on but don’t have to sit around watching these indicators as I have developed systems that alert me when they reached extreme points of interest.

At this level, we may see some enthusiasm exhaustion because once stocks have already trended up, it takes a boost in optimism to continue to drive the momentum.

Looking at the already high levels of sentiment I shared last week in Investor sentiment signals greed is driving stocks as the U.S. stock market reaches short term risk of a pullback, it seems less likely we will see prices move a lot higher from here without a pause or dip. I consider this a higher risk level for stocks.

We’ll see…

Why does any of this matter? read Why we row, not sail.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The use of this website is subject to its terms and conditions.

 

 

Why we row, not sail

When a market is rising, we can let out the sail and enjoy the ride, but when the wind stops, we row, not sail.

I started using this analogy in 2005 after reading my friend Ed Easterling’s book Unexpected Returns, which is a fine example of the distinction in mindset between tactical and dynamic risk management decisions vs. traditional (passive) asset allocation.

About sailing, he said:

Most investors, especially those with traditional stock and bond portfolios, profit when the market rises, and lose money when the market declines. They are at the mercy of the market, and their portfolios prosper or shrink as the market’s winds blow favorably or unfavorably. They are, in effect, simple sailors in market waters, getting blown wherever the wind takes them…

In sailing with a fixed sail, the boat moves because it grabs the wind; it grabs the environment and advances or retreats because of the environment. Relative return investing corresponds to this fixed-sail approach to sailing. When market winds are favorable, portfolios can increase in value rapidly. When the winds turn unfavorable, losses can accumulate quickly. Bull markets are the friends of relative return sailors, and catching the favorable bull market winds and continuing to ride them are the secrets to making money in a bull market.

About rowing, he said:

Rowing, as an action-based approach to boating, is analogous to the absolute return approach to investing. The progress of the boat occurs because of the action of the person doing the rowing. Similarly, in absolute return investing, the progress and profits of the portfolio derive from the activities of the investment manager, rather than from broad market movements.

Around 2005 I taught a course to portfolio managers via DWA Global Online University on presenting global tactical investment management and dynamic risk management to investors because it was challenging to get clients to understand why we row, not sail.

For example, we use a chart like this one to illustrate the secular bull and bear market periods are made up of several years of uptrends followed by several years of crushing downtrends.

Secular bull bear market trend chart

It doesn’t matter if you gain 100% or 200% in an uptrend if you lose your gains in a -50% downtrend.

The foundation of my ASYMMETRY® Investment Program that focuses on asymmetric risk/reward is a deep understanding of the mathematics of loss. Most of the investment industry tells investors they should hold on through losses. However, I believe investors’ natural instinct to limit loss is mathematically correct.

asymmetry of loss losses are asymmetric risk management

As we show in more detail on ASYMMETRY®  Managed Portfolios: As investors are loss averse, losses are also asymmetric. So, the natural instinct to avoid large losses is mathematically correct.

A -50% decline requires a gain of 100% just to get back to where it started.

For example, the more than -50% loss in U.S. stock indices from October 9, 2007, to March 9, 2009, wasn’t recovered until late 2013, nearly six years after it started.

The -50% loss took a 100% gain and six years to recover.

As losses increase, more gain is necessary to recover from a loss. The larger the loss, the harder it becomes to get back to the starting point before the loss. This asymmetry of loss is in direct conflict with investors’ objectives and provides us with a mathematical basis for active risk management and drawdown control.

This is why I row, not sail.

When a market is rising, we can let out the sail and enjoy the ride, but when the wind stops, I get out the oars and start rowing.

I prefer not to sink to the bottom.

The last bear market may be becoming a distant memory of investors, but those who forget the past are doomed to repeat it.

Don’t.

It doesn’t matter how much the return is if the downside is so high you tap out before it’s achieved.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The use of this website is subject to its terms and conditions.

 

Investor sentiment signals greed is driving stocks as the U.S. stock market reaches short term risk of a pullback

The Fear & Greed Index reaches the Extreme Greed level as I got a short term countertrend sell or hedge signal for U.S. stocks.

Investors are driven by two emotions: fear and greed.

Too much fear can drive stocks well below where they should be, an overreaction to the downside.

When investors get greedy, their enthusiasm to buy may drive stock prices up too far, an overreaction to the upside.

The Fear & Greed Index is a simple gauge that attempts to signal which emotion is driving the stock market. It’s made up of seven indicators, and though it doesn’t generate a perfect timing signal, it’s useful for investors to compare to their own sentiment.

fear greed index investor sentiment

As I pointed out last week, expected volatility has also declined to a low level. The VIX is now in the 12 range.

Here is a chart of the Fear & Greed index over time. As we highlighted, it’s at its historical peak.

fear greed index over time

Investors tend to want to do the wrong thing at the wrong time, so measuring extremes in overall investor sentiment is a useful way to modify investor behavior.

I operate with a massive intention of feeling the right feelings at the right time. Some claim to use systems to overcome their feelings or remove feelings altogether, but as a tactical decision-maker, I know it isn’t actually possible. I prefer to experence my emotions and let them be but have shifted my mindset to feel the right feeling at the right time.

Based on my systems and indicators, suggesting sentiment and price trends have reached a point of extreme, I feel more defense right now. My quantitative methods drive my feelings. I see the signal, get a good sense about it, then pull the trigger.

As sentiment is reaching the extreme greed level, as see the S&P 500 index below is at all-time new highs.

When I see such enthusiasm, it’s initially good for momentum, but it eventually fades and so does the price trend.

But, it doesn’t matter if we monitor quantitative measures without them driving our decisions. When I see points like this, it’s just a reminder to review my portfolio to see if I’m comfortable with the risk/reward exposures. If I see asymmetric risk/reward, I do nothing. If I have too much risk exposure, I reduce it or hedge it off.

We shouldn’t be surprised to see a decline of 2-5% from here or at least a pause, but anything is possible.

Being prepared in advance is a useful way to avoid bad investor behavior, which is why I predefined my exposure to the possibility of loss by knowing in advance when I’ll exit or reduce the exposure.

 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The use of this website is subject to its terms and conditions.

Global Macro Observations of Stock and Bond Market Trends and Volatility

The U.S. stock market indices are finally reaching new highs, but momentum indicators show them getting overbought at the same time. Nevertheless, the trend is up and volatility is declining as the trend of the S&P 500, for example, has tightened up with the range of prices not as spread out as it was.

Speaking of volatility, the next chart is an observation of the stock index price trend with the 30 Day Rolling Volatility to see how it interacts. The formula for the 30 Day Rolling Volatility is Standard Deviation of the last 30 percentage changes in Total Return Price x Square-root of 252. YCharts multiplies the standard deviation by the square root of 252 to return an annualized measure. 252 is the number of trading days in a year.

I consider it an observation of realized volatility since it’s a measure of the last 30 percentage changes of price. Here we observe the 30 Day Rolling Volatility has declined recently, though it still isn’t as low as it was a few months ago.

Realized historical volatility is in a contraction, so after it declines we shouldn’t be surprised to see volatility expand again since volaltity is mean-reverting.

It’s an observation that volatility was dynamic, not static, so it’s constantly trending and cycling up and down. Volatility contractions are often followed by volaltity expansions as investors oscillate between the fear of missing out and the fear of losing money.

The CBOE S&P 500 Volatility Index (VIX) on the other hand, is a measure of implied volatility based on options prices of the stocks in the S&P 500.  The VIX measures expected volatility. As we see below, the VIX is close to its low around 12 it reached twice this year.

Once again, an indication that we could see a volatility contraction anytime from this starting point. Or, the uptrend in stocks and downtrend in their volatility could continue.

We could look a lot deeper into more measures, such as the VVIX Index, which is an indicator of the expected volatility of the 30-day forward price of the VIX. This volatility drives nearby VIX option prices. CBOE also calculates a term structure of VVIX for different VIX expirations. It’s the vol of implied vol.

At this point, the trend for U.S. stocks is up, and the volaltity is quiet.

At the same time, U.S. stock short term momentum is reaching overbought, long term U.S. treasury bonds are oversold. An example observation is the ICE US Treasury 20+ Year Index. Overall, these bonds are in an uptrend over the past year but have corrected recently. I wouldn’t be surprised to see the long term treasuries find some buying demand here and resume the uptrend. If they don’t, there are prior levels of support for a predefined exit to cut a loss if it doesn’t work out.

Within the U.S. high yielding dividend stocks have shown relative strength and good momentum this year. The trend is seen in the index below.

As seen in the trend of the S&P Global Dividend Opportunities Index, the same is true for global high dividend stocks. 

Looking beyond stocks and bonds, the trend of gold has finally turned up after being flat for over five years.

Gold over the past 10 years shows a strong trend post-2010, a downtrend, then a generally non-trending period for years until recently.

You can probably see why a robust trend following system and risk management is useful for markets including gold. If the 10-year chart didn’t make the point, this chart going back to the 1970s probably will.

There is a time for everything under the sun.

There is a time for offense and time for a defense.

The recent trend in gold is more clear over the one-year time frame.

That’s all for now.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

The flaw of average in stock market returns

We apply a lot of probability and statistical analysis for investment management and also our wealth management and strategy.

However, I do it with a complete system and framework that includes a heavy dose of skepticism and acceptance of reality.

There are many things we just can’t know and many other things people believe they know that just ain’t true.

Then, there are many flaws in the perception and how investors and wealth management clients use data.

Like a financial engineer, I focus on what may be wrong, what may go wrong, and how our thinking could be flawed. To achieve this level of reality, we necessary think deeply about it and share our independent thinking with other believable people who may disagree.

One of the flaws I see most often in investment management, retirement planning, and retirement income management is the flaw of averages.

The flaw of averages is the term used by Sam L. Savage to describe the fallacies that arise when single numbers (like averages and average returns for stock and bond markets) are used to represent uncertain outcomes.

A great example of the flaw of averages is a 6 ft. tall statistician can drown while crossing a river that is 3 ft. deep on average.

the flaw of averages stock return

Too often we see the reliance on historical “average returns”.

Yet, almost 80% of rolling decades since 1900 have delivered returns 20% above or below the historical average

So, there is an 80% chance that the total nominal return for the next decade will be either above 12% or below 8%.

And, then, there could also be underwater periods that are much longer and deeper than the average portrays. These periods may cause investors to tap out when the water gets too deep, or the deep water lasts too long.

 

You can probably see why I think it’s essential to tactically manage risk to actively direct and control the possibility of loss and control drawdowns.

Knowing what I know, I don’t offer investment management any other way.

It’s why we describe it on the front page of our website at Shell Capital.

 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

What I learned about Semper Fi from former Tennessee Coach Phillip Fulmer

It may seem odd to hear a U.S. Marines Veteran who never played football under Phil Fulmer say he learned something about the Marine Corps motto “Semper Fi” from the old Tennessee coach.

Afterall, Semper Fi means “always faithful” but it also means “always loyal“.

I have learned a valuable lesson from this past decade from the firing of Phillip Fulmer as any Tennessee Volunteers fan probably has.

Before I go on, I’ll also be the first to say I am fully aware the following is an example of outcome bias: the tendency to judge a decision based on the outcome, rather than the quality of the decision at the time it was made. Outcome bias is a significant error observed often in investment management, but it applies to all human endeavors.

Back in 2008, Dusty Floyd explained it well:

150 career wins, a winning percentage of almost 75 percent, a national title, and five trips to the SEC championship in 17 years. How would a coach with this kind of résumé get fired?

Tennessee football coach Phillip Fulmer has done a great job at the University of Tennessee but has struggled in the past few years. In the past four seasons, Tennessee’s record has been 27-20. That’s way below par for a school with as much tradition as Tennessee has.

I have to admit,  I too was excited when the University of Tennessee announced the hiring of Lane Kiffin. At the time, it seemed the fresh eyes and energy of a younger coach with a chip on his shoulder and something to prove was an exciting new direction for the Vols. I was especially excited to hear Lane Kiffin’s father, the famous Monte Kiffin of Tampa Bay Bucs, was going to join him along with an excellent recruiter Ed Orgeron. It seemed Tennessee had the potential to become an NFL looking powerhouse. And, it did.

At the same time, we were renovating Neyland Stadium and I was grateful to be able to invest in the prestigious new West Club. The donation was large enough to get a plaque on the front of Neyland Stadium behind the General Neyland statue, who was the only coach to win more games than Fulmer as a UT football coach.

Mike Shell Capital Neyland Stadiium Statue

On the wall behind the statue are the names of the proud donors, myself included.

Mike Shell Capital Neyland Tennessee Volunteers Vols Knoxville

We enjoyed the games at the West Club and most of the time stayed on our boat with the Vol Navy for the long weekend.

After a period of walking the walk of shame, losing to teams Tennessee should beat, we eventually bought a second home in Tampa, Florida and spent the winter and football season there. Now, we spend most of our time there and this summer was our first summer in Florida.

I’m not going to rehash what happened next and the roller coaster of the past decade. It’s a national story at this point. One of the most storied football programs in the county has had some highs, but many lows. Fortunately, with a few well-timed picks, we’ve got to be present for the highs such as the huge win over Virginia Tech at The Battle of Bristol, which holds the record for NCAA football’s largest single-game attendance at an astonishing 156,990. It was held at the Bristol Motor Speedway and we enjoyed it very much.

A football coach is measured by quarters, games, and seasons. If he doesn’t have the assistant coaches and players he wants, he has to make due and wait until next season. So, it could take a few years to get the adjustments right.

Phil Fulmer had lost David Cutcliffe, the outstanding UT offensive coordinator, who became the head coach of Duke, where he still is today. When Cutcliffe left, the offense struggled, and UT had it’s second losing season since 2005. So, one of the winningest coaches in college football history agreed to resign in a very emotional press conference.

I didn’t like the way that press conference felt, seeing the extremely passionate Phil Fulmer emotional on a national podium. It felt like betrayal and disloyalty then. It felt like a very proud football program had cut out one of its own, who played football at UT, in favor of a younger more aggressive coach with something to prove. At the time, Fulmer seemed to be still enjoying the fame of the 1998 National Championship and many SEC East wins.

Then came the young Lane Kiffin. We had hope of his fresh energy, but we know how that turned out. His true dream job opened up the very next season, and he bolted for the University of Southern California. Who could blame him? He had coached at USC and wouldn’t have to compete in the powerhouse Southeastern Conference and the likes of Nick Saban’s Alabama, Auburn, Georgia, Florida, LSU, and the list goes on.

Nevertheless, it was a harsh lesson of loyalty. Kiffin wasn’t loyal, but Fulmer was.

We’ve since had to endure the roller coaster of Dooley, Butch Jones, and now the new Jeremy Pruitt. Pruitt certainly has a better history than the former, so we’ve got to give him a chance to get it right. It isn’t going to happen overnight. He may have a rocky start on Rocky Top, but at this point, we’ve got to apply some semper fi. We now have Fulmer back at UT as the Athletic Director and he picked Pruitt, so let’s give him what he needs to succeed.

I’m going to the Tennessee vs. Georgia game today. We won’t be in our old West Club seats, but we’ll be front and center. Sure, we know the probable outcome in advance, but we’re here in Knoxville to cheer them on, win or lose.

The same applies to investment management.

If I applied the same mindset to any of my most profitable trading systems over the past two decades, we would have missed out and never achieved their long term asymmetric risk/reward profile. I operate about three dozen unique systems and not a single one of them wins all the time or always achieves our desired outcome. I have scientifically backtested thousands of systems of entry, exit, and position sizing, and risk management and even with perfect hindsight, we are unable to create perfect systems that perform well over every single market regime and condition. Even when I add my own skill, intuition, and experience I am unable to make it perfect.

What I’ve learned as an investment manager all these years is we have to make it okay to lose, or we would never cut our losses short and prevent them from growing into large losses. We have to be willing to experience imperfect periods of performance because we simply can’t achieve the asymmetric risk/reward profile we want to create without accepting the periods it doesn’t look as we want.

Today, I”m reminded of what I’ve learned about semper fi from Phillip Fulmer as I’m going to attend my first Tennessee football game since he became the UT AD.

There are many similar parallels between investment management and football coaching. There is a time for offense and a time for defense. Both require tremendous commitment, discipline, and execution to operate successfully long term. Some are much better at it than others and there is a significant divergence between the skill of the best and the mediocre.

What did I learn from Phil Fulmer?

Semper Fidelis: Always be faithful and loyal. 

Stick to the system and stick with good people with passion. 

In hindsight and a large dose of outcome bias, I’m pretty sure Phil Fulmer would have achieved more the past decade.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

I don’t always comment on economic indicators, but when I do, it’s a trend like ISM Manufacturing Index

The ISM Manufacturing Index monitors changes in production levels from month to month and is considered an important economic indicator by many global macro investment managers. Some of them consider a level above 50 as an indicator of a growing manufacturing sector.

However, the current level is now down to 47.30, down from 49.50 last month and down from 63.90 one year ago. This is a change of -4.44% from last month and -25.98% from one year ago.

Global Macro traders and investors who rely on economic indicators monitor the ISM Manufacturing Index to observe US economic trends and conditions. When the index is rising, they expect a bullish stock market in reaction to higher corporate earnings. Looking at the past year, the level is in a downtrend. As such, this downtrend may be bearish for the economy and stock market.

In fact, there seems to be a trend here as I broaded out the time horizon to see the bigger picture. ISM Manufacturing Index is also in a downtrend over the past three years.

We can say the same about the past five years. This economic indicator is trending down and in a downtrend.

Next is the 10-year trend. Over the past 10 years, the recent trend is notable.

Looking back over the full period I have data, which is before 1950, the historical trend suggests it could get worse, but it’s also at the lower range it has reached before it does.

So, this economic indicator suggests as investors, we had better be prepared and aware of the situation as tactical risk management is likely to be more obviously necessary for the near future. This is potentially negative for stocks from this point.

What about bonds?

The opposite is the case for bonds. Bonds may fall as the ISM Manufacturing Index rises and in an uptrend because of the sensitivity of bonds to inflation. However, when the ISM Manufacturing Index is declining like it is now and in a downtrend, it can be positive for bonds.

The funny thing is my directional price trend systems already have us meaningful exposure to long term U.S. Treasury bonds.

You see, I don’t have to know about economic indicators or follow them, my systems and methods identify when the trends are actually starting as well as when they reverse. When they do this well, we naturally get in sync with the price trends and what these economic indicators observe.

It looks like there are real signs of a slowing U.S. economy. As such, investors need to be prepared and not be complacent with non-risk managed holdings in their portfolio. I manage our risk at Shell Capital Management by predefining my exits on all of our holdings, hedging, and tactically investing in the direction of trends and sometimes likely countertrends. It’s what our clients pay us for. As this economic expansion is very aged as is the bull market in stocks, the only certainty is the change we’ll see in the future. What has been trending up so long will eventually trend down.

I’m as prepared as I’ve ever been and probably better now than I was in the past when I operated through such conditions.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

 

 

 

 

 

 

 

 

 

 

 

 

Implied volatility as measured by VIX indicates a volatility expansion in the near term

Implied volatility as measured by VIX indicates wider prices in the near term. The CBOE Volatility Index VIX has increased to 20, which is it’s long term average, suggesting prices will spread out to 20%.

Along with a volatility expansion, as typical, we are seeing stock prices trend down.

My leveraged exposure to the long term U.S. Treasuries has offered an asymmetric hedge in recently. The long term U.S. Treasuries don’t always play out this way, but this time we’ve benefited from their uptrend and some negative correlation with stocks.

Gold is another alternative used as a hedge exhibiting relative strength and time-series momentum.

 If this is just a short term correction, we should see some buying interest near this point or a little lower. If last month’s lows are taken out, this may be the early stage of a larger decline.

We were well-positioned in advance this time, so we’ll see how it all plays out.

 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

 

 

 

 

 

 

 

 

 

 

What is going on? 3rd Quarter Market Trends and Mean Reversion

The third quarter is now in the past, so I’ll share a few observations of what is going on.

First, below is the S&P 500 stock index over the past quarter. For observation purposes, if we simply define an uptrend as higher highs and higher lows and a downtrend is lower lows and lower highs, what do we have here?

I guess we have to add a non-trend, which is when the price trend made a lower high like it did last month but still bound within the range of the prior low.

No trend analysis is complete without also observing the drawdowns along the way. At this point, the SPX is about -3% off its high and its already getting attention in the headlines.

Stretching the price trend out farther to the past year, we see it is barely positive and I define this trend as non-trending and volatile.

The drawdowns over the past year have ranged from -5%, which we normally see about three times a year, to -20% which is less common.

What about mean reversion?

In investment management, mean reversion is the belief that a stock’s price trend will tend to move toward its average price over time.

So, you can probably see how we can use simple moving averages to illustrate mean reversion and the potential for countertrends.

I don’t trade off of moving average signals since I have my own algorithms that define the trend direction, momentum, and volatility. But, most investors have a basic understanding of moving averages so they are useful for sharing observations.

During the quarter, the S&P 500 dropped below its 50 day moving average, which is a shorter-term trend measure. Yesterday, it trended down below that trend line again. A -5% decline would be normal, as we observe them two or three times a year.

I included the 200-day moving average in the chart as well. The 200 day has been a popular trend following indicator, though it has had many whipsaw signals. A whipsaw is when the price trend trades above or below the moving average and then reverses the other way. Any trend following signal has the potential to result in whipsaws, though some are better than others.

So, what we have here is a sideways quarter with a price trend that has been range-bound.  Year to date, however, the stock market is off to a strong start, but that’s because 2018 ended with a sharp waterfall decline that recovered some of the losses the first two quarters this year.

Fortunately for us, we had exposure to alternative assets, some hedging, and some stronger momentum positions that have resulted in a more smooth quarter than is trending in the right direction.

Investors need to realize this is a very aged old bull market and the economic expansion is one of the longest in American history. If you are investing based on recent past returns of the past five or ten years, I believe you are going to experience some longer-term mean reversion in the coming years. By my measures, investors seem to be complacent again, as they were in 1999 and 2007, so it seems we may be getting closer and closer to a different kind of trend.

Investors didn’t want tactical risk management before the big bear markets, they wanted it after the fact.

The next time will be no different.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

 

 

 

Divergence between Value, Growth, and Momentum.

There is an interesting divergence today between Momentum, Growth, and Value.

Up until now, Value has lagged Growth and Momentum, as seen in this 5-year chart.

The underperformance of Value has been a topic of conversation of hedge fund managers I know who are Value investors.

Three-month momentum shows Value is trending up.

I believe styles like Growth vs. Value are largely driven by sectors, which is why I tend to focus more on the more granular sectors rather than broader styles.  Today we see the relative strength is in Energy and Financials, which have been the lagging sectors lately.

value underperforming growh momentum

So, this may not be enough to say the trend is changing to a period where Value outperformance growth for years, but it’s at least enough to be aware.

At some point, Value will take over leadership and when it does, it may continue for years.

For now, exposure to Value, including high dividend-paying stocks like we have, is having a good day while other factors are not.

 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Sector SPDRs are subject to risk similar to those of stocks including those regarding short selling and margin account maintenance. All ETFs are subject to risk, including possible loss of principal. Sector ETF products are also subject to sector risk and non-diversified risk, which will result in greater price fluctuations than the overall market.

 

 

Global Macro observations and the period of indecision ends with an upside breakout in stocks

In the last observation, The stock market is in a period of indecision that it will break out of I shared:

Looking at the price trend of the S&P 500 index over the past six months, today’s 1.4% move so far has the trend tapping the upper end of the range. I encluded this chart last Thursday:

asymmetric risk reward return stocks

Here we are a week later, and sure enough, this stock index broke out of the range.

stock market spx spy trend

Of course, past performance doesn’t assure future results, so while this upside breakout is positive, it isn’t without some risks and potential headwinds.

I hedged off some of my market risks, based on pattern recognition hedging the price trend could once again fall back to the lower red line. Of course, my exits on these hedges are predefined, as always, so none of the following global macro observations have any real tactical decision-making authority.

When I enter a position, I predetermine at what price I’ll exit if it becomes a loser or overtime, a laggard.

I’m no economist, so I rarely mention any economic data trends as they don’t lead to actionable tactical signals to buy or sell. However, one of the economy’s strongest segments may be showing signs of weakening: job growth, and it seems important enough to mention. On the global macro front, it seems like the market wasn’t concerned about employment data, and for now, it was right. 

In the big picture from a global macro perspective, the probabilities of a recession are trending higher, earnings growth is lagging, and business and manufacturing sentiment are trending lower. These may be necessary issues the U.S. has to deal with to get through the trade war with China.

On the other hand consumer confidence, spending, and employment have been able to withstand difficult conditions and recover. Up until now, the consumer and employment has been the bright spot. From this point forward, any weaknesss in consumer spending, confidence, and employment is a risk. Momentum in job growth has turned down from a cyclical peak this year, so I’m guessing it’s something that may become an issue eventually. When it comes to global macro data, there’s always something to worry about, so I don’t make my decisions with it.

Today’s employment data was a little better than expected, so it’s a driver of today’s stock market upside breakout. As past performance never guarantees the future, it may be different next time.

Until then, the stock market has indeed broken out of its coil and is sprung up.

 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

 

 

 

 

 

 

The stock market is in a period of indecision that it will break out of

As I’ve been pointing out all month in August, the stock market is in a period of indecision, that it will eventually break out of.

Looking at the price trend of the S&P 500 index over the past six months, todays 1.4% move so far has the trend tapping the upper end of the range.

asymmetric risk reward return stocks

Zooming in to the beginning of the month of August, it’s been a month of indecision. Those who want to buy are battling with those who want to sell.

The range of the price trend has spread out, as was implied by the CBOE S&P 500 Volatility Index VIX. It’s been a relatively volatile month with this big-cap stock index swinging up and down in a range of 4%.  As we can see in the chart below, the VIX trended up sharply as stocks declined in price.

What we also see, however, is implied is settling back down as the price trend is swinging up and down in this 4% range of indecision.

What’s going to happen next? 

I don’t need to know what’s going to happen next. I know exactly what I’ll do next with my positions if they continue trending up, or reverse back down.

Using this stock index as an example, if it breaks below this range it’s bearish, but if it has the buying demand to break above it, the uptrend resumes.

That’s why we call price action as we’ve seen this month a base patter and we’ll eventually see a big move out of it one direction or the other.

The S&P 500 index is an unmanaged index and cannot be invested into directly, but if we could and I wanted to be long stocks, I would exit if it fell below the three recent lows.

If I wanted to be short, I would exit if it broke out above the prior high.

This is just an oversimplified example of how I tactically manage risk.

Hurricane Dorian looks to add to the August volaltity.  Hurricane Dorian is now expected to intensify into a Category 4 hurricane as it moves toward Florida and the U.S. Let’s hope it loses its momentum. I’m in Tampa Bay on the other side. It should slow down by the time it reaches us. Our home is made of concrete, tile roof, and 150 MPH hurricane windows, so we’ll be fine.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

The S&P 500 stock market index is holding the line

The stock index is holding the line so far.

spx spy technical analysis trend following asymmetric risk reward retrun

You can see the percent of S&P 500 stocks trading above their 50 day moving average closed at 30% last week. It’s also testing a low trend, not it is a real trend where buying/selling pressure exists, it’s just a line showing the percent of stocks in short term uptrends are where they were at the May low.

spx percent of stocks above 50 day moving average $SPXA50R

Next, we see the percent of stocks above the longer-term trend closed at 55% last week, the same level as the March and May lows.

$SPXA200R spx percent of stocks above 200 day moving average trend following breadth

CBOE S&P 500 Volatility Index $VIX only dropped -2.77%, which is light, considering the S&P 500 closed up 1.1%.

The options market last Friday showed asymmetry between put buying and call buying with the market favoring puts 144%. Index options seem to be mostly used for hedging.

Individual equity options are more traded for speculation. Put buying was high on individual stocks last Friday, too. You can see the typical range is much lower.

This isn’t advice for anyone as this index cannot be traded directly, but I want to make a point that if I wanted to take a position here to increase explore, I would place my exit just below the red line. The red line is the May and March lows, so if the price trend falls below that, the trend changes from up to down. Lower highs and lower lows is a simple example of a downtrend. I just wanted to point that out as a very simple example of a tactical trade based on the price trend.

spx stop loss

We’ll see how it all unfolds from here.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

 

 

 

Technical analysis of the stock trend and volatility

Just yesterday I shared the observation in The value of technical analysis of stock market trends that the stock indexes were in a tight range the past month and we’d likely see a breakout, up or down.

I didn’t mention possible macroeconomic or geopolitical factors, I just pointed it out saying the market does what it does., and something or someone gets the blame.

Today, the stock market has shifted from being positive after the open, shaking off news of China imposing new tariffs on the U.S., to a waterfall decline down -2% at this point. Below is the up-close trend of today’s action so far.

Some probably believe the stock market is falling because of the new China Tariffs on the U.S, Trump Tweet about China, Jackson Hole Comments, or The Federal Reserve.

The reality is, it’s just the market, doing what it does.

I focus on that. The price trend and volatility.

Here is the trend looking at the tight range I observed yesterday. As you can see, the price is still within the range, but it’s trending toward the lower range.

DOW STOCK MARKET DOWN DAY TRUMP CHINA

In the meantime, the CBOE S&P 500 Volatility Index (VIX) has spiked up 25% today on the new enthusiasm for expected future volatility.

Wikipedia defines Technical Analysis as:

In finance, technical analysis is an analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume.

By that definition, what I’m sharing here isn’t Technical Analysis, I guess.

Investopedia defines it as:

Technical analysis is a popular trading method that analyzes past price action, usually on charts, to help predict future price movements in financial markets.

But, I am analyzing past price action on charts, but not necessarily to predict future price movements.

I’ll just call it charting.

I hope you find it helpful.

Let’s see how it closes. 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

The value of technical analysis of stock market trends

Someone asked; how do you use technical analysis (charting) as an investment manager?

I’ll share a simple and succinct example.

Below is a chart of a popular stock market index. What do you see when you look at it?

I see an overall uptrend based on this time frame, which is only year-to-date.

I see it’s experiencing a normal-looking interruption in the short term, so far.

As such, I’m looking for signs of which direction it’s going to move, by observing which direction it does move.

Without adding a single “technical indicator” for statistical or quantitative analysis, I see the stock market using this proxy has been drifting generally sideways since February.

spy spx ytd trend following

However, it has made higher highs and higher lows, so it’s a confirmed uptrend.

Looking closer, are shorter term, I see the green highlighted area is also in a non-trending state, bound by a range. I’m looking for it to break out; up or down.

setting stop loss for stocks

If it breaks down, I will look for it to pause around the red line I drew, because it’s the prior low as well as an area of trading before that. I would expect to see some support here, where buyer demand could overcome selling pressure.

If it doesn’t, I’d say:

Look out below!

Do I trade-off this? Nope.

Am I telling you to? Nope.

But, if I wanted to trade off it, I could. This is an index and the index is an unmanaged index and cannot be invested in directly. But, for educational purposes, assume I could enter here. Before I did, I would decide my exit would be at least a break below the red line. Using that area as an exit to say “the trend has changed from higher lows to lower lows, which is down, I’ll exit if it stays below the line.

Of course, the same strategy can be applied quantitatively into a computerized trading system. I could create an algorithm that defines the red line as an equation and create a computer program that would alert me to its penetration.

This is a succinct and simple glimpse into concepts of how I created my systems.

I hope you find it useful.

I developed skills at charting before I created quantitative systems. If someone doesn’t believe in either method, they probably lack the knowledge and skill to know better.

Let me know if we can help!

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Your technical analysis is no match for Trump Tweets!

Someone texted me this image this morning.

Trump Tweets market reaction to trump tweet

Now that’s funny right there; I don’t care who you are!

But seriously though, many people like to blame others for their reality. Most of the time, the market does what it does, and something or someone always gets the blame for it – besides them.

It’s an easy way for them to be right. It wasn’t them and their risk exposure that was wrong, it was someone else like the President, or the Fed, or the machines.

I ignore the nonsense and focus on price trends. I focus on the facts.

Yes, I call it technical analysis of price trends, as it has been called for decades.

But, just like we are now seeing trading firms call computerized quantitative trading systems more trendy names like “artificial intelligence” and “machine learning” or “pattern recognition”, others have renamed technical analysis “quantitative analysis”

The trend seems to be driven by those who write research papers, books, and such.

To be sure, an example is a disclosure I saw in an SEC Form ADV registration document. In Methods of Analysis, Investment Strategies, and Risk of Investment Loss, the first lists: Quantitative analysis and Fundamental analysis, but not Technical analysis. I’m going to fictitiously call this firm “QUANT”.

QUANT will primarily utilize Quantitative analysis but may also use other analysis methods, including Fundamental analysis as needed.

Quantitative analysis involves the analysis of past market data; primarily price and volume.

Fundamental analysis involves the analysis of financial statements, the general financial health of companies, and/or the analysis of management or competitive advantages.

Investment Strategies QUANT will utilize long term trading and short term trading strategies.

Under Material Risks Involved, it goes on to say:

Methods of Analysis

Quantitative analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets do not always follow patterns and relying solely on this method may not work long term.

Fundamental analysis (I’m skipping this irrelevant part for brevity)

Investment Strategies

Long term trading is designed to capture market rates of both return and risk. Frequent trading, when done, can affect investment performance, particularly through increased brokerage and other transaction costs and taxes.

Short term trading generally holds greater risk and clients should be aware that there is a material risk of loss using any of those strategies.

Investing in securities involves a risk of loss clients should be prepared to bear.

What’s the big deal?

It isn’t a big deal, but, let’s change a single word to see what happens.

Let’s replace “Quantitative” with “Technical” and see if it fits the same.

Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets do not always follow patterns and relying solely on this method may not work long term.

Yes, that’s the definition used for Technical analysis.

The point is, they just didn’t want to call it “Technical analysis” because “Quantitative analysis is more trendy in modern times.

But, it’s the same.

I don’t debate others hoping to change their minds, but instead, I do mull over what others believe to see how it may be in conflict with what I believe. By doing that, it allows me to question my own beliefs to see if there is enough evidence to change what I believe. I do that to combat what we are all more prone to do, which is seek out information that confirms what we already believe and ignore information that says it isn’t true. Humans have the tendency to interpret new evidence as confirmation of one’s existing beliefs or theories. If we want to gain new knowledge, we have to consider we may be wrong and apply a scientific approach to discover new knowledge.

Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that affirms one’s prior beliefs or hypotheses. It is a type of cognitive bias and a systematic error of inductive reasoning.

We have to be careful of looking for information that reinforces what we already believe, without considering what could be wrong about our beliefs.

It’s reverse-engineering.

I try to break it to see if it will break and what makes it break.

…and speaking of Technical Analysis, Long Term U.S. Treasury Bond ETF TLT has been in a volatility expansion, on the upside. Demand has driven its price momentum up to levels historically seen during larger stock market declines. The price is now outside the upper price channel. You can probably observe what it typically does afterward.

technical analysis of TLT $TLT trend following

Technical Analysis of the S&P 500 index price trend: it looks to me like we’re about to observe a breakout in one direction or the other. The last time, in May, the breakout was to the downside. This time may be different. See the first image above for risk disclosure of what may go wrong — or at least who may be blamed for it 🙂

technical analysis of the stock market spx

Technical Analysis of VIX: the volatility expansion has now contracted from 25 to 15. So, the options market now expects the range to be within 15% instead of 25%.

We’ll see if vol expectations continue to drift down, or spike back up.

Ps. I didn’t provide any evidence of my political beliefs. If anyone took anything from the above as a sway one way of the other, they are joking themselves as I am joking with them. I focus on the facts. We can’t blame any single thing or any one person on the direction of stock market trends and if anyone does so, they are joking themselves.

We can say the same for calling Technical analysis Quantitative analysis, believing by changing the word, it means something different.

It doesn’t.

I say believe and do whatever creates asymmetric investment returns for you.

But as Larry the Cable Guy says:

Now that’s funny right there; I don’t care who you are!

 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Investor fear has been driving the stock market down

I like to observe the return drivers of price trends. Though I primarily focus on the direction of the price trend and volatility, I also consider what drives the price trend.

Yesterday I suggested the stock market was at a point of pause and possible reversal back up in The stock market is holding its breadth… for now.  I shared some examples of how the percent of stocks in a positive trend had declined to a point that could indicate the selling in the near term could be drying up.

So far, today’s sharp reversal up seems to confirm at least a short term low.

Up until today, the S&P 500 stock index was down about -6% off its high. In May it dropped -8% before reversing back up to a new high. I express these drawdowns in the % off high chart below. This is year-to-date, since January 1.

Just for reference, this -6% decline looks more similar to May when I expand the time frame to 1 year instead of just year-to-date. We also see the October to December waterfall decline was a much deeper -20%.

Of course, if you look close enough, the pattern prior to the much steeper and deeper part of that fall looks similar to now, with the price trend testing the prior low, recovering, then falling sharply another -10%. I’m not pointing this out to say it will happen again, but instead that it’s always a possibility, so risk management is essential.

What is driving this decline?

Fear.

It’s that simple.

Some are afraid of another recession signaled by an inverted yield curve, others of the Trump Tweets, others by the Fed lowering interest rates or not doing it fast enough. I’ve heard some hedge funds are afraid China will invade Hong Kong, others are concerned of the China tariffs. Some people probably wake up afraid and fear everything that can possibly happen, as such, they experience it as if it did.

I prefer to face my fears and do something about them.

Investors have reached an extreme level of fear in the past few weeks as evidenced by the -6% decline in the stock index. We can also see this reflected in the investor sentiment poll. The AII Sentiment Survey shows optimism is at an unusually low level and pessimism is at an unusually high level for the 2nd consecutive week.

investor sentiment extreme trading

Such extreme levels of investor sentiment often proceed trend reversals. So, these extreme fear measures along with the breadth measures I shared yesterday, I’m not surprised to see the stock market reverse up sharply today.

Another interesting measure is the Fear & Greed Index, which is a combination of multiple sentiment indicators believed to measure investor sentiment. The Fear & Greed Index has reached the “Extreme Fear” level, so by this measure, fear is driving prices.

fear greed index

Over time, we can see how the Fear & Greed Index has oscillated up and down, swinging from fear to greed and back to fear again. I highlight the current level has reached the low point it typically does before it reverses up again, with the exceptions of the sharp panics in 2018.

advisor money manager using fear greed index extreme behavior

I have my own proprietary investor sentiment models, but here I share some that are simple and publicly available. I’m not suggesting you trade-off of these, as I don’t, either, but instead use them to help modify your investor behavior. For example, rather than use these indicators to signal offense or defense, investors may use them to alert them to their own herding behavior. Most of the time, we are better off being fearful when others are greedy and greedy when others are fearful.

These measures aren’t quite robust enough to be timing indicators by themselves, my signals are coming from other systems and I’m using these to illustrate what’s driving it.

Over the past 12 months, as of right now the stock index is up 2.48%. That’s including today’s 1.5% gain.

Only time will tell if it holds the line, but as I’ve zoomed in to a 3-month time frame, we can see the first line of support that needs to hold.

We are long and strong at this point, so;

Giddy up!

 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

The stock market is holding its breadth… for now

The stocks in the S&P 500 index that are above their 50 day moving average has stopped at the same level it reversed in May. The percent of stocks in up or downtrends is a measure of breadth, which means how actively stocks are participating in uptrends and downtrends. 

spx percent of stock above 50 day moving average

At 30% of stocks above their short term trend line isn’t nearly as washed-out as they were last December, we’ll see if this is the end of the selling pressure.

The percent of stocks above their 200 day moving average is at 54%, also around the same level as the May correction.

spx stocks above 200 day moving average asymmetric risk reward

But, notice that is nowhere near the December washout, which as an asymmetric risk-reward opportunity.

Of course, nothing is more important than the actual price trend itself. In the really short term, today paused at the low two weeks ago. If this line doesn’t hold, the next one is the May low. So, we shouldn’t be really surprised to see it fall to that level.

spx spy trend following

So far this stock index is -6% off it’s high, a normal correction within an ongoing uptrend.

So, if this is just a normal pullback within an ongoing uptrend, we should soon see the enthusiasm to buy overwhelm the desire to sell. Otherwise, the stock market will obviously fall some more, and that would still be within a normal decline.

Fortunately, I anticipated this volatility and some decline and shifted to defensive stocks and some bonds to help avoid some of the declines. I also had some hedges early on that helped offset the initial losses in long exposure.

I hear there’s a lot of noise and many geopolitical themes getting the blame, but it’s really just the market, doing what it does. Something and someone always gets the blame. If you believe that’s the real driver, you aren’t paying enough attention to my observations.

We’ll see how it all unfolds from here.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

Argentina stock market loss is a reminder of single country ETF risk

If we looked at the MSCI Argentina ETF on July 4th, its gains year to date were astonishing.

Below is a chart of both iShares MSCI Argentina & Global Exposure ETF (AGT) and Global X MSCI Argentina ETF (ARGT) price trend from January 1st to July 4th.

The Global X MSCI Argentina ETF (ARGT) invests in among the largest and most liquid securities with exposure to Argentina. Both of the ETFs intend to track the MSCI All Argentina 25/50 Index.

On the iShares MSCI Argentina and Global Exposure ETF website, iShares highlights the theme:

Why AGT? Currently, the second-largest economy in South America, Argentina has recently implemented policies to make its market friendlier to foreign investors (World Bank. Based on 2015 GDP)

However, International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets or in concentrations of single countries.

Yesterday, the ETF priced in U.S. dollars dropped -24%. Just like that, in a single day, most of its year-to-date gain evaporated.

 at Bloomberg reports “Argentina’s 48% Stock Rout Second-Biggest in Past 70 Years” and;

  • Only Sri Lanka has suffered a worse single-day drop since 1950
  •  South America nation endured similar one-day sell-off in 2002

Single countries can be subject to the possibility of substantial volatility and loss of value due to adverse political events.

Argentina’s peso also fell -15% after a surprising primary election outcome. CNN says It seems investors how populists could replace the country’s current, business-friendly government.

Bloomberg goes on to say:

“That marked the second-biggest one-day rout on any of the 94 stock exchanges tracked by Bloomberg going back to 1950. Sri Lanka’s bourse tumbled more than 60% in June 1989 as the nation was engulfed in a civil war.”

The top 5 shows 1-day percent declines from -36% to -62%:

Global X MSCI Argentina ETF AGT ARGT

 

You can probably see why I say we must actively manage the possibility of loss through tactical risk management methods. Tactical risk management methods may include predefined exits, hedging, and position size control. Of the 40 or so single country ETFs I include in my global universe of ETFs, it necessarily requires the realization that any single country can result in a loss like Argentina.

 

I built my risk management systems with the possibility of these enormous losses in mind, so we can probably be more prepared than those with no plan to direct and control the exposure to the possibility of loss.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Falling stock price creates an asymmetric return for investors seeking high income from dividend yield

The demand for retirement expertise is strong and getting stronger. In my career over more than two decades, I’m not only observing an aging client base but also a noticeable increase in the number of people over fifty looking for income from their investments.

I don’t always call it “retirement” as it’s really “freedom.”

I don’t necessarily call it “financial freedom” because freedom is freedom, and it’s hard to have it without the financial part squared away.

As my wife Christi and I are rapidly approaching 50 ourselves with seemingly more momentum we’re noticing we are around more and more friends who are looking forward to the shift from “working for a living” to their money working for them.

I call it “getting off the treadmill,” and not everyone wants to get off the treadmill, but when you are ready to, you need a plan.

We create plans for getting off the treadmill and more importantly, staying off it.

But that isn’t my topic today. Today we have a simple topic relative to retirement income portfolio management. That’s what most call it. I just think of it as replacing earned income from working or running a business with passive income from not having to physically “do” things to get money income.

As an active investment manager, I’m not otherwise a fan of anything passive. There is nothing about what I’m going to share here that is passive for me, but it is for investors who want to get a check and go enjoy doing whatever it is they want to do with their time.

Here we go.

The word “correlation” is a statistical term that is grossly overused in the investment industry, but there may be no better true example than the negative correlation between price and yield (or interest rate.)

When the price of a stock or bond that is paying dividend or interest FALLS, its yield from that starting point RISES.

Conversely, when the price of a stock or bond that is paying dividend or interest RISES, it’s yield FALLS from that starting point.

It’s an inverse correlation and the one time when I switch from a trend-following strategy to a countertrend strategy.

If I want high income, I necessarily aim to buy low and sell high through the trend cycles.

I’ll share a very straightforward example, but I’ve removed the name of the fund. This ETF is one I actually own and since my mission here isn’t to make recommendations to people I don’t know or promote a position I have in my ASYMMETRY® High Income Yield portfolio, we’ll just leave off the name. Instead, let’s focus on the price and yield trends.

One advantage of falling stock prices is as price falls, the dividend yield rises from that new price. In the example below, the blue line is the price trend over the past five years. The orange line is its dividend yield. You can see when the price declines, the yield from that staring point rises.

retirement income high yield portfolio

If we buy it after it falls, our yield percentage is based on what price we buy it. Of course, that’s assuming all its holdings continue to pay their dividends/interest. This isn’t risk-free, so I add some risk management techniques to the overall strategy.

The bottom line is, when we look at the blue line above, that’s the price, and it has declined to the lowest point in five years. However, the orange line, which is the dividend yield on this ETF is at an all-time high.

If it’s high income we want from our savings, we want to buy after the price falls, then may sell, or hedge, to reduce exposure after the price trends up to an extreme.

When we buy high yielding assets at lower prices, the dividend payment is higher from that starting point as long as the companies we invest in keep paying their dividends. In this example, this one ETF alone invests in over 100 of the highest dividend-yielding equity securities around the world.

One of the primary risks of high dividend-yielding securities is rising interest rates. Over more than a decade, we’ve seen the central banks drive interest rates from one extreme to another. As the chart of the Prime Rate shows, they lowered rates from 8% in 2007 all the way to 3.25% and kept it at that historically extreme low level. Starting in 2016, the Federal Reserve started raising interest rates. By last year, the Prime Rate had reached 5.5%. The Fed recently lowered the rate to 5.25%.

Economic data now suggests the Fed may continue to lower interest rates.

So, instead of a rising interest rate environment, we may see a falling interest rate environment.

The bad news is; if the Fed keeps lowering rates, historically, the Fed has lowered rates to ward off recession or when it sees substantial risks of a downturn.

The good news is, these falling prices are creating an opportunity for investors who want to build a high-income portfolio through dividend yield and interest.

Of course, if that sounds like you, you don’t want to wait until it happens to get started. If you look closely at the chart again, there are seasons and cycles to increase and decrease exposure.

retirement income high yield portfolio

What we are seeing now is a new opportunity to add exposure.

I’m not saying to randomly go pick high yielding dividend stocks or ETFs. Like any investment, it isn’t risk-free. Investing always involves risk, including the possible loss of principal. High yielding stocks are often speculative, high-risk investments. So, portfolio management requires actively managing the risk along with diversification. Some high dividend companies can be paying out more than they can support and may reduce their dividends or stop paying dividends at any time, which could have a material adverse effect on the stock price of these companies and the Fund’s performance. International investments additionally involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

The bottom line is; there is no free lunch. If we want the potential for return, we have to be willing to take the risks we are willing to take, and tactically manage or hedge the risks we want to limit.

As with most things in life, timing is everything. We don’t have to get the timing perfect, just good enough to result in asymmetric risk/reward.

Right now, I see interesting asymmetric risk/reward setups in some of these securities we use to build our high-income portfolio. That is, the potential for future capital gain from price appreciation and high income from the dividend yield seems more elevated than the downside risk.

Of course, if I predetermine my downside risk as I do, I can skew the payoff asymmetrically.

For example, in the case above, this fund of 100 stocks is yielding about 10% from this price. If I invest in it today, the future expected return from the dividends alone would be approximately 10% a year from now, and it pays monthly. You can probably see how attractive that sounds to someone who wants to live off their capital. Let’s see a simple example of the possibility of asymmetry.

Price Falls: As its price has already fallen sharply and its yield has increased to nearly 10%, I may believe it won’t drop a lot more. However, even though it may be oversold, I could predetermine an exit of only -5% below the current price. If it falls -5% after I buy it, I could sell it and take the loss and move on. But, these positions are unique. It isn’t just about the price trend. As price falls, its income-generating potential is increasing. So, a falling price actually increases the future asymmetric risk/reward payoff potential.

Price Stays the Same: If the price stays the same for a year, we will earn about 10% from the dividends. If I only risked 5% on the position and it trended up instead of down and stayed the same for a year, our asymmetric risk/reward is 2:1. I risked 5% to earn 10%.

Price Trends Up: The best outcome is I buy it, and the price goes up, and we also earn the 10% income from the yield. If the price gained 10% and the yield paid 10%, the total return would be 20%. If I risked 5% to earn 20%, the asymmetric payoff is 4:1.

You can probably see why I call this strategy ASYMMETRY® High Income Yield.

Questions? feel free to email me. 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

 

All investors are market timers

All investors are market timers.

It isn’t just tactical traders.

I’ve been hearing more about “market timing” recently from some investment advisors saying they aren’t market timers.

But they are.

We all are.

And timing is everything. Like it or not.

I start off with general definitions of market timing from a Google search.

According to Wikipedia:

Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis.”

This definition indicates “by attempting to predict future market price movements” is what draws the distinction of “market timing.”

Next is Investopedia:

“What Is Market Timing?

Market timing is a type of investment or trading strategy. It is the act of moving in and out of a financial market or switching between asset classes based on predictive methods. These predictive tools include following technical indicators or economic data, to gauge how the market is going to move.

So, it seems the distinction they make for “market timing” is a prediction.

Yet, everyone must necessarily make a prediction about the future to invest or trade.

For the passive indexers who buy and hold index funds, they necessarily make a prediction those funds past performance will resemble future results. They assume the stock and bond markets will have a positive return over the long term. The truth is, that is not a certainty, but a prediction on their part. In fact, choosing a time to rebalance their asset allocation is market timing, too, especially if they do it in response to price trend changes.

For value investors who actively look to add stocks they believe have been undervalued by the market, and/or trade for less than their intrinsic values, they are necessary market timing. When they sell a stock that has reached full value, they are timing the exit. It’s market timing. Some may even reduce or hedge overall stock exposure when the broad stock indexes are overvalued, which is also a timing decision. The more aggressive value investors, such as a value hedge fund, may use leverage to buy more stocks after their prices fall in a bear market. It’s market timing.

For momentum investors. it’s about following the historical trend. Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period. It’s market timing as it assumes on average they’ll achieve more gains from the positive trends than losses from the negative trends. Extrapolating the recent past into the future is necessarily market timing.

What about non-directional trading strategies like certain options spreads and volatility trading? They still require and entry and an exit and timing the trade. Being invested in the stock market, buy the way, is explicitly short volatility, so when volatility expands stocks usually fall.

I want to be long volatility when it’s rising and short or out when it isn’t. I want to be in an options positions that on average result in asymmetry: more profit, less loss.

For example, an options straddle is a non-directional trading strategy that incorporates buying a call option and a put option on the same stock or ETF with the same strike and the same expiration. With a non-directional trade, we may have a two in three chance of making money because we can profit if the stock moves up or down. It requires movement, which is a prediction of the price expanding and timing it. It’s market timing.

Rather than trying to debate against “market timing” it seems more useful to admit we are all doing it in all we do, one way or another.

I embraced that long ago, and for me, I realize timing is everything.

But that doesn’t mean it always has to be perfect timing, either.

Asymmetry results from the average gains overwhelming the average losses, so the timing could have no edge if the profit-taking and loss cutting systems are robust.

All investors are market timers. The market timers who make the biggest riskiest bet are the passive index asset allocators who make no attempt to manage their risk, assuming past performance is indicative of future results.

Past performance is no guarantee of future results.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Global Asset Allocation hasn’t done any better

I’ve been hearing of how different active management strategies haven’t performed as well as the S&P 500 stock index the past five years. I can’t say it’s a big surprise since the SPX has been well into an overvalued level since 2013.

iShares Global Asset Allocation ETFs are an interesting example for GAA. Each of them has a percent in stocks and a percent in bonds. According to iShares:

Each iShares Core Allocation Fund offers exposure to U.S. stocks, international stocks, and bonds at fixed weights and holds an underlying portfolio of iShares Core Funds Investors can choose the portfolio that aligns with their specific risk considerations like investment time horizon; for example, those with longer investment time horizons may consider the iShares Core Aggressive Allocation ETF.

Each ETF has a fixed allocation to stocks and bonds.

ishares global allocation ETF

So, the difference between them as they go from conservative to aggressive is what percent is in stocks vs. bonds. iShares Core Allocation brochure says these ETFs harness the experience of BlackRock and the efficiency of iShares ETFs to get a broad mix of bonds and global stocks. BlackRock is the largest asset manager in the world, so if it’s global allocation you want, I’m guessing these may be hard to beat. I’ve not invested in them nor do I recommend them, but I think they make for a good example of what can or can’t be accomplished with Global Asset Allocation.

Global Asset Allocation hasn’t done much better than alternative strategies. Over the past five years, the total return for the most aggressive ETF is 31%. Simple math says that’s around 6% over five years.

So, by this measure, Global Asset Allocation doesn’t come close to putting 100% of your money into a stock index fund. Below we see the SPY, for example, has doubled the iShares aggressive allocation and tripled the conservative allocation.

But, who invests all their money in the stock index all the time?

I don’t believe I know anyone who does.

Why?

A picture is worth a thousand words. The stock index has declined over -50% twice since 1999, so it could certainly do it again.

Next, we compare the S&P 500 which is fully invested in stocks all the time to their conservative allocation in terms of % off high to observe historical drawdowns. Clearly, there is a huge difference in the downside risk as well as the upside reward. For a conservative investor who can’t handle -50% drawdowns or more than, say -20%, investing all their money in something that declines that much isn’t an option.

When the valuation level is so expensive, it increases the possibility a big bear market may happen again.

The Shiller PE Ratio for example, is the second-highest it’s ever been. In fact, the only two times it was higher was Black Tuesday before the largest crash in American history and the 1995-99 bubble. This has also been the longest economic expansion in U.S. history.

Shiller PE Ratio

So, we shouldn’t be surprised to see another bear market and recession in the years ahead. However, my main point here is these higher valuation levels suggest higher risk levels, so many active management strategies have probably taken less risk in the past five years.

But, it doesn’t seem Global Asset Allocation from the largest asset manager in the world hasn’t done any better.

May as well be honest and realistic about it.

Not convinced?

Think you or your investment advisor can do better than iShares managed by BlackRock at Global Asset Allocation?

Ok, I’ve added four more well known Global Asset Allocation funds. To keep the chart clean, I’m only comparing them to the top-performing iShares ETF, which of course is the most aggressive since it’s a bull market.

None of these funds have achieved a better result. The two best known active global allocation funds, BlackRock Global Allocation, and PIMCO All Asset have achieved a total return of only 15% the past five years.

The past five years have been very unusual. It’s a period of the longest economic expansion in U.S. history and the longest bull market.

It isn’t going to last forever.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Small stocks are still lagging

The chart is the price trend of the Russell 2000 Index, which is a small-cap stock market index compared to the S&P 500, the stock market index based on the market capitalizations of 500 large companies. Small-cap stocks have been lagging over the past year.

Smaller stocks lagging behind larger companies is more typical in the late stage of a bull market and economic expansion.

Looking back over three years, we see smaller stocks were leading on the upside during the uptrend. That hasn’t been the case recently.

This divergence may be an early sign of a regime change.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

The volatility expansion is here…

Since I mentioned it a week ago, volatility has indeed expanded.

In fact, it’s increased 32% today alone.

Implied volatility as observed by the VIX has almost doubled the level it was a week ago.

The Fear & Greed Index is now at the “Extreme Fear” level. VIX is one of the signals it uses to measure the degree of investor panic.

how to use fear greed index

Clearly, the options market has now priced in more expected movement in the range of prices. When I mentioned it a week ago, it implied a 12% range, now it’s 23%.

The S&P 500 stock index is down 3.35% today.

stock market 2019

We’ll see if this is enough panic selling today to drive prices low enough to attract new buying demand.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Charting and technical analysis of the stock market trend

I usually share more of my observations of the stock market trend when the shit hits the fan. The truth is, I enjoy volatility expansions more than the quiet, calm trends. There isn’t as much for me to talk about when the trends are calm and quiet.

I also try to point out, in advance, when I believe we may see a volaltity expansion like we are now. You shouldn’t expect it from me as I’m ultimately an investment manager, not a Mark Twain, so my own tactical trading decisions are my priority. Also, what I share here doesn’t necessarily represent what I am trading in our managed portfolios. In fact, I usually try to avoid mentioning any symbol, stock, ETF, etc. that I may be trading or invested in. As such, use my observations at your own risk as it is not investment advice. With that said…

Here is the one year chart of the S&P 500 with some basic technical analysis applied. The blue trend line I drew overhead is where we would have expected to see “resistance become support,” but it hasn’t. So, there wasn’t enough buying demand to overcome selling pressure today. Based purely on quantitative measures as I’ve shared over the past week, it isn’t a surprise to see a volatility expansion and price trends widen out.

stock market momentum and support resistence

I marked how the current decline relates to the past two. This one has turned down rather sharply and quickly as of today. The SPX stock index is down about -6% from it’s high of which nearly half of the loss is today.

I now expect we’ll see some buying interest step in… at least temporarily. Only time will tell if this becomes a waterfall decline like we saw October to December, or worse.

I haven’t mentioned any news items that could be used as catalysts. Last week it was the Fed and employment, today it’s China, Hong Kong, and Trump tweets. Contrary to what most people probably believe, the range of prices broadening out and price trends falling is something I thought we may see as a normal quantitative reaction. Whatever may get the blame, it’s just the market, doing what it does. I can assure you of only one thing: I’ve heard a wide variation of reasons today from different levels of people. On the financial news, it’s one thing, from global macro hedge fund managers, it’s another. For example, one mentioned the Chinese PLA army is building on the Hong Kong border…

“May you live in interesting times” 

Ironically, it is an English expression purported to be a translation of a traditional Chinese curse.

In the meantime, my short term momentum systems are showing the broad stock index reaching its lower range of probabilities, so we “should” see it retrace up at some point, at least temporarily. Of course, there is always a chance of a waterfall decline the moves much deeper than a normal range of probabilities. In fact, we have already seen that now if you look at the chart. The price trend has moved below the “normal range of the market” as measured by the lower band.

We’ll see how it all unfolds.

If you want to follow along, sign up on the right to get automatic emails immediately when I share a new observation. 


Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Measuring the volatility expansion

To no surprise, we are observing a volatility expansion.

I say it isn’t a surprise, because I shared my observation on July 28th in Is volatility setting up for an expansion? the following:

I’m not going to be surprised if we see a VIX volatility expansion this week along with the range of stock prices spreading out.

There are plenty of potential catalysts that could drive volatility and uncertainty higher for those who need a story driving it.

This morning, the CBOE Volatility Index® (VIX® Index®) is trending 20% to 21.20, which is its long term historical average. As I pointed out before, it was at 12 when I pointed out the possibility of a volatility expansion. I didn’t expect to see it just because it was at a low level of 12, but instead because there was no shortage of potential catalyst that could cause prices to spread out into a wide range from indecision.

The CBOE Volatility Index® (VIX® Index®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, theVIX®Index has been considered by many to be the world’s premier barometer of investor sentiment and market volatility.

The VIX has gained 76% since I shared the observation.

Is there a way to trade this volatility? Yes, there is, and it’s easier said than done. Tactical traders can trade VIX options, futures, ETFs, or the ETN. I share the below chart for informational purposes only. It’s the iPath® Series B S&P 500® VIX Short-Term FuturesTMETN charted along with the VIX index and does not necessarily represent any position I have taken. As you can see, it has gained 27% over the past week as the VIX gained 76%, but past performance is not necessarily indicative of future results. In fact, trading the VXX is very tricky and timing is everything.

A deep dive into VXX and long volatility ETFs is beyond the scope of my mission here as I just want to show a simple example of “long volatility” for asymmetric hedging. The succinct reason the VXX didn’t track the VIX index perfectly is because he Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants’ views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index. For additional information including the risks associated with VXX and ETNs, please see the VXX prospectus. The bottom line is, to successfully trade the VXX is beyond simply trading its price trend, it also requires understanding its roll yield issues and the VIX term structure.

While CBOE Volatility Index® (VIX® Index®) is a measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices, I use other measures to observe actual, realized, historical volatility.

Below is the S&P 500 stock index with bands of standard deviation. As you can see, the red arrow shows the price has spread out below the lower volatility band. These volatility bands normally contain the range of price, until it doesn’t. In this case, the volaltity is measured by the standard deviation, so this is a simple observation of the standard deviation shortfall. A price trend can and does trend beyond its normal range.

Bollinger Bands Volatility Expansion SPX $SPY $SPX

In the next chart, I use channels that represent a band of the average true range. In this case, the average true range is adapting more responsive by spreading out faster, so the SPX price trend is still within its lower channel as the price trends down.

Keltner Channels ATR SPX $SPX volatility expansion

The bottom line is, we’re seeing a volatility expansion as I suspected we could.

We’ll see where it goes from here…

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

“THEY KNOW NOTHING!”

Today marks the 12 year anniversary of the Jim Cramer character on CBNC having his now-famous emotional breakdown on live TV. It’s worth listening to once a year to reflect on the extreme level of panic going on this day 12 years ago.

So, I have shared it below.

I was cool as a fan that day… my risk management methods were robust and I had developed the discipline to execute through it. Avoiding the waterfall declines and panic level losses has been the highlight of my experience so far.

I believe we’ll see another period like this and the next time, it could even be worse.

I also managed through the 2000-03 period well, too, by simply observing bonds were trending up as stocks were trending down, so I shifted from stocks to bonds.

As such, I’m prepared and as ready as I’ve ever been, and hopefully, my past experience of operating through the last two major bear markets will continue to compound my skill and discipline.

 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Why we don’t necessarily need the stock market to go up

Yesterday I mentioned in “Volatility continues to expand, and stocks are falling” some hedging positions such as gold, long-term treasuries, or long volatility or short stock indexes have helped offset some of the stock market loss. I thought I would share a few examples for informational purposes. None of these ETFs necessarily reflect any position my investment management firm currently has.

The first is gold and the long term U.S. Treasury. They are both in uptrends and made meaningful gains yesterday.

I like to observe and understand return drivers and how markets interact with each other. You may notice in the year-to-date chart above gold and long-term U.S. treasuries seem to be correlated. That is, they are trending in a similar pattern, which makes us wonder if they are driven by the same global macro return drivers.

Over a one-year period, the two appear interconnected most of the time.

I’m not a huge fan of correlation as it’s used in finance to measure how trends interact. But, many investment managers use it, so I’ll share some observations here.

Correlation is defined as a measure of the linear relationship between two quantitative variables, for example, a price trend. When the values of one variable decrease as the values of another increase to form an inverse relationship, this is known as a negative correlation. When two markets trend closely together, they are considered correlated.

When markets trend disconnected from each other, they are considered non-correlated. When markets trend the opposite of each other they are considered negatively correlated. In the chart below, I added the correlation coefficient on the bottom, which cycles up and down, but shows a relatively high degree of correlation quantified. I like to see it visually in the charts, but I also have computer systems that determine it quantitatively with the equation.

I don’t often like to get into such math here, but… bare with me.

Next, we observe the 3-year time frame. Gold and treasuries have been highly correlated most of the time. It appears these two markets may be inspired by the same return drivers at times.

Over five years, the price trends look similar much of the time. You may notice the correlation isn’t so accurate. For example, the correlation is very low early 2018, but both of the price trends were down, they just zigged and zagged differently. The volatility through off the correlation number.

It doesn’t require any advanced math to see in this price trend to see the value of exposure to gold and treasuries could have added (at times) to a stock portfolio over the past year. For example, as the stock index fell last year, gold and treasuries trended up. As stocks have been weaker lately, their trends are breaking out to the upside. I say “at times” because it isn’t always true; timing is everything. You may be surprised to see gold has gained more the past year than stocks. A lot more, in fact. The stock index has gained less than 5%, gold 17% and treasuries 12%.

Many investors are probably too stock-centric as they compare their investment returns to stock indexes that are 100% invested, all the time.

My point here is that there are many other markets from which we can look for trends. The U.S. stock market has had a great year in 2019, up over 10%, but over the past full year, not so much.

You can probably see why I prefer my global, tactical, unconstrained approach better.

By having a global universe, I can look for trends in the U.S. and globally.

By being tactical, I can increase/decrease my exposures based on my expected asymmetric risk/reward.

Being unconstrained, I can look for trends across all markets and apply different systems like trend following and countertrend, and across different time frames, long or short.

We don’t necessarily need the stock market to go up if we can define the direction of trends and actively manage their risk.  It also helps to observe and understand how markets interact with each other.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Volatility continues to expand, and stocks are falling

In Is volatility setting up for an expansion? I suggested we may see a volatility expansion from the VIX at 12. The CBOE Volatility Index VIX has since gained 40% and the longer-dated 3-month VIX also implies a 20% higher volatility.

Today the VIX was down over -10% at one point and then reversed up to close in the green by 11%.

VIX VOLATILITY EXPANSION

Investors should expect to observe more movement in stock prices as they are now spreading out in a wider range. The stock indexes have turned down into a normal pullback, down about -2.4% off their highs.

I mostly share observations of broad indexes to make general statements about their trend. Here is the NASDAQ and S&P 500 % off high over the past year to see how much they’ve reclined recently relative to prior losses.

Some hedging positions such as gold, long-term treasuries, or long volatility or short stock indexes have helped offset some of the stock market loss.

We’ll see how it goes from here…

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Asymmetry vs. Convexity

Convexity captures the asymmetry in the connection between bond prices and changes in interest rates.

Duration only captures one aspect of the relationship between bond prices and interest rate changes. For more significant interest rate trends, the correlation between the change in rates, and the change in bond prices is asymmetric.

The bond price decrease resulting from a substantial interest rate increase will typically be less than the price increase resulting from an interest rate decline of the same magnitude.

This asymmetry arises from the convex payoff pattern shown by the solid curved line in the chart below.

asymmetry vs convexity

It plots the relationship between the yield of a bond and its price.

The dashed line estimates the consequence of a change in yield on the price of the bond.

This convex pattern also means a portion of the interest rate move continues uncaptured by duration.

Duration is a measure of interest rate risk and is mathematically derived from the slope of the dashed line.

The curved line represents convexity.

Convexity is a measure of the degree of the curve in the correlation between bond prices and bond yields.

Convexity captures the asymmetry.

Now we’re seeing some volatility expansion

I suggested in Is volatility setting up for an expansion? we may see volatility increase.

Sure enough, implied volatility, as measured by the VIX, has trended up from 12.16 to 15.30, which implies the expected volatility over the next 30 days has examined from about 12% to 15%.

VIX

The bands around the price trend below use a measure of realized historical volatility (standard deviation) over the past 20 days. As the realized volatility has contracted, it signals the range of prices spreading out has been narrow. This is an uptrending, quiet, market condition. When I see one market condition like this I’m alert for it changing.

bollinger band spx

In the next chart, we observe another channel of volatility around the stock index measured with average true range (ATR) and it has been a tighter band. The stock index price has also been pushing the upper boundary since the beginning of the year.

spx atr channel position sizing

Periods of low and contracting volatility are often followed by periods of higher and expanding volatility.

On the other hand, here we see the realized volaltity of implied volatility has reached its upper band, so if it remains within a normal range, it may remain inside the band. However, it can certainly spike up if the market expects higher movement.

vix volatilty of volatlity

So, Semper Gumby, always flexible.

This uptrend could change.

I know when I’ll exit all my positions if they trend down enough to cut my losses short. I also know what percent of drawdown that would lead to if all of my positions decline together. If I wanted, I could tighten it up to reduce the drawdown if prices fall more. Or, I could hedge with a short index position or go long volatility.

You can probably see how everyone decides what they get from the market.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Is volatility setting up for an expansion?

I’m not going to be surprised if we see a VIX volatility expansion this week along with the range of stock prices spreading out.

There are plenty of potential catalysts that could drive volatility and uncertainty higher for those who need a story driving it.

According to Bloomberg:

As Fed officials begin their discussions on Tuesday they will have some more data with which to assess the economy. Personal income, pending home sales and consumer confidence statistics are all due that morning. Then on Thursday, the ISM manufacturing report is expected to show industry is stabilizing and continuing to expand. Friday’s trade data will be pored over for evidence that the skirmish with China is having an effect. Also next week, the Treasury will say on Wednesday how much money it needs to borrow amid rising budget deficits.

For me, the driver of a volatility expansion $VIX will just seem like a normal countertrend from a historically very low point. As vol has contracted into the 12’s it is at the low level of its cyclical range. This is when I start looking for a reversal.

VIX $VIX #VIX VOLATILITY EXPANSION JULY 2019

VIX futures are at a 9.86% contango, so the roll yield is a little steep. That is, the September VIX future is about 10% higher in price than the August VIX price. The difference in the price creates a roll yield those traders who are short VIX options or futures hope to earn.

vix-futures-term-structu

Those of us more focused on the directional trend, especially countertrends, will be more alert to see volatility expand from here. The trouble is, the contango creates a headwind for the ETFs and ETNs we may want to enter long at some point. That’s because they may invest in both the front month and second month, so as they roll forward through time they are selling the lower-priced august to buy more of the higher-priced September. This negative roll yield is why the VIX based ETFs trend down over the long term. To trade them successfully, timing is important, but it’s also not so simple.

The next chart is the S&P 500 stock index with Bollinger Bands around the price trend set at two standard deviations from its 20 day moving average. While the VIX is an implied volatility index based on how the options market has priced options of the S&P 500 index stocks, these bands are measures of realized volatility. Actual volatility has also contracted recently.

bollinger bands realized volatility

Periods of low and contracting volatility are often followed by periods of higher and expanding volatility.

Let’s see how it goes…

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

Trend following: no system will adapt perfectly to all conditions all the time.

I just came across this Wall Street Journal article about trend following as I was searching for something.

Jan 9, 2019 – Trendfollowing investment strategies—a computer-based way of … Trendfollowing algorithms turn bearish at swiftest pace since 2008 as …

 

Below that headline, when I clicked on it, was:

“Trend-following algorithms turn bearish at swiftest pace since 2008 as machines steer more trades”

Clearly, since publication January 9th it wasn’t a productive signal from trend-following if we look at the S&P 500 stock index and mark the date of the article as I did with the green highlight below.

trend following performance 2019 stocks stock market

The last several years has been more challenging for trend following systems and investment managers applying the strategy. The challenge is more an issue for less experienced portfolio managers and their investors if they’ve never operated through periods when trends and volatility is more hostile for the strategy.

Trend following performed well during late 2007 to early 2009 period. Most investment managers executing the strategy were CTA’s applying it to futures contracts as “Managed Futures”, though a few of us were doing it with stocks and a global universe of ETFs.

This performance during the crash gave trend following a reputation of being a risk management strategy, or at least a crisis risk hedge. While trend following does have the potential to capitalize on sustained trends and avoid or profit from downtrends, periods of changing trends can be more of a challenge. It depends on the time frame we apply and how we use the signals from trend-following indicators.

According to CME about trend following:

“Trend following systems aim to identify and exploit sustained capital flows across asset classes as markets move back out of and into equilibrium, often after prolonged imbalances. Other CTA styles thrive on volatility and choppy price action that accompanies these flows, as well as a variety of other market phenomena.”

They go on to say:

“The market conditions that have traditionally been difficult for CTAs employing trend following strategies have been those in which there is no follow through on trends, such that prices are mean-reverting. As a result, many CTAs incorporated additional strategies in an effort to capture these types of market characteristics as a complement to their trend following.”

Trend following trading systems are primarily expected to prosper most during periods of strong, clear, and sustained price trends. Some market conditions may be difficult for these strategies. We’ve observed most trend-following strategies have experienced somewhat hostile conditions over the past five years.

A price trend is a price that drifts in one direction or another. Volatility refers to the day-to-day range in price swings. A market condition can be trending or non-trending, volatile or smooth. A condition of strong, clear, sustained, price trends with low volatility may be a more pleasant experience that is easier to stick with. Just the opposite is a market condition with no clear directional price trend that is very volatile in its day-to-day price swings. If the time frame doesn’t match up well, these trend following systems will get whipsawed as they enter a trend just before it reverses back down, or it exits a trend at a low price before it reverses up.

Volatile market conditions are typically hostile conditions for both passive and active strategies. A risk management objective may be to reduce exposure to volatility during these periods. Even a condition of strong, clear, and sustained price trends may be so volatile in its day-to-day range that it may shake us out of otherwise profitable positions. On the other hand, a smooth, clear, sustained price trend may be easier to stick with, but volatility is sometimes low at the end of a sustained trend as investors are complacent just before it reverses.

Although we’ve observed most trend-following and momentum strategies have experienced somewhat unfriendly conditions over the past five years, those of us who have applied them over many market cycles for two decades or more know the systems don’t always match the trends perfectly. However, we have confidence over enough market cycles and trends these methods can be robust and result in asymmetric returns. Sometimes the asymmetric returns are achieved by avoiding large losses as my own systems did 2007 to 2009 and other times by exposure that results in relative outperformance and alpha as I saw 2005 to 2008.

Investment programs can be designed to fit different market conditions, but no system will adapt perfectly to all conditions all the time. An expectation of perfection may be a risk to the investor’s capital if it causes the investor to abandon a good program during a losing streak or drawdown. What investors should focus on is what results the investment manager has achieved over long periods of full market cycles.

For me, I have known that no system will adapt perfectly to all conditions all the time, so I manage my systems to get closer to what I want. I have automated systems that we operated mechanically. That is, the computerized trading programs generate signals and trades that can be executed systematically without any thought or oversight if we wanted. However, I’ve been operating dozens of these systems for 16 years now and was a chartist for years before that. I’ve learned how the systems operated having observed thousands of their signals in real-time in real life. From that, along with already having some skill at charting price trends, I’ve developed intuition about when my systems may be in hostile conditions. As such, in my primary portfolio, I play a shell game with them – pun intended. That is, I observe market conditions such as trend direction, momentum, and volatility expansion and contraction and decide which system to apply, when. The variations are based on trend following vs. countertrend, trend time frames shorter-term to longer-term, and different equations and algorithms to define the trend. These systems are also applied to different universes of markets like individual stocks, sector ETFs, international, bonds, etc.

Back to the WSJ article:

Computer Models to Investors- Short Everything WSJ Trend Following article

Fortunately, I didn’t follow that trend.

For example, the chart below is the period leading up to the date of the Wall Street Journal article “Computer Models to Investors: Short Everything” so we know how the stock index looked at the time.

trend following sell signal 2019

Charting the trend another way, here is the same index and time frame, but past on its % off high, which is the drawdown. We observe the stock market index declined nearly -20% from October 2018 to January 2019 and then recovered about 7% of the loss by the date WSJ published the article.

stock market drawdown decline 2018

If an investment manager had gone short as the article suggested trend-following models signaled, they would be down about -17% since. Of course, those models could have signaled to reverse from short to long before now.

Fortunately, I didn’t follow that trend. I participated in the last 2018 downtrend more than I prefer, but I’ve since captured the gains in 2019 to make up for it. It’s because in late December I was buying when others were fearful. I increased exposure at lower prices and have held it since. I applied my countertrend strategy, not my trend following strategy. How did I know to do that? I didn’t know for sure, but my analysis suggested a high probability of an asymmetric entry as I shared in An exhaustive analysis of the U.S. stock market and then later in a following An exhaustive stock market analysis… continued. 

I sometimes share my observations of market conditions here, but I always write them for myself. Having done this for over two decades now, I don’t underestimate the edge gained from the ability to revisit what I really observed and believed at the time and how it all unfolded. As I suggested in Investors follow the trend after the fact, count on it, 

ALL TIME NEW HIGH STOCK MARKET STOCKS 2019

Here we are seven months later and investor sentiment has changed dramatically from absolute panic last December to optimistic and that’s driving prices higher. Investors see headlines of the stock indexes finally reaching all-time new highs again, which probably reinforces their optimism the higher it trends.

So, most trend-following models have already signaled “buy” and be participating in the uptrend. Again, no system will adapt perfectly to all conditions all the time. An expectation of perfection may be a risk to the investor’s capital if their expectations and ego cause them to abandon a good investment program during a losing streak or drawdown.

Self-discipline and persistence seem to be required by all strategies.

We’ll see how it all unfolds from here…

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm.. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Investors follow the trend after the fact, count on it.

Whatever is popular in personal financial planning and investment management today will not be in the near future.

People believe and do the wrong things at the wrong time without a reasonable estimate of where trends are in different cycles.

Example: In 2007, everyone believed a house was an excellent investment.

Today younger generations believe the opposite.

The truth: Timing is everything.

Example: I see a lot of talk on Twitter, etc. about “low fees” referring to index ETFs. We sure didn’t hear that at the lows of 2008 – 2009 when those low fee index funds were getting crushed.

Investors wished they had tactical risk management or hedge funds that actually hedged or traded long/short. After the fact, they would have gladly paid a 2% management fee plus 20% of profits to have avoided the crash in their investment accounts.

I tactically trade low fee index ETFs, so I like them to be efficient, too, but I observe other financial advisors put too much focus on it. If your only value proposition is “low fee” you may be in the wrong profession. I’d rather achieve something over full market cycles and get compensated adequately for it.

Another recent example is after 2008 up until 2013, investors and advisers wanted tactical risk management (after-the-fact). Then, after the stock market kept trending up post-2013, they have become more and more complacent about risk.

This when a sage investor monitors and observes the big picture, preparing for the next cycle and change in trend.

I operated through these periods by observing these cycles and trends and noticing when the crowd reaches extremes.

But, this time has been different.

We are now witnessing the longest bull market in stocks and economic expansion in U.S. history.

What you need to know today is this too shall pass. When cycles reach an extreme, they usually swing the other way just as intense.

In 2013, the stock market reached what is considered an expensive valuation level. The S&P 500 was trading at 20 times earnings per share. As such, many active investment managers dialed back their stock risk exposures. But, the stock market kept trending up, and expensive has only gotten more expensive. Maybe it’s justified in a low inflationary period? Nevertheless, it’s considered a much higher risk state for fundamental investors.

You can see the expensive valuation of the stock index in the Shiller PE chart below. There were only two times it was this high or higher.

shiller pe ratio 2019

It is what it is. The valuation level as measured by Shiller PE is well into what is considered a higher risk zone in what is now the longest bull market and economic expansion in U.S. history.

shiller pe ratio 2019 average high low

At extremes, I prepare for the other way.

This one has taken much longer and stretched higher, so maybe its reversal will be uglier.

I’m not saying I’m bearish on the stock market at this moment, but instead pointing out the big picture risk longer term that I’m prepared to deal with.

People are attracted to things after the fact. What is fashionable today will be tomorrows despised. What is hated today will be tomorrows cool.

It will all happen after the fact.

Count on it.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm.. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

 

A few observations on Global Macro and Trend Following

A few observations on #GlobalMacro and #TrendFollowing

As I see it, trend following can be global macro and global macro can be trend following. I call my primary strategy “global tactical,” which is an unconstrained, go-anywhere combination of them both and multiple strategies.

There is no way to predict the future direction of the stock market with macroeconomics. There are far too many variables and the variability of those variables change and evolve. The way to deal with it is to simply evolve with the changing trends and direct and control risk.

For me, it’s about Man + Machine. I apply my proprietary tactical trading systems and methods to a global opportunity set of markets to find potentially profitable price trends. Though my computerized trading systems are systematic, I use their signals at my discretion.

I believe my edge in developing my systems and methods began by first developing skill at charting price trends and trading them successfully. If I had started out just testing systems, I’d only have data mined without the understanding I have of trends and how markets interact.

Without the experience of charting market trends starting in the 90’s I probably would have overfitted backtested systems as it seems others have. A healthy dose of charting skill and experience helped me to avoid systems that relied on trends that seemed unlikely to repeat.

For example, if one had developed a backtested system in 2000 without experience charting those prior trends in real-time, they’d have focused on NASDAQ stocks like Technology. The walk forward would have been a disaster. We can say the same for those who backtested post-2008.

All portfolio management investment decision-making is very challenging as we never know for sure what’s going to happen next. The best we can do is apply robust systems and methods based on a positive mathematical expectation and a dose of skilled intuition that comes with experience.

As such, ALL systems and methods are going to have conditions that are hostile to the strategy and periods you aren’t thrilled with the outcome. For me, self-discipline comes with knowledge, skill, and experience. I am fully committed, steadfast, and persistent in what I do.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and are not specific advice, research, or buy or sell recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information provided is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Happy Birthday, America!

People sleep peacefully in their beds at night only because rough men stand ready to do violence on their behalf.

land of the free because of the brave

Independence Day is a federal holiday in the United States commemorating the Declaration of Independence of the United States on July 4, 1776. The Continental Congress declared that the thirteen American colonies were no longer subject to the monarch of Britain and were now united, free, and independent states.

Happy 4th of July! May we all enjoy our freedoms and independence today and forever.

Semper Fi,

Mike Shell

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and are not specific advice, research, or buy or sell recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information provided is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

 

Logical Inconsistency?

One of the most widely quoted words of wisdom from legendary investor Warren Buffet is,

 

“Rule No. 1: Never lose money.

Rule No. 2: Don’t forget rule No.1.”

 

But.. is it a logical inconsistency?

Warren Buffet Rule number 1 lose money BRK $BRK Berkshire Hathaway

Logical Insonconsinecy:

When multiple statements are given which contradict one another.

These may be given together or may be separated in time. Sometimes the contradictions are rather subtle and are difficult to spot. At other times, they are obvious. If you have enough authority, then you may be able to carry this off.

 

For me, actively managing risk for drawdown control is essential to “not lose money.”

 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and are not specific advice, research, or buy or sell recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information provided is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

Will the stock market hold the line? or do we keep hedging risk? and opportunity for high income yield

The U.S. stock indexes declined -6.84% for the large-cap S&500, -11% for mid caps, and about -19% for small-cap stocks mostly in the single month of May.

asymmetric risk reward stock market

Since June 1st, however, these same stock indexes have started to trend back up.

stock market asymmetry

Over the past 3 months, momentum has turned negative for the stock indexes.

momnetum stocks 3 month

My strategy was to hedge off some of this downside risk. I then removed my hedges for a profit. It doesn’t always work out that way. A hedge position isn’t necessarily intended to be profitable through the entry and exit, but instead, the objective is to hedge off some of the downsides of long positions. Sometimes I hold them too long and lose their gains, other times I exit and realize a profit, and then there are times I exit them too soon with a profit but miss an even large profit. It ain’t perfect, nor does it need to be, and I’m okay with it.

My stock market observation yesterday, which I shared on Twitter, was:

This double bottom could be a likely short-term low if the holds the line… my guess is it’s more likely than not. If it breaks down further from here, though, it probably gets ugly like when it didn’t hold last December…

SPY $SPY buy signal countertrend trend following

So far, so good… as marked with a simple trend line.

SPY INVESTMENT MANAGER TACTICALA week ago the AAII Sentiment Survey showed an unusually high level of Pessimism and optimism at an unusually low level… signals to stalk the market for good risk/reward setups on the buy side.

behavioral finance economics investor sentmiment advisor

I exited my hedges a few days ago and increase my exposure to stocks. However, I did this at the same time my momentum and systematic trend following systems shifted from stocks to bonds or cash. So, my entries are based on signals from my countertrend and high-income yield systems. As prices fall in high yielding ETFs, their dividend yield increases.

Global X SuperDividend™ US ETF (DIV) is an interesting example. This is not investment advice for anyone to buy this ETF as I only provide advice and portfolio management to clients via an executed contract. It is useless to know what I would buy if you don’t know how much I would buy and when I would sell. With that said, the chart of Global X SuperDividend™ US ETF (DIV) shows as the price (blue line) declined to a double bottom, the dividend yield has increased to 7.6%. So, if I entered it here, it would be expected to yield 7.6% going forward. I am only using this for informational purposes, so I’m not including all the variables and risks it may not which can be found here.

The point is, you can see how as price falls in a high yielding asset, it’s yield rises.

Global X SuperDividend™ US ETF (DIV)

I have recently made my ASYMMETRY® High Income Yield Portfolio available to clients who seek high income from their portfolio and are willing to accept fluctuation in the balance. Up until now, I had been testing this strategy with my own capital. The portfolio focuses on asymmetric risk/reward opportunities for high-income yield and also adds an asymmetric hedging system to help with downside risk management. For more information on the strategy, contact me.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and are not specific advice, research, or buy or sell recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information provided is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Stock market reaching an interesting point but I hedged some risk a week ago

Stock market indexes are reaching a point they should find some buying interest if it exists. We’ll soon find out if they can hold the line, or see more selling pressure…

stock market asymmetry

My short term momentum indicators are reaching oversold at the same time the S&P 500 is testing the support area in green above as well as the 200 day moving average.

At the same time, the Long Term Treasury ETF is pushing on its upper band and becoming more likely to reverse back down within its average range. I sold a position for a small profit in TLT that was short term hedge.

TLT ASYMMETRY HEDGE $TLT ASYMMETRIC

My other hedges, which are much more asymmetric than TLT, remain in place to hedge off some market risk until the selling pressure seems to be drying up. My hedging isn’t necessarily intended to result in a profit if the stock market falls, but instead of offset losses in other positions we want to continue to hold. Although sometimes the payoff in the hedge is large enough I realize the profit while it’s there. However, if I took profits too soon every time we wouldn’t have the exposure for hedging purposes in larger waterfall declines. At this point, we have open profits in our remaining hedges.

We’ll see how it all unfolds…

 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and are not specific advice, research, or buy or sell recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information provided is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

 

Remembering the other wall

As we approach the Memorial Day weekend, someone reminded me today of a statement made by President Ronald Reagan on June 12, 1987:

“Mr. Gorbachev – tear down this wall”

I had enlisted in the U.S. Marines and would enter training a year later. So,  for the first time in my life, I was paying attention to world events.

It’s probably hard for most people to conceive, but young men and women joining the U.S. Marines were hoping for the opportunity to fight the Communist Party of the Soviet Union after high school. #TheFewTheProud

But here we are 30 years later and we probably have as many who would rather fight for it. #ComingApart

Socialism and communism

The Difference Between Communism and Socialism

“Communism and socialism are economic and political structures that promote equality and seek to eliminate social classes. The two are interchangeable in some ways, but different in others.In a communist society, the working class owns everything, and everyone works toward the same communal goal. There are no wealthy or poor people — all are equal, and the community distributes what it produces based only on need. Nothing is obtained by working more than what is required. Communism frequently results in low production, mass poverty and limited advancement. Poverty spread so widely in the Soviet Union in the 1980s that its citizens revolted. Like communism, socialism’s main focus is on equality (symmetry). But workers earn wages they can spend as they choose, while the government, not citizens, owns and operates the means for production. Workers receive what they need to produce and survive, but there’s no incentive to achieve more, leaving little motivation. Some countries have adopted aspects of socialism. The United Kingdom provides basic needs like healthcare to everyone regardless of their time or effort at work. In the U.S., welfare and the public education system are a form of socialism. Both are the opposite of capitalism, where limitations don’t exist and reward comes to those who go beyond the minimum. In capitalist societies, owners are allowed to keep the excess production they earn. And competition occurs naturally, which fosters advancement. Capitalism tends to create asymmetry between the wealthiest citizens and the poorest, however, with the wealthiest owning the majority of the nation’s resources.”

 

 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and are not specific advice, research, or buy or sell recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information provided is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Protecting the Flock is Asymmetric

Memorial Day is a federal holiday in the United States for remembering the people who died while serving in the U. S. military.

Memorial Day

Source: United States Marine Corps

How many American military have died in war

Protecting the flock is asymmetric, so we need to be reminded. Less than 1% of Americans serve in the military. Out of a nation of 320 million people, 1.3 million Americans are on active duty military according to the Department of Defense. In comparison, 12% of the population served during World War II.

what percent of Americans serve in military

Source: How many Americans have died in U.S. wars?

Since fewer families are impacted by war, there seems to be a disconnect in the situational awareness of what is going on in the world.

On Memorial Day, remember it wasn’t just one who gave his life for us. It was over 1.1 million and counting…

flag

The normal noise of the market?

We shouldn’t be surprised to see stock prices pull back closer to their average true range in the days ahead. Such a pullback or stall would be normal.

Below I highlight the strong momentum Technology sector XLK ETF as an example of stock prices in some sectors finally reaching their prior highs. In addition to the price trend reaching a point of potential overhead resistance at the prior high, we observe this trend is also outside the upper volatility band of average true range.

TECH SECTOR MOMENTUM XLK $XLK $IYW

Most of the time, we should expect to see a price trend stay within this range. If a price trend breaks out of the range higher or lower, it can be evidence of a trend change. In this case, the short term trend has been up since January, the intermediate trend has been sideways, non-trending and volatile since last September. Sine the short term trend has been an uptrend since January, I view the upside breakout above the volatility band a signal the trend may be more likely to pull back within the channel range.

The broad stock market S&P 500 index ETF SPY doesn’t look a lot different than the Technology sector, except it’s about -2% away from reaching its September 2018 high.

stock market SPY $SPY

The bottom line is, looking at the directional price trends they are up in the short term but reaching a point they could see some resistance from the prior highs. At the same time, my momentum systems suggest the trends are reaching an overbought level and the price and expanded outside their average true range channel.

A small short-term pullback in stock prices from here would be within the range I consider normal noise of the market.

 

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and are not specific advice, research, or buy or sell recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information provided is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

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