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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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: Signs of bullish sentiment across the globe

In some cases, the recovery of economic and market trends are as impressive as the rate in which they fell.

The so-called “panic button” indicator, TED Spread, is back down to low levels. The chart tracks the daily TED Spread (3 Month LIBOR relative to the 3 Month Treasury Bill) as a measure of the perceived credit risk in the U.S. economy. It tends to widen during times of economic uncertainty. The TED Spread spiked up briefly in March, but has since settled back down.

The TED Spread spiked up briefly in March, but has since settled back down.

German economic sentiment snapped back fast.

The ZEW Indicator of Economic Sentiment is a leading indicator for the German economy. It reflects the expectations in six months of 300 financial experts on inflation rates, interest rates, stock markets, exchange rates, and oil prices for leading global economies. A value greater than 0 reflects more optimism than pessimism and a value less than 0 reflects more pessimism than optimism with respect to economic sentiment.

ZEW Indicator of Economic Sentiment for Germany is at a current level of 63.40, which is right at the high it reached in 2014.

ZEW Indicator of Economic Sentiment for Germany and the Eurozone updates will be released tomorrow, so we’ll see how they have trended through June.

US Consumer Sentiment has trended up off its low. We’ll see if it can continue this uptrend with the COVID cases trending up again.

The Sabrient Insider Sentiment Index is designed to identify companies with potentially superior risk-return profiles that also are;

(1) reflecting favorable corporate insider buying trends (determined via the public filings of such corporate insiders) and/or

(2) have recent earnings estimate increases published by Wall Street analysts.

The Sabrient Insider Sentiment Index declined with the stock indexes in March and has recovered in similar fashion. As with investor sentiment measures, it seems to follow price. Nothing drives sentiment like the price trend.

Speaking of sentiment, the Citigroup Panic/Euphoria model is a gauge of investor sentiment. It identifies “Panic” and “Euphoria” levels which are statistically driven buy and sell signals for the broader market.  Historically, a reading below panic supports a better than 95% likelihood that stock prices will be higher one year later, while euphoria levels generate a better than 80% probability of stock prices being lower one year later.

The current reading of the Citigroup Panic/Euphoria model at 0.41 indicates euphoria and anything at or below -0.17 indicates panic.

The S&P 500 EQUAL WEIGHT is probably the best measure of the U.S. stock market. Here, I charted both the standard capitalization weighted index along with its Equal Weight counterpart. The cap-weighted S&P 500 is heavily driven by its top holdings, whereas the equal-weighted index holds about .20% in the 500 or so stocks in the index.

The S&P 500 Equal Weight Index declined -40% in March, which is more than the -34% of the S&P 500 weighted based on company size. The equal-weighted index also remains in a -17% drawdown off its highs, which is more than the standard SPX index, which is more weighted to the largest stocks.

For example, below are the top 25 stocks in the cap weighted S&P 500 everyone follows. As these top stocks have as much weighting in the index as 5%, the equal weight only holds about 0.20% in these same stocks.

SymbolName% Weight
MSFTMicrosoft Corp5.94%
AAPLApple Inc5.81%
AMZNAmazon.com Inc4.51%
FBFacebook Inc A2.22%
GOOGLAlphabet Inc A1.69%
GOOGAlphabet Inc Class C1.65%
JNJJohnson & Johnson1.44%
BRK.BBerkshire Hathaway Inc Class B1.36%
VVisa Inc Class A1.28%
JPMJPMorgan Chase & Co1.17%
PGProcter & Gamble Co1.14%
UNHUnitedHealth Group Inc1.10%
HDThe Home Depot Inc1.03%
MAMastercard Inc A1.03%
INTCIntel Corp0.97%
NVDANVIDIA Corp0.91%
VZVerizon Communications Inc0.88%
TAT&T Inc0.83%
ADBEAdobe Inc0.82%
NFLXNetflix Inc0.80%
PYPLPayPal Holdings Inc0.79%
DISThe Walt Disney Co0.79%
MRKMerck & Co Inc0.76%
BACBank of America Corp0.75%
CSCOCisco Systems Inc0.75%
S&P 500 Holdings as of June 26, 2020

The price trend for Emerging Markets stocks has been dismal since the 2007 peak, which has had some negative impact on global macro. That is, considering the killer trend from 2003 to 2007 has a strong return driver for us, it hasn’t been the case since then. So, we’ve not had much exposure to EM, even though it’s now considered undervalued relative to the rest of the world, for me, it has to be trending up with some momentum. This tend is non-trending and volatile.

Zooming in to the year to date, at least the MSCI Emerging Markets Index only declined about the same as US stocks.

Looking inside the EM Index we see the top country exposures are China, Taiwan, South Korea, India, and Brazil, all of which we can gain portfolio exposure via ETFs.

Looking at these individual emerging countries, Brazil has been hammered the most, Taiwan, Korea, and China have been relatively resilient.

In fact, the trend in China is probably surprising to investors, especially considering it’s where the COVID-19 Coronavirus started. China only had a -18.4% drawdown priced in US Dollars.

Brazil has some of the worse COVID trends in the world right now, which isn’t helping their stock market trend either.

Here’s a view of the global stock market trends. Though they are down from their February 2020 highs, they are well above their March 2020 lows.

Gold has had one of the most asymmetric risk/reward profiles YTD. In 2020, Gold has only only down about -3% and a drawdown from its peak of -11%, but it has gained 16%. That’s relatively strong asymmetry.

Gold is no contest against the long term US Treasury Index in 2020. Long Term US Treasuries have the strongest momentum and asymmetric risk/reward year to date, which is why I have exposure. Gold has still been a good asymmetric risk/reward, though.

We remain on defense and invested in bonds for now as they seem to exhibit the most asymmetric risk reward.

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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: Extreme asymmetric observations and changes

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole.

Macroeconomics is the part of economics focused on the big picture: analyzing economic phenomena such as interest rates, growth, unemployment, and inflation. Macro is in contrast with microeconomics, the study of the behavior of individual markets, workers, households, and firms. Macroeconomic phenomena are the product of all the microeconomic activity in an economy.

Global is related to, or involving, the whole world, not just one country or state.

Global Macroeconomics, or Global Macro, then, is looking at the whole world for trends and behavior of big picture trends.

US Total Vehicle Sales measures the total number of auto, light truck, and heavy truck sales in the US and helps gauge how consumers are spending their discretionary income. In the chart, we can visually see the trends in car and truck sales going back 43 years.

US Total Vehicle Sales bottomed at prior lows, and is now trending back up.

US Light Truck Sales is part of total sales and at a current level of 9.6 million, it’s up from 6.7 million last month and down from 12.57 million one year ago.

US Light Truck Sales has been in an overall uptrend the past four decades, and it reverted to the long term average, but is recovering. US Light Truck Sales is up 41.68% from last month, and -23.96% from one year ago.

Personal Consumption Expenditures Price Index (PCE) is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior. The PCE price index, released each month in the Personal Income and Outlays report, reflects changes in the prices of goods and services purchased by consumers in the United States. Quarterly and annual data are included in the GDP release.

Personal Consumption Expenditures Price Index (PCE) Year over Year is is at 0.55%, compared to and 1.38% last year (a decline of 60%) and is materially lower than the long term average of 3.25%.

US Personal Spending Month over Month is at 8.17%, compared to -12.62% last month and 0.44% last year. US Personal Spending is now higher than the long term average of 0.52%. The chart shows this data was historically more stable, but we’ve observe some extreme outlier trends this year never seen in the last 60 years.

The US Inflation Rate is the percentage in which 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.

US Inflation Rate is at 0.12%, compared to 0.33% last month and 1.79% last year. This is disinflation, which is a decrease in the rate of inflation. Disinflation is a slowdown in the rate of increase of the general price level of goods and services in a nation’s gross domestic product over time. Inflation has mostly trended below the long term average of 3.23% for years, but is extremely low at 0.12%. We could be a risk of deflation, which occurs when the inflation rate falls below 0%.

Inflation reduces the value of a currency over time, but sudden deflation increases it. As inflation is declining, the US Dollar is trending up.

When we think of macroeconomics trends like inflation and the US Dollar, we also think of gold. Here is Gold, priced in US Dollars. The Gold Price in US Dollars measures the cost in US Dollars for a Troy Ounce of gold. Gold can be seen as a “safe haven” investment since it is a tangible investment. Gold is also believed to be a hedge against inflation, which is why it reached as high as $1,895 per troy ounce in 2011 when inflation trended higher.

Gold is in an uptrend.

Inflation and interest rates are the primary return driver of stocks and bonds as well as some commodities and currencies.

The 10 Year Treasury Rate is the yield earned by investing in a US government issued treasury security that has a maturity of 10 years. The 10 year treasury yield is the longer end of the yield curve. Many analysts use the 10 year yield as the “risk free” rate when valuing the markets or an individual security. Historically, the 10 Year treasury rate reached as high as 15.84% in 1981 as the Fed raised benchmark rates in an effort to contain inflation.

10 Year Treasury Rate is the lowest it has been the past 30 years, currently at 0.64%, compared to 2.01% last year, and is significantly lower than the long term average of 4.45%.

We all know that past performance is no guarantee of future results, and the bond market expected return is a fine example. One thing that is essential for investors to understand is the long term bond returns will not repeat their past performance over the long term.

The directional trend of interest rates like the 10 Year Treasury Rate are a driver of other rates, such as mortgage rates.

The 30 Year Mortgage Rate is the fixed interest rate that US home-buyers would pay for a 30 year mortgage. Historically, the 30-year mortgage rate has trended as high as 18.6% in 1981, and up until now has trended down as low as 3.3% in 2012.

The 30 Year Mortgage Rate is at 3.13%, the lowest in 48 years, compared to 3.82% last year, and less than half of its 7.97% long term average.

The 15 Year Mortgage Rate is trending down low enough to double tap its all time low at 2.59% reached in May 2013, which is significantly lower than the long term average of 5.36%.

That’s all for now.

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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.

We’ll see a pause in reopening as hospitalizations trend up

Unfortunately, we’ll see a pause in reopening as hospitalizations trend up.

Hospitalizations have much further to rise, but they shouldn’t increase as much as cases.

I just got an updated data feed for today. Florida Coronavirus Cases is at a current level of 122,960, up from 114,018 yesterday, and a change of 7.84% from yesterday. Cases increased by 205% this week and 1,050% over the past 30 days.

Florida COVID hospitalizations continue in a 45-degree uptrend.

I continued to reiterate the direction of a trend is important, but so is the rate of change. This new rising rate of change isn’t what we want to see and is a derivative of the reproduction rate.

Daily deaths in Florida, however, continues to oscillate around its mean. I expect this may trend up and follow new cases, but, it will depend on how many of those new cases are younger healthy people who get over it vs. higher-risk people who may not.

Cases relative to tests administered shows us the ratio between the two. As this trend bottomed June 9th and has seen trended up, it tells us the cases relative to tests is increasing. In other words, new cases are showing more momentum than new testing.

THE GOOD NEWS IS: The death rate in FL continues to fall, which is hopefully a reflection of better treatment and/or the virus weakening. I’m guessing some part of it is a function of younger people getting infected and shaking it off.

Life is full of risks and rewards, so we make the best of it by directing and controlling our possibility of loss.

Intelligent people focus on managing the downside, the surprises, the uncertainty, and the risks since the upside of rewards takes care of itself.

At this point, we’ve all been made well aware of how to direct and control our risk to the possibility of loss, so we only have to do it.

As I said last week in This is what the stock market will focus on next, the market indeed focused on these increasing trends. The widely followed stock indexes fell about -3%.

These stock indexes are now down -11% or more off their highs, and the Dow Jones is down -15% from its February high.

I reduced our exposure to stocks to zero a week ago.

Be informed, and prepared, not afraid.

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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.

Individual investors fear a bad outcome

Individual investors are now bearish based on the survey and expected volatility.

Since 1987, the American Association of Individual Investors has asked the same simple question each week to see what direction individual investors think the market is headed over the next six months. The results are compiled into the AAII Investor Sentiment Survey, which offers insight into the mood of individual investors.

Since the crowd tends to get it wrong at extremes, when I see sentiment reach a historic high or low, I take note.

Falling bullish investor sentiment and rising bearish sentiment pushed the spread between bullish and bearish investors down to a low level.

Bearishness hasn’t historically trended much higher than this.

Bullish investor sentiment is about as low as it has been in history.

Neutral investor sentiment is about average.

Unlike the AAII Investor Sentiment Survey, the Fear & Greed Index, which tracks seven different investor sentiment indicators, is neutral.

Investor fear and greed oscillates over time as investors swing from the fear of missing out and the fear of losing more money. Fear and greed is neutral at mid field in the cycle and is pointing down again.

Investor sentiment gauges may not be the best market timers, but the Fear & Greed Index can be a useful gauge for investors to signal when you don’t want to be part of the crowd sentiment.

At extremes, most investors feel the wrong feeling at the wrong time, so if we are to create better results than the crowd, we must necessarily be thinking, feeling, and doing the opposite of the herd.

Expected volatility remains elevated, also signaling a higher than average level of fear.

After the biggest volatility expansion, ever, implied volatility (VIX) has settled down to 32, which is elevated. The CBOE Volatility Index (VIX) is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. The VIX is derived from the price of the S&P 500 index options, and provides a measure of market risk and investors’ sentiments.

So, I’m guessing one of two things is about to happen. Either this bearishness will prove wrong and the stock market will trend up, or it will get a lot worse.

It seems like investors are probably becoming more concerned about the new uptrend in COVID 19 cases.

I don’t believe Coronavirus was the primary driver of the stock market crash in March, but it may be more of an issue now that it continues to spread.

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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.

What’s driving the stock market down

On Monday, I suggested in This is what the stock market will focus on next the stock market would start reacting to the uptrend in COVID 19 cases.

Indeed, the stock market indexes seem to be reflecting something negative today.

I’m guessing it may be the uptrend in new cases per day. For example, Florida has reached a significant new high.

Image

As I’ve been saying for the past two weeks, the new uptrend breakout in cases per day is NOT driven by more testing. Below is a sample of the states with the highest new cases, and as you can see, the bars show the percent increase in new cases and testing.

Image

This is NOT the kind of asymmetry I like to see.

Considering the elevated risk level in the stock market by my measures, it is likely we’ll see more downside for stocks.

So, we have been positioned in long U.S. Treasuries for over a week.

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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 are all over the place

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. Macroeconomics is the part of economics focused on the big picture: analyzing economic phenomena such as interest rates, growth, unemployment, and inflation. Macro is in contrast with microeconomics, the study of the behavior of individual markets, workers, households, and firms. Macroeconomic phenomena are the product of all the microeconomic activity in an economy.

Global is relating to, or involving, the whole world, not just one country or state.

Global Macroeconomics, or Global Macro, then, is looking at the whole world for trends and behavior of big picture trends.

US Existing Home Sales reflects the total unit sales of US homes that are already built. It is a lagging indicator tracking the US housing market, which is impacted by changes in mortgage rates. Historically, US Existing Home Sales declined to a trough of 3.77 million units sold in November 2008 as foreclosures increased and home values fell during the US Housing Crisis.

US Existing Home Sales is at a current level of 3.91M, down from 4.33M last month and down from 5.33M one year ago. This is a change of -9.70% from last month and -26.64% from one year ago.

The US Retail Gas Price is the average price that retail consumers pay per gallon, for all grades of gasoline. Retail gas prices are important to view in regards to how the energy industry is performing. Additionally, retail gas prices can give a good overview of how much discretionary income consumers might have to spend.

US Retail Gas Price is at a current level of 2.185, up from 2.123 last week and down from 2.821 one year ago. This is a change of 2.92% from last week and -22.55% from one year ago. US Retail Gas Price is trending up from its recent low, which was around the same level of support gas had at prior lows of the past decade.

China Imports YoY is down -16.69%, compared to -14.19% last month and -8.22% last year. This is lower than the long term average of -3.83%.

China Trade Balance is at a high of 62.93B, up from 45.33B last month and up from 41.20B one year ago. This is a change of 38.82% from last month and 52.73% from one year ago.

US Continuing Claims for Unemployment Insurance is at a current level of 20.54M, down from 20.61M last week and up from 1.70M one year ago. This is a change of -0.30% from last week and 1.11K% from one year ago.

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 market conditions in the US economy with respect to employment; as more new individuals file for unemployment benefits, fewer individuals in the economy have jobs. Historically, initial jobless claims tended to reach peaks towards the end of recessionary periods such as on March 21, 2009 with a value of 661,000 new filings.

US Initial Claims for Unemployment Insurance is at a current level of 1.508M, down from 1.566M last week and up from 222,000 one year ago. This is a change of -3.70% from last week and still up 579.3% from one year ago.

Equity option demand continues to be focused on call buying relative to put options.

The CBOE Equity Put/Call Ratio had reached a very low level, indicating options traders were mostly operating in speculative call options over put options for hedging.

I pointed out in “Volatility contractions are eventually followed by volatility expansions” on May 27th:

“CBOE Equity Put/Call Ratio is trending toward the low level was saw before the waterfall decline in March. A falling put-call ratio, or a ratio less than 1, means that traders are buying fewer puts than calls. It suggests that bullish sentiment is building in the market.”

Shortly after, we saw a -7% decline in the stock indexes.

However, I’m seeing evidence of hedging now. The CBOE Index Put/Call Ratio shows a relatively high degree of hedging with put options.

Implied volatility as measured by the CBOE Volatility Index (VIX) remains very elevated, even though it declined nearly 10% today. In fact, it has mean reversed, as it does. The VIX is at its one year average.

Global Macro trends are all over the place.

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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.

This is what the stock market will focus on next

As much as I wish it wasn’t so, some important trends are in the wrong direction.

New COVID – 19 cases here in Florida are trending to a material new high.

Contrary to what some seem to blindly say; it isn’t because of more testing.

In Florida, testing slowed down 3% while new cases grew 88% over the last week.

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Yesterday, Governor Ron DeSantis acknowledged that the rising number of new Covid-19 cases in Florida cannot be explained away by an increase in testing, and announced plans to step up enforcement of social distancing practices in bars and nightclubs in “DeSantis pivots on Covid-19 surge, says testing doesn’t account for spike.

“Even with the testing increasing or being flat, the number of people testing positive is accelerating faster than that,” DeSantis told reporters during a briefing at the state Capitol. “You know that’s evidence that there’s transmission within those communities.”

Of course, it isn’t just Florida.

As of today, US Coronavirus Tests Administered is at a current level of 26.57 million, up from 25.98 million yesterday. It’s a change of 2.25% from yesterday.

US Coronavirus Cases is at a current level of 2.255 million, up from 2.223 million yesterday, which is a change of 1.46% from yesterday.

Here are the absolute trends in comparison.

The good news is the spread between US Coronavirus Tests and Cases is in an uptrend, so negative tests overwhelm positive test results.

We can use a ratio chart to see the relative trend in cases and tests. I do the same with global market trends. For example, we can compare the US Energy sector to the S&P 500 to see the relative strength or weakness. When the trend is down as it is here, the sector is lagging.

Here is a simple analog chart comparison.

In contrast, the Technology sector has been relatively stronger than the S&P 500 stock index.

And the relative strength ratio between Technology and the broader stock market index shows the opposite trend than what we saw from Energy.

So, back to the COVID trend, taking this same ratio methodology applied to tests and cases, the relative trend is down, so cases are lagging tests by a material amount. We want to see this trend continue.

So far, states have reported 630 deaths and the trend is down, so we are seeing a national decline. Death reporting lags approximately 28 days from symptom onset, according to CDC models that consider lags in symptoms, time in hospital, and the death reporting process.

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So, that’s the good news.

What I believe people will increasingly focus on is the breakout in new cases per day. Many trackers are normalizing the trend with a 7 day moving average, but the data already has a natural lag between contraction, testing, a positive case, so I’m not adding one myself.

Instead, I want to see a new breakout as soon as it develops. If we wait for a 7 day moving average new high, the lag will delay noticing the breakout.

I pointed out over a week ago I’m seeing new breakouts to the upside.

I’m still seeing new breakouts in cases per day.

I pointed out Florida, Arizona, and Texas. Now add Georgia.

And it isn’t just more testing in Georgia.

California is still trending up, and although their testing is rising, it isn’t just an increase in tests.

Oklahoma cases have now broken out into an uptrend. Again, the new high in cases per day doesn’t correspond to a new high in testing.

We’re seeing breakouts in other countries, too, such as Brazil.

Others like Russia have peaked and are drifting down.

So, there’s the trends.

What about the momentum of the trend?

Just as I have proprietary momentum and relative strength algorithms to define the speed of a price trend in global markets, they also have a measure of the speed of the COVID – 19 trend.

The values for Rt is a key measure of how fast the virus is growing. It’s the average number of people who become infected by an infectious person. If Rt is above 1.0, the virus will spread quickly. When Rt is below 1.0, the virus will stop spreading. Projecting the reproduction number is essential to understand how explosive an uptrend in new cases may be.

The Rt for Florida is 1.39, so it’s likely to spread relatively fast and we’ll see cases trend up as the new cases are spreading it to others. Florida has been in the top five of all states since I’ve been monitoring it.

Hawaii has the highest reproduction number in the United States.

Tennessee hasn’t been spreading it as fast.

The Rt for New York was as high as 2 early on, so a person who contracted the virus spread it to about two more, but it has slowed.

The states with the lowest Rt levels are in the north right now and the highest are in the south, or the warmest climates.

So much for the theory that heat will smoother the Coronavirus. It doesn’t seem to be the case.

Here are all of the states ranked from lowest to highest R.

Here are the Southern states. Most are in the red zone.

Next is the Northeast, who has maintained the most aggressive shelter in place and such.

Does this mean it’s working? Well, yes, if you aren’t around people, the spread will slow. However, only time will tell if these more city like areas come back sharply once they are back to full production.

By the way, here are the states that never sheltered.

So, we should prepare for the media to increasingly make this a big story again. As I see it, the odds of catching it is relatively low if less than 1% of the population has it. The trouble is, without testing everyone, we don’t know the positive rate. Right now the positive rate in Florida is increasing at 12%.

We should also prepare for the likelihood the stock market will eventually respond to these rising trends in new cases and the possibility of fear driving the stock market down again.

Although, it isn’t just a reaction to the continuation of COVID, but also the high risk level of the stock market.

The stock market is at an elevated risk level based on both fundamental valuation and quantitative momentum measures.

The S&P 500 Shiller CAPE Ratio, also known as the Cyclically Adjusted Price-Earnings ratio, is defined as the ratio the the S&P 500’s current price divided by the 10-year moving average of inflation-adjusted earnings. The metric was invented by American economist Robert Shiller and has become a popular way to understand long-term stock market valuations. It is used as a valuation metric to forecast future returns, where a higher CAPE ratio could reflect lower returns over the next couple of decades, whereas a 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 27.64, up from 26.03 last month and down from 29.24 one year ago. This is a change of 6.18% from last month and -5.48% from one year ago. It remains well above average and it’s at the third highest level it has ever been. These trends in valuation get resolved eventually, even if the Fed is trying to support stable prices.

The short term relative strength reading the speed and magnitude of the moves isn’t as overbought as it was when I pointed it out two weeks ago, but it’s also far from oversold.

Let’s see how it all unfolds from here.

Let us know if we can help here.

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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.

Everything is Relative: Florida COVID – 19 Trend Update

“It doesn’t matter what we think about a trend, it matters what the crowd thinks about it, but more importantly, how they will respond to it.”

– Mike Shell

For a quick update on the Coronavirus COVID – 19 trend, I’ll use my home state of Florida as the example.

The first cases of Coronavirus (COVID-19) were confirmed on March 1st, 2020, which occurred in Manatee and Hillsborough County. During the initial outbreak of Coronavirus in the United States, Florida’s public beaches and theme parks were under scrutiny as being areas of large crowds. Some in the news media criticized Florida for being relatively late in issuing a “Shelter-At-Home” order, finally putting it in place beginning April 3rd, 2020. Cases ramped quickly from 2 on March 4th, to over 5000 by the end of the month. Since then, however, the number of cases in Florida has leveled off, slowing the rate of change.

I focus on the direction of the trend and its rate of change.

The COVID Tracking Project has now tracked 85,826 cumulative Florida Coronavirus cases , up from 82,719 Thursday. This is a change of 3.88%. Here, I show the standard arithmetic scale on the chart.

The concern I see in the above chart is it seems to be forming a rough S-shaped curve. That is, cases trended up though April and May around the same pace, but this month the rate of change is notably stronger in the  linear price scale of an arithmetic chart. The arithmetic or linear chart doesn’t illustrate or scale movements in relation to their percent change, but instead, the linear price scale plots price level changes with each unit change according to a constant unit value. So, there is an equal distance between the data points as each unit of a change on the chart is represented by the same movement up the scale, vertical distance, regardless of what the level when the change happened. The arithmetic chart is the standard basic chart, especially over shorter time series, and it shows absolute trends.

To see how the time series unfolds with a focus on percentage of change, we changed the scale to logarithmic. The logarithmic chart is plotted so that two equal percent changes are plotted as the same vertical distance on the scale. Logarithmic scales are better than linear scales for normalizing less severe increases or decreases. Applying a logarithmic scale, the vertical distance between the data on the scale the percent change, so we can better identify changes in rates of change. Here, we see a strong uptrend in March, then the rate of change has since leveled off. The trouble, however, is it is still trending up and at its high.

Florida Coronavirus Tests Administered is at a current level of 1.5 million, which up from 1.486 million the day before, an increase of 1.72%.

COIVD – 19 Deaths have increased 1.4% since Thursday. Deaths are obviously an essential factor to track. Florida Coronavirus Deaths is at a current level of 3,154.00, up from 3,110.00 yesterday.

The steep uptrend in deaths is scary looking using the arithmetic scale showing the absolute trend in cumulative deaths. In the next chart, we observe the same trend as a log scale, which shows the rate of change is in an uptend, but has been slowing. I labeled the highest high (now) and the average over the period for reference.

Florida Coronavirus Hospitalizations is at 12,862, up from 12,673 the prior day, which is a change of 1.49%. To focus on the rate of change, here is the log scale chart.

Keep in mind, my objective here isn’t to rehash the research of others, but instead to share what I see in the trends and rates of change. As such, this isn’t a complete analysis of the virus. It’s my observations, as a quant and trend system developer and operator. The data source is The COVID Tracking Project which can only report the data as provided by the states.

ZOOMING IN TO PER DAY

The per day trends are important if we want to spot a change in trend quickly. As I warned in “In addition to the equity markets entering a higher risk level of a drawdown and volatility expansion, we now have a renewed risk of the scary COVID narrative driving more fear” a week ago, the uptrend got some attention last week. It doesn’t matter what we think about a trend, it matters what the crowd thinks about it, but more importantly, how they will respond to it.

The uptrend in Florida Coronavirus cases per day has indeed continued and with a notable new high.

I don’t like to see an uptrend like this because it’s a virus, and viruses are contagious, so they spread. In the case of Coronavirus, we can get an idea of the speed and rate of spread by the reproductive number (R0), or ‘R-naught’, represents the number of new infections estimated to stem from a single case. The reproductive number (R0) is relatively high, according to a research paper on the CDC: Assuming a serial interval of 6–9 days, we calculated a median R0 value of 5.7 (95% CI 3.8–8.9). 

I’m not going into the details here, but, with a reproductive value of 5.7, an increase in new cases is material in my opinion. That is, once it trends up as we are seeing now, it seems more likely to continue.

Are new cases a function of increased testing?

Some say the increase in new cases per day is a result of more testing. That doesn’t seem to be the case. Below is a charge of cases per day with a time series of tests administered per day under it. Visually, we see no correlation. However, there are many caveats to the data. So, anyone who wants to make a cased leaning one way or another can find ways to skew it, but it is what it is. We have a material increase in cases in Florida.

QUANTIATIVE ANALYTICS

Now, we’ll take a deeper dive and apply some analytics to the trends by observing some ratios.

The Florida COVID – 19 Death Rate has been gradually trending down. Florida Coronavirus Death Rate is at 3.67%.

In the past two weeks of May, the death rate was 4.6%, so it is falling.

In our investment management, I’ve been drawing ratio charts for over two decades to determine which market or stocks has greater trend momentum than another. When the numerator (top) is trending stronger than the denominator (bottom value) we say it has stronger relative strength or momentum. In this case, I have used Florida Coronavirus Cases Per Day as the numerator (top value) and Florida Coronavirus Tests Per Day as the denominator (bottom value), which shows a clear uptrend in the cases per day relative to the tests per day. This concerns me because of the rate of spread. As you look at the ratio chart, consider that a value of 0 would mean new cases per day is the same as new tests per day. Instead, new cases is currently trending higher than testing.

Florida cumulative cases relative to tests administered is also showing some change in trend. the past few weeks. Again, not of the date collected is perfect, but it’s still representative of a statistically significant sample of the population.

My objective for trend following is to identify a trend early in its stage to capitalize on it until it changes.

Comparing per day cases to other states doesn’t mean a lot, since the data needs to be normalized. For example, what President Trump said a few weeks ago is a true statement: the number of cases are a function of testing. If we didn’t test and didn’t categorize a case as COVID, there would be no “COVID cases.” Some people, politically motivated, seem to have difficult understanding that simple statement. I’m not politically motivated, so I just say it like it is. With that said, California is winning the match of the most cases per day followed by Texas. Florida is above Arizona.

Again, this doesn’t tell us anything aside from the absolute number. A relative comparison is often necessary and this is an example. For example, we could first calculate per day cases relative to tests or population, then compare them. That’s beyond the scope of my objective today.

Here are the states that reported over 500 new cases. We are seeing some large bubbles in the southwestern United States right now.

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The bottom line is, we want to see these levels drifting down, not up. We want to see this trend down.

People who are at high risk should continue to operate according to the risks, but also keep it in perspective that at this point, it isn’t yet so wide spread.

In the big picture, the population in Florida is 22 million and about 86 thousand cases have been labeled COVID 19. 86,0000 out of 22 million is about 4 tenths of a percent, or 0.40%.

That’s 40 cents of $100.

Our changes of contracting COVID 19 in Florida, then, is less than half of 1% at this point.

Everything is relative.

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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.

So far, 2020 has shown us some fine examples of risk, investor sentiment, divergence, and volatility

Implied volatility, as measured by the CBOE Volatility Index (VIX) has trended up about 50% since the most recent low on June 5th. I’ll call it a moderate volatility expansion. Normally a volatility expansion from 23 to 40 would be considered a material event, but relative to the highest spike we’ve seen in March, it doesn’t seem huge for 2020.

The Bank of America Bull & Bear Indicator is at 0.90 vs. 0.40 last week. It is used as contrarian indicator to identify market extremes in investor sentiment. Currently, their measure of investor sentiment is very bearish, which is bullish for the stock market.

BofA Bull & Bear Indicator

Bank of America Private Client Sentiment shows bearishness, and here is a line chart showing its history.

BofA Private Client Sentiment

On the topic of investor sentiment, and the Bank of America Bull & Bear Indicator, here is a chart of its history going back to 2002. As marked on the chart, it was backtested pre-2013.

BofA Bull & Bear Indicator History

I share the CNN Fear & Greed Index a lot, because it’s easily assessable, so anyone can view it. The Fear & Greed Index is neutral right now.

Within the Fear & Greed Index are seven different investor sentiment indicators. Unlike the Bank of America Private Client Bull & Bear Indicator, which is a survey of their clients, the Fear & Greed Index is derived from quantitative technical indicators.

Stock price breadth, or how well stocks are participating in the uptrend, is the leading driver on the Greed side. They use the McClellan Volume Summation Index, which measures advancing and declining volume on the NYSE. It shows during the last month, approximately 8.08% more of each day’s volume has traded in advancing issues than in declining issues, pushing this indicator towards the upper end of its range for the last two years, which is extremely bullish.

The only other of the seven indicators showing bullish investor sentiment is safe haven demand. That is, the demand for bonds over stocks. They measure it by the difference between the past 20 day stock and bond returns. Stocks have outperformed bonds by 6.99% during the last 20 trading days. This is close to the strongest performance for stocks relative to bonds in the past two years and indicates investors are rotating into stocks from the relative safety of bonds. Of course, this bullish investor sentiment is a sign that greed is driving the market. Notwithstanding these two extremes, overall, the Fear & Greed Index remains neutral.

Value is a Value

The dispersion of stock valuation multiples between the lowest and highest valuations has narrowed. But, despite the recent relative strength in value, it is still wide relative to history. So, value stocks remain a relative value.

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Hot Momentum Stocks are Showing Relative Strength

According to Goldman Sachs, the most popular retail trading stocks have materially outperformed the S&P 500, so far.

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Cross-Asset Realized Volatility has been Extreme

Another sign of dispersion is the number of 3 standard deviation prices moves. We’ve already seen more extreme trends across asset classes in 22 years.

Volatility and Number of 3-Sigma Moves

Despite the impressive V shaped rally from what is so far the low on March 23rd, I continue to notice the mean reversion year to date and over the past year. Here is year to date, and I marked the high, low, and average percentage.

At the low, the S&P 500 was down about -31% YTD. With the help of a very aggressive Federal Reserve proving liquidity, it has recovered most of the decline in one of the fastest in history.

It ain’t over till it’s over, and this ain’t over.

Asymmetry is about the upside vs. the downside in terms of asymmetric risk/reward. No observation of the price trend is complete without also noting the downside drawdown it took to achieve it. The drawdown for the S&P 500 was an astonishing -34% in just 23 days. It’s a reminder of risk.

I believe risk must be measured, directed, and controlled if we are to compound capital positively.

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

Clearly, in 2020, we’ve surely seen some of the finest examples of risk, divergence, and volatility.

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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.

In addition to the equity markets entering a higher risk level of a drawdown and volatility expansion, we now have a renewed risk of the scary COVID narrative driving more fear

People tend to overreact and under-react to new information.

We observe it in the global capital markets more frequently than anywhere, and with immediate feedback.

So, those of us who are adept at identifying and monitoring directional trends in global markets have an advantage in researching trends of all kinds if our quantitative trend methods are robust, and our qualitative judgment and decision-making process is repeatable.

Intellectual skills that are associated with acquiring reliable information about nature are parts of the scientific process. Scientists of all kinds need skills like: communicating, observing, classifying, measuring, predicting, inferring, and researching.

Science isn’t just science, there’s also some art to it. I believe the first skills are more art, such as communicating, observing, classifying.

Many say investing and investment management is both art and a science. Some believe investment management is more art than science, others believe it’s more science than art. Quants try to make it more scientific than artistic.

I do a combination. I am Man + Machine.

The way I look at trends and how time series interact with each other is a robust process that may be applied to anything.

I don’t read articles in Bloomberg or The Wall Street Journal to hear the opinions of others to decide what I believe for myself. When I was a young rookie I did read a lot at first, as we all do, then learned the hard way to focus my efforts on my own original research and thinking.

I do best when I do my own work, as an independent thinker.

So, over the decades as a professional researcher, I first inspect the data to observe any trends and then make sense of it afterward. Sometimes my intention is for predictive analytics, other times it’s just prescriptive. predictive and prescriptive analytics. Predictive analytics provides us with the raw information for making informed decisions, while prescriptive analytics provides us with data-backed, evidence-based decision points that we can weigh against one another.

The scientific method is an empirical method of acquiring knowledge through careful observation, and applying rigorous skepticism about what is observed, realizing how cognitive assumptions and bias can distort how one interprets the observation.

  • Descriptive Analytics, applying data aggregation and data mining to provide observations and insight into the past to answer:
    • What has happened?”
  • Predictive Analytics, applying statistical models and probabilistic forecasting methods to understand the future and answer:
    • “What could happen?”
  • Prescriptive Analytics, applying simulation and testing algorithms to advise on possible outcomes and answer:
    • “What should we do?”

The Scientific Method and experimenting is a systematic approach to problem-solving and decision-making.

An algorithm may look something like this:

Problem —> Hypothesis —-> Prediction —-> Test Predictions —> Evaluation

We all have biases. All industries have biases. Sometimes these biases gave blindspots. Our biases that can narrow our vision and influence behavior and beliefs. It’s why in asset management, we often consult with researchers outside the industry to help avoid blind spots from industry bias. For example, the personal financial planning profession has a tendency to blindly say “balance your risks and rewards” and “balance your portfolios”, which is about the silliest things I’ve ever heard.

If you balance your risk and reward, you get symmetry on your statement.

If we want asymmetry, we have to skew the risk and reward positively.

It’s essential to identify blind spots, own them without being defensive, and adjust our behavior to avoid it.

MY OBSERVATIONS OF COVID 19

I have an advantage, because I observe COVID 19 trends and rates of change as it is, without any bias as to beliefs about the disease and such. That is, I’m just purely looking at the data we collect and feed into our systems for observation.

It’s like this:

  • I focus on; what has changed?
  • I look for extremes in levels, like new high or low breakouts.
  • I also monitor the rates of change. Fast breakouts are more likely to form an ongoing trend than slow.

FLORIDA COVID 19 UPDATE

As COVID 19 and the mass quarantine strategy for suppressing the spread has become a political debate lately, so some of you may perceive what you are about to read that way.

Don’t.

I have no political bias about this whatsoever. My personal preference is to get past this virus as quickly as possible with as little human suffering as possible. Ignoring the data and facts doesn’t get us there. Exaggerating the data and facts doesn’t either. So, I suggest you try to see the trends for what they are, as I am.

My home state of Florida is now, unfortunately, trending in the wrong direction. I pointed it out with some fellow money manager friends last week of a potential breakout in the trend and it has since trended higher for a meaningful and material breakout. No one wants businesses to open and get back to normal more than me, but what is, is. The cases per day is in a strong uptrend. The prior high was 1575 on April 3rd and 1601 on May 16th. Yesterday was 2581. I hope to see this trend down.

NEW UPTREND IN FLORIDA CASES NOT DRIVEN BY NEW TESTING

The first hypothesis we think of is, well, maybe the uptrend in driven by an increase in testing. Naturally, increasing the absolute testing also should increase the number of positive tests. That isn’t the case. The high in testing was May 20th in Florida. The testing per day remains materially below that level according to the most recent data.

Keep in mind, the lower line is tests administered per day, so there is a lag between testing and the classification of a positive case. In fact, there are natural lags in all of this data. For example, I don’t expect to see the results of the protests until a week or two afterward to account for the lag in showing symptoms, going to get tested, and getting the test results. If there is any increase in the protesting areas, we’ll hear about it next week or later.

FLORIDA COVID 19 HOSPITALIZATIONS AT AN ALL TIME HIGH

Not much to add here. It is what it is.

I can try to make it seem better with a logarithmic based chart, which draws the chart in a way that two equal percent changes are plotted as the same vertical distance on the scale. It visually normalizes the rate of change. The good news is the rate of change overall is slowing. The bad news is this could look like an S-curve later, which would be typical of a spread.

By the way, here is the log chart of the new cases per day. We normally use a logarithmic chart scale for long term charts to normalize the data especially if I’m comparing it to something else where relative strength (rate of change) is measured. But here, we still see a breakout in rate of change. So, it’s a material breakout in my opinion, but I hope it breaks down.

Unfortunately, three of the new uptrends are in states were we have clients; Florida, California, and Texas. Next up is Texas.

TEXAS COVID 19 UPTREND

New cases in Texas is trending up to all time highs. I think Houston, Texas is now at risk of another stay-at-home order.

CALIFORNIA COVID 19 TREND

California new cases per day has trended up to the all time high again. It doesn’t seem to be in direct result of more testing per day, either.

ARIZONA COVID 19 CASES AT NEW HIGH

Arizona is at a high in new daily cases reported, but also in tests per day. The trouble in Arizona is the material new uptrend in hospitalizations.

The momentum in hospitalizations in Arizona is a real problem, and I’m using a logarithmic scale below, but it doesn’t help.

So, we are seeing new hospitalization highs in Texas, Arizona, and North Carolina. We’re showing Louisiana here as well for context, since it had an early COVID-19 outbreak.

We saw 3 states report more than 2,000 cases yesterday: California, Florida, and Texas. A picture speaks a thousand words.

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 COVID HAS HIT THE NORTH MUCH HARDER THAN THE SOUTH

But the South is now seeing a surge in cases…

And it doesn’t seem to be an increase in testing.

Can hospitalizations keep falling if cases are rising?

Because hospitalizations are rising rapidly in some Southern states.

I expect we’ll be hearing a lot about these new high breakouts in Arizona, Florida, Texas, and California. All of which, by the way, are the hottest and most humid states in the U.S., so much for the heat and humidity killing the virus.

What we have here is, a a notable uptrend across the South. I hope to see it fade, but based on what I’m seeing, it’s more likely to continue. Only time will tell.

If you are at risk, I recommend remaining cautious, wearing the dang mask, and treating this virus with respect.

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Speaking of the scientific method used for decision-making.

If you want to get as technical as possible, here’s some homework for the wannabe scientists and armchair mathematicians who really want to get into the maths of the matter. The virus has sparked a lot of important debates around the globe among though leaders. As researchers, we argue and debate our beliefs in hopes to gain new knowledge. One of the most heated public debates has been Taleb and Ioannidis.

The International Journal of Forecasting (IJF) is organizing a special section devoted to “Epidemics and forecasting with focus on COVID-19”. Based on their blog posts, John P. Ioannidis and Nassim N. Taleb will be given the opportunity to think of each other’s arguments about the COVID data and how to use it. Consequently, they will both be invited to write a full paper to better detail their views and why they think the opposite side’s views may not be adequate under the current circumstances. These opinion papers will then appear in the IJF, after scientific review by their peers. IJF should reserve the right to publish a closure based on this debate. This debate will not only allow us to better understand the points of view of the two great scientists but be also left as a guide for how to deal with future pandemics.

Nassim N. Taleb believes that all efforts and resources should be directed to halt its spread and reduce the number of infected and deaths without any concern about forecasting its future course as the uncertainty of doing so cannot be measured and the risks involved are highly asymmetric. See “On single point forecasts for fat tailed variable by Nassim Nicholas Taleb.”

 John P. Ioannidis, on the other hand, claims that more reliable information is needed to make multiple billion-dollar decisions and that forecasting has failed us by being too pessimistic about the future growth of the pandemic and by exaggerating its negative effects. See “Forecasting for COVID-19 has failed”

Both of their observations are well worth a read.

In addition to the equity markets entering a higher risk level of a drawdown and volatility expansion, we now have a renewed risk of the scary COVID narrative driving more fear.

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 a second leg down, this is where I think it will start.

“I still had much to learn, but I knew what to do. No more floundering, no more half-right methods. Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position. But my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities.” – Jesse Livermore, Reminiscences of a Stock Operator, by Edwin Lefèvre, first published in 1923.

The US stock market is now at risk of another decline

First, the relative strength of the S&P 500 has reached a level I consider overbought for the first time since the crash.

It’s a measure of too far, too fast.

The Relative Strength Index (RSI), developed by J. Welles Wilder. Born in Noris, Tennessee, Wilder was a mechanical engineer, turned real estate developer, turned technical analyst, and best known for his work in technical analysis. Wilder created the Average True Range, the Relative Strength Index (RSI), Average Directional Index, and the Parabolic SAR, which he published in 1978 in New Concepts in Technical Trading Systems

is a momentum oscillator that measures the speed and magnitude of directional price trends. The RSI oscillates between zero and 100, so it is range bound.I The RSI is defined as overbought when it reaches 70 or higher and oversold below 30.

Another useful measure of market trend conditions is breath. The percent of S&P 500 stocks above their 50 day moving average shows us how many stocks are participating in the uptrend. Since June 1st, 97% of the stock are trending above their 50 day moving average, so they are in short term uptrends.

Strong breadth of participation is a good thing, until it reaches an extreme. A breath thrust as we saw begin the start in April was a good sign as the stock market was trending up, more and more stocks were entering uptrends. However, once all of the stocks are already in uptrends, we eventually have to wonder what is going to keep driving them higher.

Much of investment management is an understanding of what other market participants are likely to do next. When I see the percent of SPX stocks above their 50 day moving average at the highest level in twenty years, it simply tells us most of the stocks are in short term uptrends, but, the next direction for buying enthusiasm is going to be down.

On a longer term time frame, which is the 200 day moving average, only about 60% of the S&P 500 stocks are in longer term uptrends, so there is plenty of room for continuation.

Next up is the good ole NYSE Bullish Percent.

The NYSE Bullish Percent was the first breadth indicator. The NYSE Bullish Percent was developed by Abe Cohen, the founder of Investors Intelligence in 1955. Abe Cohen was an early pioneer of point & figure charting , which he believed provided the ideal building blocks for a market barometer. By recording stock prices, P&F charts effectively map out the relationship between demand (buyers) and supply (sellers). The advantage of P&F charts is the supply/demand asymmetries are clear cut and easy to identify:

If demand outstrips supply, a P&F buy signal is generated

If supply outstrips demand a P&F sell signal is generated.

The Bullish Percent, then, is a breadth indicator that shows the percentage of stocks on Point & Figure Buy Signals. As with other oscillators, the Bullish Percent Index is range bound and fluctuates between 0% and 100%. In its most basic form, the Bullish Percent Index favors the bulls when above 50% and the bears when below 50%. Bullish Percent is considered overbought and a higher risk zone when above 70% and oversold and a lower risk level when below 30%.

At the current reading of 83, it’s clearly in the “high risk” zone.

So, I wouldn’t be surprised to see this uptrend at least stall here, temporarily.

If we’re going to see a second leg down, this is where I believe it will start.

The Federal Reserve is fully committed to keeping this trend going, so we’ll see…

Risk management is essential for all investments because all investments have a risk of loss.

As a tactical decision to reduce our exposure to loss in response to the elevated risk levels I’m seeing, I sold to take profits on our remaining stock positions on Tuesday and invested in US Treasuries.

“But my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities. ”

– Jesse Livermore, Reminiscences of a Stock Operator, by Edwin Lefèvre, first published in 1923.

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 how big of an overshoot the COVID projection was

The last time I wrote about The Institute for Health Metrics and Evaluation (IHME) COVID-19 Projections for the United States was in #FloridaMorons is trending on Twitter, so let’s take a look at the Florida Coronavirus trends on April 18th.

I said:

Models Misbehaving

I’m sure there will be no shortage of criticism of the models attempting to predict things like hospital resource us such as the COVID-19 Projections from Institute for Health Metrics and Evaluation (IHME) that were widely used. The model had many assumptions, as any model would, and sometimes models get it wrong. Keep in mind, this model assumed social distancing, too, so it wasn’t a model misbehaving from our success in flattening the curve.

Below is an image I saved on April 11th, already showing Florida hospital resource use was improving.

Here it is today. Their educated guesses overestimated resource use, though it wasn’t a big surprised to me, since I paid attention to the wide range of possibilities they illustrated.

How inaccurate were they?

On March 27, 2020 the projected infections was 259, 204, but the confirmed infections was 16,576.

The brown line at the bottom is the confirmed infections, the higher line is their projections.

COVID – 19 isn’t over.

It’s still spreading, but not nearly as they predicted.

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.

Jobs Report: Markets respond to positive rates of change and positive surprise

On Monday, I shared on Twitter:

Today’s jobs report is a mighty fine example of the market responding to positive rates and change and surprise.

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 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 reached as high as 10.80% in 1982 and 9.9% in November of 2009. Both of these times were notable recessionary periods.

That is, until COVID – 19 came along.

We saw a 14.7% unemployment rate in April in the United States of America. A stunning increase from such a low level in February of 3.5%. The unemployment rate had been declining, for example, it was 5.3% five years ago.

After today’s jobs report, the US Unemployment Rate is at 13.3%, compared to 14.7% last month and 3.6% last year. It’s still nearly three times higher than the long term average of 5.75%, but a lot better than Wall Street had expected.

Wall Street expected a loss of 7.7 million jobs and a 19.8% unemployment rate today.

Bloomberg emailed sent out at 7AM this morning:

So, and Unemployment Rate at 13.3% is a huge positive surprise.

Some independent economist are already disputing the numbers.

In the last observation I shared last week, I said:

“And May’s unemployment number may be higher when it’s announced on June 5. 

The stock market is said to be a discounting mechanism. The largest stock market investors who drive price trends don’t look back, they look forward.

It’s an auction market and operates on the proposition that investors and traders gaze into the future and discounts all known information about the present moment and expectations for what’s expected to happen next. So, when unexpected events happen, the market takes into account this new information very rapidly.

It certainly seems to be happening now.

Either the market is factoring in a quick recovery, or something else is driving it up.”

I think it’s safe to say the market has indeed gazed into the future and discounted a sharp recovery.

Yes, it certainly seems overly optimistic, but what is, is.

Notwithstanding a second wave of COVID-19 that hits even harder than the first, Wall Street seems to be pricing in the worst is behind for the U.S. economy. 

What’s next?

It’s been a radical year. What else should we have expected out of 2020.

We’ve got to have some fun with it.

The US stock market will probably trend up today and reach an overbought level for the first time since January.

Remember: The market discounts the future, meaning it prices in future expectations. This discounting mechanism goes both ways.

The market is people. It’s large investors and small, but the largest investors drive the trends. It’s institutional investors managing money for others that are more advanced about gazing into the future.

Above all else, when it comes to forecasting or now casting a future trend, getting a grasp of what the majority of the market is thinking and doing is essential.

My guess is, the market has factored in the extremely aggressive response from the Federal Reserve and US Treasury to provide liquidity after it evaporated in March.

I know it’s very hard to go with the flow. Who would have believed this -37% decline would have recovered as much as it has so quickly?

No one.

But, it ain’t over till it’s over.

We have a new problem now.

The relative strength of stock indexes just tapped the overbought level, so the risk of a fall is now higher than it has been since this uptrend started.

Semper Gumby.

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.

Should we care the S&P 500 closed above its 200-day simple moving average?

As the U.S. unemployment rate in April 2020 was 14.7%, the highest since the Great Depression, the U.S. stock market is trending up.

And May’s unemployment number may be higher when it’s announced on June 5. 

The stock market is said to be a discounting mechanism. The largest stock market investors who drive price trends don’t look back, they look forward.

It’s an auction market and operates on the proposition that investors and traders gaze into the future and discounts all known information about the present moment and expectations for what’s expected to happen next. So, when unexpected events happen, the market takes into account this new information very rapidly.

It certainly seems to be happening now.

Either the market is factoring in a quick recovery, or something else is driving it up.

The Efficient Markets Hypothesis (EMH) is based on the theory that the stock market is a very efficient discounting system, so it factors in expectations of the future. The Efficient Markets Hypothesis suggests the stock market generally moves in the same direction as the economy.

Yeah, I know. If there ever was a time that sounds silly it’s now. Well, and every other market crash and bubble. I’ve seen my fair share of those in the past two decades.

One of the most interesting paradoxes in investment management is the market discounts everything is also the first premise of Technical Analysis.

The three premises on which the technical approach is based:

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

That both the Efficient Markets Hypothesis and Technical Analysis is based on the belief the market discounts everything known and expected about the future is logically self-contradictory, because EMH doesn’t believe prices move in trends. EMH certainly doesn’t believe Technical Analysis, including trend identification systems for trend following and pattern recognition, is useful. Yet, trend systems and pattern recognition are some of the very strategies that I’ve seen to achieve asymmetric risk-reward.

I consider most trend identification systems to be pattern recognition. Pattern recognition is the systematic recognition of patterns in data. For example, the first action in trading breakouts is to identify current price trend patterns along with potential support and resistance levels in order to signal entry and exit points.

So, here we are. The S&P 500 is now trading above its 200 day moving average again after trending below it on February 27th.

It has been shocking to most that the stock index is now only down about -10% from its February high after a -36% waterfall decline over just 23 trading sessions.

It the fastest waterfall we’ve seen of this magnitude, so maybe we shouldn’t be surprised to see it swing back up to recover 2/3rds of the decline.

But no, it’s not a surprise. I tactically traded through the last two most radical bear markets since the Great Depression and they both included many swings up and down along the way.

The swings are the danger.

If you wait too long and enter after prices have already trended up sharply, you may get invested in stocks just in time for the next trend down.

The same goes for the downside. If you wait until your losses are so large they become intolerable and tap out at the lows, you risk missing out on the price trend recovery like we just saw.

At what point do you feel good about geting back in?

After prices have trended back up as they have now? The S&P 500 is above the 200 day moving average, so it’s a sign of an uptrend.

Is this the time to buy?

Or, do you feel better about investing in stocks after the price trend falls more?

What if it doesn’t?

These are tactical trading decisions. Most investors are not good at it, but some of us are better.

The market is people who trade and invest in the market. People are always looking forward, gazing into the future that doesn’t yet exist, so prices are always adjusting according to people’s beliefs about what’s going to happen next. This includes all signals. All signals are necessarily predictions of the future.

As the SPX is now trending above its 200-day average, trend followers who use the SMA will buy here. We may indeed see some buying interest come in because of it. Only time will tell if its enough buying pressure to drive prices up more. I’ve been operating trend systems for decision-making for over two decades and I don’t know of any money manager who actually trades off a 200-day moving average signal, except one. I’m going to save it for another observation, but until then, I’ll simply share this.

The S&P Trend Allocator Index is designed to track the performance of a systematic trend-following strategy allocating between the S&P 500 and cash, based on price trends. If the S&P 500 is observed to be in a positive trend, then the index is allocated to the S&P 500, otherwise, it is allocated to cash.

Here is the S&P Trend Allocator Index relative to the S&P 500 stock index which is fully invested, all the time.

 Oops.

Prior to the waterfall decline, the S&P 500 was trending 11% higher than its 200 day moving average. So, it was going to have at least a -11% drawdown with perfect execution. That’s a nice thing about it. It’s a predefined exit, so at the February high, you knew if the stock market falls, you’ll lose at least -11% before you exit. When we know our defined risk, we can decide to accept it, or not. If you were trading off the 200 SMA and believed a -11% drawdown was unacceptable, you could have raised your stop above it.

But then, if you sold earlier, how would you know when to get back in?

Ok, I just wanted to drive home the point: tactical trading decisions aren’t easy. No indicator works perfectly.

I don’t use the 200 SMA, but the S&P Trend Allocator index does. However, you may notice it didn’t sell at the price trend break below the 200 SMA. Instead, it sold later, and down much more. The S&P Trend Allocator Index sold later because it waits until five days after a crossover to sell. I marked on the chart the point on the price trend it actually sold.

S&P Trend Allocator Index Construction

“At the close of each business day, a trend signal is calculated based on the closing value of the S&P 500 Total Return Index (the “Allocation Indicator Index”) compared to its prior 200-day Simple Moving Average (SMA). The SMA is defined as the average of the last 200 closing values of the S&P 500 Total Return index. The trend signal is positive if the last five consecutive closing values of the S&P 500 Total Return index are equal to or greater than the SMA. The trend is negative if the last five consecutive closing index values are below the SMA. The trend signal does not change from its current status until there have been five consecutive days of index values indicating a signal change.”

I’m not going to get any deeper on this right now, but I will in a later observation, but the drawdown in the S&P Trend Allocator Index was about -27%.

Keep in mind; an index does not include any transaction cost or fees and may not be invested indirectly. If we were applying this trend following method with real money, there would have been transition costs, fund fees, advisory fees, and slippage to account for which would have negatively impacted the return profile. With that said…

Should we care that the S&P 500 is above its 200-day simple moving average?

Since the index was operated in real-time, above is the total return relative to its S&P 500 stock index which is fully invested in stocks all the time.

Here is the drawdowns for a complete picture of its risk-reward profile.

As you see, the S&P Trend Allocator applying the 200-day moving average to the S&P 500 had a drawdown of -27% vs. the -34% drawdown of the S&P 500.

So, the risk management method of the S&P Trend Allocator provided a drawdown control edge of about 7% relative to the fully invested stock index that is exposed to the risk and reward of the stocks all the time.

However, the total return is materially less at this point. Although the S&P Trend Allocator 200 day SMA exit signal exits with a lag and then reenters with a lag, it has participated in most of the stock market drawdowns and then misses out on the early part of its gains off the lows when the rate of change is highest.

It will take a larger downtrend for the 200 day SMA to show its value. The magnitude of the March decline was tremendous, but it happened so fast the lag was exposed as a risk to the strategy.

Now, just imagine how the risk/reward profile will be impacted if it enters the stock market right now, and then the market trends down again. This is one of the risks to be aware of with any trend-following or tactical trading system or method.

No investment strategy is ever perfect, but we gain an edge when we are aware of their weaknesses. I have spent more time trying to break my systems and methods to discover weaknesses than I did creating them.

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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 contractions are eventually followed by volatility expansions

The CBOE Volatility Index (VIX) estimates expected volatility by aggregating the weighted prices of S&P 500 Index (SPX) puts and calls over a wide range of strike prices. Specifically, the prices used to calculate VIX Index values are midpoints of real-time SPX option bid/ask price quotations.

CBOE Volatility Index (VIX) has averaged 33 this year with a low of 12 and high of 83.69, the highest implied volatility has ever been.

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The VIX futures curve is in contango about 80% of the time and normally goes into backwardation in stressed markets.

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VIX is a gauge of expected future volatility and VVIX is the vol of VIX. Both suggest a lower future vol. We’ll see.

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The VVIX is drifting down relative to VIX the past five days.

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Forecasts of volatility for stocks are valuable for investors as a measure of traders’ uncertainty about a stock or index price. With VIX we can quickly gauge the future expectation for volatility priced by options. If it’s a “fear gauge”, it’s indicating less fear.

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The CBOE Index Put/Call Ratio is back to its long term average. I believe index options are mostly traded by fund managers for hedging.

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The CBOE Index Put/Call Ratio is just under its one year average. It was about 0.70 before the March waterfall decline.

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CBOE Equity Put/Call Ratio is trending toward the low level was saw before the waterfall decline in March. A falling put-call ratio, or a ratio less than 1, means that traders are buying fewer puts than calls. It suggests that bullish sentiment is building in the market.

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CBOE Equity Put/Call Ratio drifting down to 0.50 may be an early warning sign the market is becoming complacent.

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Since I believe index options are mostly used by money managers for hedging, I consider its level around average to be normal. But I believe equity options are traded more by speculators, so it may be the earlier gauge of a shift in sentiment.

I was talking volatility trading with someone recently when it occurred to me I was learning Lotus 1-2-3 for advanced accounting in the 90s when I first started exploring volatility and VIX indexes. So, I’ve been observing the volatility profile a long time.

I wouldn’t be surprised to see another volatility expansion before we see implied volatility back down dow 20 or lower.

Another useful way I like to illustrate the volatility contractions and expansions to clients is a volatility channel. In the chart I used two standard deviations from the 20 day moving average around the S&P 500 price trend to show an upside breakout known as Bollinger Bands. The chart below is is the width of the bands, which is a good illustration of the volatility expansion and contraction the past two months.

Periods of volatility contractions are eventually followed by volatility expansions.

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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.

The big picture of the stock market in context

It’s essential to make observations about the big picture to see what is going on, since the longer trends eventually have an impact on shorter trends.

Before March, the US economy was in the longest economic expansion on record. It was aged, to say the least. I pointed out several times the past year unemployment was at an all time historic low at 3% or so.

Now it’s 14.7%.

The stock market was in the longest bull market, ever. An uptrend in stocks is usually around 4-5 years before being interrupted by a -20% bear market decline.

This time it was 11 years.

Before March, I had been pointing out the S&P 500 was the second highest valuation going back over 140 years, according to Shiller.

The S&P 500 Shiller CAPE Ratio, also known as the Cyclically Adjusted Price-Earnings ratio, is defined as the ratio the the S&P 500’s current price divided by the 10-year moving average of inflation-adjusted earnings. The metric was invented by American economist Robert Shiller and has become a popular way to understand long-term stock market valuations. It is used as a valuation metric to forecast future returns, where a higher CAPE ratio could reflect lower returns over the next couple of decades, whereas a lower CAPE ratio could reflect higher returns over the next couple of decades, as the ratio reverts back to the mean.

Even after the S&P 500 stock index declined -34%, the S&P 500 Shiller CAPE Ratio is at a current level of 25.88, down from its 33.31 high in January 2018, but far from an undervalued level. In fact, it has so far just reverted to its 10 year average.

Long term bull markets have historically started at low levels, like 10. Bull markets historically end at high valuation levels, such as around 20. It’s far from a science and not a good market timing indicator. But, it helps us to understand the big picture risks/rewards. From a high starting point, we shouldn’t expect to see high capital gains from passive indexing.

Here is S&P 500 Shiller CAPE Ratio going back before 1900 to put it into context.

Even though the price to earnings ratio has fallen as the price fell, it isn’t anywhere near what we consider undervalued.

So, it is what it is.

If this is the early stage of a bigger bear market, it has plenty of room to fall before become “undervalued” and this may explain why

On Twitter today was some concern about the famous value investor Warren Buffett isn’t buying stocks. Instead, he’s selling stocks.

“Is it meaningful that Buffett has $137 billion in cash and $40 billion yearly in cash flows to deploy in Berkshire $BRK.B and he’s worried it might not be enough?”

Buffett is famous for buying stocks when others are panicking. But, he isn’t, et. The simple answer is the stock market in general remains at 25 times earnings by the Shiller measure, and it reached the lower teens in March 2009 and single digits before that before another secular bull market occurred.

Prices have to reach a low enough level to attract buying demand. As of now, we’re seeing it happened in March, considering the gains since the March 23rd low.

But, it looks like prices may have to fall a lot more before big value investors like Buffett get more invested.

An investment manager like me has much more flexibility. I’m far more quick and nimble, so I can make tactical decisions and then change my mind with liquidity.

If no buyers are willing and able to enthusiastically buy the stocks and bonds we’re selling, especially because we have to much of it, then;

oops.

Semper Gumby.

Always Flexible.

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.