The stock market is at an inflection point

The S&P 500 is stalling as if there is resistance at this price level, and there’s a lot of potential supply for those in a loss trap.

It’s also getting overbought as measured by the relative strength index.

The yellow horizontal highlight denotes the price range with the most volume, which you can see in the Volume by Price bars on the right which show the volume at each price level that could be support or resistence.

At the current price level, you can see the yellow highlighted area is the price range of the highest volume of the past three months.

In February, the SPY declined and found support, or buying demand, at this level. Afterward, it trended up before trending down to this level again and once again was met with enough buying enthusiasm to hold it for several days, then the support failed and the S&P 500 Index ETF declined.

At that point, those who bought earlier at higher prices around the price level or higher carried a loss.

In May the stock market trended up against but selling pressure dominated and the index once again trended sideways for several days of indecision before finally breaking down in a waterfall decline for several days.

The stock market finally got oversold again and investor sentiment was extremely bearish, and it’s since climbed a wall or worry.

Now the price has trended up to this price level again that has been both support and resistance in the past three months and it seems to be stalling.

Today started off strong, up 1% or more, only to fade by the end of the day.

The stock market is at an inflection point.

If the stock market gets enough buying demand to keep prices trending up this bear market could be over sooner than later. However, with the Federal Reserve increasing interest rates because the annual inflation rate in the US has accelerated to 9.1% and economic growth is slowing, if the US is in a recession, as noted in “Bear Markets with an Economic Recession Last Longer and are More Severe” bear markets typically last much longer and trend down more.

Investors should be cautious this may not be over yet, and far from it.

We’ll see, and probably sooner than later.

The inflation report this week may be a market mover.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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 investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the listAny opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Every new price trend begins with a countertrend

Every new price trend begins with a countertrend, and that’s true for uptrends that roll over into downtrends and downtrends that reverse into uptrends, so trend following starts with a countertrend.

Technology-weighted Nasdaq 100 changed the short-term trend, breaking out above its 50-day average, now in a short-term uptrend.

Past performance is never a guarantee of future performance, but if the Nasdaq uptrend follows through, it’ll need to trend up more than 12% to trade above the longer-term 200-day average.

Nasdaq meets first overhead supply as potential resistant around 13,000.

All the areas above current prices are the hurdle of a trend trying to recover from losses.

Why?

Because many investors and traders may be trapped in losses around those prior lows and highs, the price levels attracted much historical trading.

Many tactical traders mistakenly claim resistance “is” at these levels, but we don’t know if there is resistance to further prices trending up until the price range is reached.

If a price trend reaches a level and reverses back, then we know there was “resistance” to that price level, which means there was selling pressure once the price got to that higher level.

Only time will tell if that is the case here, but we’ll be watching to see if new uptrends are met with selling prior price levels of interest, then we’ll know how much trouble these trends will have trending up into areas investors may have wished they had sold before taking on heavy losses.

To see what I mean, the Nasdaq 100 index was down -33% year to date a few weeks ago, and after a series of higher lows and higher highs (an uptrend) it’s still down -25%.

If you were invested in the Nasdaq type investment this year, or a portfolio of similar stocks, you’ve been in a loss trap.

As prices trend back up, trapped holders may start to tap out, although others may hold on until they get back to breakeven.

This is the kind of price action we’ll observe unfold from here to see which market dynamics are more dominant.

Overhead supply of shares wanting to be sold becoming at least some pressure as resistance is why price trends look so rough and volatile after a downtrend.

At every level the trend reaches, other investors and traders are deciding to buy, hold, or sell.

It’s what makes a market.

For now, we have an uptrend in enough of the high-growth stocks as measured by the Nasdaq 100 index to clear the 50-day average, so no resistance there.

Every new price trends begin with a countertrend and a follow-through.

Let’s see how it goes from here.

Giddy up!

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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 investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the listAny opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

After Selling Pressure Drives Stock Price Trends to a Low Enough Level, We’ll See Sentiment Shift

Once the stock market catches a break and trends up enough, we’ll probably see short covering keep it going for a while.

The percent of stocks trading above their 50 and 200 day averages is a useful signal of market breadth to gauge the participation in uptrends and downtrends.

I’ve been monitoring these statistical measures of trend and momentum for more than two decades, and long concluded after most stock prices have already trended up, I start to wonder where the next demand will come from to keep the uptrend going.

After prices have already fallen to an extremely low level, it starts to signal those who want to sell may have already sold.

But, it takes falling prices to drive the downtrend to a low enough point to attract long-term value investors as stock prices get cheaper and cheaper, to them.

At this point, below is the percent of S&P 500 stocks trading above their past 200-day average. We see only about 19% of the stocks in the S&P 500 are in intermediate-term to longer-term uptrends.

Can it get worse? Can stocks trend lower? and more stocks trend lower?

Yes, it can.

A visual of the same chart above in logarithmic scale helps to highlight the lower end of the range.

In October and November 2008 only 7% of stocks were in uptrends.

In March 2020 only 10% of the S&P 500 stocks were in uptrends.

Keeping in mind the stock index has some exposure to sectors considered to be defensive like utilities, REITs, and consumer staples, it took a serious waterfall decline like -56% in 2008 to shift most of the 500 stocks into downtrends.

The point now is, that about 80% of stocks in the S&P 500 index are already in downtrends and at some point, the selling will dry up and new buying demand will take over.

I’m seeing other evidence that correlates with these price trends.

According to the investment bank Deutsche Bank, there’s a record short in equity futures positioning of asset managers. That means investment managers have high short exposure, hoping to profit from falling prices, or at least hoping to hedge off their risk in stocks they hold.

Goldman Sachs is the prime broker for many hedge funds and investment managers, including my firm, and Goldman Sachs reports long positioning aiming to profit from uptrends in stocks is off the chart.

Once the stock market catches a break and trends up enough, we’ll probably see short covering keep it going for a while.

This doesn’t suggest we buy and hold passively, but it suggests stocks have already declined into downtrends and big institutional money is positioned for further declines, so we have to wonder who is going to keep selling stocks?

Economics 101 is what drives prices, and that’s supply and demand.

There’s been a supply of stock selling that has been dominant over the desire to buy, so prices are in downtrends.

This is when I am looking for the negative sentiment to change.

Last week I shared my observations of fundamentals in Fundamental Valuation: Is the Stock Market Cheap or Expensive? and more granular that some important sectors have reached undervalued status according to CRFA in Are Growth Sectors Technology, Consumer Cyclicals, and Communication Services more Undervalued than Value?.

But the big risk for long-term investors who passively hold stocks, index funds, or mutual funds is I showed in Bear Markets with an Economic Recession Last Longer and are More Severe that if we are in a recession, this bear market will likely eventually get much deeper.

You can probably see why are Shell Capital, we row, not sail, when the wind stops blowing in our preferred direction.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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 investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the listAny opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Inflation is Declining According to this Trend Analysis of Commodities

In economics, inflation is an increase in the prices of goods and services in an economy.

When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.

You may not see the value of your money change online like you do with your investment fund values changing daily, but it’s changing.

Inflation is a real risk for everyone, but it’s worse for people who have their money earning a low rate of interest at a bank or another low-yield fixed asset.

If someone believes they are being a “conservative investor” by investing money in an interest-bearing bank account, it’s only because the bank statement doesn’t show the real value of money after inflation.

The latest inflation report shows U.S. Inflation is 9%, three times higher than the long-term average of 3.25%, so if someone is only earning 3% on a CD, the value of their money is 6% less than it was.

That is, they “lost” 6% of buying power.

Chart by http://www.ycharts.com

But that’s not the main point of this observation, it’s just one of many reasons the trend in prices is important.

The US Inflation Rate is the percentage a chosen basket of goods and services purchased in the US increases in price over a year. Inflation is one of the metrics used by the US Federal Reserve to gauge the health of the economy. Since 2012, the Federal Reserve has targeted a 2% inflation rate for the US economy and may make changes to monetary policy if inflation is not within that range. A notable time for inflation was the early 1980’s during the recession. Inflation rates went as high as 14.93%, causing the Federal Reserve led by Paul Volcker to take dramatic actions.

As an investment manager applying trend systems to global markets, I see it much more granular. I’m applying computerized trend systems to a wide range of global currencies, commodities, stocks, and bond markets, so I see the directional trend changes and shifts in momentum. Although I’ve automated the process of monitoring all these global markets, I still like to review the pictures as charts to see what is going on.

I ranked the S&P GSCI Indices by short-term momentum to see which are trending up the most, so we’ll start there.

I think it’s well known that many commodities markets had been trending up this year, but as we’ll see, many of these markets are now in downtrends.

I’ll share these trends in a way that makes it obvious that commodities aren’t just tradable markets, but they impact all of us, and commodities are interconnected. For example, the price of soybeans impacts livestock.

The S&P GSCI Feeder Cattle Index provides investors with a reliable and publicly available benchmark for investment performance in the feeder cattle market. S&P GSCI Feeder Cattle Index is in an uptrend as defined by above the 50 and 200-day moving averages. In fact, in the lower two frames, I include the percent above or below the 50 and 200-day average, and Feeder Cattle is about 5% above its 50-day average and 8% above its 200-day average price.

Feeder Cattle is the strongest uptrend over the past three months. It only gets worse from here.

Feeder Cattle

S&P GSCI All Cattle Index is a broader basket of cattle, and it too is in an uptrend after breaking out of a multi-month base.

All Cattle

Live Cattle represented by S&P GSCI Live Cattle Index looks very similar, and is an uptrend, but not an all-time new high as it’s still below the February high.

Here’s where the weakness in these commodities trends begins. The S&P GSCI Gas Oil Index is in an intermediate-term uptrend; It’s 20% above the 200-day average. But the recent decline pushed it 6% below the 50-day average. The Gas & Oil index is in a primary uptrend, but short-term pullback. Longer-term trends begin with a shorter-term trend, so we’ll see how it trends from here.

Heating oil is represented by the S&P GSCI Heating Oil Index. Like gas and oil, it’s in a primary uptrend, but a short-term downtrend.

Now we’re getting into commodities with a negative price momentum over the past 3 months.

S&P GSCI Sugar Index is in a non-trending, volatile period over the past year, and it’s right at the 50 and 200-day average.

The S&P GSCI Livestock Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the livestock commodity market. Livestock is another market that’s lost its upward momentum over the past three months, and one to watch for a breakout.

S&P GSCI Natural Gas Index is in a primary uptrend, but recent downtrend in the short term. It tapped its 200-day average and is trending back up, but nearly 7% below where it was three months ago.

I ranked these trends by three-month momentum, so all of the commodities up to this point were outperforming the broad commodity index we know as S&P GSCI Total Return Index. My three-month momentum ranking is completely arbitrary, but it signaled many of these trends had changed recently.

The S&P GSCI Total Return Index is in a primary uptrend as defined by a level above its 200-day average, but it’s in a downtrend since it peaked in June.

S&P GSCI Total Return Index is what many global macro asset managers managing global macro hedge funds use as a benchmark for commodities, so the rest of these trends are more granular looking inside this broader index made up of these other indices.

S&P GSCI Energy Index is in a primary uptrend but has declined materially over the past month.

S&P GSCI Unleaded Gasoline Index is a big one that impacts Americans and our personal economy. S&P GSCI Unleaded Gasoline Index is in a primary uptrend but has corrected a lot these past five weeks. Once again, we see a commodity trend tapping the 200-day moving average, so a breakout below it will signal a changing primary trend.

Coffee is in a downtrend. S&P GSCI Coffee Index is below the 50 and 200 average, signaling it’s in both a short-term and intermediate-term downtrend. This may help explain why Latin American countries like Brazil’s stock index is down, too. Latin America makes a lot of the world’s coffee.

Unless you’re a long/short commodity trader like a CTA trend follower who aims to capitalize on these downtrends as much as the uptrends, this is one of the rare times downtrends are something to cheer on.

S&P GSCI Crude Oil Index is in a short-term downtrend, but a primary uptrend.

Meanwhile, S&P GSCI Cocoa Index is in a downtrend across both time frames.

Hey Crude, as in Brent Crude. We have a downtrend in S&P GSCI Brent Crude Index over the short run after a volatile non-trending period.

An interesting Intermarket analysis this year has been the trend in Gold. Gold is seen by many market participants as a store of value and a safe haven, but S&P GSCI Gold Index is in a downtrend after a sharp uptrend around March. You can probably see how applying multiple time frames can be useful in observing these trends.

By and large, the metals like precision metals are in downtrends.

S&P GSCI Platinum Index is in a downtrend.

Soft commodities, or softs, are commodities such as coffee, cocoa, sugar, corn, wheat, soybean, fruit and livestock. The term generally refers to commodities that are grown, rather than mined. You can see how some of the commodity markets tracked by indices are very granular focused on one single market trend, and others are a basket of commodities within a sector.

S&P GSCI Softs Index has shifted from a quiet uptrend to a volatile downtrend.

A biofuel is any fuel that is derived from biomass, that is, plant or algae material or animal waste.

After an uptrend breakout around March, S&P GSCI Biofuel Index has trended back to the same level it started.

Some of the most common products produced with soybeans are tofu, soy milk, soy sauce, and soy flour. Approximately 85% of soybeans grown around the world are used to make vegetable oils that are either sold to consumers or used commercially according to The Spruce Eats. The USDA says “Just over 70 percent of the soybeans grown in the United States are used for animal feed, with poultry being the number one livestock sector consuming soybeans, followed by hogs, dairy, beef and aquaculture.”

You can probably see how interconnected all this stuff is.

S&P GSCI Soybeans Index is in a downtrend after an uptrend started at the beginning of this year. Hopefully, this lower animal feed cost will help lower the prices of the livestock that are in uptrends.

Lead is still widely used for car batteries, pigments, ammunition, cable sheathing, weights for lifting, weight belts for diving, lead crystal glass, radiation protection and in some solders, according to RSC.org.

S&P GSCI Lead Index is in a downtrend, so I guess we’ll eventually see the price of ammo and car batteries decline, too. Overall, lead has been a non-trending volatile market the past year, but it’s now more decisively in a dowtrend.

Lean Hog is a type of hog (pork) futures contract that can be used to hedge and to speculate on pork prices.

S&P GSCI Lean Hogs Index has trended into a downtrend, so your bacon price may improve.

Palladium is one of a number of metals starting to be used in the fuel cells to power things like cars and buses as well as in jewelry and in dental fillings and crowns.

S&P GSCI Palladium Index is in a downtrend.

Grains are used around the world and are also called cereals, and are the most important staple food. According to NatGeo, humans get an average of 48 percent of their calories, or food energy, from grains. Grains are also used to feed livestock and to manufacture some cooking oils, fuels, cosmetics, and alcohols.

S&P GSCI Grains Index is in a downtrend after it broke up with momentum going into this year. If you like to eat and drink alcohol, this is great news as it seems the prices should drift back to where they were.

Wheat is used for white bread, pastries, pasta, and pizza, so this downtrend in S&P GSCI Wheat Index is a welcome change.

Dr. Copper is market lingo for the base metal that is reputed to have a “Ph. D. in economics” because of its ability to predict turning points in the global economy.

S&P GSCI Copper Index is in a strong downtrend, so if its reputation holds true, the Ph. D. in economics suggests a global economic slowdown is ahead.

The Royal Society of Chemistry says aluminum is used in a huge variety of products including cans, foils, kitchen utensils, window frames, beer kegs and airplane parts. 

If the trend in S&P GSCI Aluminum Index is a guide, the price of your next beer keg or airplane should drift lower. Aluminum is in a downtrend.

Industrial Metal alloys are known for their strength, durability, and corrosion resistance, so engineers, architects, and others in the industrial field use these alloys to construct buildings, wires, pipes, bridges, machines, and much more according to Wieland.

S&P GSCI Industrial Metals Index shows industrial metals are in a downtrend with great momentum.

Industrial metals are down so much I’ll show a two-year chart to see the price is back to 2020 levels.

Last but not least is cotton. I think we all know what cotton is used for. The price of clothes should see some decline with S&P GSCI Cotton Index in such a downtrend.

What we’ve observed is many commodity markets were in uptrends, but have more recently trended down. Not all of these necessarily impact the Consumer Price Index, but we certainly use most if not all of them one way or another.

Commodities are real “stuff”, and the prices of much of this stuff are no longer as elevated as it was. If this flows into lowering prices of the stuff we buy, then we’ll see inflation fall from here.

If inflation trends down from here, it’ll be positive for stocks and bonds and may result in the Federal Reserve pausing its aggressive interest rate hikes.

Now you know why we aren’t long commodities at this point.

Investor sentiment (about stocks) is so negative right now, that any slight improvement in inflation may spark an uptrend, then the extremely bearish positioning may drive short covering to keep the trend going a while.

Let’s 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® Managed PortfoliosMike 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 investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the listAny opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Bear Markets with an Economic Recession Last Longer and are More Severe

Bear markets that occur in economic recessions last longer and are more severe than bear markets without an economic recession.

The non-recession bears are clustered in the upper left quadrant (lower decline, recovered sooner) and the big bear markets with recession are red dots.

Source: NDR

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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 investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the listAny opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Are Growth Sectors Technology, Consumer Cyclicals, and Communication Services more Undervalued than Value?

Growth sectors like technology, consumer cyclical, and communications have seen the brunt of the selling this year, and growth is now more “undervalued” than value sectors per CFRA.

According to CFRA: Stocks are ranked in accordance with the following ranking methodologies. Qualitative STARS recommendations are determined and assigned by equity analysts, with 5 being the highest rating.

But as stated in Fundamental Valuation: Is the Stock Market Cheap or Expensive? undervalued stocks can get much more undervalued (prices fall more) in a recessionary bear market.

Risk management is essential in bear markets.

For example, the S&P 500 is down about -23% so far and needs a 30% gain to get back to the prior high.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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 investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the listAny opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Systematic Put Protection Hedging Strategies Have Struggled or Failed in this Bear Market

During the waterfall decline in March 2020, the Cboe S&P 500 5% Put Protection IndexSM (PPUT) successfully hedged off stock market beta, but it hasn’t done the same in 2022.

The green highlight shows the Cboe S&P 500 5% Put Protection IndexSM in black and S&P 500 stock index in red. Clearly, the systematic put protection index helped to hedge off downside risk in the SPX during the waterfall decline of March 2020, but that same hedge hasn’t protected long beta portfolios in 2022.

Cboe S&P 500 5% Put Protection IndexSM (PPUT) tracks the value of a hypothetical portfolio of securities (PPUT portfolio) designed to protect an investor from negative S&P 500 returns. The PPUT portfolio is composed of  S&P 500® stocks and of a long position in a one-month 5% out-of-the-money put option on the S&P 500 (SPX put).

Let’s see what happened over these two very different outcomes, and I’ll share my observations of what changed that impacted the outcomes.

Using data from YCharts, we see the full year 2020 in the chart comparing the S&P 500 Total Return Index (SPX) to the Cboe S&P 500 5% Put Protection IndexSM (PPUT) which is long the SPX, but adds one-month 5% out-of-the-money put option on the S&P 500 (SPX puts) options to hedge.

For the systematic put hedge strategy, 2020 was a fine example of risk management resulting in not only drawdown control, but also how avoiding large losses can increase the portfolio return in some conditions.

The S&P 500 declined over -30% around March 2020 as COVID spread, but the 5% SPX put lowered the drawdown to -16.52%.

That’s asymmetry and a key part of creating asymmetric investment returns.

The 5% put hedging strategy limited the downside by 50%, then went on to allow the long-only exposure to the S&P 500 to nearly double the stock index.

This is what I look for in the pursuit of asymmetric payoffs to produce asymmetric returns.

Naturally, the incredible performance of this very simple systematic hedging strategy tracked by PPUT got some attention after it performed so well. But, no method is perfect, and all strategies are fallible.

Fast forward to 2022, and the outcome has been completely different. Investors and traders who relied on a 5% monthly put option have fully participated in the downside of the SPX this year.

This phenomenon has driven many to ask, why such a radically different outcome?

I’ll attempt to explain my observations as succinctly as possible because understanding derivatives like options is the most complex task in the capital markets for most people.

For more than two decades, I’ve focused on alternative trading strategies in pursuit of asymmetric payoffs that lead to asymmetric investment returns.

Asymmetry isn’t just about finding low-risk positions that offer a higher expected payoff, like a 2-to-1 reward to risk.

Instead, asymmetry is even more focused on limiting the downside in hopes to avoid the negative asymmetry of loss.

Losses compound against us exponentially the deeper we allow losses to get.

So, my focus has been actively trading momentum growth stocks, tactically trading more systematically a global universe of ETFs, and volatility trading/hedging, all of which are unconstrained in my primary portfolio.

So, I have a unique perspective on this topic.

The short and sweet answer to why this time was so different than 2020 is a function of these issues.

  1. During the waterfall decline of March 2020, prices spread out (to the downside) very quickly. It was one of the sharpest waterfalls in history. When prices spread out, I call it a volatility expansion, and rising vol increases the premium for options. For the same reason, the VIX spiked to > 80 in March 2020, but it’s been constrained under 40 so far in 2022.
  2. This year, the stock indices have declined over -20%, but it’s been a much slower grind down. SPX is down about -20% over six months instead of down over -30% in three weeks. The speed of prices spreading out is volatility, and volatility is a significant driver of option premiums. Think of it this way: home insurance in Florida is expected to be cheaper before a catastrophic hurricane when people are complacent than after the hurricane does its damage. The good news is, that options pricing allows for better timing of relative value if you have a system for it.
  3. Another difference is the luck of roll and expiration dates for this systematic strategy that executes about every 30 days. My friend Russell Rhoads, who is one of the most well-known VIX experts, pointed out to me that the ability to use a series that expires on days that don’t contribute to the VIX calculation would have been helpful this year. That is, the systematic strategy of buying 30-day SPX put options has the potential to fall on days that aren’t efficient. The roll is a risk.
  4. Finally, we believe most institutional money managers were already hedged. This has been a long drawn-out decline, a lower vol downtrend, so it’s given time for money managers to add protection, so demand for puts hasn’t been a spike, but instead more methodical.

The bottom line is the asymmetric volatility phenomenon has impacted the put option hedging strategy.

The asymmetric volatility phenomenon suggests that prices trend down faster and sharper than they trend up, which can be an advantage of put option hedging, or a disadvantage when it’s calmer like this year.

All of the above has also kept the VIX below 40 this year.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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 investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the listAny opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Fundamental Valuation: Is the Stock Market Cheap or Expensive? 

For me, and everyone else even if they don’t realize it, the price trend is the final arbiter.

For more than two decades, I’ve focused my efforts on developing systems to identify trends early in their stage to capitalize on trends as they continue and exit a trend if it reverses.

It all started in business school, where I earned a Bachelor of Applied Science degree in advanced accounting. It was “advanced” because I took the extra advanced classes above a typical accounting major required to sit for the CPA exam in Tennessee. It basically results in a master’s in accounting, but not really, but it’s just the same 150 credit hours.

I rarely speak of my formal college simply because I haven’t considered it a source of edge for investment management.

But maybe it has.

In some conversations recently, people have asked about my background and how I got started as an investment manager and founder of an investment firm. After further review, I’ve come to realize the knowledge I have of financial statements, and the vast details and fundamental information that make them up, is what drove me to observe very little of it really drives the market price in an auction market.

That’s something I’ve always believed, but it occurred to me during business school.

To be succinct; I very quickly discovered undervalued stocks are trading at a cheap multiple of earnings for a reason, and that’s more likely to continue than to reverse.

I didn’t have a lot of capital to play with, and it was hard earned capital. I worked as a Sheriffs’ Officer full time through college fully time, so it took me a few extra years to complete. I wasn’t about to lose too much of what I had in the stock market, so I aimed to cut my losses short early on.

I’ve focused on cutting my losses short ever since, so now I have about 25 years experience as a tactical trader with an emphasis on the one thing I believe I can best limit or control; the downside of my losers.

When I focus on limiting the downside of loss, I am left to enjoy the upside of gains.

But we can’t do that with fundamentals and valuation. Risk can only be directed, limited, managed, and controlled, by focusing on the price trend.

The price trend is more likely to continue than to reverse, as evidenced even by vast academic studies of momentum.

Because a price trend is more likely to continue than to reverse, it’s essential to realize if you attempt to buy stocks that are in downtrends, you’ll likely experience more downtrend.

So, buying what you perceive are “undervalued” stocks is like catching a falling knife they say.

I’d rather wait for the knife to fall, stab the ground or someone’s foot, then pick it up safely.

Knives a dangerous, and up close, even more dangerous than a gun, so govern yourself accordingly.

Nevertheless, the valuation of stocks and overall valuation of the market by and large can be useful to observe at the extremes in valuation.

The chart below tells the story based on Morningstar’s fair value estimates for individual stocks.

The chart shows the ratio price to fair value for the median stock in Morningstar’s selected coverage universe over time.

  • A ratio above 1.00 indicates that the stock’s price is higher than Morningstar’s estimate of its fair value.
    • The further the price/fair value ratio rises above 1.00, the more the median stock is overvalued.
  • A ratio below 1.00 indicates that the stock’s price is lower than our estimate of its fair value.
    • The further it moves below 1.00, the more the median stock is undervalued.

It shows stocks are as undervalued as they were at the low in 2011, nearly as undervalued stocks were March 2020, but not as undervalued as stocks reached in the 2008 stock market crash when the S&P 500 lost -56% from October 2007 to March 2009.

If I were to overall a drawdown chart of the stock index it would mirror the undervalued readings in the chart.

As prices fall, stocks become more undervalued by this measure.

My observation is by and large stocks are relatively undervalued, but they can get much more undervalued if they haven’t yet reached a low enough point to attract institutional buying demand.

To be sure, in 2011 when stocks were as undervalued as Morningstar suggests they are now, the stock index had declined about -19%, similar to the current drawdown of -23%.

Source: http://www.YCharts.com

The waterfall decline in stock prices March 2020 was -34%, although it recovered quickly in a v-shaped reversal, so it didn’t get as much attention as the current bear market which is down 10% less, but has lasted for seven months without a quick recovery.

Time allows the losses to sink in for those who are holding their stocks.

This time the average stock is down much more than the stock indexes, too, so if you’re holding the weakest stocks your drawdown is worse than the index.

In that case, you’re probably wondering how low it can go.

If stock prices haven’t yet be driven down to a low enough level to attract big institutional capital to buy these lower prices, stocks can certainly trend down a lot lower from here.

For example, in the 2007 – 2009 bear market known as the 2008 Financial Crisis, one I successfully operated through as a tactical trader and risk manager, the stock index dropped -56% over 16 grueling months.

The infamous 2008 crash included many swings up and down on its way to printing a -56% decline from its high in October 2007.

That’s how bad it could get.

It’s also largely the cause of the situation the U.S. finds itself in today.

Since the 2008 Global Financial Crisis, the U.S. Treasury and Federal Reserve Open Market Committee have provided unprecedented support for the equity market and the bond market.

Passive investors and asset allocators have been provided a windfall from the Fed and Treasury, but it’s time to pay the debt.

For passive investors, they’ve been hammered with large losses this year and risk losing more if stock and bond prices keep trending down.

Stocks are already undervalued, but they can get much more undervalued.

Even worse, as my experience tactically operating through many declines like this since the 1990s reflects, are the paranna bites along with the shark bites.

The shark bite is from a passive asset allocator holding on through a prolonged deep bear market in stock prices as they fall -20%, -30%, -40%, -50% or more.

Because losses are so asymemtric and geometically compound aginast you, these capital losses become harder and harder to recover from.

If you lose -50%, it takes a 100% gain to get it back.

Stock market trends are asymmetric; they trend up much lower than they crash down, so that larger gain needed often takes longer, too.

So your emotional capital is at risk.

When you’re down a lot, you’re thinking and decision-making becomes cloudy and stressed because you[‘re under pressure like a pressure cooker.

You don’t know how low it can go.

If you are a buy and hold asset allocator, your loss is unlimited, as there is not point in which you would exit but zero.

Zero may be unlikely, but -50% or more isn’t, as evidenced by history.

And you’ve not been here before.

You’ve not seen this before.

The Fed has never stretched its open market operations this far before.

We just don’t know what’s going to happen next.

But, I’m prepared to tactically execute through whatever unfolds.

I’m having a great year relatively speaking. I’ve been positive most of the year and haven’t ventured far below our all-time new high.

Times like these are when my skillset is designed to show an edge.

Like many tactical investment managers like trend followers, hedge funds, global macro, I too had a period of relative underperformance of the long-only stock indexes. I held my ground but learned some new tricks during the many swings the past decade, and sharpened my countertrend axe to chip away some of the bad parts we don’t want.

But relative outperformance has never been my objective, especially not against a stock index for stock fund that’s fully invested in stocks all the time.

My objective has always been absolute return, not relative return.

My absolute return objective is what drives me to actively manage risk for drawdown control.

Like a good doctor, I aim to first do no harm… as best I can as a risk taker.

Looking at the Shiller PE ratio for the S&P 500, a long-term observation, the U.S. stock market is still grossly overvalued.

The S&P 500 was the second-highest most expensive valuation in 140 years, and even after the decline this year, the stock index is still twice the valuation of Black Monday in October 1987 and

only down to its extremely overvalued level it was on Black Monday Oct. 19, 1987, when the Dow Jones Industrial Average fell -22% in a single day and just now down to the valuation level the stock index was on Black Tuesday in the 1929 crash.

If you believe in fundamental valuation as a gauge and a guide, anything can happen, so please govern yourself accordingly.

If you need help or have questions, contact us here.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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 investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the listAny opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Observations of the Stock Market Trend, Bond Market, and Investor Sentiment

Nothing drives investor sentiment like a strong price trend.

The S&P 500 stock index is down over -20% this year, and it was down -24% YTD just two weeks ago.

The stock index peaked at the end of last year and is down about -13% over the past 12 months.

But that’s not all.

This time it’s different.

I’ve been warning here for years all the Fed intervention would eventually have to stop, and it would also drive down bond prices, too.

The ICE US Treasury 20+ Year Index is down -23% this year, so long-term U.S. Treasury bonds are down even more than the stock index.

The ICE US Treasury 20+ Year Index peaked July 27, 2020, and has since declined by -32%, far more than stocks.

As warned, bonds are no longer a crutch for declining stocks.

Bonds have been worse.

The Federal Reserve FOMC and U.S. Treasury are no longer accommodating higher stock and bond prices, or applying the “Fed Put” as we call it.

Since 2008, the Feds have stepped in to support the economy and the markets by providing unpreceded liquidity, which has eased selling pressure in waterfall declines and made the market more optimistic.

Fed intervention has resulted in a windfall for stock and bond investors since.

You can no longer rely on the Fed to step in to support market prices.

The challenge today is we’ve never seen the Fed provide such support for stocks and bonds as it has post-2008, so the windfall stock/bond investors have received has now come due.

I had been warning of it:

It’s eventually going to be payback time for the windfall stock market investors have received over the last decade – if you don’t actively manage risk for drawdown control.

Stocks had reached the second-highest most expensive valuation in 140 years, and as you can see in the above chart, and stayed there for the last decade.

High valuations could previously be justified by low inflation, but clearly, that’s no longer the case.

Nothing drives investor sentiment like a strong price trend.

As prices are trending up, investors and traders get more and more bullish, optimistic, and confident.

As prices fall into downtrends, investors and traders get more and more bearish, pessimistic, unsure, doubtful, and outright scared.

Although we tilt more optimistic or pessimistic as a personality trait, by and large investor behavior changes more in downtrends than uptrends.

The prospect theory says that investors value gains and losses differently, placing more weight on perceived gains versus perceived losses.

Prospect theory is also known as the loss-aversion theory.

With Prospect Theory, the work for which Daniel Kahneman won the Nobel Prize, he proposed a change to the way we think about decisions when facing risk, especially financial. Alongside Tversky, they found that people aren’t first and the optimal utility maximizes, but instead react to changes in terms of gains and losses.

In short, Prospect Theory suggests investors are loss-averse, so our risk reward preferences are asymmetric.

We prefer asymmetric investment returns; we want more of the upside, and less of the downside.

Clearly, want can’t receive asymmetric investment returns from just buying and holding risky markets, bonds included.

I believe asymmetric investment returns are pursued by our focus on asymmetric payoffs and positive mathematical expectation over many trades.

ASYMMETRY® is about more upside than downside, an average, over a period of many buys and sells.

ASYMMETRY® is about producing higher average gains than losses, or a positive expectancy.

Back to investor sentiment.

AAII Investor Sentiment remains very asymmetric, though it has shifted more neutral, it remains BEARISH.

The Fear & Greed IndexFear & Greed Index, which is driven by 7 market indicators instead of a sentiment survey, remains in the EXTREME FEAR zone.

EXTREME levels of FEAR or GREED are usually a contrary indicator, but in a prolonged bear market, bearish sentiment is like a pressure cooker.

Investors who hold their losses too long get caught in a LOSS TRAP.

A loss trap is like the Chinese Finger Pull game.

The harder you pull, the tighter the loss trap.

It’s why I predefined my risk in advance, to cut losses short rather than allow losses to grow large and larger.

The LOSS TRAP is not fun, and can be very costly.

Don’t let smaller losses become larger and larger losses, or you’ll be caught in the trap, and the harder you resist, the tighter it gets.

The Fear & Greed Index peaked on November 9th and has since printed lower highs and lower lows; a downtrend.

At this point, the prolonged trend in investor fear suggests this may be the early stages of a prolonged bear market, so govern yourself accordingly.

It’s why I tactically trade market trends.

It’s why I actively manage my risk in each position and across the entire portfolio for drawdown control.

The windfall buy-and-hold passive investors have received from the U.S. stock market from Fed action is due for payback.

Our ASYMMETRY Managed Portfolio has been positive for the year.

Though past performance is never a guarantee of future results, this is when I’ve historically revealed an edge.

When the wind is blowing, we can cast the sail ride and enjoy the ride.

But when the wind stops blowing, we have to get out the oars or risk sinking.

At Shell Capital, we row, not sail.

We are here to help if you need it, contact us.

We are a fiduciary money manager fully committed to guiding our clients.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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 investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the listAny opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Does Trend Following Work on Stocks?

Some recent conversations prompted me to revisit some of the return capture and loss avoidance conclusions from the 2005 paper, Does Trend Following Work on Stocks?

Conclusions:
The evidence suggests that trend following can work well on stocks. Buying stocks at new all time highs and exiting them after they’ve fallen below a 10 ATR trailing stop would have yielded a significant return on average. The evidence also suggests that such trading would not have resulted in significant tax burdens relative to buy & hold investing. Test results show the potential for diversification exceeding that of the typical mutual fund. The trade results distribution shows significant right skew, indicating that large outlier trades would have been concentrated among winning trades rather than losing trades. At this stage, we are comfortable answering the question “Does trend following work on stocks?” The evidence strongly suggests that it does.

Does Trend Following Work on Stocks?

Stock Market Ahead of the Fed, and What’s Likely to Happen Next

In the last observation, I shared “Implied volatility is indicating another possible volatility expansion” I pointed out that Implied volatility is indicating another possible volatility expansion.

The Volatility Index VIX was at 21, implying a range of stock prices (S&P 500) intraday of about 1.3% over the next 30 days.

On that same day, April 5th, my measure of realized, actual, historical near-term volatility was 1.6%.

Today the VIX is at 29, implying a 1.8% intraday range, and my measure of realized, actual, historical near-term volatility is 2% down a little from its 2.2% peak over the last 30 days.

Clearly, the options market is still pricing in a volatility expansion or a wider range of stock prices.

Today is a big day for stock, bond, and commodity investors and traders as the Fed FOMC will announce its plans. According to data from CME, the Fed funds futures imply an expected 99.8% chance of a 0.50% interest rate increase. So, the market is clear about its expectations of the direction of short-term interest rates.

Individual investors are more bearish than they were in March 2020.

News eventually turns negative and the environment becomes hostile. The levels of bullish sentiment and risk-taking prove to be excessive. As prices trend down it drives bearish sentiment and selling, putting further downward pressure on prices.

There is certainly cause for concern by many measures.

For example, I’ve been saying; it’s eventually going to be payback time for the windfall stock market investors have received over the last decade if you don’t actively manage risk for drawdown control.

I say it’s eventually going to be payback time for the windfall stock market investors have received over the last decade because the Shiller PE Ratio has been extremely elevated, indicating stocks are generally expensive and overvalued.

The Shiller PE ratio for the S&P 500 is a price-to-earnings ratio based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10.

The highest the Shiller PE Ratio reached was 44 at the Tech Bubble peak in 2000, now it’s at 35, the second-highest level in 140 years, and double the average and median.

This long-term valuation measure is very bearish for the big picture.

Up until now, the high multiple of earnings prices was trading could be justified because of the very low level of inflation over the past decade.

That is no longer the case, and stock prices have trended down to reflect a new trend in inflation (rising prices.)

We haven’t seen the prices of things we buy increase this much, or the rate of change, in a long time.

The Fed has been employing radical policies to stimulate the economy and prop up the stock market since the 2008 “Global Financial Crisis”, and it’s time to pay the piper.

The windfall investors received from buying and holding stocks and bonds is an anomaly, not their skill, so govern yourself accordingly.

Past performance does not assure future returns.

At times like this, it’s more likely the opposite.

That’s the big picture, here are some observations I see when I zoom in to the here, and now.

I’ve already pointed out that individual investors are very bearish according to the AAII survey and even more bearish than at the start of the global pandemic and waterfall decline in stocks in March 2020.

By waterfall decline, I’m referring to the -34% decline in the S&P 500 in the first part of March 2020 alone.

You can probably see it’s a big deal that individual investors surveyed are more bearish now than they were then. In comparison, here is a drawdown chart from YCharts showing the S&P is currently “only” down -13% from its high, far from the waterfall decline in 2020.

In the short run, though, there are some negatives becoming more positive, at least temporarily.

The Technology Sector has earned the top weighting of over 27% of the capitalization-weighted S&P 500 stock index.

Below is the price trend for the S&P 500 Information Technology Index, which shows it has found support, or buying interest, around the current level several times this year.

While the S&P 500 Information Technology Index is a sell from a trend following perspective, it has the potential for a countertrend if it can continue to hold the line. If it doesn’t and breaks below the lows, it’s probably going to get real ugly.

Looking inside the S&P 500 Information Technology Index, I monitor the percent of stocks above/below the trend-following moving averages.

At this moment, 38% of the S&P 500 Information Technology Index stocks are above the 5-day average, 23% are above the 20 day, and only 17% are above the 50-day average and the 200-day average.

Here’s what the percent of S&P 500 Information Technology Index stocks above the 50-day moving average looks like.

Yes, it’s pretty washed out as most of the technology stocks are already in downtrends, but that doesn’t imply they can’t go lower, but instead that selling pressure has already pushed the prices down to a level we normally see at lows.

Healthcare is the second-largest exposure in the S&P 500 at 14% of the index. While isn’t only about half of the Technology allocation, it’s material position size in the index.

The S&P 500 Health Care Sector Index has also trended down to near its prior low earlier this year, and its volatility has expanded as we can see in the volatility Bollinger Band around the price trend spreading out.

Like the Technology sector, it’s bearish looking from a trend following perspective, but after prices move to an extremely high or low, we start to wonder if the buying/selling has exhausted.

To get a clue, I look at the percent of stocks in the sector relative to their trend-following moving averages.

I also measure their momentum, volatility, and relative strength for overbought oversold, relative value of options prices, but for brevity, I’m showing only the basics.

As of right now, the S&P 500 Health Care Sector Index shows 51% are above the 5-day average price, 9% above the 20-day, 23% above the 50-day, and 33% of health stocks are above the 200-day average.

Here’s the visual on a chart.

Healthcare stocks have been under selling pressure, so the question is have those with a desire to sell already sold? What we know is it is reaching a level we’ve historically seen the downtrends start to shift back to uptrends, but it could always go lower.

Past performance is no guarantee of future results.

Next up is the S&P 500 Consumer Discretionary Sector Index, which has earned a weighting of 11.5% in the S&P 500 index, after these three sectors are reviewed, these three of eleven sectors are 53% of the overall allocation in the broad-based index.

The recent price trend of the S&P 500 Consumer Discretionary Sector Index looks similar to the others, as selling pressure has pushed down the prices to the prior low reached earlier this year.

Historically the S&P 500 Consumer Discretionary Sector Index has found buying interest at this level, but we’ll soon see if buyers continue to support this level or higher, or if it trends down to a lower low and a downtrend.

Below is the breadth trend of the stocks in the S&P 500 Consumer Discretionary Sector Index as defined as the percent of stocks above the 50-day average.

Once again, we see a washed-out condition, as 75% of the S&P 500 Consumer Discretionary Sector stocks are below the 50-day average price, and only 25% are above the 50-day average.

My interpretation is the stock market has already been dominated by sellers.

Sellers have already pushed stocks down near the low levels they have historically bottomed and reversed back up.

But, this time is different.

We now have high and rising inflation, and that’s not great for the multiple of earnings stocks trade.

I believe in the weeks after this Fed announcement today, we’re going to see what we got.

If these price trends keep trending lower, it’s likely to be a very ugly long drawn out bear market without the Fed providing its life support.

And then there’s the bond situation, but we’d do that later.

I expect to see some bounce, but what the price trends do in the coming weeks is more telling.

If we don’t see a bounce, look out below.

Sellers haven’t capitulated, but they will.

We’ve been very busy at Shell Capital coming off the best year in 2021 we’ve had in a decade and another great year in 2022 thanks to some asymmetric risk/reward payoffs from tactical trading and long exposure to commodities and other alternatives.

Individual investors are facing the most hostile conditions in decades right now with no place to hide for stock and bond investors, so we have decided to open our door to new clients for the first time in many years. The ASYMMETRY® Managed Portfolios program provides independent custody at Folio Institutional® by Goldman Sachs. Our clients own their accounts titled in their own name at Goldman Sachs, independent of us, and they give us the authority to trade their managed accounts via our investment management agreement.

If you need help, don’t hesitate to contact us.

We couldn’t be more prepared for whatever happens next, and we’ve tactically executed through challenging conditions many times over more than two decades.

Although we can’t assure future success, we’ve stacked the odds in our favor and can do the same for you.

Send us an email to see how we can help guide you in the right direction.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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 investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the listAny opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Implied volatility is indicating another possible volatility expansion

Implied volatility is indicating another possible volatility expansion.

The VIX index is a calculation designed to produce a measure of a constant 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPX) call and put options.

The VIX had drifted below its long-term average of around 20, but as you can see in the chart, it’s printed a lower high.

As the VIX remains elevated and in an uptrend as defined as higher lows and higher highs, it suggests the market expects stock prices to be more volatile.

The 10-2 Year Treasury Yield Spread Continues to Indicate a Warning of a Possible Recession

In Following the Trend of Inflation and Risk of Bonds I mentioned we are closely monitoring the 10-2 Year Treasury Yield Spread because an inverted yield curve has a track record of predicting future recessions 6 – 24 months in advance.

The 10-2 Year Treasury Yield Spread is declining fast and has now trended to 0.24%, meaning the 2 Year U.S. Treasury Yield is nearly the same yield as the Year 10 U.S. Treasury Yield.

For more context, read: How We’ll Know if a Recession is Imminent.

For information about our proactive investment management, active risk management, hedging your risks, and ASYMMETRY® Managed Portfolios, contact us.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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. Please 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Extreme Bearish Investor Sentiment Eventually Becomes Bullish for the Stock Market

We measure investor sentiment in many ways from indicators that illustrate the result of investor actions from trading such as the Cboe Volatility Index® (VIX®), the first index to measure the market’s expectation of future volatility. Volatility can be measured using actual historical price changes (realized volatility) or it can be a measure of expected future volatility that is implied by option prices. The VIX Index is a measure of expected future volatility as implied by options.

The VIX Index is a calculation designed to produce a measure of constant 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPX℠) call and put options. On a global basis, it is one of the most recognized measures of volatility — widely reported by financial media and closely followed by a variety of market participants as a daily market indicator.

Currently, the VIX has trended around 30, which I consider a volatility expansion. As you can see in the chart, the long-term average is around 20, so levels above average are periods expected to see a wider range of prices as prices, and more indecision.

When the VIX is elevated, it suggests the market is paying more for the protection of options, so many consider the VIX a “fear gauge.”

The good news is stock market returns have historically been higher after VIX trends above 30. Because it’s a sentiment indicator, the market eventually gets so bearish investors who desire to sell have already sold, and those who want to hedge (with options) have hedged.

Today’s VIX at 30 is far from an extreme spike we’ve seen before, but still elevated.

We’re going to venture far beyond the VIX today.

The VIX is one of 7 indicators included in the CNN Fear & Greed Index we have been monitoring for years. The Fear & Greed Index isn’t designed for market timing per se, but it can be a useful reminder of your own sentiment. At the extremes, you may consider feeling more contrarian and following the most famous contrarians mantra:

“Be fearful when others are greedy, and greedy when others are fearful. – Warren Buffett

Right now, the Fear & Greed Index suggests Extreme Fear is driving the stock market.

Looking inside the Fear & Greed Index the CBOE Volatility Index (VIX) at 30 is part of the weight of the evidence used to drive the gauge. It uses a moving average applied to the VIX level and as of yesterday, it has changed from “Extreme Fear” to Neutral as implied volatility declined.

Another option-related indicator included is the CBOE 5-day average Put/Call Ratio. It now says, “during the last five trading days, volume in put options has lagged volume in call options by 65.73% as investors make bullish bets in their portfolios. This is a lower level of put buying than has been the norm during the last two years and is a neutral indication.”

Put options are used mostly to hedge portfolios against price declines. When investors hedge more, it’s a signal they are bearish, and when they hedge less, it’s assumed by and large they are less bearish.

Below is the trend of the Fear & Greed over time. As you can see, it’s down to the Extreme Fear level, which proceeds a low in the stock market, and eventually a new uptrend.

Once investors who want to sell have sold, we eventually see prices trend down to a low enough level it attracts buying demand.

To get an indication of when this may be near, we look at a wide range of investor/trader sentiment indicators, but also the price chart itself for clues.

I like to use the Fear & Greed Index here because it’s publically and freely available so anyone can observe and follow it, but there are many more we monitor that isn’t.

Advisor Sentiment from Investors Intelligence is one of my favorite investor sentiment indicators.

As you can see in the chart, bearish investment advisors now outnumber the bulls. The bull-bear spread narrowed to -4.6% and the first negative level since early April 2020. This is an extreme reading of bearishness, and historically precedes a reversal of a downtrend as it suggests those who have sold have sold, leaving buying demand in the dominant position.

According to Investors Intelligence, this extreme reading signals a lower risk level than before for tactical trading opportunities.

However, the caveat is it could absolutely get much worse because every eventual -50% decline in the stock market necessarily involves such extreme fear to drive prices lower. So, it’s essential to understand contrarian indicators are a windsock, but no indicator is flawless.

Sentiment indicators could remain extremely bearish for months in a long-lasting waterfall decline.

It’s essential to realize bearish sentiment necessarily proceeds large declines in the stock market, but eventually, the extreme pessimism signals the desire to sell may have faded enough for the demand to buy to become dominant.

When a market is falling, the prices trends are eventually driven down to a low enough point to attract new buying demand, and the trend reverses.

Indicators can be helpful to gauge sentiment and behavior, but nothing drives sentiment like a change it the price trend.

The price trend is the final arbiter.

“The trend is your friend until the end when it bends.” – Ed Seykota

Aguing with the trend is like arguing with a guard rail on a motorcycle. You can test it and try it, but it’s probably going to be a bad outcome.

A simple interpretation of the price trend of the stock market using the S&P 500 Index as a proxy is what was a low volatility primary uptrend has changed to a downtrend as defined by its lower highs, and lower lows.

Below we see my line in the sand, which shows the index is at a level it’s seen several times before.

For now, the stock market is attempting an uptrend.

If the S&P 500 declines below 4200 I’ll consider it a continuation of the downtrend.

The moving average of the price is a common technical indicator used for trend following. The 50 day and 200 day are the most popular. As you can see, the S&P 500 is also defined as a downtrend using these trend following indicators.

The SPX is down about -9% from its high, and was down as much as -12% as of last week. That’s far from a major decline, but enough to help drive a lot of fear of a further loss of value.

The bottom line is investor and advisor sentiment has reached an extreme level of pessimism that could proceed at least a short-term retracement of the stock market decline.

However, there is plenty of potential catalysts that could result in a price shock, or waterfall decline, such as a nuclear threat from Russia. For example, The New York Times reports “Putin Is Brandishing the Nuclear Option. How Serious Is the Threat?

“Over the weekend, as his military laid siege to Ukraine for the fourth day, President Vladimir Putin ordered Russia’s nuclear forces into a higher state of alert, the first time the Kremlin has done so since the Russian Federation was established in 1991.”

And then there are actions from The Federal Open Market Committee (FOMC) of the Federal Reserve. Few things drive prices and sentiment more than changing interest rates.

Next up, I’ll take a look at what the stocks inside the index is doing to gauge how far they’ve trended and how far they may go.

Let’s see how it all plays out, but right now, we’re seeing early evidence of a possible capitulation, at least in the short term, barring no unknown, unknown, or nuclear attack.

In the meantime, I’m taking advance of some asymmetric risk-reward opportunities in our tactical trading.

For information about our proactive investment management, active risk management, hedging your risks, and ASYMMETRY® Managed Portfolios, contact us.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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. Please 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Following the Trend of Inflation and Risk of Bonds

In How We’ll Know if a Recession is Imminent I said if the 10-2 Year Treasury Yield Spread crosses below zero, and the yield curve becomes inverted, that’s what will signal a recession is probably imminent, but a recession may not be identified until 6 – 24 months later.

We can’t wait until a recession is called to manage our investment risks; the stock market has historically been the leading indicator, declining well in advance.

After U. S. inflation was reported today that inflation accelerated last month to a 7.5% annual rate to a 40-year high, U.S. Treasury Yields trended up to 2%.

Since the 10-2 Year Treasury Yield Spread is the difference between the 2 year U. S. Treasury and the 10 year U. S. Treasury, the spread will tighten as the shorter-term interest rate converges with the longer-term rate.

Recently both yields have been increasing, but the 10-2 Year Treasury Yield Spread is still falling.

The U.S. inflation momentum is driven by rising price trends for autos, household furniture, appliances, as well as for other long-lasting goods we buy.

For example, here is the U. S. Consumer Price Index for used cars and trucks.

It is well known certain consumer prices have been trending up since the pandemic, so the question for the second-level thinker is whether or not these rising inflation trends are already reflected in the prices of stocks and bonds.

So far this year, 2022 has started off with stock markets trending down.

For example, the S&P 500 declined nearly -10% in the few weeks before retracing about half the loss over the past two weeks.

Longer downtrends often retrace about half of their decline before turning down again, so we’ll soon see if this is the early stage of a deeper decline for stocks or a continuation of the primary uptrend.

The Nasdaq 100, which is weighted heavier in large-cap growth stocks and the technology sector, has reacted to more selling pressure down -14% before retracing some of the decline.

Emerging country stocks as measured by the MSCI Emerging Markets Index have finally shown some relative strength against U. S. stocks.

The MSCI Emerging Markets Index trended up at first, then only declined about -3%, and is now positive YTD.

Rising interest rates have a direct negative impact on bond prices, and that is especially true for longer-term bonds.

For example, the ICE U.S. Treasury 20+ Year Bond Index shows the bond price is down over -6% already in 2022.

If you buy and hold bonds, you’re going to learn the risks of bonds and bond funds in a rising rate regime.

Many investors today haven’t invested long enough to have experienced the possible losses that can be driven by this kind of rising inflation, rising interest rates, regime.

Investing involves risks you must be willing to bear, and if you aren’t willing and able to take the risk, you may consider reducing or hedging your risks.

For information about our proactive investment management, active risk management, hedging your risks, and ASYMMETRY® Managed Portfolios, contact us.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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. Please 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

How We’ll Know if a Recession is Imminent

Recessions are officially announced long after they begin.

It usually takes nine to twelve months before the National Bureau of Economic Research (NBER) to announce when a recession started.

For example, on June 8, 2020, the National Bureau of Economic Research announced the U.S. economy was officially in a recession. The COVID lockdown-driven recession was so obvious NBER’s Business Cycle Dating Committee didn’t need the typical time frame to decide.

Here’s the Unemployment Rate with NBER-dated recessions in gray, for an example of business cycle dating.

recessions figure 071921.jpg
Unemployment rate. NBER-dated recessions in gray. Source: Bureau of Labor Statistics via the Federal Reserve Bank of St. Louis.

Who is the National Bureau of Economic Research and its Business Cycle Dating Committee?

The NBER’s Business Cycle Dating Committee maintains a chronology of US business cycles. The chronology identifies the dates of peaks and troughs that frame economic recessions and expansions. A recession is the period between a peak of economic activity and its subsequent trough, or lowest point. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief. However, the time that it takes for the economy to return to its previous peak level of activity or its previous trend path may be quite extended.

According to the NBER chronology, the most recent peak occurred in February 2020. The most recent trough occurred in April 2020.

That was quick!

But the NBER’s Business Cycle Dating Committee maintains a chronology of US business cycles in the past, which tells us nothing about here, now.

I follow the 10-2 Treasury Yield Spread as an early warning signal of an imminent recession.

The 10-2 Treasury Yield Spread is the difference between the 10 year treasury rate and the 2 year treasury rate. This yield spread is commonly used as the main indicator of the steepness of the yield curve.

A yield curve is a visual representation of yields (interest rates) on U. S. Treasury bonds across a range of different maturities. In normal circumstances, the shape of the trend is upward; short-term rates are lower than long-term rates. It makes sense because if we are investing in bonds to earn interest, we should expect a higher rate for investing for a longer period. Another reason is a risk premium longer-term bonds as longer term durations are exposed to a greater probability interest rates will change over its remaining duration, causing the price to fluctuate.

If you invest in a bond that doesn’t mature for 10 or 20 years and rates of new bonds being issued increase, as they are now, the price of the bonds you hold will decline in price so their yield matches about what the market is paying now. This is a risk for bond holders in a rising interest rate environment as we are in now, driving by rising inflation.

As the 10-2 Treasury spread approaches zero it signals a “flattening” of the yield curve. Here is the spread today, and it’s history over the past few decades. I shaded in gray the historical recessions to see how the 10-2 Treasury spread preceded historical recessions several months in advance. I also highlighted the area below zero where the signal occurs as the yield curve is flat. Right now, because short term interest rates are trending up driven by the U. S. Federal Reserve, the yield curve is trending toward flattening.

Only time will tell if the yield curve goes flat, where the short term (2 year) rate is the same as the longer term (10 year) yield, but we see its the directional trend at this point.

But what’s the 10-2 Treasury spread signal?

A negative 10-2 yield spread has historically been considered a precursor to a recessionary period.

A negative 10-2 spread has predicted every recession from 1955 to 2020, but has inverted 6 – 24 months before the recession occurring, so it is a far-leading indicator.

The 10-2 spread reached a high of 2.91% in 2011, and went as low as -2.41% in 1980.


10-2 Year Treasury Yield Spread is currently at 0.62%, compared to 1.01% last year, and its lower than the long term average of 0.93%.

If the 10-2 Year Treasury Yield Spread crosses below zero, and the yield curve becomes inverted, that’s what will signal a recession is probably imminent, but a recession may not be identified until 6 – 24 months later.

Or, it could be very fast, like 2020.

Until then, I’m systematically monitoring the 10-2 Year Treasury Yield Spread for the advance warning.

For information about our proactive investment management, active risk management, hedging your risks, and ASYMMETRY® Managed Portfolios, contact us.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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. Please 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Nasdaq Resumes Downtrend 

The Nasdaq 100 Index has failed to hold above the 200-day moving average, a longer-term trend indicator.

Breadth of the Stock Market Indicates Internal Weakness and a Stealth Bear Market

I focus most of my attention on my own positions or those on my lists for portfolio management.

Nothing is more telling than what the stocks on my lists that meet certain fundamental earnings growth and technical criteria are doing.

Nothing is more important than the trend, momentum, and volatility of our actual positions.

However, it doesn’t mean we don’t also observe all the other stocks, bonds, commodities, and currencies for signs of strength or weakness.

Even though it may not impact my exposures or drive any change in our positions, I still enjoy taking the time to see what “the market” is doing, overall, in the big picture. That’s what I mostly share here, for informational purposes only.

Below is a chart of the percent of U. S. stocks trending about the 50-day moving average, an intermediate-term trend signal.

Percent of U.S. Stocks Trending Above the 50 Day Moving Average

A few observations of asymmetry are:

  1. Only 30% of stocks are trending above the 50 day moving average.
  2. As we can see in the charge giong back 20 years, its at the low end of its historical range.
  3. In signficant stock market declines, it gets much worse. For example, in March 2020, more than 90% of stocks were in downtrends, the worst in two decades, including 2008.
  4. About 8 times this Market Breadth indicator stopped at this level before trending back up, as stocks trended back up.
  5. About 13 times this Market Breadth indicator didn’t stop here at this level, but instead kept trending loweer as stocks trended lower.

Overall, my observation from this asymmetry (imbalance) is many stocks have already entered downtrends.

Overall, stock market participation started showing weakness after the May 2020 advance, then improved into late 2010 before reaching a peak, and it’s been trending down since.

We may start to hear some call it a “Stealth Bear Market,” a phrase used to describe stock market conditions when the overall indexes are by and large trending higher, but many stocks are trending lower.

A “Stealth Bear Market” may define a trend like this because the S&P 500 stock index has been trending up, as the percent of stocks participating in the uptrend has declined.

Regardless of what we call it, the bottom line is most stocks are already in downtrends, so we’ve been stalking to see when they start trending back up again.

I think it’s essential to actively manage risk and adapt to changing market trends. If you need help, contact us. We manage accounts titled in your own name at an independent custodian of Goldman Sachs.


Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

The U. S. Stock Market Bubble

What do I think about the U. S. stock market?

It’s in a bubble, so I’m getting prepared.

And time is different, too, because of rising inflation and interest rates, which means falling bond prices.

So bonds aren’t going to be a crutch in a falling stock market.

Why do I think it’s a bubble?

A picture is worth 1,000 words.

S&P 500 Shiller CAPE Ratio was created by Yale University economist Robert Shiller as a way to understand long-term stock market valuations.

The S&P 500 Shiller CAPE Ratio, also known as the Cyclically Adjusted Price-Earnings ratio, is calculated as the ratio of the S&P 500’s current level divided by the 10-year moving average of inflation-adjusted earnings.

The S&P 500 Shiller CAPE Ratio may be used as a valuation method to forecast future expected returns.

– Higher CAPE ratio could indicate lower returns over the next couple of decades,
– Lower CAPE ratio could reflect higher returns over the next couple of decades, as the ratio reverts back to the mean.

S&P 500 Shiller CAPE Ratio is at a current level of 39.60, and as you can see in the chart, it suggests the stock market is the second most expensive since 1881, the last 140 years. It’s more than 200% higher than its long-term average, and far from the low levels that historically preceded long-term bull markets.

The current risk for investors is it plays out similar to the past but without bonds trending up, acting as a crutch to hedge some of the stock market losses.

There’s never been a more critical time to row, not sail, so we’ve got out the oars.

It’s an exciting time to be an investment advisor and portfolio manager. We are empowered with a broader, more robust suite of tools to define and manage risk than at any other time in history.

Is this the beginning of a bear market?

Maybe, we’ll see, only time will tell.

Even if it is the early stage of a bear market, it’ll likely unfold with many swings up and down along the way.

But I think we’ll see all the speculation unwind in the years ahead.

For the tactical trader, investment success isn’t so much what the market is doing to you, but what you are doing with the market.

I think that’s the case for everyone.

If you need help, contact us.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed PortfoliosMike 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 are 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Market Action Discounts Everything

The philosophy and rationale of technical analysis is there are three premises on which the technical approach is based: 

  1. Market action discounts everything. 
  2. Prices move in trends. 
  3. History repeats itself. 

“The statement “market action discounts everything” forms what is probably the cornerstone of technical analysis. Unless the full significance of this first premise is fully understood and accepted, nothing else that follows makes much sense. The technician believes that anything that can possibly affect the price—fundamentally, politically, psychologically, or otherwise—is actually reflected in the price of that market. It follows, therefore, that a study of price action is all that is required. While this claim may seem presumptuous, it is hard to disagree with if one takes the time to consider its true meaning.

All the technician is really claiming is that price action should reflect shifts in supply and demand.

If demand exceeds supply, prices should rise.

If supply exceeds demand, prices should fall.

This action is the basis of all economic and fundamental forecasting. The technician then turns this statement around to arrive at the conclusion that if prices are rising, for whatever the specific reasons, demand must exceed supply and the fundamentals must be bullish. If prices fall, the fundamentals must be bearish. If this last comment about fundamentals seems surprising in the context of a discussion of technical analysis, it shouldn’t. After all, the technician is indirectly studying fundamentals. Most technicians would probably agree that it is the underlying forces of supply and demand, the economic fundamentals of a market, that cause bull and bear markets.

The charts do not in themselves cause markets to move up or down. They simply reflect the bullish or bearish psychology of the marketplace.

As a rule, chartists do not concern themselves with the reasons why prices rise or fall. Very often, in the early stages of a price trend or at critical turning points, no one seems to know exactly why a market is performing a certain way. While the technical approach may sometimes seem overly simplistic in its claims, the logic behind this first premise—that markets discount everything—becomes more compelling the more market experience one gains. It follows then that if everything that affects market price is ultimately reflected in market price, then the study of that market price is all that is necessary. By studying price charts and a host of supporting technical indicators, the chartist in effect lets the market tell him or her which way it is most likely to go. The chartist does not necessarily try to outsmart or outguess the market. All of the technical tools discussed later on are simply techniques used to aid the chartist in the process of studying market action.

The chartist knows there are reasons why markets go up or down. He or she just doesn’t believe that knowing what those reasons are is necessary in the forecasting process.

Prices Move in Trends

The concept of trend is absolutely essential to the technical approach.

Here again, unless one accepts the premise that markets do in fact trend, there’s no point in reading any further.

The whole purpose of charting the price action of a market is to identify trends in early stages of their development for the purpose of trading in the direction of those trends. In fact, most of the techniques used in this approach are trend-following in nature, meaning that their intent is to identify and follow existing trends.

Source: Murphy, John J.. Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (New York Institute of Finance) (pp. 2-3). Penguin Publishing Group. Kindle Edition. 

Purpose is a more powerful motivator than money.

Purpose is a more powerful motivator than money.

“Purpose is a more powerful motivator than money. When you are not paid as much as you would like, your purpose will provide you a reason to continue producing excellence in your work. When you have more money than you ever thought possible, your purpose will provide you with a reason to continue producing excellence in your work.”  – William J. O’Neil

William J. O’Neil on Ego

William J. O’Neil on Ego

“The market has a simple way of whittling all excessive pride and overblown egos down to size. After all, the whole idea is to be completely objective and recognize what the marketplace is telling you, rather than try to prove that the thing you said or did yesterday or six weeks ago was right. The fastest way to take a bath in the stock market or go broke is to try to prove that you are right and the market is wrong.”

– William J. O’Neil

Interesting convergence between small and large company stocks

Market cycles and trends are dynamic, ever evolving, so labels such as big and small are subjective, relative, and change over time. Everything is impermanent, so nothing lasts forever.

Investors expect smaller companies stocks to offer greater potential returns over the long-term, but they may come with greater risk compared to large-cap companies. Because smaller faster growing companies are considered more risky, they also require a higher expected return as the “risk premium.”

The Russell 2000® Index measures the performance of the small company stock segment of the US equity universe. The Russell 2000® Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

According to the index provider, the Russell 2000® is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.

The Russell 2000 tracks the roughly 2000 securities that are considered to be US small cap companies. The Russell 2000 serves as an important benchmark when investors want to track their small cap performances versus other sized companies. The Russell 2000 tends to have a larger standard deviation in comparison to the S&P 500. However, it also is expected to yield larger returns in positive market environments. The reasoning is smaller companies are in a more aggressive growth phase of a business cycle and small companies are more nimble than large companies to take advantage of opportunities. It is also widely believed small-cap stocks have historically achieved better relative momentum early in a new cycle when liquidity is cheap and overall growth rates are faster.  Small-cap companies may also be less affected by global trade conditions given their businesses are more domestically driven than large companies that do business globally.

Indeed, up until March, the chart below comparing the relative strength of the price trend of the Russell 2000 small cap index relative to the S&P 500 weighted more toward large companies shows small companies outperformed larger companies significantly.

However, that has not been the case since the small stock index peaked in March. As I highlighted in yellow, the Russell 2000 has been drifting sideways into a five month long base without a breakout.

In the meantime, the S&P 500 stock index has trended up with decreasing volatility.

What we observe now is a convergence between the two. The S&P 500 is catching up as the Russell 2000 drifts in a non-trending state.

If the market generally believes small company stocks will outperform in the early stage of a new economic expansion and business cycle because they may respond to new positive conditions faster and potentially grow quicker in young bull markets, then this recent relative underperformance the past five months may be bearish sentiment.

It’s going to be interesting to see how this unfolds. It may be a an early warning of a market top, at least temporarily. Then again, if the Russell 2000 can break out of this base to the upside (instead of the downside) it could eventually bring the large companies with it.

A rising tide lifts all boats, so the saying goes, and it sometimes applies to stocks participation in market trends.

We’ll see…

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Technical analysis is the analysis of human mass psychology, so it’s also called behavioral finance

What is technical analysis?

Technical analysis is the study of financial market action.

The technician looks at price changes that occur on a day-to-day or week-to-week basis or over any other constant time period displayed in graphic form, called charts. Hence the name chart analysis.

A chartist analyzes price charts only, while the technical analyst studies technical indicators derived from price changes in addition to the price charts.

Technical analysts examine the price action of the financial markets instead of the fundamental factors that (seem to) effect market prices. Technicians believe that even if all relevant information of a particular market or stock was available, you still could not predict a precise market “response” to that information.

There are so many factors interacting at any one time that it is easy for important ones to be ignored in favor of those that are considered as the “flavor of the day.”

The technical analyst believes that all the relevant market information is reflected (or discounted) in the price with the exception of shocking news such as natural disasters or acts of God. These factors, however, are discounted very quickly.

Watching financial markets, it becomes obvious that there are trends, momentum and patterns that repeat over time, not exactly the same way but similar. Charts are self-similar as they show the same fractal structure (a fractal is a tiny pattern; self-similar means the overall pattern is made up of smaller versions of the same pattern) whether in stocks, commodities, currencies, bonds.

A chart is a mirror of the mood of the crowd and not the fundamental factors.

Thus, technical analysis of human mass psychology. Therefore, it is also called behavioral finance.

Source: Technical Analysis Explained

Expected volatility for the S&P 500 is fading

Expected volatility for the S&P 500 is fading.

A CBOE Volatility Index (VIX) level of 15.78 signals the market expectation for annualized vol over the next 30 days has now declined to 15.78%.

Options speculators and hedgers don’t seem too concerned about the upcoming seasonally weak period, among other risks.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Ed Seykota on Position Sizing

Ed Seykota was asked:

“If you could give me ten rules to consider with respect to position sizing what would they be?”

He replied:


1. Bet high enough to make meaningful profits when you win.

2. Bet low enough so you are ok financially and psychologically when you lose.

3. If (1) and (2) don’t overlap, don’t trade.

4. Don’t go adding a bunch of rules that don’t work, just so you have ten rules.

Equal Weight S&P 500 Trends Up

The S&P 500 Equal Weight Index is like the S&P 500, except the 500 stocks are equally weighted instead of market cap weighted. For example, the stock exposure of the S&P 500 everyone quotes is based on market capitalization of the stocks, so the largest stocks are weighed heavier than smaller stocks.

Below are the top 10 holdings of the S&P 500 and their weightings. The top 10 out of about 500 holdings is 28% of the index.

All of the 500 holdings of the S&P 500 Equal Weight Index are allocated at 0.25% no matter how large or small the company.

Said another way, the Equal Weight Index gives much more exposure to smaller stocks.

Up until now, the S&P 500 was trending with greater momentum than the Equal Weight Index.

As of today, the S&P 500 Equal Weight has finally trended above its prior high and breaking out of a base going back to May.

It’s a positive sign for stocks.

One of the bearish signs we’ve seen lately has been poor breadth of participation as measured by the percent of stocks above their 50 day moving average.

The S&P 500 Percent of Stocks Above 50 Day Moving Average is an indicator showing the percentage of stocks in the S&P 500 that closed at a higher price than the 50-day simple moving average.

We’ve heard a lot of concern on Wall Street about the divergence between the S&P 500 and the percent of the stocks in the index above their 50-day average price. The red arrow shows the falling breadth indicator S&P 500 Percent of Stocks Above 50 Day Moving Average signaling only about 54% of the stock are in a short term uptrend.

Such divergence is normally considered bearish, but not so this time.

Those who are concerned about this bearish divergence may consider instead comparing the percent of stocks above the 50 day to the Equal Weight Index because the S&P 500 Percent of Stocks Above 50 Day Moving Average itself is equally weighted, not cap-weighted. It’s a percentage and cares nothing about the size of the company.

With that in mind, here is the S&P 500 Equal Weight Index giving each stock the same 0.25% weighting compared to the S&P 500 Percent of Stocks Above 50 Day Moving Average, which gives each stock the same weight.

What I see here is the S&P 500 Equal Weight price trend peaked in early May, but it was preceded by a divergence in the S&P 500 Percent of Stocks Above 50 Day Moving Average. That is, the S&P 500 Percent of Stocks Above 50 Day Moving Average started trending down in April as the index was making new highs for a few more weeks. It signaled some of the stocks had peaked and started trending down, and then the whole index finally paused and has trended sideways for two months, until today.

I’m not real bullish right now about the stock market, and we had reduced our exposure significantly, but this is a positive sign. I’ll be watching for more stocks to trend up showing increasing participation so if this continues the wind will be in the markets sails again.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

The Smart Money Method: How to pick stocks like a hedge fund pro – on Asymmetric Payoffs

One of my recent reads is The Smart Money Method: How to pick stocks like a hedge fund pro (November 24, 2020) by Stephen Clapham.

Naturally, when he mentioned “Asymmetric Pay-offs” I have to share the quote:

ASYMMETRIC PAY-OFFS

My favourite opportunities are those with asymmetric pay-offs. Here there is potential for considerable upside, but not a lot of downside (or vice versa for shorts). Sometimes, a share will have fallen out of favour with the market. It usually takes a catalyst – an event such as a change in management – for the market to become more enthusiastic, and for the share price to factor in the recovery opportunity. Whatever the idea, and wherever the source, this concept of a reward which is not commensurate with the risk is a critical objective.

As a special situation investor, I am drawn to areas where there are unusual rewards. This usually involves a higher element of risk. The trick is to find companies which have asymmetric pay-offs. In these cases, there is an element of downside risk, but the upside is significantly higher and you have a good reason to believe in the positive pay-off, because of a change in a fundamental driver.”

Stephen Clapham. The Smart Money Method (p. 32). Harriman House. November 24, 2020.

Learning to read the cardiograms of the market’s health

“So understand that chart reading and technical analysis is not some arcane science. It’s not black magic or astrology. Very simply, it is learning to read the cardiograms of the market’s health. Your physician runs X rays, blood tests, and EKGs on you before making a diagnosis. The competent technical analyst does the same to the market. Neither one is a witch doctor, though I have some reservations about certain MDs I’ve known.”

Stan Weinstein’s Secrets For Profiting in Bull and Bear Markets  – January 1, 1988

The General Market Cycle Influences Almost Every Stock

“I found that the relationship between the Average and my individual stocks was confined within certain principles, but they could not be measured exactly. From then on I made up my mind to keep watching the Dow Jones Industrial Average, but only in order to determine whether I was in a strong or a weak market. This I did because I realized that a general market cycle influences almost every stock. The main cycles like a bear or bull market usual creep into the majority of them.”

-Nicolas Darvas, Nicolas . How I made 2,000,000 in the stock Market. Larchmont, NY: American Research Council, 1960.

It’s a good time to reduce exposure, or hedge.

I’ve been busy making improvements to my systems the past several months, so I haven’t shared any of my market observations with the public.

Although we’ve certainly had many requests for it, I’ve waited until I notice a material change in the risk level.

I think we are now entering a materially higher risk level.

First, I’ve gotten a call from two different friends, two days in a row, who have no investment management experience, and both were asking my opinion about investing in speculative stocks.

Ruh-roh.

Talking with other hedge fund managers lately, I’ve mentioned the investor sentiment reminds me of 1999. Back in the late 90s everyone was a stock market genius, and that seems to be the belief again as price trend up confirming their expertise.

We know how that played out, and it will again.

Those who don’t believe it have a lesson to learn, and they will.

I prefer to follow the trend until the end when it bends, but sometimes trends, which are driven by an under-reaction that takes time to catch up can eventually result in an overreaction and an extreme. This uptrend hasn’t yet reached a major extreme by some measures, but it’s getting there enough to be a warning of a higher risk level.

As of now, the percent of S&P 500 stocks trending above their average price of the past 50 days has reached about 90%, so most of the stocks are already in an intermediate term uptrend. Broad participation in an uptrend is a positive sign, but once most of the stocks are already trending up, I start to wonder when the trend will pause and reverse. This breadth indicator signals investor sentiment at the extremes, and it’s reached the point we should be prepared for an interruption of this uptrend. Of course, the market can remain irrational longer than you can remain solvent, so this doesn’t require a reversal, it’s a warning shot across the bow.

Next up is the percent of S&P 500 stocks above the 200 day moving average, which is a longer term uptrend signal. Here we highlight it reaching its highest level in over a year at 95% of the stocks in a long term uptrend. Again, it’s a positive sign that all but 5% of these stocks are in an uptrend, but once they’ve mostly trended up like this, it’s prone to be the end of the cycle.

Anyone who has been following along with my observations the past two decades know I love me some volatility trading, so my systems monitor for volatility expansions and contractions. What we have here is, a volatility contraction seen in the CBOE Volatility Index (VIX) fading down to the 17 handle range.

After prices have trended up for a while, I’ve observed the price trends tighten up as investors become more and more confident the trend will continue. Once something happens to cause a reaction, we’ll see prices spread out, which is volatility, and specially, a volatility expansion. The 17 range is far from an extreme low in the expected volatility over the next 30 days, which is what VIX indicates based on options prices, but as seen in the charge above, it’s trended to a new low.

Volatility contractions are eventually followed by volatility expansions. As soon as something surprises the market, we’ll probably see indecision, which leads to prices spreading out as investors and traders try to figure out what’s going to happen next.

Looking at a longer time frame of the past decade, here we see volatility can contract down to the 12% range, so an overall tightening of the range of prices can always continue longer than expected.

Next up is the fundamental valuation of the stock index. I’m not a fundamental analyst, despite my advanced accounting degree. I learned the hard way a long time ago a stock price can trend far away from anyones perception of fundamental value.

If you’re an analyst at Goldman Sachs researching a company to see if they can pay for the loan the investment bank is considering giving them, you want to discover the potential to pay, and it’s a fundamental analysis to make an educated guess. When that company has stock trading on an exchange, it’s an auction market determined by supply and demand, which is driven by sentiment as much as anything. Many momentum stocks like Tesla are bid up based on enthusiasm for what may eventually be, not what is today.

With that said, I do believe the fundamental valuation level does have some predictive ability in the long run. When the S&P 500 Shiller CAPE Ratio is at its second highest level in 139 years, it suggest to me the corrections may be deeper in magnitude and quicker to unfold. We’ve seen that these past several years, and I expect to see it more.

Because stocks are generally expensive based on the price to earnings ratio, it suggests we row, not sail.

If you wait for the wind to keep blowing, you may find yourself in the middle of the ocean running out of resources to stay afloat.

I prefer to get out the oars and start rowing to get where we want to be.

Speaking of the price to earnings ratio of S&P 500 stocks, here is another interesting observation. The S&P PE Indicator shows the average P/E Ratio for stocks in the S&P 500. It’s essentially a fundamental breadth indicator, similar to the percent of SPX stocks above their moving averages, which is price based breadth. This indicator is calculated by dividing the closing value of the S&P 500 by the trailing twelve months (TTM) of GAAP earnings for SPX, and multiplying the result by 100.

As you can see in the chart, it’s in uncharted territory of the past decade.

Of course, a high price to earnings ratio may be more justified as long as inflation is low, as it is now. If inflation begins to trend up, it’ll likely put longer term pressure on these price trends.

For these reason and more, I think it’s a good time to reduce exposure to the possibility of loss and/or hedge off downside risk.

I hope this helps!

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

This is by far the single best 5 minutes I’ve seen on the current state of American politics

Jim Jordan’s Case Against Impeachment Is What Every American Needs to Hear

No comment necessary.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

The stock market uptrend is strong, but it’s entering a higher risk level

The year 2020 has been quite a ride for most of us.

It started out with the stock indexes trending up, then collapsing over -30% in March. Now, the stock market proxies are reaching new highs.

Clearly, the trend is up recently, and we’re in this trend.

Overall, these volatile conditions has been hostile for both active and passive strategies.

I’m about as active, tactical, as it gets, and even I’m not thrilled with 2020.

I normally enjoy volatility expansions and such, but this one has presented unprecedented risks from the uncertainty of the global pandemic, but also the risk of price shocks as we saw in March.

Oh, and then there was a contentious Presidential Election.

The risk now is a price shock driven by the enormous stimulus because of the uncertainty of how it will all unfold.

It’s all part of it, and I do embrace uncertainty. I enjoy watching how a movie unfolds, and don’t like to know in advance, even if I could.

I just keep doing what I do; adapt, improvise, and overcome.

It is what it is.

Speaking of volatility: the CBOE S&P 500 Volatility Index (VIX) signals expected volatility is evaporating. The VIX has contracted back down to near 20 again, the same range it reached in August. So, the demand for the protection of options is declining. Sometimes it’s a good sign, and the volatility contraction could continue. Notice in January and February the VIX was at 12, today it’s nearly 22, so it’s elevated.

I’m on guard to protect my profits, so I actively monitor risk and sentiment indicators to see when the potential for a price trend reversal is more likely.

I think we’re starting to get there, but we’ve got aggressive stimulus acting as a put option.

It could keep going.

But, the percent of stocks in the S&P 500 above their 200 day moving averages measures the breadth of participation in the uptrend. Right now, 90% of the 500 or so stocks are in longer term uptrends. That means only 10% are not in uptrends. This strong breadth is a positive sign for momentum, but once it reaches such a high level I begin to wonder when the buying enthusiasm may dry up.

After most of the stocks have already been driven up, we have to wonder when the bullish sentiment reverses to selling pressure.

If you want to realize profits, we have to take them at some point.

Unrealized profits are just the markets money, and can fade away quickly, and even become a loss.

That’s all I’ll share for now. I’m just seeing some signs of what may be becoming an inflection point.

I’m usually more early than I am late, so we’ll see how it unfolds from here.

Investors who are inclined to actively manage risk may start considering reducing exposure or hedging off the risk of loss.

Have a Happy Thanksgiving!

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Welcome to Goldman Sachs.

For more information, see: A message to all Folio Financial employees, customers, investors and the entire Folio Financial community.

Buying Climax Signals a Top in the Stock Market

There was enough buying climaxes in stocks this week to signal a short term top in the stock market.

This week 596 stocks printed a buying climax, which is the most since Feb 2018.

A buying climax is when a stock trends up to a 52 week high, then closes the week with a loss, which is a sign of distribution shifting from strong to weak hands.

A buying (or selling) climax is the result of surge in supply and demand.

The key theory of a buying climax is the exhaustion of demand as the last buyers enter the market.

The final surge of buying typically leads to p

For example, PayPal printed a buying climax this week. Shares of PYPL trended up to a new 52 week high, then closed down on the week. It’s a sign of distribution, as shares of shifting from strong holders to weak. Stocks like PayPal have benefited from people staying at home and buying things online. It was a leading stock with strong relative strength, until now.

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Visa (V) is another example of a BUYING CLIMAX. Visa has been a leading stock with strong momentum and earnings growth, but it trended to a new high, then closed down.

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UPS is another example of a BUYING CLIMAX from a leading stock as it printed a new 52 week high, but closed down this week. Not as strong of an example as above, but a buying climax nonetheless.

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As stocks like UPS have benefited from the stay at home climate of rising deliveries, it’s obviously driven by companies like Amazon (AMZN), which happens to be another BUYING CLIMAX example.

Amazon trended to a new high, then closed down this week.

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Costco (COST) is another example of a big winning stock that printed a new high during the recent euphoria for stocks that closed down this weak to print a buying climax.

Nvidia has been one of the most explosive momentum stocks this year. NVDA printed a new high, then closed -12% off its high this week.

The list of 596 stocks that printed a Buying Climax includes most of the recent leading momentum technology stocks like Apple, Adobe, Microsoft, but also financials like asset manager BlackRock.

The bottom line is: we’ve seen a period of euphoria, as measured by investor sentiment indicators like the Citigroup Panic/Euphoria Model, and now we’re seeing some blow off tops shift to buying climaxes.

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I shared my observations of investor sentiment getting silly the week before in “The weight of evidence is becoming increasingly bearish for the US stock market.”

These quantitative indicators have a long history of signaling a shift in supply and demand, which suggests the risk level is elevated for the stock market.

We typically see a buying climax at the end of a bull market cycle.

Investors confidence the trend will continue results in complacency as to market risk. Their confidence the uptrend will continue drives them to ignore the risk of loss, so they don’t manage their risk or hedge exposure to loss.

Complacent investors believe the current trend isn’t going to reverse anytime soon, so they get caught off guard when it does.

Once they start taking on heavy losses, they may panic sell, adding to the selling pressure that pushes prices down even lower.

Risk averse investors should prepare themselves for an increasing probably of a downtrend in stocks.

This may be just a warning shot across the bow of what may be more selling pressure to come.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Observations of the Unemployment Trend

The US Unemployment Rate measures the percentage of total employees in the United States that are a part of the labor force, but are without a job. It’s one of the most widely followed indicators of the health of the US labor market and the US economy as a whole.

Historically, the US Unemployment Rate reached as high as 10.80% in 1982 and 9.9% in November of 2009, which were recessionary periods.

The US Unemployment Rate is at 8.40%, compared to 10.20% last month and 3.70% this time last year.

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US Unemployment Rate remains significantly higher than the long term average of 5.76%.

The US Labor Force Participation Rate from the Bureau of Labor Statistics is the sum of total number of employed persons and unemployed persons looking for work in the United States as a percentage of the working age population.

US Labor Force Participation Rate is at 61.70%, compared to 61.40% last month and 63.20% this time last year.

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Looking at the bigger picture over a longer time frame, there has been a negative trend from the 2000s of 67.10% participation to the 2010s 62.50% participation as the boomer generation has begun shifting out of the working age population.

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In bad economic conditions, the labor force participation rate may actually fall as people eventually give up looking for a job.

So, the employment situation seems to be improving, but we’re likely to see some of these job losses become permanent.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

The weight of evidence is becoming increasingly bearish for the US stock market

 “The trend is your frienduntil the end when it bends.” 

Stock indexes making higher highs and higher lows is a good thing – until it isn’t.

I run a combination of systems. Most of them are trend following in nature, meaning the objective is to enter a trend early in its stage to capitalize on it until it changes.

But when trends reach an extreme it’s time to take note.

For me, what follows is what I consider market analysis, which doesn’t necessarily result in an specific trades, per se, but instead, it’s my intellectual exercise to understand what’s going on. And it’s nice to have an idea of when a trend may be ready to change.

In law, weight of evidence “refers to the measure of credible proof on one side of a dispute as compared with the credible proof on the other.

It is the probative evidence considered by a judge or jury during a trial.

In this case, the jury are active investors in the market.

Probative evidence is having the effect of proof, tending to prove, or actually proving. So, when a legal controversy goes to trial, the parties seek to prove their cases by the introduction of evidence. If so, the evidence is deemed probative.

Probative evidence establishes or contributes to proof.

The weight of evidence, then, is based on the believability or persuasiveness of evidence.

Since we never know the future in advance, when we engage in market analysis, we necessarily have to apply the weight of the evidence to establish the probability.

After monitoring price trends and a range of indicators intended to measure the strength of a trend for more than two decades, I’ve got a feel for the weight of the evidence. So, my confidence in these observations has increased over time, even as imperfect as it is.

Let’s see some evidence to weight.

By the first of June, 98% of the S&P 500 stocks were trending up, above their short term trend 50 day moving average. Since then, we’ve seen some divergence between the stocks in an uptrend and the stock index.

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It tells us fewer stocks are participating in the uptrend.

The advantage of monitoring breadth measures like % of stocks above a moving average or bullish percent is it’s a high level barometer that may highlight what is changing. Sometimes, it’s what is diverging.

In this case, the price trend of the stock index is diverging with the percent of stocks in a positive trend.

One of the warning signs in January and February was this same divergence between the uptrend in $SPY and the breadth of participation of the individual stocks in the index.

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When I see divergence, it reminds me to look inside to see what has changed.

It’s usually explained by sector rotation.

For example, over the past month, Technology and Communications have shown relative strength, but the momentum in Consumer Discretionary and Utilities are the laggards.

As a new trend gets underway, some of the component sectors within the S&P 500 diverge, so we also see it show up in the percent of stocks trending up vs. down.

After watching quantitive technical indicators like this since the 90s, I can also tell you we commonly see a breadth thrust in the early stages of a new uptrend. We did in January to February 2019 after the waterfall decline at the end of 2018.

A breadth thrust is bullish confirmation.

How long the trend may last, well, we’ve always preferred to see more stocks parts-cation in an uptrend than less. The theory is a broad uptrend that lifts all boats has more true momentum. An example of elevated breadth was 2017, when the stock index trended up with very little volatility or setbacks.

But if you look real close, that yellow highlight of 2017 also shows the percent of stocks above their 50 day moving average oscillated between the 50 and 95% zone throughout the year. It’s an oscillator, so it swings between 0% and 100%, but the fact it stayed above 50% in 2017 was a signal of internal strength. It often swings wider in a typical year, but 2017 was far from typical.

The bottom line is, what we have here, now, is fewer of the S&P 500 stocks trending up, which means more are crossing down below their intermediate trend trend line.

So, my interpretation is the trends are weakening, and it’s likely to be more reflected in the stock index eventually.

Investor sentiment is another essential measure.

Nothing drives investor sentiment like a price trend. As prices trend up, people get more bullish (or greedy) and as prices trend down, they feel more fear (of losing more money.)

The Fear & Greed Index tracks seven indicators of investor sentiment. It’s gradually dialing back up to Greed, but not yet Extreme Greed.

But when we take a look inside, and understand how it works, I see the main holdout is VIX . At around 22, the VIX still indicates a moderate level of FEAR, but we have to consider VIX is fading from its highest level, ever, so its absolute level may not be as indicative.

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On the other hand, the level of the Put/Call Ratio is among the lowest levels of put buying seen during the last two years, indicating EXTREME GREED on the part of investors.

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Junk Bond Demand has reached EXTREME GREED. Investors in junk bonds are accepting 2.05% in additional yield over safer investment grade bonds. This spread is much lower than what has been typical during the last two years and indicates that investors are pursuing higher risk strategies.

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The 3rd EXTREME GREED indicator is the S&P 500 is 15.28% above its 125-day average. This is further above the average than has been typical during the last two years and rapid increases like this often indicate extreme greed, according to the Fear & Greed Indicator.

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Aside from neutral $VIX, some other moderate hold outs of the 7 indicators include breadth. The Fear & Greed Indicator uses the McClellan Volume Summation Index, which measures advancing and declining volume on the NYSE. It has fallen from EXTREME GREED just over a week ago.

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Stock Price Strength is another moderate GREED level. It says the number of stocks hitting 52-week highs exceeds the number hitting lows and is at the upper end of its range, indicating greed.

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Safe Haven Demand is at a bullish investor sentiment level. Stocks have outperformed bonds by 6.87% during the last 20 trading days, close to the strongest performance for stocks/bonds in the past 2 years – investors are rotating into stocks from the relative safety of bonds.

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THE BOTTOM LINE IS: The seven indications of investor sentiment are dialing up to a very optimistic level, signaling investors are bullish on stocks.

Though some of it isn’t yet extreme, when we put it in context, anything can happen from here, but its now at a higher risk zone.

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Another measure of investor sentiment is put volume. Puts are listed options on stocks and indexes that may be used to hedge the downside. The CBOE Total Put Volume is at the lowest level this year, which suggests there isn’t a lot of hedging taking place.

The NAAIM Exposure Index represents the average exposure to US Equity markets reported by the members of the National Association of Active Investment Managers. They are fully invested for the first time since December. Their exposure to the stock market has followed the trend of the stock index.

Another sentiment poll is the Advisors Sentiment, which was devised by Abe Cohen of Chartcraft in 1963 and is still operated by Chartcraft, now under their brand name of Investors Intelligence. This survey has been widely adopted by the investment community as a contrarian indicator. They say since its inception in 1963, the indicator has a consistent record for predicting the major market turning points. It has reached that point.

Speaking of Abe Cohen, another indicator he developed in the mid 1950s is the Bullish Percent Index. He originally applied it to stocks listed on the NYSE, but we have been doing the same for other listed stocks and sectors since. The NYSE Bullish Percent is an example of another gauge of overall market risk. A common analogy applied to the NYSE Bullish Percent is that of a football game: level of the bullish % represents the current field position and the “end-zones” are above 70% and below 30%.

Currently, at 70%, it has entered the higher risk zone, suggesting it’s time to put the defensive team on the field.

Many of these indicators are measuring the same thing; investor sentiment.

After everyone has already gotten bullish and put their money to work in stocks, we have to wonder where future demand for shares will come from.

It’s been a nice run, but stars are aligning to look more and more bearish in my opinion. Uptrends are great, but all good things eventually come to an end.

If we want to protect our profits, it is probably time to reduce expose or hedge.

And that’s likely right about the time most people are excited about their stocks and wanting to buy more.

What could go wrong?

As of this writing, we have a CAT 4 hurricane just hours from hitting Texas and Louisiana, the Fed meeting tomorrow, and China firing missiles into disputed sea.

That’s the weight of the evidence as I see it.

You can be the judge if the evidence is believable and persuasiveness enough, but the final arbiter will be the price trend in the coming weeks.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

What’s driving the stock market?

Q: What’s driving the stock market?

A:

Whereas, the black line is the S&P 500 stock index commonly used to represent the US stock market, and the red line is the Total Securities Held Outright by All Federal Reserve Banks. The Fed Balance Sheet is at a current level of 6.256 TRILLION.

—– Nothing follows —–

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 TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

The stock market tapped its prior high, then backed off

On Friday I suggested “If we’re going to see selling pressure become resistance, this is where it starts” and though this has been an incredibly resilience market, I’m seeing signs of weakness.

I shared some of the signs this afternoon in “Point & Figure Charting the NASDAQ Trend.”

As the trading day got to the close, the S&P 500 and other stock market indexes drifted down.

The S&P 500 tapped its prior high, then backed off.

The NASDAQ 100, which has been in the strongest uptrend, also reversed down the most at nearly -2% today.

I had pointed out the internal weakness in the NASDAQ stocks earlier today.

It seems to be a continuation.

So, “If we’re going to see selling pressure become resistance, this is where it starts” and we’ll soon see if the US stock market attracts some new selling pressure, or if it’s there is enough enthusiasm to buy to overpower any selling.

Even the longest of long term investors should be aware of the risk this could be a significant top in the US stock market. That is, no matter how passive or “buy and hold” you are, if this turns out to be the early stage of a prolonged bear market, you’ll wish you had put in a place a hedging and/or risk management program to protect your capital.

If you need investment advice on risk management, or are interested in our ASYMMETRY® Hedging program, an overlay we can add to any investment portfolio, get in touch here.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Point & Figure Charting the NASDAQ Trend

Point and Figure charting is one of the four primary forms of charting used to observe price trends.

I started studying Point & Figure charting myself in the late 1990s when I was interested in a more precise way to determine my exits. P&F charts make the exit based of a price trend more obvious. For example, without knowing anything about these charts you can probably see the area I highlighted in red was a price range this stock found buying interest (support) a few times in the past, but then it broke down. When it did, it fell a lot. On the bullish side, the stock has found selling pressure (resistance) at the price level I highlighted green until it finally broke out to the upside.

When I first started researching and trading high growth momentum stocks, I wanted a more precise way to define these price trends, so I became what they called a Point & Figure Craftsman. I later wanted to test these breakouts and patterns, so I ended up quantifying them into algorithms. But, I still look at all forms of charts from time to time to get a “feel” for the trends unfolding.

The last time I spoke at a non-client conference was in September 2008 for the National Association of Active Money Managers. I did a two-hour presentation on “exits” and used P&F charts as a great visual example to see trend changes.

The presentation, just days before what would become the start of the “Global Financial Crisis”, highlighted:

“When to sell a loser, laggard or winner is the heart of Mike Shell’s presentation on combining point and figure charting with relative strength to trade ETFs. “It’s the exit, not the entry, that determines your result at the position level. The exit determines whether or not you make or lose money, and how much you make or lose,” explains Mike.”

The topic of exits turned out to be very timely, as it was the beginning of the infamous waterfall decline that began in October 2008.

The history of Point & Figure charting is over 100 years old. “Hoyle” was the first to write about it and showed charts in his 1898 book, The Game in Wall Street. The first book/manual dedicated to Point and Figure was written by Victor Devilliers in 1933. Chartcraft Inc, in the USA, popularized the system in the 1940s. Cohen founded Chartcraft and wrote on point and figure charting in 1947. Chartcraft published further pioneering books on P&F charting, namely those by Burke, Aby and Zieg. Chartcraft Inc is still running today, providing daily point and figure services for the US market under the name of Investors Intelligence. Mike Burke still works for Chartcraft, having started back in 1962 under the guidance of Cohen. Burke went on to train other point and figure gurus, such as Thomas Dorsey who would go on to write authoritative texts on the subject.A detailed history can be found in Jeremy du Plessis’ ‘The Definitive Guide to Point and Figure’ where many references and examples are cited.

Point & Figure charts offer a well-defined methodology to identify current trends and emerging trends as they develop.

In fact, Point & Figure charts are all about price, not time.

Point & Figure charting doesn’t plot price against time as time-based charts do. Instead, P&F plots price against changes in direction by plotting a column of Xs as the price rises and a column of Os as the price falls.

So, Point and Figure charts are a way to visualize price trends in stock, bond, commodity, or currency, without regard to the amount of time that passes.

For example, here is the P&F chart of the NASDAQ.

When a column of Os declines below a prior column of Os, it’s a sell signal.

If there was one prior column of Os, it’s a “double bottom” sell signal.

We say supply is in control over demand for the shares.

P&F charts basically allows us to analyze supply and demand.

If enough buying enthusiasm pushes the price up into a column of Xs, the stock, commodity, or whatever market is being accumulated.

Demand exceeds supply.

If the desire to sell exceeds the desire to buy, the selling (supply) pushes the price down into a column of Os, which is what we’re seeing in the NASDAQ at the moment.

Up until now, the NASDAQ has been the dominant of the popular indexes investors follow. It’s heavily weighted in tech stocks, which have been where the momentum has been since the March crash.

But now we are seeing some trend changes.

Another example, again using P&F, is the Percent of NASDAQ 100 stocks in a bullish trend. A bullish trend, again, is a column of Xs above the prior peak, which is an uptrend. When a high percentage of the stocks in the index are trending up, the bullish percent is in a column of Xs and rising to mark the strength. Below, we see a macro indication that enough stocks in the index are falling to signal a bearish trend.

In fact, in P&F methodology terms, the above pattern is “Bear Confirmed” since July 29th. A Bear Confirmed signal is when chart is falling (a column Os) below the 70% level and has generated a P&F sell signal. I highlighted the sell signal on the chart.

The bullish percent charts are a measure of the internal breadth of the stock index. That is, when stocks inside the index start trending down enough to generate P&F sell signals, enough of them generates a sell signal in this breadth index.

So, we say the breath is weakening, which is a warning shot across the bow.

If we hadn’t already seen the emerging weakness develop in the individual stock charts, an indicator like this can alert us to the emerging weakness and prompt us to look inside.

Let’s do that.

Here’s a table of the stocks in the NASDAQ 100 from Investors Intelligence that have been trending down into bearish trends. For better understanding, I also include the breakout date it trended down to illustrate how an emerging trend unfolds.

As you glance over the dates, you can probably see how the price trends of these stocks begin to roll over from bullish to bearish directional trends, which shows up in the bullish percent composite.

The bullish percent composites usually point to internal weakness or strength earlier than the price trend of the index. For example, the NASDAQ ETF just generated a P&F sell signal yesterday, but the bullish percent signaled a Bearish Confirmed pattern on July 29th.

I consider it a warning shot across the bow.

For me, the trend of my individual positions is my focus. But, risk signals like this can draw my attention for a closer look at what is going on internally.

I consider charting and technical analysis to simply be market analysis, which isn’t the same thing as deciding what or when to buy or sell. Market analysis is the ongoing research I do to gain perspective of the underlying trends, momentum, sentiment, and volatility. None of it may drive my individual position buys and sells.

Another bearish development the P&F method alerts us to is the relative trend. The relative trend monitors the relative trend of stocks against their index. In this case, the NASDAQ 100 is compared to the S&P 500. The formal P&F pattern here is “Bull Correction” since July 23rd, as the column of Os show it lagging the SPX.

Point & Figure charting is just another form of trend following. It focuses completely on the price trend itself, not volume or even time. It just prints the price change, only when it’s enough to add another X or O. If there isn’t enough price change to add an X or O, it’s ignored as irrelevant.

You can’t probably see how this form of charting may be helpful to focus on the real trend.

There’s a lot more to Point & Figure charting, but I’ll stop there.

Let’s see how the NASDAQ unfolds from here.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

If we’re going to see selling pressure become resistance, this is where it starts

Technical analysis is the study of financial market price trends.

What’s funny is that technical analysis has evolved into now being called quantitative analysis.

Technical analysis has long been a method of much debate, until the academics determined that past price performance may have an impact on future performance.

I’ve been a chartist and technician for over twenty years now, and I make no bones about it.

I’m also called an independent thinker, because I don’t care what others think of it. I do me, and you do you.

Academics previously didn’t think the study and measurement of past price trends had any edge to be gained. It’s probably because Eugene Fama said “markets are efficient.” So, if it comes from the ivy tower of university, it must be true?

It isn’t.

The efficient-market hypothesis is a hypothesis in financial economics that states that asset prices reflect all available information.

If markets are efficient, then all known information is already factored into prices, and so there is no way to “beat” the market because there are no undervalued or overvalued securities available.

That’s far from reality.

If the markets reflect all known information, and are efficient, then how could we explain a -34% decline in the S&P 500? and a -37% decline in the Dow Jones Industrial Average in just three weeks?

No, that’s gotta be an under-reaction or an overreaction, or both at different times.

It’s the under-reaction and overreaction to new information that causes prices to drift, or trend, directionally over time rather than just always spiking up or down. It’s always what drives momentum, which is know even accepted by academics who didn’t want to believe that past performance had any impact on the current or future price.

I know, it was a silly proposition. Who wouldn’t look at the past price history for perspective of its historical direction, momentum, and volatility.

I was attracted to charting early on in my career. As I earned an advanced accounting degree, including all the advanced accounting courses on top of the standard ones, which would qualify me for the CPA exam in Tennessee. I don’t know about other states, but Tennessee required 150 credit hours and at least five advanced accounting classes on top of the core accounting degree. It is basically a Master’s degree, since I think a B.S. is about 124 hours.

Anyway, I did it, and the more I learned accounting, the more I realized it wasn’t of much use in an auction market.

In theory, the price of a stock trades at some multiple of earnings and such. If it were so simple, we could easily determine with high probability what a stock should trade at, and it would be accurate.

But it isn’t.

I say that anything other than the price trend itself has the potential to lead you astray from its reality.

That includes fundamental valuation measures.

I know accounting and finance about as well as anyone, and as a student who was trading stocks, it didn’t take long to realize the above statement. If a stock is undervalued, there’s a reason the market doesn’t like it. You may not know the reason yet, but some large institutional investors may.

I prefer to follow the big money that moves the price trend. They aren’t always right, either, but all the really matters is the direction they drive the price.

Does it really matter why?

or who?

So I’m a realist. I’ve got a lot of stereotypes I guess.

As I show you the following charts, I like to also include what may be wrong about them. For example, I’m about to show you the price trend of the S&P 500 index, which includes in it about 500 stocks. So, when we look at the index price trend, we have to realize what it represents. If we make a judgment based on the trend of an index, we’re doing it with an understanding there are about 500 different company stocks moving around inside it that have an impact on the outcome.

It isn’t perfect, but neither is fundamental analysis.

Here we go. What we have here is the popular stock index rubbing up on the top end of a range that represents the prior (February) high.

Technicians, or technical analysts, call this area “resistance”, but I disagree.

I call it potential resistance.

You see, it isn’t resistance until it is.

Resistance is an area on the chart where selling pressure overwhelms buying pressure enough to drive the price lower. A resistance level is identified by a previous price high or peak on price trend chart as I did above.

However, if resistance is where selling overwhelms buying, that hasn’t happened yet. So, it can’t yet be “resistance.”

All analysis requires some common sense and plain critical thinking.

Now, here is the problem. People always want to know of a catalyst that could cause a prevailing price trend to change.

People love a good story.

The reason I believe we’ll see some resistance here, if we’re going to, is because of my momentum measures are signaling the trend is entering the upper end of its range.

The last time the S&P 500 got into this zone was the first week of June.

The S&P 500 declined about -7% afterward.

So, if we’re going to see some pull back, I expect it will come soon.

Afterwards, we’ll then see if it eventually trends back up to a new all time high, or if it instead reverses down into more of a downtrend.

This is how it works. It’s a Bayesian probability, where we update the possibilities as we go.

At each new stage of a trend, the expected value changes.

Let’s see how it unfolds from here.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Has the economy lost momentum?

I pay more attention to macroeconomic trends when we are in a recession.

Though my tactical investment decisions are driven by the direction of price trends, momentum, sentiment, and volatility, it’s useful to take a moment to see what in the world is going on.

Clearly, employment and payrolls seem to be one of the main macroeconomic risks right now.

The July ADP employment report showed private employment increased by 167,000, far less than the expectations of the street of 1.2 million. It’s a big disappointment.

Today, we see the US Continuing Claims for Unemployment Insurance is at a current level of 16.11 million, down from 16.95 million last week, which is a change of -4.98% from last week and -35% from the peak in May.

For a long term perspective, here is US Continuing Claims for Unemployment Insurance going back to 1967, the past 53 years. It averaged 2.8 million over the period, reached 10 times higher than average, and is still 5 times higher than the long term average.

Of course, the average over 53 years doesn’t mean much when such an outlier is present, but maybe it helps put the trend into perspective.

Prior to now, the highest continuing claims for unemployment insurance from the Department of Labor was 6.6 million. That’s 10 million less than now. So, for perspective, todays level is nearly three times what it was at the peak in 2009. Said another way, the worst claims for unemployment insurance in 2009 was only 1/3 of today.

But hey, today’s 16.1 million is better than the peak at 25 million just a few months ago.

By the way, that 25 million was more than four times the highest level it reached in 2009.

So yeah, employment is an issue that certainly has my attention as a macroeconomic trend guy.

Next up is US Initial Claims for Unemployment Insurance. US Initial Jobless Claims, as tracked and reported by the US Department of Labor, provides data on how many new people have filed for unemployment benefits in the previous week. It allows us to gauge economic conditions in regard to employment.

As more new people file for unemployment benefits, fewer people in the economy have jobs. Of course, initial jobless claims tended to peak at the end of recessionary periods such as the last cycle peak on March 21, 2009 when it reached 661,000 new filings.


US Initial Claims for Unemployment Insurance is at a current level of 1.186 million, which is nearly double the 2009 peak, but it’s -83% below the stunning March 2020 high of 6.8 million.

I know I just shared some of these numbers a few days ago, but these are updated data this morning.

The next big issue I think we’ll see comes tomorrow.

If tomorrows payroll numbers are similar to these ADP numbers, the job growth will be way below Wall Street expectations of 1.5 million.

We’ll see how it unfolds in the morning.

In the meantime, the resiliency of US stock market has been remarkable. Though anyone paying attention knows the driver is the US government intervention, the S&P 500 has now recovered from its -34% loss in March.

The Dow Jones Industrial Average remains about -5% from the February peak.

The equal weight S&P 500, which gives far more weighting to the smaller and mid size stocks, is about -6.4% from its prior high.

To the layman, it would seem the stock market has all but recovered.

If we didn’t know better, the bear market is over.

Do we know better? or is it over?

Will 2020 go down as the sharpest decline in modern history and the fastest recovery?

We’ll see.

But, over the long run, the stock market is driven by fundamentals. The challenge with fundaments like earnings growth, dividend yield, and the price-to-earnings multiple (optimism) they trade at.

Here is a chart of the rate of change of the S&P 500 price trend normalized with the Shiller S&P 500 CAPE Ratio, which is a measure of valuation. I’ve pointed out many times the valuation level was extremely high, though it has been since 2013. Look when it peaked in the relative chart compared to the SPX at the start of 2018.

What’s happened since then?

Swings.

Massive swings.

And sharp sudden drawdowns.

While the S&P 500 Shiller CAPE Ratio is now down to about 30, which is -10% below where it was at the start of 2018, the valuation level is still as high as it was before the Great Depression.

The markets are going to swing up and down and motivate a lot of mistakes along the way, but if history is a guide, we may be in for a much longer bear market and recession than is currently reflected.

You can probably see why my investment strategy is unconstrained, so I can go anywhere, including cash and treasuries, and apply different tactics for tactical decisions in pursuit of asymmetric risk/reward.

It’s never perfect, but I just keep doing what I do.

In hindsight, I’ve been underinvested in stocks the past few weeks, but we’ll see how it plays out from here.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

The US Unemployment Situation is Stunning

US Initial Jobless Claims, provided by the US Department of Labor, provides underlying data on how many new people have filed for unemployment benefits in the previous week.

We can gauge economic conditions with respect to employment.

As more new individuals file for unemployment benefits, fewer individuals in the economy have jobs.

For example, initial jobless claims have tended to reach a cycle peak at the end of recessionary periods. For example, near the end of the last recession, on March 21, 2009 there were 661,000 new filings.

US Initial Claims for Unemployment Insurance is at a current level of US Initial Claims for Unemployment Insurance is at a current level of 1.434 million, which is an increase 592.8% from one year ago.

But, if it makes you feel any better, US Initial Claims for Unemployment Insurance are down -79% from its March 2020 high.

So, US Initial Claims for Unemployment Insurance is up 576% from the beginning of 2020, though it was up over 3,000% in March.

The US Unemployment Rate measures the percentage of total employees in the United States that are a part of the labor force, but are without a job.

The US Unemployment Rate is one of the most widely followed indicators of the health of the US labor market and the US economy as a whole.

Historically, the US Unemployment Rate has reached as high as 10.80% in 1982 and 9.9% in November of 2009.

Both periods were significant recessionary periods.

US Unemployment Rate is at 11.10%, compared to 13.30% last month and 3.70% last year. It is much higher than the long term average of 5.75%.

The US Unemployment Rate at 14.7% was by far the highest it has been in 72 years according the the Bureau of Labor Statistics.

At 11.10% the US Unemployment Rate is still higher than the prior peak in 1982.

I know most people were shocked by this spike in unemployment, and of course, much of it was driven by the Coronavirus pandemic, but it’s also just the market, doing what it does.

For example, I shared in an observation here on December 29, 2019 in “Asymmetry in yield spreads, inverted yield curve warning shot, and unemployment” when I shared the following in regard to what was then an extremely low unemployment rate.

“The yield curve inversion doesn’t automatically mean a recession is in the near future.

Employment is essential, too. The U.S. Unemployment Rate is about as low as it’s ever been.”

“As with all cycles, it isn’t the extremely low level of the cycle we should focus on, but what’s more likely to happen next. It should be no surprise that low unemployment precedes recessions.”

But, I’ll close this observation with the same one I did this one last December.

For me, the directional trend of the stock market will be my primary guide for the economy but I monitor many trends for situational awareness of what is going on.

I hope all is well with all of you and you are avoiding COVID-19 like the plague.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

We should see COVID-19 deaths peak in the next two weeks

US coronavirus new cases per day are in a downtrend, and trend in US hospitalizations is following the downtrend in new cases.

Taking a closer look, here is the past 30 days.

US cases per day is -31% off its high and US currently hospitalized is down about -5% from its peak.

Sure, the reported data has its fair share if issues, but we are probably observing a large enough sample size of the population to draw meaningful statistical inference.

Of course, nothing is more important than deaths per day, so here is a logarithmic chart. I’m using a logarithmic scale to respond to the skewness of the larger values by normalizing the scale of the trend based on percent change.

The equation for COVID is new tests administered drives new reported cases, which leads to hospitalizations with a lag, and then deaths lag hospitalizations.

Since we are observing a trend change from a peak level, we can expect to see deaths peak in about two weeks.

Of course, the trends of this virus are driven by human behavior.

So, the future direction depends on all of us, and each of us individually.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

A lot of talk about the NASDAQ being 21% above its 200 day moving average

There’s a lot of talk about the NASDAQ being 21% above its 200 day moving average, so… here’s my 2 cents on the matter.

Yes indeed, the NASDAQ is over 21% above its 200 day moving average. So, if the 200 SMA is your exit, you’d endure a 21% drawdown waiting to sell. I’ve got a ratio chart for it, too. The 1.216 = 21.6% variation. Also note, it’s higher than it was in February.

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At a ratio of 1.20 it was high in February, since 1.20 = the level of the NASDAQ was 20% higher than its own 200 day SMA. How high is that?

It’s a decade high!

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So, yeah, the NASDAQ seems stretched…

Like the CBOE Put/Call Ratio I shared in Here’s what the equity options put call ratio is telling us, and what it isn’t, the % above a moving average is another indication of sentiment.

When it’s as high as it is now, the market very enthusiastic.

For example, the Fear & Greed Index calls it market momentum and uses the 125 on the S&P 500 as a measure of investor sentiment.

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Chatting with some friends on Twitter, someone asked about the relative comparison to the 2000 stock market bubble.

The current period is no comparison to 1999-2000 when the NASDAQ was 50% above its 200 day SMA.

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Here is the ratio between the NASDAQ and its own 200-day moving average back to 1985. The relative ratio level the NASDAQ got in 1999 was the highest ever seen.

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Interestingly, I first started observing to get trading signals from relative strength ratio charts in the late 90s, and by the time 1999-2000 rolled around, I was comparing not only stocks to other stocks and their sector index, but also a cross section of global markets. For example, stocks vs. bonds, etc.

The NASDAQ was all the craze around 1999, and I had a t-shirt that said “NASDAQ; the world puts its stock in us.”

With technology leading with momentum, the tech heavy nas is seeing some popularity again.

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Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Here’s what the equity options put call ratio is telling us, and what it isn’t

I’m hearing a lot of talk about the CBOE Equity Put/Call Ratio tapping an extreme low again. At 0.38, the ratio between equity puts and calls has once again reached its lowest level of the past year.

For a broader perspective, here is the CBOE Equity Put/Call Ratio going back to 2006. Indeed, the current ratio between equity puts and calls is as low as it gets. The lowest level was in 2010, when it reached 0.32, barely lower than the current 0.38 reading. Yes, indeed, the CBOE Equity Put/Call Ratio reaching an extremely low level. In fact, it’s as low as it has ever been going back to 2006.

Normally, we consider such a low level to be an example of extreme complacency and GREED DRIVING THE MARKET. For example, the CBOE Equity Put/Call Ratio is the first of seven indicators used in the Fear & Greed Index.

When the ratio is trending down and at a low level, it’s because equity Call option volume is greater than the equity Put option volume. When there’s more trading volume in equity calls, we assume options traders buying speculative calls, so they are bullish. VERY bullish now.

When the market is so one-sidedly bullish, it’s a contrarian indicator suggesting over-enthusiasm. That is, we assume the calls are mostly speculative positions and puts are defensive, so the demand is on the long side. It’s an imperfect assumption, but I generally agree.

I pointed out a similar extreme read out early June, when Call Volume spiked up to a historically high level. Indeed, the stock market had a -6% down day afterward. This time is a little different, and the chart shows why. Call volume isn’t nearly as high, relatively speaking.

Call volume isn’t as high as it was in June, but put volume is also lower. So, the ratio is at the same low level at 0.38, but the absolute volume is different. It’s still probably an indication of enthusiasm and complacency, but it may not have the delta it had last time.

Keep in mind, even though a call option gives the buyer the right, but not the obligation, to buy a stock at a specified price within a specific time period, call volume also includes sellers of call options. So, the dominant demand could be the selling of call options instead of buying them, but every seller needs a buyer, and the prevailing direction of the trend hints as to the dominant side the market is enthusiastic about.

We can say the same about put option volume. While a put option gives the buyer the right, but not the obligation, to sell a stock at a specified price within a specific time period, put volume also includes sellers of call options. Buying a put option is bearish, but selling a put option is bullish.

Still, the general direction of put/call volume is that equity call volume is assumed to be mostly speculative bets on the stock to rise and put volume is primarily speculative (or hedging) bets on the stock to fall.

So, an observation of put and call volume includes a combination of the options market belief the stocks will trend up, but also less desire to protect against stocks going down.

This time, as seen in the chart, the primary difference in the current Put/Call Ratio is a lower level of put volume, requiring less of an uptrend in call volume to drive the ratio up.

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I hope this helps!

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Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

COVID-19 Update for Florida; cases, hospitalizations, and rates of change

I’m in Florida, which happens to be one of the states with the highest momentum in COVID – 19 cases. So, I’m going to share my observations as I flip through the data. I’m more of a data scientist, not an epidemiologist, so my focus is purely on the direction of these trends, and their rates of change. There are many limitations or challenges in interpreting the visualization. The data source labeled on the chart is deemed reliable but is not guaranteed, and the case data is limited by test availability.

What you believe is true, for you.

I say that, because we are observing about as much bias from this data as we see every day trading global capital markets.

No matter what I show in my observations, you’ll most likely still believe what you already did.

It’s confirmation bias.

Confirmation bias is the tendency to interpret new evidence as confirmation of one’s existing beliefs or theories.

The Coronavirus has become so politically charged, we see many people judging the trends based on their political affiliation, rather than pure data science.

That’s not the case for me.

My concern is to understand the trends to make a judgment on what is going on.

Let’s see what we see.

First, let’s start with Florida COVID – 19 Cases. The trend is up.

Amazingly, the visual doesn’t change a lot when I switch from an arithmetic chart above to the logarithmic chart below. The log chart below emphasizes the rate of change, rather than the absolute number change. Even the logarithmic chart is trending notably higher, so we not only have an uptrend, but it’s been gaining momentum. That is, the steepness of the recent uptrend is just as steep as it started months ago. We’d like to see it slow down, peak, and then reverse downward.

Florida COVID – 19 Hospitalizations uptrend continues. Again, this is the arithmetic chart, so it shows the absolute change.

Next, I shifted the Florida COVID – 19 Hospitalizations chart to a log scale, to emphasize the rate of change. The rate of change slowed down for a while, but is clearly pointing up.

I pointed out an upside breakout in the trend of new cases on June 12th. Since then, new cases per day have increased from 1,698 per day to 15,300 new cases yesterday in Florida. That is, the cases per day have increased by 708% since the trend breakout 30 days ago. We are now in a new paradigm, so take your precautions accordingly. I’m hoping this is the peak, and we’ll see it turn down from here.

Florida Coronavirus Tests Administered Per Day is also in an uptrend and spiked up. Some of this recent uptrend could be due to data backlogs from the July 4th holiday weekend, but it is what it is.

Deaths per day on Florida due to COVID has generally remained stable, oscillating around average for months. On average, about 43 Floridians per day are dying of Coronavirus. This is an absolute number, but we’ll look at some ratios and rates of change.

Florida COVID-19 Deaths are at 4,346 now. Though the trend is up, everything is relative, and we are talking about 4,346 out of a population of 21.48 million to put it in perspective.

There have been 2.58 million COVID tests reported in Florida, and this is one trend we want to see continue upward. The more testing, the better prepared we are. If you are asymptomatic, you could be spreading the virus to your friends and family, unknowingly.

Now, for some good news.

The Florida COVID – 19 Death Rate is at an all-time low. To calculate the death rate, we use the formula: Florida Coronavirus Deaths x 100.00 / Florida Coronavirus Cases. At this time, 1.6% of cases in Florida have died from the virus, and the rate has trended down. However, keep in mind deaths lag testing and cases by three to four weeks, so we may see this trend up as new cases become more mature.

Also, note the death rate was higher and increasing early on because the virus got into some assisted living and nursing homes. More recently, the average age of cases has fallen, so fewer younger people have been hospitalized and died from COVID. So, the rate of change has since been slowing.

Next up, we’ll observe some ratios, since everything is relative.

Here, I apply some of the same techniques to these trends I’ve been applying to global markets for over two decades. When looking at ratios in world markets, we call it “relative strength”, as one of the data streams is trending with greater momentum than the other.

Florida COVID cases relative to tests administered shows us about 10.5% of the tests administered are counted as positive tests. Below we see it represented as a ratio between the two. When the trend is rising, as it is now, more cases are positive. I marked the current level since it’s notably back at its prior high. Last month, only about 5% of tests were positive cases.

The next chart is drawn with per day cases vs. test data, so it’s noisier. The above chart was a cumulative total amount. I’m monitoring all of them.

How many Florida COVID – 19 cases are in the hospital?

One observation is hospitalizations relative to cases. From this trend, we can conclude about 7% of cases are hospitalized, but the trend is down since late May and early June.

Florida finally started reporting COVID cases currently hospitalized last week. We have 7,542 COVID cases in the hospital in Florida.

If we compare currently hospitalized cases relative to hospitalizations we start to get an idea of what percent of hospitalized is currently still hospitalized. The sample size is small here since they only started reporting recently, but we’ll be looking for this trend to fall.

What percent of cases are currently hospitalized? We can get an idea of the trend by comparing Florida cases currently hospitalized to cases. Again, the sample size is small, but it’s trending down at about 3%.

As time passes and we get more and more data, we’ll see directional trends and rates of change.

I’ve been focused on data science, statistics, and probably most of my life. If there is anything I think we’ve learned in 2020 is a shortfall in people’s understanding of the maths.

Many times I’ve heard people state silly things about the data being incomplete, or imperfect.

But we rarely every have perfect data, or complete data.

I’ve heard mathematically ignorant people make fun of statistics and probability, yet most everything around is is based on those very things.

The reality is, we live in an imperfect world, we live with uncertainly about most everything.

Many events can’t be predicted with certainty.

The best we can do is determine how likely they are to happen, using the concept of probability.

Probability is simply how likely something is to happen.

When we are unsure about the outcome of something, we can talk about the probabilities of certain outcomes—how likely they are.

The analysis of events with probability is called statistics.

Statistics is a mathematical body of science that pertains to the collection, analysis, interpretation or explanation, and presentation of data. It’s a branch of math.

So, we’ve got a lot of new uptrends in cases and such down south, hopefully we are seeing it peak and trend down.

It’s uncertain, so all we can do is monitor the data for directional trends and changing momentum. When the rate of change picked up last month, I suggested we’d see an uptrend in cases, as we did.

We want to see the rate of change slow down, then the spread dies off and trends down. Until we do, prepare, and protect yourself accordingly.

In the meantime, I encourage everyone to study maths like probability and statistics.

We don’t have to be sure about anything, if we are pretty sure about something, and place our bets accordingly.

It’s the essence of asymmetric risk/reward which drives asymmetry.

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Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Volatility, Put/Call Volume, and such

I see some hedging demand in the options market.

The ratio between Index puts and calls doesn’t get much higher than this. The CBOE Index Put/Call Ratio is elevated at 1.86, indicating probable hedging in the options market.

To be sure, here is the index put volume compared to index call volume.

Total options volume is relatively low for 2020, however.

But, right at its long term average.

The CBOE Equity Put/Call Ratio shows us the relative volume of individual stock puts and calls. Equity call volume was extremely high on June 8th, and has since mean reverted. I considered it to be very speculative, since call options are mostly traded for upside speculation in the underlying stock.

I pointed out before that speculative call volume reached an extreme high level, which was a contrary indicator.

Indeed, the S&P 500 index peaked with the peak in speculative call buying.

The decline in the S&P 500 so far has only been -7%, and it started June 8th. It remains about -6% from its high.

The options market doesn’t see a lot of hedging near the stock market peaks, but it sure does after the market trends down.

The S&P 500 tapped the 200 day moving average last week, but is trying to trend above it. Today was a good start, if it can hold the line.

For those who like the concept of mean reversion, here’s your sign.

This market has impressive resilience, but we never know the next -5% or larger down day is coming.

Well, I may not know for sure, but I know when the odds are stack in our favor as I showed in “If we’re going to see a second leg down, this is where I think it will start.”

For now, expected volatility contracted nearly -9% today, so the options market believes we’ll see less range over the next 30 days.

We’ll see…

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Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

Global Macro Trends: Eurozone Economic Sentiment, US Home Sales, Texas Manufacturing Business Activity, and Retail Gas Price

Eurozone Economic Sentiment Indicator is reversing back up off its lowest level ever at a current level of 75.70, up 12.15% from last month and -26.43% from one year ago. It’s way below average, but at least a countertrend from the extreme low reached this year.

Eurozone Consumer Confidence Indicator is at a current level of -14.70, up from -18.80 last month as it has almost reverted back to its long term average.

US Pending Home Sales Month over Month is at -21.77%, compared to -20.83% last month and -1.14% last year, which is lower than the long term average of -0.03%. Pending home sales mounted a record comeback in May, seeing encouraging contract activity after two previous months of declines brought on by the coronavirus pandemic, according to the National Association of Realtors®. Every major region recorded an increase in month-over-month pending home sales transactions, while the South also experienced a year-over-year increase in pending transactions.

The Pending Home Sales Index (PHS), a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos, and co-ops. Because a home goes under contract a month or two before it is sold, the Pending Home Sales Index generally leads Existing-Home Sales by a month or two.

Here is the Year over year relative to Month over Month.

Meanwhile, in Texas… the outlook has recovered after an epic decline.

The Dallas Fed conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state’s factory activity. Firms are asked whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged over the previous month. Responses are aggregated into balance indexes where positive values generally indicate growth while negative values generally indicate contraction.

Texas Manufacturing Business Activity Index is at a current level of -6.10, UP from -49.20 last month and even UP from -12.60 one year ago.

We’ll see if Texas can keep up the recovery with an uptrend in new COVID-19 cases, especially in Houston. The number currently hospitalized is at an all time high.

And the new uptrend in cases doesn’t seem to be driven by more testing in Texas. Although testing has trended up, it was above average about five weeks before cases were, and about eight weeks before the escalating uptrend.

To be sure, we can apply the same relative ratio we would to a stock vs. its index. For example, Apple, Inc. (AAPL) is a top technology stock, so if we want to determine when it’s outperforming the tech sector, we compare it to the sector index. Here we see the relative momentum between them as a ratio. When the line is trending up, Apple has relative strength over the tech sector.

Below I did the same with Texas cases relative to tests administered, which shows cases have momentum over tests. Up until now, the percent of positive cases was trending down.

The US Retail Gas Price is the average price that retail consumers pay per gallon. Retail gas prices is good to observe to see how the energy industry is performing. Retail gas prices can give a good observation of how much discretionary income consumers might have to spend.

US Retail Gas Price is at a current level of 2.216, up 1.42% from last week and down -19.68% from one year ago. Gas reached a peak in July 2008 and then trended back up to the $4 range the summer of 2011 to the summer of 2014 before trending down again.

Gas has now reverted to its long term average price, which has remained elevated since 2005.

If you wondered why electric cars are still popular, it’s because the average price of gas is elevated to a new higher level. Over the past decade, gas had oscillated between $4 and $2, for an average price around $3 a gallon.

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Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

I want to share a secret with you about unrelated nonsense

I want to share a secret with you.

Take a close look at this map and think about each of these states.

US Map Rug Rectangle 36" X 80" | Classroom Map Rug

What you see on TV, in the news, doesn’t necessarily reflect the beliefs of all of us.

Do you think they have the same concerns in Montana as New York City?

Do Tennesseans really care what they think in Los Angeles?

Does someone living in the Florida Keys need to be told by people in Minnesota how to live their life?

Successful people, especially wealthy people who we advise, focus on what’s inside their own boat.

Where are you getting the information you feed your mind?

Because the algorithm is very simple;

Garbage in, garbage out.

That is all.

Make it a great day.

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Join 38,847 other followers

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike 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 views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.