What could go wrong

Investors, including millionaires and fund managers, are really bullish.

According to E-Trade Financial:

“In Q4 of last year, even as stocks gained, millionaires were cautious and possibly worried about a repeat of the plunge in the fourth quarter of 2018. Now 76% of these wealthy investors grade the U.S. economy highly, and there has been a 16% increase in investors who expect the market to rise by as much as 5% this quarter, according to an E-Trade Financial quarterly survey provided exclusively to CNBC.”

Then, Bank of America Merrill Lynch’s regular survey of global fund managers:

“The FOMO — fear of missing out — market did not come out of nowhere.

Last November, Bank of America Merrill Lynch’s regular survey of global fund managers found that global fund managers’ cash levels posted their largest decline since President Donald Trump’s 2016 election as investors rushed to take on risk.”

After reading that, I thought: With everyone so bullish, what could go wrong? 

Place tongue in cheek image here.

Following up with my reaction over the weekend to Barron’s cover in Now, THIS is what a stock market top looks like!, I finally got around to reading the article “Ready or Not, Here Comes Dow 30,000.”

Barron’s said:

“Investors are responding to a set of conditions- low interest rates, muted inflation, and massive cash returns from U.S. companies – that make putting money into stocks the rational thing they can do.”

So, the reach for yield drives the stock market because:

“Some 80% of companies in the index cash-return yields higher than treasuries.”

Below I compare the S&P 500 stock index ETF dividend yield to the 10 year Treasury rate. By this measure, the 10 year is 1.84%, which is 0.14% more than the SPY.

10 year treasury yield compared to S&P stock index yield

However, since the Treasury yield curve is relatively flat, the one-month Treasury is 1.54%, so there isn’t much of a spread or premium between the interest rate earned for just one month over 10 years.

10 year treasury yield compared to S&P stock index yield

Moving on to “What Can Go Wrong” they say rising bond yields are a risk to equities.

Of course, rising prices (inflation) is a driver of rising bond yields.

So, inflation may be the driver of a longer-term downtrend in stocks if these markets interact this way.

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. So far, the FED has been successful ‘on average’, but there have been some uptrends in inflation.

US INFLATION RATE DRIVES BOND YIELD PRICE

Next, I added the high and low inflation rate since 2012 and highlight above 2% in yellow. 

inflation rate drives bond yield price high low

By and large, inflation cycles within a range. With the current inflation rate at 2.29%, which is a little higher than the Fed 2% target, I suppose global macro traders should pay attention to the trend and rate of change of inflation. 

What could go wrong?

There are always many things that can cause a market to fall. We’ve got a U.S. Presidential election this year, an impeachment, now

A quick glance at headlines shows:

BREAKING NEWS

CDC expected to announce first US case of deadly Wuhan coronavirus

Changes to impeachment rules

So, there are always many things that could go wrong and be regarded as a catalyst for falling prices, but I focus on the direction of the price trend, momentum, volatility, and sentiment as my guide.

The direction of the price trend is always the final arbiter.

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 in Florida, Tennessee, and Texas 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.

 

Now, THIS is what a stock market top looks like!

Stock Market Risk is Elevated

I walked out the front door this morning with a cup of coffee to take the pup out and pick up my weekly Barron’s in the driveway.

When I got inside, I opened it up and BEHOLD! 

Barrons cover signal indicator

Gracing the cover of Barron’s is:

“Dow 30,000 THE MARKET’S BIG RUN: Why stocks could vault past the milestone”

I haven’t read the article, as the cover is signal enough for me.

The Magazine cover indicator says that the cover story on the major business magazines is often a contrary indicator.

I’m sure they made a great case for higher stock prices.

The trend is your friend until it ends.

Markets can remain irrational longer than you expect, but there are times when markets overreact and the probability of a trend reversal becomes more and more likely.

This looks like one of those times.

I searched for other headlines:

Dow 30,000 Barron's

I found a few.

barron's dow 30,000 melt up won't stop

And as a friend on Twitter pointed out, it’s way ahead of schedule. In 2017 Barron’s said :

“Next Stop Dow 30,000” and followed with “the Dow could surpass 30,000 by the year 2025.”

dow 30,000 2017 barron's call

So far, Barron’s was right on that prediction. Below is the Dow price trend since the cover in 2017. But, consider the Dow is near 30,000 five years earlier than expected. 

dow performance barron's 2017 30,000 call to 2020

Notwithstanding the Dow is only about 2% from 30,000, the articles are calling for more uptrend. Sure, it’s possible this calm uptrend will continue to drift up without a volatility expansion, but it’s become much less likely as I see it.

I love me some good quiet uptrends, but all good things eventually come to an end.

In the case of equity market trends, these calm uptrends usually end when the majority least expect it.

That seems to be the case now.

Right now, the Dow Jones Industrial Average is signaling the higher likelihood of a volatility expansion. I say this because the Dow price trend has drifted above its average true range volatility channel and the Bollinger Band® lines plotted two standard deviations away from a 20-day simple moving average. These volatility measures visually illustrate volatility expansions and contractions and signal when a price trend moves outside it’s “normal” range. I call it “the normal noise of the market.” Periods of low volatility are often followed by volatility expansions.

dow 30,000 trend

My observations this week seem especially important because risk levels have become more elevated, yet individual investor sentiment is extremely optimistic.

As I’ve had very high exposure to stocks, I have now taken profits in our managed portfolios.

It’s a good time to evaluate portfolio risk levels for exposure to the possibility of loss and determine if you are comfortable with it. 

For more information on my observations that risk is becoming elevated, read:

You probably want to invest in stocks

Investor sentiment is dialed up with stock trends

Is gold a good buy right now?

What’s the stock market going to do next?

Questions, comments, need help? email me 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 in Florida, Tennessee, and Texas 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 the stock market going to do next?

Last week, I ended “You probably want to invest in stocks” with: Is it a good time to buy stocks? That’s my next observation as I’ll share the big picture.

As promised, here is my observation and insight on the big picture as well as the short term possibilities.

THE BIG PICTURE 

First, I start with the big picture.

The S&P 500 is trading at 31.8 x earnings per share according to the Shiller PE Ratio which is the second-highest valuation level it has been in 150 years. Only in 1999 did the stock index trade at a higher multiple times earnings.

Shiller PE ratio for the S&P 500

This price-earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10.

What is the P/E 10 and how is it calculated?

  1. Look at the yearly earning of the S&P 500 for each of the past ten years.
  2. Adjust these earnings for inflation, using the CPI (ie: quote each earnings figure in 2020 dollars)
  3. Average these values (ie: add them up and divide by ten), giving us e10.
  4. Then take the current Price of the S&P 500 and divide by e10.

The bottom line is, the stock market valuation has been expensive for a while now. The only time I factor in the price-earnings ratio is in the big picture. Although it isn’t a good timing indicator, it is considered a measure of the margin of safety for many investors and at this elevated level, there is no margin of safety by this measure.

As such, risk seems high in the big picture, which suggests investors should access their exposure to the possibility of loss in stocks and stock funds to be prepared for a trend reversal.

WHY MANAGE THE POSSIBILITY OF LOSS? WHY NOW?

That’s about as far as I go with “fundamental valuation” as quantitatively, I know to focus more on the direction of trends, momentum, and volatility.

So, let’s take a look.

STOCK MARKET MOMENTUM SEEMS STRETCHED.

I love me some up trends and momentum, but… sometimes all the gains come in a short period… and that’s what we’ve seen the past three months.

SPX SPY TREND AVERAGE LEVEL PAST YEAR

Just for fun, I included the average level of the S&P 500 (SPX) in the chart to show what level would be “mean reversion” if it happened. I don’t expect it to drop the low, but it’s interesting to see, nevertheless.

Next, I include the relative strength of SPX which measures the velocity of the price trend recently.

S&P relative strength momentum asymmetic returns

I highlighted the upper area red because when relative strength is really high, it often results in a price decline. Think of it as a “too far, too fast” indicator, but like all signals, it’s imperfect.

I highlighted the lower level as green because when prices fall so far, so fast that its relative strength is this low, the trend eventually reverses back up. It’s a measure of selling exhaustion.

Looking at the same data, but from a different angle, here you can see the correlation between the higher and lower relative strength levels and what happened next with the price trend.

SPX SPY RSI RELATIVE STRENGTH

In observing relative strength daily for over two decades now, in my observations, this level of relative strength suggests this is in the high-risk zone.

But, quantitative analysis of price trends is best observed through different confirming indicators.

THE WEIGHT OF THE EVIDENCE 

For the sake of brevity, I’ll skip too much of a detailed definition, but the percent of S&P 500 stocks trading above their 200 day moving average is a measure of market breadth. Market breadth shows us what percent of stocks are participating in the trend. Right now, 87% of the S&P 500 stocks are trading in longer-term uptrends as defined by the 200-day moving average.

percent of stocks above 200 day moving average SPX SPY

The high participation in the trend is a good thing until it reaches higher levels and extremes, then I start wondering where the next buying enthusiasm is going to come from. I start looking for the buying pressure to dry up. The red line I drew marks the three peak levels over the past year for reference.

In case you are wondering, here is how high the current level is relative to the past fifteen years.

investment trading offense and defense risk management

It’s up there.

I analyze markets as to the direction of the trends, momentum, volaltity and investor sentiment.

VOLATILITY LEVEL AND DIRECTION 

When it comes to volatility, I look at both the direction and rate of change in volatility, but also the level. I also split volatility into two completely different parts: implied (expected) volatility and realized (historical) volatility.

Starting with implied volatility, the VIX is extremely low again at 12.19. As we see in this long term chart, volatility cycles up and down over time, but it doesn’t really “revert to the mean.” To illustrate it, I included the long term average of 19.

VIX $VIX LONG TERM AVERAGE OF THE VIX

The bottom line is, implied volatility, which is the expected volatility as implied by options prices shows a very low expected range of prices over the next 30 days. That’s positive until it isn’t.

At such low levels in implied volatility, we should expect to see another volatility expansion.

Next is the historical volatility on the S&P 500 index, which is the 30 Day Rolling Volatility. Here we calculate 30 Day Rolling Volatility as Standard Deviation of the last 30 percentage changes in Total Return Price * Square-root of 252 then multiplying the standard deviation by the square root of 252 to return an annualized measure. 252 is the number of trading days in a year.

I’m sure you needed to hear that. I won’t do it again.

S&P 500 spx spy historical realized volatility expansion

I drew a red line over its history to highlight the current level. Historically, it’s on the low end. Volatility is commonly used as a measure of a security’s riskiness. Typically investors view a high volatility as high risk.

However, the opposite is true.

Volatility decreases over time as price trends up and by the time the price peaks, investors so confident the trend will continue they become very complacent. When volatility is extremely low as it is now, it’s when the risk of a price decline increases.

The opposite is also true. When volatile expands to a high level, it does so because prices have fallen and investors are indecisive, causing the range of stock prices to spread out. Prices spreading out is volatility and we see it spike at stock market lows.

What’s going to happen next?

The trend is up, it’s a quiet uptrend as volatility is contracting, and most stocks are trending up.

Everything is good until it isn’t.

KNOW YOUR RISK LEVEL AND RISK TOLERANCE. 

Everything is impermanent, nothing lasts forever, so this too shall pass and by my measures, it’s getting closer.

So, I implemented my drawdown control and took profits on stocks today.

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.

You probably want to invest in stocks

You probably want to invest in stocks right now, I bet.

If you are already invested in stocks, you probably want to be more aggressive in investing in stocks. Maybe it’s selling bonds to buy more stocks, or investing that extra cash, or something really aggressive like adding leverage or buying more risky stocks.

I believe this because investor sentiment is dialed up and 2020 started out about as enthusiastic as it gets. Well, and we’re getting calls from people wanting to invest.

fear greed index

The Fear & Greed Index is driven by seven different investor sentiment indicators. If you’re an investor, I encourage you to use it as a gauge for your own enthusiasm and panic.  When you feel one way or another about the future direction of the stock market, check the indicator to see what emotion is driving the stock market now.

Avoiding costly mistakes is essential in money management, so if we can help you avoid buying too high and then tapping out at the lows, that’s an edge. That’s the behavioral counseling we do; investor behavior modification. It’s one of the main observations I share here. If nothing else, I hope I can help you avoid making costly emotional decisions as many investors do.

The Options Speculation Index measures speculative call buying as a % of total option activity. Right now, it shows the options market bought to open 21.6 million speculative call options, the most ever, according to SentimentTrader. The previous record was 19.7 million during the week of Jan 26, 2018. The total bullish/bearish volume was the most since March 2000. This is extreme.

options speculation index

Investors sentiment trend to follow price trends, so investors or trend followers.

After prices trend up, investors get more bullish, expecting the gains to continue.

After prices trend down, investors get more bearish, expecting the losses to continue.

So, it isn’t a surprise to see this level of enthusiasm, considering the stock index is at an all-time high.

stocks stock market at all time high

The AAII Investor Sentiment Survey is a another gauge that offers insight into the mood of individual investors. Each week, AAII asks its members a simple question: Do they feel the direction of the stock market over the next six months will be up (bullish), no change (neutral) or down (bearish)? They refer to this question as the AAII Sentiment Survey. Since they started polling members in 1987, our survey has provided insight into the moods of individual investors.

aaii investor sentiment

Pessimism among individual investors about the short-term direction of the stock market is at a six-week high. The latest AAII Sentiment Survey also shows lower levels of bullish and neutral sentiment. Below is a chart I drew of the % Bearish sentiment from the survey with a line marketing its long-time average. Investors are not bearish, as the level is at its long term average. So, this gauge doesn’t match the Extreme Greed of the Fear & Greed Index. 

US Investor Sentiment, % BEARISH

The % Bullish is actually below average by this measure. Bullish sentiment, expectations that stock prices will rise over the next six months, fell 4.1 percentage points to 33.1%. The historical average is 38.0%. Optimism has been below this average during 41 out of the last 52 weeks.

US Investor Sentiment % Bullish

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 3.9 percentage points to 37.0%. Even with the drop, neutral sentiment is the expectation that is above its average of 31.5% for the 33rd time in 34 weeks.

 

investor sentiment for trading

AAII guesses:

The killing of Iranian general Qasem Soleimani likely influenced this week’s results. Several respondents brought up the conflict with Iran and tensions in the Middle East. Also affecting sentiment are the trade agreement between the U.S. and China, Washington politics, earnings growth, the economy, valuations and the stock market’s recent record highs.

This week’s special question asked AAII members: what you think will most influence the direction of stock prices in 2020?

Approximately 39% of respondents believe that geopolitical events will have the most influence on stock prices in 2020.

Individual investors have a lot of opinions based on news:

Unsurprisingly, the ongoing conflicts with Iran and China are named specifically. Domestic politics are also named by many respondents, with 26% stating that the outcome of the November elections will most likely influence the market. Additionally, 18% of respondents from this survey believe that earnings performance will sway the stock market and 17% say that the Federal Reserve’s policy and a low-interest-rate environment will have the biggest influence on how the stock market will move in 2020.”

Here is a sampling of the responses:

“The economy and earnings. And maybe an end to some of the trade wars.”

“The Fed will need to continue to lower rates and will probably need to continue its easing to maintain liquidity in overnight lending.”

“Strong business cycle in the U.S. and better trade agreements with China.”

“Earnings versus forecasts.”

“Conflict in the Persian Gulf and the 2020 election will increase uncertainty.”

In my opinion, these individual investors focus on the wrong things. The direction, momentum, and volatility of the price trend are all the matters. The direction of the price trend is the final arbiter. 

Is the AAII Sentiment Survey a Contrarian Indicator?

To learn more about the survey and the opinion of Charles Rotblut, who is vice president at AAII and editor of the AAII Journal on the matter, read the article by the same name: Is the AAII Sentiment Survey a Contrarian Indicator? 

Here are his conclusions in sentiment insights and as its role as a potential contrarian indicator for market direction.

“As the data shows, extraordinarily low levels of optimism have consistently preceded larger-than-average six- and 12-month gains in the S&P 500.”

It goes on to add:

“Sentiment is not a flawless contrarian indicator, however. Though unusual, bullish and bearish sentiment readings above or below one standard deviation from their historical average have a mixed record of signaling market direction. Extraordinarily high bullish sentiment and extraordinarily low bearish sentiment (two standard deviations away from the average) have generally worked well, with the exception of two notable periods.”

“It will be many years before we know whether the periods of 2003–2004 and November 2007–February 2009 were mere blemishes on the survey’s record as a contrarian indicator or a sign that both optimism and pessimism can remain at high levels for an extended period of time. I tend to think the latter will be the case, given long-term market history.”

Two important conclusions:

The failure of sentiment to work perfectly highlights two important points. Though correlations between sentiment levels and market direction have appeared in the past, the AAII Sentiment Survey does not predict future market direction. Overly optimistic and pessimistic investor attitudes are characteristics of market tops and bottoms, but they do not cause stock prices to change direction. Rather, it is changes in expectations of future earnings and economic and valuation trends that move stock prices. The timing of such changes has proven to be difficult to predict with accuracy.

This leads to my second concluding point: Never rely on a single indicator when forecasting market direction. Rather, consider a variety of factors—including prevailing valuations, economic data, Federal Reserve policy, government policies and other prevailing macro trends—and allow for a large margin of error in your forecast.:

As the saying attributed to John Maynard Keynes goes, “the market can stay irrational longer than you can stay solvent.”

As many studies like Dalbar show; individual investors have difficulty achieving good results over the long term, so they must be focused and doing the wrong things.

“Since 1994, DALBAR’s Quantitative Analysis of Investor Behavior (QAIB) has measured the effects of investor decisions to buy, sell and switch into and out of mutual funds over short and long-term timeframes. These effects are measured from the perspective of the investor and do not represent the performance of the investments themselves. The results consistently show that the average investor earns less – in many cases, much less – than mutual fund performance reports would suggest.”

None of the global macro news items they listed can possibly be predicted, so it is futile. So, if investors using this type of information for investment decision making, you can probably see how they may end up “switching in and out of mutual funds” at the wrong time.

By focusing on the price trend and its statistical possibilities and actively managing risk and drawdown, I believe we stack the odds in our favor by focusing our resources on the few things we can control.

Is it a good time to buy stocks? That’s my next observation as I’ll share the big picture.

Got questions? need help? Send me an email here.



Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data 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.

How will the conflict with Iran impact global equity markets?

On December 30th someone tweeted the headline:

IRAN WARNS U.S. ITS MIDDLE EAST DOMINANCE IS OVER AFTER NAVAL DRILLS WITH RUSSIA, CHINA

I replied and shared the link to the Newsweek article about the threat from Iran:

According to the NPR timeline of Iran events, it started a few days sooner.

Friday, Dec. 27: Attack near Kirkuk

Militia group Kataib Hezbollah attacks the K1 military base near the Iraqi city of Kirkuk with rockets, killing an American contractor and wounding several American and Iraqi personnel. Kataib Hezbollah has ties to Iran. It has denied orchestrating the attack.

In response:

Sunday, Dec. 29: Trump orders some airstrikes

Tuesday, Dec. 31: Embassy compound stormed

On Tuesday morning, Iraqi supporters of Kataib Hezbollah begin storming the U.S. embassy in Baghdad. The violence escalates, with militia members attempting to enter the embassy, starting fires and damaging the outside and a reception area of the embassy.

The conflict in Iran escalates:

Thursday, Jan. 2: Esper’s warning; Soleimani killed

Esper gives a statement emphasizing that the U.S. “will not accept continued attacks against our personnel & forces in the region.” He also sends a message to U.S. allies to “stand together” against Iran.

U.S. Marines are deployed:

Thousands of Marines Head to Middle East on Navy Ship as Iran Pledges Retaliation

A Navy amphibious assault ship with thousands of Marines on board will skip a planned training exercise in Africa to instead head toward the Middle East as tensions there spike.

Now, infantry from the U.S. Army:

750 soldiers with 82nd Airborne headed for CENTCOM, additional 4,000 troops expected to deploy as Iran tensions mount“At the direction of the Commander in Chief, I have authorized the deployment of an infantry battalion from the Immediate Response Force (IRF) of the 82nd Airborne Division to the U.S. Central Command area of operations in response to recent events in Iraq,” Secretary of Defense Mark Esper said Tuesday evening in a written statement.

Just like that, we go from a relatively peaceful time to what may become another war in the middle east if Iran doesn’t stand down.For some of us, these things hit closer to home when we know those being deployed. But, you don’t sign up to be a U.S. Marine or Army Ranger expecting to get through your tour without deployment and the possibility of combat. As Americans, we are fortunate for our Sheepdogs yearning for a righteous battle: On Sheep, Wolves and Sheepdogs.

How will the conflict with Iran impact U.S. and global equity markets?

I don’t know.

Neither does anyone else.

But I do have an idea, and it’s pretty obvious it isn’t positive news, though we never know for sure how the world markets will react to any news.

Although I am regarded as a “global macro” investment manager, I don’t focus so much on the “macro” as in “macroeconomics” as I do the direction of price trends and their volatility.

Economic indicators, as well as fundamental evaluations, have the potential to be very wrong and stay wrong. If you believe ABC stock is cheap at $50, you really believe it cheap as it falls -50% to $25 and then what if it drops to $5? Not my cup of tea.

That dog don’t hunt.

I focus instead on directional price trends.

The concept is very simple:

  • If I’m long an asset that is trending up, it’s good.
  • If I’m out of assets that are trending down, it’s good.
  • Or, if I’m short assets that are trending down with the potential to earn a profit from the downtrend, it’s good.

It’s easier said than done, so it isn’t so simple to operate. For example, what time frame is a trend? Why one time frame over another? It all has to be quantified to determine what is most robust.

And you know what? that changes, too.

It’s not as simple as running a backtest to determine the best signals, parameters, and time frame to apply them to and then expecting the future will be just like the past. Past performance doesn’t always indicate future results. So, this requires work. It also requires me to keep it real.

I’ve been pointing out for a few weeks that a volatility expansion seems imminent. Since I first observed it, the S&P 500 index had a minor decline of 2-4% before continuing its uptrend. The U.S. equity market has been bullish. But, here we are again. The price trend has drifted above its average true range channel. A price trending above its average true range is positive, but when it stays above it, it can also result in mean reversion. That is, the price may drift back toward the middle of the volatility channel like it did early December.

spx spy ATR volatilty expansion asymmetric

So, on a short term basis, the stock indexes have had a nice uptrend since October with low volatility, so we shouldn’t be surprised to see it reverse to a short term downtrend and a volatility expansion.

For those who were looking for a “catalyst” to drive a volatility expansion, now they have it.

We don’t know what’s going to happen next in Iran, but what I do know is exactly how I’ll respond to changing price trends.

I predetermine my exits in advance to cut losses short.

I predefined my risk and know how much risk exposure I have at any time.

Since I do this for all of my positions, I know how much risk I have accepted in each individual position, but I also know how much portfolio risk I have for drawdown control.

As a simple example, if I had 15 positions across global markets and each of them has their own individual exit points where I would sell to reduce exposure, then I can use the summation of that risk at the portfolio level to predetermine a drawdown limit. Of course, any hedging positions such as a short S&P position, reduce the portfolio risk of the longs, too. And, not all of these global positions are necessarily driven by the same return drivers, so they may not all be correlated. So, they may not all trend up or down together. For example, when the S&P 500 stock index has had a down day of -1% or more the past fifteen years, the Long Term U.S. Treasury has gained an average of 0.80% on the same day. An even more asymmetric example is on the same day the stock index fell -1% or more, the long volatility index-based ETFs may have gained 5% to 15% on the same day.

It’s times like this when my process and systems become more obviously necessary.

For everyone else, there’s buy and hold with no limit to their downside loss.

That dog don’t hunt, for me. 

Let’s hope for peace in the middle east, but if they don’t want peace, Godspeed to our Troops as they enter and embrace the unknowable. 

Semper Fidelis.

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

“Those who forget the past are doomed to repeat it”

One of the advantages of writing observations in real-time is the ability to go back and read them with perfect hindsight.

We know that global asset allocations of varying mixes of stocks and bonds have had a strong year in 2019.

global tactical asset allocation performance 2019 asymmetric return

Most of the gains were achieved in the first four months. Here are the return streams through May 1, 2019, for different targeted allocations.

Since May 1st, global asset allocation portfolios experienced much more volatility and less capital gain.

How did such a great year for stocks and bonds begin?

At the end of a year like this, I like to reflect on this time a year ago, especially since the market state is so radically different between now and then.

If we want to learn from the past and our experiences, it’s essential to revisit things from time to time.

A year ago, we celebrated Christmas with a stunning waterfall decline in stocks.

Today, we’ve enjoyed an equally stunning guiser in gains.

So, what has changed?

To gain an understanding, here is what I’m reading into the new year.

December 17, 2019:

What’s going to happen next for the stock market?

December 20, 2019:

The stock market has reached a short-term extreme as investor sentiment indicates fear

December 23, 2019:

An exhaustive analysis of the U.S. stock market

December 24, 2019:

An exhaustive stock market analysis… continued

January 1, 2019:

Investor Sentiment into the New Year 2019

If you read all of them, you’ll be surprised how much you learn about market trends,  behavior, volatility, and internals.

MERRY CHRISTMAS!

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

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

 

 

 

 

 

Reminiscences of a December to remember

What a difference a year makes.

A year ago, global equity markets were in a waterfall decline that started in October 2018.

The S&P 500 stock index declined by nearly -20% and the MSCI ACWI Index fell -18%. The MSCI ACWI Index is MSCI’s flagship global equity index is designed to represent the performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 26 emerging markets.

A financial advisor I know said:

“This is the worst Christmas of my life!”

I think he was serious.

After a euphoric period for stocks in 2017, it shouldn’t have been such a surprise if we are prepared for the trend to swing the other way, as it does.

I’m not sure of professionals in other industries experience the same level of trauma as a financial advisor. Most of my clients are Physicians and owners of companies, and as much as I know about their work, I can’t think of a similar scenario for facing a shock. It’s like a Physician or Dentist having all their patients really sick at the same time. So, I get it. In fact, it’s why we do what we do with active risk management and investor behavior modification.

The good news is, the markets didn’t get any sicker. Instead, Christmas Eve was the low, which, of course, we only know for sure in hindsight. But, as I shared on this date late year in “An exhaustive analysis of the U.S. stock market” the probably was in favor of reversal back up was high, so a year ago today was an asymmetric risk-reward setup and I traded it accordingly.

Investment management is probabilistic, never a sure thing. 

Asymmetric risk-reward is the probability of the payoff vs. a loss, but more importantly the size of the potential payoff relative to the possibility of loss. For example, if we believe there is a 70% chance of a downtrend in a stock index that’s an asymmetric probably, but only an asymmetric payoff if the magnitude of the fall is greater than the magnitude of a possible gain. If we believe there is a 70% chance of a -5% decline, but a 30% chance of a +20% gain, the asymmetry is -3.5% on the downside and +6% on the upside, for a positive 2.5% expectation. Even though the upside was less probable, the expected payoff made it the better bet.

A year ago today, I shared this observation:

The bottom line is the stock market could certainly be entering another big bear market. It’s long overdue as this bull is very aged and overvalued. Even if it is, it will include swings up and down along the way. That’s the challenge for all strategies that trade or invest in stocks. For buy and hold investors, it’s a challenge as stocks swing up and down and they have full exposure all the time and unlimited downside risk. For tactical traders, the swings are a challenge as we increase and decrease our exposure to risk and reward and none of our methods are perfect. The key, for me, in dealing with it is to hold the lowest risk, highest potential reward exposure. Barring we don’t see some waterfall decline, most of the market is at a point we should see a countertrend move up at least temporarily. If prices keep trending down, I’m guessing the upswing that does come will be just as sharp.

After prices have fallen, I start looking for signs of a potential countertrend and it could come at any time.

Someday in the future, stock investors will be giddy again and completely forget about how they feel right now. But for now, the trend is down, but the sentiment and breadth are at such extremes we should be alert to see at least a short-term reversal in the days ahead.

The next day, on December 24, 2018, in “An exhaustive stock market analysis… continued” I shared:

After prices have declined, I look for indications that selling pressure may be getting more exhausted and driving prices to a low enough point to attract buying demand. That’s what it takes to reverse the trend.

I’ve been here before. I’ve executed through these hostile conditions as a tactical operator. The more hostile it gets, the more focused in the zone I get. After the stock market has already declined, I start looking for this kind of panic selling and extreme levels for a countertrend. We’re seeing those levels now. Sure, it could get worse, but we have reached a point that lower prices are more and more likely to result in a reversal back up.

Sure enough, those dates marked the low. Not because of the date or seasonality, but because of the stock market had gotten so washed out the selling pressure was exhausted. As I pointed out in the observations; those who wanted to sell had sold and eventually that panic selling dries up.

By May these indexes had recovered from their nearly -20% declines, so if you tapped out near the low, you missed out on the recovery.

It doesn’t always work out this way. All -50% bear markets begin with a -10%, -20%, and -30% decline that continues to swing up and down on the way to the final low. A year ago was the worst stock market drop in a decade, but it could have gotten worse. If it had, it would have likely rebounded to retrace some of the loss, then resumed the downtrend again. An example is January 2000 to March 2001, which was a -20% decline and only the beginning of a much deeper, longer, bear market.

Those of use who operated in the bear market from 2000 to 2003 know how it unfolded. In the next chart, I added the NASDAQ Composite since by 2000, most investors were largely in NASDAQ listed tech and internet stocks. For them, it was a bloodbath.

This is why I believe it’s essential to actively – manage- risk. Active risk management goes way beyond diversification and asset allocation to having predefined exits for every holding to stop the loss should it trend down and/or hedging.

Buy and hold indexes? Only if you have the stomach for it. You’d have to be willing to lose more after you’ve lost a lot, be very patient holding those losses and be able to afford the loss in capital to buy and hold indexes.

Here’s why:

After the S&P 500 peaked in late 1999 it didn’t see the same level for eight years. In April 2007 it finally recovered the loss. We can’t say the same for the NASDAQ. It was still down -41%.

In fact, the truth about buy and hold is this experience.

Oh, did I forget the dividends? The total return index isn’t much better; it’s -45% vs. -53% without dividends.

So, I’m not making light of a waterfall decline and certainly a year ago could have been the beginning of a much longer and deeper waterfall. Surely we’ll see one again someday in the future, so you had better know how to tactically shift and actively manage risk if you want to try to avoid it.

One more chart before I digress and get back to this past year. The NASDAQ was in a massive bear market for 15 years. It didn’t reach its 2000 level again until the end of 2015.

You can ask any stock investor you know who invested in the late 1990s if they didn’t hold mostly technology stocks by 2000. Here’s an image of the top 15 Nasdaq companies when the index peaked in 2000.

Top 15 Nasdaq companies when the index peaked in 2000

Many of these stocks don’t exist anymore.

Here is what Pensions & Investments wrote about it in 2015:

With the Nasdaq composite eclipsing 5,000 for the first time since March 2000, P&I took a look at the makeup of the index the last time it was over 5,000. According to Nasdaq, on the day the index peaked (March 10, 2000), the combined valuation for composite companies was about $6.6 trillion. At the opening Monday, the combined valuation of firms was $7.6 trillion.

Among the largest 15 companies in the index back in 2000, only four remain in the top 15 today: Microsoft, Cisco, Intel and Qualcomm.

Over the entire 781-week period, only Qualcomm and Microsoft stocks had positive returns — up 1.54% and 1.34% annually, respectively. Cisco’s stock had a cumulative return of -52.5% (-4.8% annually) and Intel was down 24.63% (-1.9% annually).

The composition of the Nasdaq Composite index has changed dramatically. In 2000, technology companies dominated its makeup by number of companies (64.9%), compared to 43.22% today. In 2000, telecom firms were the second-largest (11.8%), but only account for 0.83% of the index today. Consumer services (20.9%) and health care (16.2%) are the second- and third-largest industries by number of firms in the index today.

The point is; markets are dynamic. No matter how incredible the innovation and the craze for it, or how bad the waterfall decline, these things do pass.

That’s where I believe we can have an edge.

We don’t have to participate all in, all the time.

And, even if we don’t fully participate in an uptrend, it may be worth it if we avoided the downtrend. The math is still in our favor as we don’t need to capture as much gain if we avoid some loss.

“Those who cannot learn from history are doomed to repeat it.” –George Santayana

When the stock market is trending up with low volatility this time of year as it is now, it’s a good time to reflect on the past when things are in the opposite state. Of course, that is after being prepared for a reversal of the trend. This time last year was an astonishing time by any measure because of the speed of the drop in stock prices.

Rather than rehash it, I suggest reading these as I am this week:

An exhaustive analysis of the U.S. stock market” and “An exhaustive stock market analysis… continued“.

I think you’ll be surprised at what you learn from such commentary written in real-time in the heat of the battle at a time like this when the markets are quietly trending into the new year.

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

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

 

Trump impeachment, Trump tweets, stock market trends, trend following, and volatility

When Donald Trump was elected the President of the United States the headlines read like this one from MarketWatch:

Dow futures plunge 750 points as Trump takes key battleground states

Stock markets are not handling Election Night well.

Futures for the Dow Jones Industrial Average plunged as Republican presidential nominee Donald Trump’s lead widened in the presidential race against Democratic rival Hillary Clinton.

And CNN:

Wall Street welcomes Trump with a bang – Business – CNN.com

Nov 9, 2016 – An overnight panic in global markets evaporated as Wall Street gave an … Trump’s election would bring about a plunge in the stock market. … “The selloff last night was an hysterical reaction,” 

Since then I’ve heard a lot of hedge fund type investment managers who operate investment strategies that include risk management, hedging, or trend following complain about the hostile conditions. Some of them blame it on algorithms, but it seems most of them blame it on Trump’s tweets. One trader recently said:

“Trump completely screwed me over these past two years by rocking the markets with constant vol spikes. Had we had a reasonable president, I probably would have made a lot more money.”

To that, I replied:

“Well, ya know, “everyone gets what they want from the market” and personal responsibly (respond-ability) is the foundation of good results. SPX has gained 58% with declining vol since the last election.”

stock market since trump election

Sure enough, after the “plunge” headlines that probably shocked a lot of individual investors out of the stock market who weren’t already out, the S&P 500 went on to deliver an even more surprising total return since then. I also pointed out volatility as measured by standard deviations has somewhat declined since then.

Who knew?

No one!

Who believed the stock index would gain so much over a period of geopolitical instability and vol spikes?

I don’t know anyone. Well, except those who buy and hold. Periods like this are favorable to those who buy and hold. That is if they can hold through the drawdowns, volatility, and news headlines, which ain’t easy. Don’t forget, that would be the same investors who held through a -56% loss in the S&P 500 that took many years to recover from. Most people can’t do it, because when they’re down -50% they don’t know if the losses are over or will get even worse.

It only takes once.

So, the essential element is knowing your risk tolerance.

Standard deviation, a measure of historical volatility has declined, but that trend doesn’t reflect what real people deal with; drawdowns in their account values. Below are drawdowns in the stock index since the 2016 election. The first year as abnormally quiet, and then we’ve observed two very sharp waterfall declines.

stock market volatility trump tweets

My trader friend goes on to say:

“Yeah 2017 was phenomenal. This year, however, was absolute misery if you weren’t a buy-and-holder. Basically, any sort of “market goes up, quickly shocks down, then continues right back up again” just makes any sort of momentum/trend-follower system look like an idiot.”

To that I replied:

“It didn’t seem too bad to me. The S&P Trend Allocator index tracks the performance of a systematic trend strategy allocating between the S&P 500 and cash, based on price trends. If the SPX is observed to be in a positive trend, its allocated to the SPX therwise, it is allocated to cash.”

S&P trend following index

As seen in the chart, the S&P 500 recovered from the -20% loss at the end of last year and made an even higher gain. The blue line is the S&P Trend Allocation index, a trend following model applied to the S&P 500 stock index that exits when the index falls. This index cannot be invested in directly, but it shows us the results of the model. You can see it was in cash in January because of the big decline in late 2018. It finally got back in synch with the S&P 500 around March, but it “missed out” on the sharp recover over those first three months. This is the cost of active risk management with a trend following system. If you want to avoid big losses, this is the price you pay.

In the chart, I also included the S&P Target Risk Moderate Index, which is a global asset allocation of 60% stocks and 40% bonds. It was smoother in 2019, but the bonds, too, offset gains. So, for those who say “I’ll put most of my money in stocks, but not all of it” that’s about what it would have looked like. However, indexes don’t include fees and expenses.

Next, I expand the time frame back to about three years to the inception of the S&P Trend Allocator index to see it’s risk-reward. Yes, it achieved less total return and its trend following strategy exits a little late, resulting in missing some of the price trend recoveries, but in a major decline it would potentially pay off. 

S&P trend allocation etf portfolio

Here is a comparison of the downside drawdowns where we can see the red line trend model missed half of the drawdown late 2018. For that peace of mind, it didn’t capture all of the 2019 recovery.

S&P trend allocator trend following risk management drawdown

The S&P Trend Allocator index is a very simple trend-following model. Though I have similar systems, this isn’t what I do. My systems include many more parts, different parameters, and apply trend following and countertrend in an unconstrained way to a global opportunity set of markets.  To me, the issue with the S&P Trend Allocator index is its symmetrical trading system; it enters and exits with the same method. Mine are an asymmetrical trading system: entering the trend one way, exiting another. I believe trends waterfall down faster than they drift up, so my strategy is more focused on those beliefs. 

We’ve had a great year in 2019 in regard to risk-adjusted returns because I’ve been more focused on countertrend moves along with some trend following. I believe everyone gets what they want from the market. Most investors can’t tolerate large losses of 100% stocks all the time, so they need active risk management. If we miss those big down moves, we don’t have the asymmetry of losses working against us as we compound capital over the long-term.

If you make investment decisions based on elections and politics, you’re probably going to be surprised over and over.

If your investment strategy doesn’t account for volatility, no matter what causes it, you may be doing the wrong thing at the wrong time.

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

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

 

 

Stock market volatility, participation in the trend, REITs, and MLPs

The U.S. stock market as measured by the S&P 500 index reached reaches a new high, so volatility remains subdued. After prices trend up, investors become increasingly more confident and confident is reflected by a tight range in price. I saw this because the possible is also true; when investors and traders are indecisive, we see a more sideways volatile trend as the buying and selling pressure tries to decide in which direction to position capital. We observe this contracting volatility in the chart below. I colored the volatility band around the price based on an average true range to highlight its trend and range. The line on the top is the past 14-day average true range of the SPX showing historical volatility remains very low.

spx spy trading trend following

For a different perspective to see who historical vola.tiy is negatively correlated with the price trend, I drew the charts together below. When the stock market trends up, realized historical volatility as measured by and an average of the past 14-day true range of moment typically trends down.  As the stock market loses value, volatility increases. Volatility trading for an asymmetric hedge can result in a larger asymmetric payoff than the price itself.

spx negative correlation with atr volatility vix

As the SPX price trend is up, most of the stocks it tracks are in longer-term uptrends as evidenced by the below chart of the percent of S&P 500 stocks above their 200 day moving average. Right now, 77% are trending up which is the upper end of the breadth recent cycle I marked with the line. Breadth indicates participation in a trend up or down. The more stocks are trending up, the more healthy an uptrend. However, these measures reach extends at their high and low extremes in the cycle.  While 77% of the S&P 500 stocks in uptrends are positive at some point the buying enthusiasm is exhausted and it’s usually signaled by high readings.

spx percent stocks above 200 day moving average

I’m not asserting this foretells a big down move, but instead, it’s situational awareness that the risk level is elevated.

Next, is the shorter-term trends. The percent of stocks above their 50 days moving averages has been sideways since mid-October. Currently, 73% of stocks are in short term uptrends. So, by this measure, they haven’t yet reached the recent cycle high in July.

spx percent of stocks above 50 day

I sorted the S&P stocks to see which were below their 50 day to look for a pattern. Sure enough, I see one; it’s mostly REITs (Real Estate Investment Trusts) which is no surprise since REITs have been weak recently. We don’t own any of the stocks. 

quantitative analysis of technical indicators.png

The Dow Jones REIT Index is designed to measure all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate. Based on the observation above, it is no surprise to see this index of 175 real estate stocks is below its 50 day moving average, but is above the 200-day moving average and is oversold today. My relative strength systems that signal asymmetric rate of change suggest REITs are near a short term low.

REIT

This reminds me of another high dividend-yield sector. In Alerian MLP Index is diverging from crude and reaching new lows on November 20th I point out this same trend system suggested a countertrend rally was probable and sure enough, it gained 7% since then. Here is the updated chart of the Alerian MLP Index.

MLP ALERIAN OIL GAS ENERGY MLPS AMJ

REITs may not play out so well, but, what is, is.

The trend is your friend until the end when it bends. So far, this uptrend hasn’t since October has done little but drift up aside from the -3% dip last month and a volatility expansion that was little more than a blip.

We’ll see how it all unfolds from here.

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

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data 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.

Alerian MLP Index is diverging from crude and reaching new lows

The Alerian MLP Index is an interesting trend. It’s down -61% since inception. The Alerian MLP Index is a gauge of energy infrastructure Master Limited Partnerships (MLPs) whose constituents earn the majority of their cash flow from midstream activities involving energy commodities. We’ve been noticing recently it has trended down to a lower low that 2016 while WTI Crude Oil Spot Price is much higher than it was then.

It’s an interesting divergence and may be an example of an asymmetric risk-reward if it reverses back up from this relatively low level. In theory, after such a downtrend further downside could be limited and the potential for upside greater. Of course, The Alerian MLP Index is an index, so it cannot be invested indirectly. I’m using it only as an example. The index could keep trending down much lower than anyone believes it can.

It is always essential to predetermine risk in advance. There are many things that could drive MLP prices lower, including trade deals, or lack thereof.

It will be fascinating to see how this trend unfolds and what it may be signaling about the global macro environment.

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

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

 

 

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

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

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

Why?

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

What about consumer sentiment?

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

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

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

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

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

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

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

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

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

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

consumer sentiment correlation with the stock market intermarket analysis

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

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

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

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

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

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

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

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

Periods of low volatility are often followed by volatility expansions

I like uptrends, until the end when they bend.

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

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

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

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

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

Average True Range ATR use in portfolio management trading volatlity

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

VIX $VIX #VIX IMPLIED VOLATLITY

Periods of low volatility are often followed by volatility expansions.

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

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

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

For an update, see A volatility expansion seems imminent

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

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

Investor optimism is reaching extremes

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

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

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

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

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

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

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

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

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

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

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

AAII Investor Sentiment Survey

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

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

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

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

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

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

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

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

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

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

I focus on these extremes in investor sentiment.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Index Construction Target Risk S&P global asset allocation index

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

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

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

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

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

To me, that’s tactical.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

moving average drawdown whipsaw risk

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

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

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

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

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

It’s all easier said than done.

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

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

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

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

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

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

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

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

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

 

 

 

 

Why we row, not sail

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

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

About sailing, he said:

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

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

About rowing, he said:

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

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

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

Secular bull bear market trend chart

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

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

asymmetry of loss losses are asymmetric risk management

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

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

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

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

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

This is why I row, not sail.

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

I prefer not to sink to the bottom.

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

Don’t.

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

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

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

 

Global Macro Observations of Stock and Bond Market Trends and Volatility

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There is a time for everything under the sun.

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

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

That’s all for now.

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

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

 

The flaw of average in stock market returns

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

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

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

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

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

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

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

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

the flaw of averages stock return

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

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

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

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

 

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

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

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

 

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

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

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

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

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

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

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

Back in 2008, Dusty Floyd explained it well:

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

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

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

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

Mike Shell Capital Neyland Stadiium Statue

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

Mike Shell Capital Neyland Tennessee Volunteers Vols Knoxville

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

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

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

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

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

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

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

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

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

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

The same applies to investment management.

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

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

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

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

What did I learn from Phil Fulmer?

Semper Fidelis: Always be faithful and loyal. 

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

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

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

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

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

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

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

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

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

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

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

 

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

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

 

 

 

 

 

 

 

 

 

 

 

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

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

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

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

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

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

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

What about mean reversion?

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

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

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

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

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

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

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

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

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

The next time will be no different.

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

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

 

 

 

 

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

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

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

asymmetric risk reward return stocks

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

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

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

What’s going to happen next? 

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

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

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

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

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

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

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

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

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

Technical analysis of the stock trend and volatility

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

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

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

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

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

I focus on that. The price trend and volatility.

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

DOW STOCK MARKET DOWN DAY TRUMP CHINA

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

Wikipedia defines Technical Analysis as:

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

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

Investopedia defines it as:

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

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

I’ll just call it charting.

I hope you find it helpful.

Let’s see how it closes. 

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

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

The value of technical analysis of stock market trends

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

I’ll share a simple and succinct example.

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

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

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

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

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

spy spx ytd trend following

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

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

setting stop loss for stocks

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

If it doesn’t, I’d say:

Look out below!

Do I trade-off this? Nope.

Am I telling you to? Nope.

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

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

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

I hope you find it useful.

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

Let me know if we can help!

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

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

Investor fear has been driving the stock market down

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

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

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

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

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

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

What is driving this decline?

Fear.

It’s that simple.

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

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

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

investor sentiment extreme trading

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

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

fear greed index

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

advisor money manager using fear greed index extreme behavior

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

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

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

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

We are long and strong at this point, so;

Giddy up!

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bloomberg goes on to say:

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

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

Global X MSCI Argentina ETF AGT ARGT

 

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

 

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

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

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

All investors are market timers

All investors are market timers.

It isn’t just tactical traders.

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

But they are.

We all are.

And timing is everything. Like it or not.

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

According to Wikipedia:

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

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

Next is Investopedia:

“What Is Market Timing?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Past performance is no guarantee of future results.

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

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

Global Asset Allocation hasn’t done any better

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

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

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

Each ETF has a fixed allocation to stocks and bonds.

ishares global allocation ETF

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

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

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

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

I don’t believe I know anyone who does.

Why?

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

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

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

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

Shiller PE Ratio

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

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

May as well be honest and realistic about it.

Not convinced?

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

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

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

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

It isn’t going to last forever.

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

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

The volatility expansion is here…

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

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

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

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

how to use fear greed index

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

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

stock market 2019

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

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

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

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

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

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

 

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

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

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

trend following performance 2019 stocks stock market

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

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

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

According to CME about trend following:

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

They go on to say:

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

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

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

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

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

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

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

Back to the WSJ article:

Computer Models to Investors- Short Everything WSJ Trend Following article

Fortunately, I didn’t follow that trend.

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

trend following sell signal 2019

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

stock market drawdown decline 2018

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

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

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

ALL TIME NEW HIGH STOCK MARKET STOCKS 2019

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

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

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

We’ll see how it all unfolds from here…

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

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

A few observations on Global Macro and Trend Following

A few observations on #GlobalMacro and #TrendFollowing

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

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

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

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

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

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

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

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

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

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

The normal noise of the market?

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

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

TECH SECTOR MOMENTUM XLK $XLK $IYW

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

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

stock market SPY $SPY

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

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

 

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

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

Giddy up…

As expected, the U.S. stock market declined briefly, then found enough buying enthusiasm to drive prices to a new breakout above the March high.

As I concluded in Strong stock market momentum was accompanied by broad participation:

“…though we shouldn’t be surprised to see short term weakness, we could suppose the longer term trend still has room to run.”

As we see in the chart below, while the U.S. stock market is trending with absolute momentum, the strongest relative momentum has been in other countries around the globe.

global macro asymmetric risk reward .jpg

Though my short term momentum systems signaled weeks ago the current uptrend may become exhausted and it did, the reversal back up and continuation since then appears bullish.

At this point, it appears some global stock markets are in uptrends and may have more room to run. For asymmetric risk/reward, I cut my losses short and let the winners run on.

Giddy up…

 

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

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

Welcome to March! A review of global asset allocation and global markets

In the first two months of 2019 global asset allocation has gained 4% to 8.6%. I use the iShares Core Global Allocation ETFs as a proxy instead of indexes since the ETFs are real world performance including costs. The four different allocations below represent different exposure to global stocks vs. bonds.

global asset allocation ETF ETFs asymmetric risk reward .jpg

I’m not advising anyone to buy or sell these ETFs, but instead using them as an example for what a broadly diversified global asset allocation portfolio looks like. Most financial advisors build some type of global asset allocation for their clients and try to match it with their risk tolerance. The more aggressive clients get more stocks and the most conservative clients get more bonds. Of course, this is just asset allocation, so the allocations are mostly fixed and do not change based on market risk/reward. This is very different than what I do, which is focus on asymmetric risk/reward by increasing and decreasing exposure to risk/reward based on my calculations of risk levels and the potential for reward. So, my system is global, but it’s tactical rotation rather than fixed allocation.

The iShares Core Allocation Funds track the S&P Target Risk Indexes. So, BlackRock is the portfolio manager managing the ETF and they are tracking S&P Target Risk Indexes. Here is their description:

S&P Dow Jones Indices’ Target Risk series comprises multi-asset class indices that correspond to a particular risk level. Each index is fully investable, with varying levels of exposure to equities and fixed income and are intended to represent stock and bond allocations across a risk spectrum from conservative to aggressive.

In other words, they each provide varying allocations to bonds and stocks. The Conservative model is more bonds, the Aggressive model is more stocks.

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

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

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

S&P Target Risk Aggressive Index. The index seeks to emphasize exposure to equities, maximizing opportunities for long-term capital accumulation. It may include small allocations in fixed income to enhance portfolio efficiency.

Below is an example of the S&P Target Risk Index allocations and the underlying ETFs they invest in. Notice their differences is 10% to 20% allocation between stocks and bonds.

Global Allocation Index Construction

These ETFs offer low-cost exposure to global asset allocation with varying levels of “risk,” which really means varying levels of allocations to bonds. I say they are “low-cost” because these ETFs only charge 0.25% including the ETFs they are invested in. Most financial advisors probably charge 1% for similar global asset allocation, not including trade commissions and the ETF or fund fees they invest in. Even the lowest fee advisors charge at least 0.25% plus the trade commissions and the fund fees they invest in. With these ETFs, investors who want long-only exposure all the time to global stock and bond market risk/return, they can get it in one low-cost ETF. However, they do come with the risks of being fully invested, all the time. These ETFs do not provide any absolute risk management.

As an unconstrained, go-anywhere, absolute return manager who does apply active risk management, I’m unconstrained from a fixed benchmark, so I don’t intend to track or “beat” a benchmark. I operate with the limitations of a fixed benchmark. My objective is to create as much total return I can within a given amount of downside risk so investors don’t tap out trying to achieve it. It doesn’t matter how much the return is if inveestors tap out during drawdowns before it’s achieved. However, I consider global asset allocation that “base rate.” If I didn’t think I could create better asymmetric risk/reward than these ETFs I wouldn’t bother doing what I do. I would just be passive and take the beatings in bear markets. If we can’t tolerate the beatings, we would invest in the more conservative ETF. I intend to create ASYMMETRY® and win by not losing, and that necessarily requires robust risk management systems and tactics.

Now that we know what they are, below are their total returns including dividends looking back over time. (To see the full history in the prospectus click: iShares)

In the chart below, we see the global asset allocation ETFs are attempting to get back to their September 2018 high. While the S&P 500 stock index is still down about -4% from its September 2018 high, the bonds in these ETFs helped reduce their drawdowns, so they have also recovered their losses better.

global tactical asset allocation asymmetric risk reward

To be sure, below are the drawdowns. The iShares Core Conservative ETF is only 30% stocks and 70% bonds, so it had a smaller drawdown and has recovered from it already. I added the S&P 500 in this chart with is 100% stocks to show how during this correction, the exposure to bonds helped offset losses in stocks. Diversification does not guarantee a profit or protect against a loss in a declining market. Sometimes diversification and even the broadest global asset allocation fails like it did in 2008.

GLOBAL TACTICAL ASSET ALLOCATION ASYMMETRIC RISK REWARD DRAWDOWN

We can look inside the ETF to see their exposures. Below we see the iShares Core Moderate ETF which is 60% stocks and 40% bonds largest holding is the iShares Core Total USD Bond Market ETF (IUSB) at 50% of the fund.

iShares Core Moderate Allocation ETF

Below is the 1-year total return chart including dividends for its largest holding. It has gained a total return of 2.9% the past year. All of the gains were this year.

iShares Core Total USD Bond Market ETF (IUSB)

Next, I added the other two largest holdings iShares Core S&P 500 ETF (IVV) and iShares Core MSCI International Developed Markets ETF (IDEV). The weakness was worse in international stocks. 

GLOBAL ASSEST ALLOCATION ADVISORS TACTICAL

No total return chart is complete without also looking at its drawdowns. The combination of the total return chart and the drawdown is what I call the ASYMMETRY® Ratio. The ASYMMETRY® Ratio is the total return divided by the risk it took to achieve it. I prefer more total return, less downside drawdown.

global tactical asset allocation drawdown risk management

The point is, global stocks and bonds have recovered much of the losses. As we would expect so has global asset allocation. The only issue now is the short term risk has become elevated by my measures, so we’ll see how the next few weeks unfold.

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

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

Strong stock market momentum was accompanied by broad participation

Not only has the broad stock market indexes like the S&P 500 advanced sharply with great momentum since late December 2018, but its breadth has also been impressive.

The percent of stocks trading above their 50 day moving averages shows about 92% of stocks are in short term uptrends. This advance not only confirmed the price trend momentum but suggests participation has been broad. More stocks are above their 50-day moving averages that late 2017.

percent of stocks above the 50 day moving average trend following asymmetric risk reward

The downside is we are necessarily observing only the past and the past doesn’t assure future performance. In fact, once 92% of stocks are already in shorter-term uptrends, we can start to wonder at what point the buying enthusiasm is exhausted. That is, indicators like this may be observed for signs of an inflection point.

percent of stocks above 200 day moving average trend following

However, the percent of stocks above their 200 day moving averages is at 63%. So applying that same line of thinking, though we shouldn’t be surprised to see short term weakness, we could suppose the longer term trend still has room to run.

We’ll see…

 

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

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

Putting my short-term technical analysis tactician hat on and hedging off equity risk

I’m dialing in to look at shorter-term technical analysis as my risk management systems are suggesting a risk of a stock market decline is becoming elevated.

tactician technical analysis analyst tactical manager trader

Zooming in to shorter time frames, the U.S. stock market advance appears to be becoming exhausted.

The chart below is the SPDR® S&P® 500 ETF, yesterday on a 5-minute chart. Now that’s zooming in! I’m not a day trader, but I’m monitoring the trend for signs of buying exhaustion and/or selling pressure to potentially take over. Yesterday this index ETF was up nearly .75% in the morning, then you can see it drifted down to close well below its VWAP for the day.

SPY VWAP MOMENTUM RELATIVE STRENGTH TREND FOLLOWING

The next chart shows the SPY trend going back for about six months. The recent stock advance has been impressive and I’m sure glad we participated in it, but I’m now applying some situational awareness. The strong momentum since the late December 2018 low could be becoming exhausted and may find some resistance for higher prices, at least temporarily.

SPY

As a tactician, since we had heavy exposure to stocks, I’ve been gradually reducing exposure and today started hedged off some equity risk to offset some of my market risks. I did that as opposed to taking large profits and realizing taxable gains. Fortunately, we took advantage of last years volaltity and made the best of it by executing significant tax loss harvesting. This time I decided to hedge some of our gains rather than realize them.

I may be wrong, but my risk management systems are elevated for at least a short term exhaustion, so I expect we’ll see some selling pressure overwhelm buying at some point from here. If it doesn’t, then it’s a good sign the momentum may be here to stay a while, but I’ll probably still wait for a reversal down to add more exposure in my tactically managed portfolio. My objective is asymmetric risk/reward, and from this starting point, I see more potential for downside than upside for stocks. My systems aren’t always right, but the magnitude of the gains are larger than the losses when it’s wrong. I call it ASYMMETRY®.

 

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

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

Global asset allocation takes a beating in 2018

Most financial advisors and financial planners recommend to their clients some type of global asset allocation. Their global asset allocation models usually include a range of bonds, U.S. stocks, and International stocks. Some may include what are considered alternative investments like real estate (REITs), private equity, or tactical trading, but most of them keep it plain vanilla. This asset allocation method is called “strategic asset allocation” since it usually applies some form of portfolio optimization of historical returns and volatility to determine the weight between stocks and bonds.

Who can blame them? asset allocation and diversification is easy to sell and easy to defend. If someone sells their business or retires with a large 401(k), it’s easy to sell them on diversifying their assets. If the markets go down it isn’t their fault, it’s the market that’s doing it. Is it too much drawdown or volatility? They just recommend a change to less stocks and more bonds. Of course, that only works when bonds aren’t falling too.

Since many actively managed mutual funds failed to avoid losses during the last bear market 2007 to 2009, many advisors shifted their strategic asset allocation from actively managed mutual funds to index funds. It’s easy to see why; their clients lost a lot of money, even as much as -40% for a balanced portfolio of 60% stocks and 40% bonds. If they were more invested in stocks, it was as much as -50% or more.

If a mutual fund was supposed to be “active,” I can see how such losses would be unacceptable. If an investor is paying more for portfolio management, they probably expect to have a more asymmetric risk/return profile than what long-only exposure to stock indexes all the time would provide for less cost. Index funds and ETFs are cheap because they simply provide exposure to market risks and rewards. They provide this exposure all the time, so when markets fall as they do in a bear market, they lose value and have no stop loss for risk management.

I also use index ETFs to gain exposure to markets, countries, and sectors, but I don’t just buy and hold them, I increase and decrease my exposure to actively manage my risk/reward. My objective is an asymmetric risk/reward, so I want to avoid the larger losses as I try to capture gains. For me, it starts at the individual position level and flows through to the portfolio level. I’m entering positions we expect to result in an asymmetric risk/reward payoff; positions with a higher expected gain than its potential loss. I do this over and over, and they don’t all have to result in asymmetry. We just need the average gains to exceed the average losses over time to achieve a positive asymmetric risk-return profile. It’s an absolute return objective, meaning our focus is on our own payoffs and risk-reward profile, not trying to track what a stock index is doing. My strategy is unconstrained from the limitations of a fixed benchmark. Our objective is more about making money with a predetermined amount of absolute risk, not relative returns and tracking indexes. As such, the return stream is expected to be unique.

That isn’t what active mutual fund managers do.

The typical active mutual fund has an objective of relative return vs. an index benchmark. As I’ve been an investment manager for over two decades, I’ve seen the relative return comparisons become more and more intense. Brokerage firms and investment advisors have created sophisticated performance reporting programs to compare their performance to chosen benchmarks. Active mutual funds have a mandate to “beat” and index. For example, some of them aim to beat the large growth, mid value, or small growth asset classes. Most of them attempt to beat their benchmark by filtering through the stocks in the index and picking better stocks. If a relative return is their objective, they are not focused on managing downside risk. Instead, they are focused on tracking the benchmark and getting ahead of it. Many of them probably attempt it by holding a more focused portfolio or with a portfolio of the higher momentum stocks relative to the benchmark. Since risk management isn’t their objective, they view any overweight in cash as a risk of underperformance. That’s what traditional “active managers” do. What I do is typically called “tactical management” since my objective is absolute return, not relative return, and I want to actively control my drawdowns through risk management. For example, I could be positioned in all cash in a bear market, hedged, short, or long volatility.

So, there is an important distinction between “active managers” with a relative return benchmark-beating objective and those of us with an unconstrained strategy and focus on absolute returns. Mutual funds are typically relative return managers trying to beat a benchmark, hedge funds are typically absolute return managers creating their own unique return stream. Although, typically means that isn’t always the case.

Ok, so, the headline was about the performance of Global Asset Allocation this year.

Back to global asset allocation.

Some financial advisors and media enjoy disparaging all types of active management. They talk about how relative return managers like most mutual funds don’t beat their benchmarks. They’ll point out how absolute return hedge fund type strategies may manage downside risk, but don’t earn as much return as an all-stock portfolio. Most of the time, it isn’t a reasonable comparison. For example, saying the Barclays Hedge Fund Index underperformed the S&P 500 the past decade isn’t complete without also considering the drawdowns. In the last bear market, the S&P 500 declined -56% while the Barclays Hedge Fund Index that includes a composite of thousands of hedge funds declined only -24%. I will suggest the stock index loss was so large most tapped out while the Barclays Hedge Fund Index was low enough that investors could have held on.

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

This year has been a challenging and hostile year for all investment strategies.  While those who adhere to a long-only fully invested asset allocation all the time will talk about the performance of active managers, theirs isn’t much to speak of, either. I know a lot of advisors, and we work with some who invest in my portfolio. Most of their global asset allocations are very simple, and now many of them use index funds and charge an advisory fee for the asset allocation and rebalancing.

There are some mutual funds that offer a varying method of asset allocation. I am not recommending any of these funds, this is for educational and informational purposes only. Some popular ones that come to mind are BlackRock Global Allocation (MDLOX), Arrow DWA Balanced. PIMCO All Asset All Authority (PAUAX), DFA Global Allocation 60/40 (DGSIX). BlackRock Global Allocation, Arrow DWA Balanced, and PIMCO All Asset All Authority are active allocation funds while DFA Global Allocation is a passive allocation fund managed by Dimensional Fund Advisors. Below are their year-to-date total returns, including dividends. (To see their full history click on the links in their names above.)

Global Asset Allocation Funds

I know financial advisors who are big advocates of large asset managers like Dimensional Fund Advisors (DFA), PIMCO, and BlackRock. Advisors often tout how large they are and how many academics or how many analysts and portfolios managers they have on staff. I included the Arrow DWA Balanced fund because it’s managed by Dorsey Wright, which isn’t as large, but I know advisors use it. Most advisors who offer asset allocation models are doing their own asset allocations for their clients. The above returns are the result of each of these asset managers doing the allocation and investment selection. So, I would expect when it comes to global asset allocation, those funds should be as good as it gets. How is a financial planner who isn’t a portfolio manager going to do better?

Some may say “What about Vanguard? They are some of the cheapest funds you can buy?”. I don’t know of a Vanguard global asset allocation fund like the DFA fund, but they do have a balanced 60/40 fund that doesn’t include exposure to international. Below is their balanced allocation fund along with their International stock fund. Though their fund isn’t down -7% like the global allocation funds, if you added 20% of their International to make it “global,” we can see it would be similar.

vanguard asset allocation funds

Since indexing and ETFs have become more popular than mutual funds, today we have some interesting ETFs that track global asset allocation indexes so we can better understand the return streams of global asset allocation.

iShares is a BlackRock company, the world’s largest asset manager with $6.29 trillion in assets under management. If an investor thinks a large size with many professionals is the key to investment success, they would probably BlackRock is the best. Of course, I don’t agree, since the most skilled portfolio managers I know are small, focused, specialized firms with all their skin in the game. BlackRock’s iShares offers the iShares Core Allocation Funds, which are ETF allocations of ETFs. Each iShares Core Allocation Fund offers exposure to U.S. stocks, international stocks, and bonds at fixed weights and holds an underlying portfolio of iShares Core Funds. Investors can choose the portfolio that aligns with their specific risk considerations like investment time horizon and risk tolerance; for example, those with longer investment time horizons and higher risk tolerance may consider the iShares Core Aggressive Allocation ETF.

More specifically, the iShares Core Allocation Funds track the S&P Target Risk Indexes. So, not only do you have BlackRock’s portfolio management managing the fund, but they are tracking S&P Target Risk Indexes. Here is their description:

S&P Dow Jones Indices’ Target Risk series comprises multi-asset class indices that correspond to a particular risk level. Each index is fully investable, with varying levels of exposure to equities and fixed income and are intended to represent stock and bond allocations across a risk spectrum from conservative to aggressive.

In other words, they each provide varying allocations to bonds and stocks. The Conservative model is more bonds, the Aggressive model is more stocks.

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

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

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

S&P Target Risk Aggressive Index. The index seeks to emphasize exposure to equities, maximizing opportunities for long-term capital accumulation. It may include small allocations in fixed income to enhance portfolio efficiency.

Below is an example of the S&P Target Risk Index allocations and the underlying ETFs they invest in. Notice their differences is the 10% to 20% allocation between stocks and bonds.

Global Allocation Index Construction

These ETFs offer low-cost exposure to global asset allocation with varying levels of “risk,” which really means varying levels of allocations to bonds. I say they are “low-cost” because these ETFs only charge 0.25% including the ETFs they are invested in. Most financial advisors probably charge 1% for global asset allocation, not including trade commissions and the fund fees they invest in. Even the lowest fee advisors charge at least 0.25% plus the trade commissions and the fund fees they invest in. With these funds, investors who want long-only exposure all the time to global stock and bond market risks and returns, they can get it cheap in one fund.

Now that we know what they are, below are their total returns including dividends year to date in 2018. (To see the full history click: iShares)

global asset allocation fund ETF

The % off high chart shows their drawdowns from their price high.

global asset allocation ETF ETFs

Global asset allocation is having a challenging year in 2018 because U.S. stocks, International stocks, and bonds are all down this year.

Of course, a calendar year doesn’t mean a lot. What we do over 15 or 20 years or more is what matters. But, as low-cost index asset allocation advisors talk about the performance of active managers and hedge fund type managers, 2018 has included conditions that have been hostile for all kinds of strategies.

As I said yesterday if this market volatility and correction develops into a full bear market, the asset allocations that are fully exposed to downside risk will test investors’ tolerance for drawdowns.

How deep can drawdowns be for such a globally diversified portfolio? Looking at the historical % off high of DFA Global Allocation and Vanguard Balanced gives a historical example. Even two of the efficient allocation funds available had drawdowns of around -35% to -40% in the last bear market. If it’s done it before, it can certainly happen again.

DFA Global Allocation Vanguard Balanced

Those of us applying active risk management and hedging strategies aim to limit the drawdowns within a tolerable amount rather than allowing them to become too large. For me, more than -20% becomes exponentially more difficult to tolerate and recover from. We have to deal with the -10% or so drawdowns sometimes since we can’t avoid them all. We necessarily have to take some risk to gain exposure to the possibility of gains.

Ok, so my headline was a little exaggerated. Drawdowns of -5% to -12% isn’t exactly a “beating”, but that’s the kind of headline we often see about active management and hedge funds.

You can probably see why I believe it’s essential to actively manage risk and position capital in the direction of price trends.

 

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

The observations shared on this website are for general information only and are not specific advice, research, or buy or sell recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

What’s going to happen next for the stock market?

The popular stock indexes are now down about -5% year to date.

dow jones stock market

The popular stock indexes are now about -13% off their highs.

stock market dow jones spx spy dia

I don’t normally include the NASDAQ since it’s so overweight the Technology sector, but it’s down -17% off its high and the Russell 2000 small-cap index is down -19%. The year started off very strong and is ending with weakness so far.

nasdaq russell 2000 dow jones

I pointed out earlier this year that Emerging Markets and Developed countries stock markets were already in a bear market if we define it as -20% off highs. Here we see they are down even more than the U.S. stocks year to date.

emering markets stocks

I warned before that with interest rates rising, bonds may not provide the crutch they have in past stock market declines. That has been the case in 2018. Even with the long-term Treasury gaining recently from being down -12%, it’s still down -6% year to date.

BOND ETF TLT LQD AGG ETFS

Many investors are probably wondering what’s going to happen next. I said a week ago in Stock Market Observations that stocks have fallen far enough that “We would expect to see some potential buying support at these levels again.” For these popular stock indexes, they are now at the point of the February and April lows and reaching an oversold level by my momentum measures.

We are looking for signs that selling pressure is drying up as those who want to sell have been exhausted and new buying demand increases to take over. Some signs of stock prices reaching a low enough point to attract more buying than selling are observed in investor sentiment measures and breadth indicators.

A simple easy to follow gauge of investor sentiment is the Fear & Greed Index, which is a composite of seven Investor sentiment measures. The investor sentiment reached an “Extreme Fear” zone again.

investor sentiment fear greed index

Investor fear by this measure has been high for the past few months. At some point, we would expect to see those who want to sell have sold. However, if this stock trend becomes a bear market we would expect to see this gauge remain low for a long time. Although, the stock indexes will swing up and down along the way.

fear and greed over time investor sentiment stock market

Another observation of investor sentiment reaching an extreme was last week’s AAII Investor Sentiment Survey. Last week pessimism spiked to its highest level since April 2013, while optimism fell to an unusually low level.

bearish investor sentiment

For some historical context, the % of bearish investors has reached the high level it did at the 2016 stock market low. When investor fear reaches such extremes, it’s a contrary indicator.

bearish sentiment

A bear market is a process, not an event. At -13% it’s hard to say if this will become a bear market, though there are some potential drivers that could cause stocks to fall more over time.

The first warning sign for the big picture is earlier this year the Shiller PE ratio for the S&P 500 reached the second highest level ever, with data going back before 1880.

Shiller PE ratio for the S&P 500

The only two times the Shiller PE ratio for the S&P 500 had reached this “overvalued” level was 1929 and 1999. Of course, 1929 was followed by The Great Depression and 1999 was followed by the Tech Bubble Burst. The only time I pay attention to the PE ratio is for a big picture assessment of valuation when it reaches extreme highs or lows. At such a high level of valuation, we shouldn’t be surprised to see volatility and stocks decline. The unknown is if it keeps declining much more to reach an “undervalued” level at some point. So far, with -13% decline, the Shiller PE ratio for the S&P 500 has declined from 33 at the beginning of the year to 28 now. Twenty or higher is considered high, 10 or less is considered low. It is what it is.

A bear market is a process, not an event, which means the stock market will swing up and down along the way. For example, historical bear markets are made up of swings of -10%, +8%, -14%, +10%, each swing doesn’t make a higher high, but instead prints a lower high and lower lows. The good news is, the swings are potentially tradable. However, for those tactical traders who attempt to trade them, it isn’t easy and it doesn’t always feel good. These kind of periods are volatile, so a skilled tactical trader has to increase and decrease exposure to the possibility of gain and loss. For me, predefining risk is essential, but so is holding the predetermined exposure to give a trend room to play out.

Some potentially positive news is the breadth indicators suggest most stocks are participating in the downtrend. That doesn’t sound positive unless you realize as stocks get washed out on the downside the selling pressure is eventually exhausted, at least temporarily. Below is one indicator we observe to see what is going on inside S&P 500 stock index. It’s the percent of the 500 stocks in the index that are trending above their 50-day moving average. When this indicator is low, it signals stocks may be nearing a level of selling exhaustion as most of them are already in downtrends. However, if this does become an actual bear market of -20% or more, we’ll see this indicator swing up and down along with the price trend. At this point, it’s in the green zone, suggesting the stocks may be near the “washed out” area so we could see some demand take over supply in the days or weeks ahead.

As you can see below, the percent of stocks above their 50 day moving average has now reached the low level it did in February and back in August 2015 and January 2016 that preceded a reversal back up.

percent of stocks above 50 day moving average

I shared my observations of this breadth indicator back in February when I explained it in more detail if you want to read it Stock Market Analysis of the S&P 500. I also shared it in October when the current downtrend started. In October, the percent of stocks above their 200 day moving average was still high and hadn’t declined much. That isn’t the case now. As you can see, even this longer term breadth indicator is now entering the green zone. As more stocks have already declined, it becomes more and more likely we’ll see selling exhausted and shift to buying demand as prices reach lower more attractive levels for institutional investors.

As you can see below, the percent of stocks above their 200 day moving average has now reached the low level much below February and now down to the levels reached in August 2015 and January 2016 that preceded a reversal back up in stocks.

stock market breadth percent of stocks 200 day

Another indicator that measures the participation in the trend is the S&P 500 Bullish Percent index that I have been observing for over two decades. This is the percent of stocks on a Point & Figure buy signal, which often traces a pattern something similar to the 50 day and 200-day moving averages as it has the past four years. As we see below, this indicator is reaching the low level not seen since August 2015 and January 2016 that preceded a reversal back up.

buliish percent index

At this point, we haven’t yet seen enough buying enthusiasm to overwhelm the desire to sell. But, many of these indicators I’ve been monitoring for nearly two decades are reaching a level we should see some shift at some point. If we don’t, the stock market may enter into a more prolonged and deeper bear market. However, historically lower lows are made up of cycle swings along the way, so we should still see at least some shorter-term uptrends.

I’m starting to hear a lot of “bear market” talk in the news and on social media, so I thought I would put the current decline into context. My mission isn’t to take up for the stock market, but instead to present the facts of the trends as they are. I was defensive at the beginning of the year and then added more exposure after prices fell. I predefine my risk by predefining my exits in all of my positions, so any exposure I have has a relatively short leash on how low I’ll allow it to go before I cut my loss short, rather than let the loss get large. I am never a market cheerleader, but because I was already defensive near the peaks, I may have the potential to take advantage of the lower prices. I’m almost always going to be a little too early or a little too late and that is fine. It’s never been perfect but has still achieved the results I want the past two decades.

To put the current decline into historical contacts, we can simply compare it to the last decline of -10% or more, which was around August 2015 and January 2016. For nearly two years, the stock index was range bound with no upside breakout.

stock market 2015 2015 decline bear market

Looking closer at the % off highs, we see the late 2015 decline was -12% and the first few months of 2016 was about -15%.

stock market decline 2015 2016 asymmetric risk reward

Here is 2018. So far, it isn’t actually as much of a decline.

bear market stocks stock market

Another interesting observation I’ll share is the trend in the CBOE S&P 500 Volatility Index (VIX). Below is the 2015 to 2016 period again with the S&P 500 in the top panel and VIX volatility index in the bottom panel. We see the VIX spiked up sharply around August 2015 when the stock market decline. However, when the stock market recovered the loss and then declined again to a lower low, the VIX index didn’t reach the same high level the second time. The volatility expansion wasn’t nearly as high even though the stock index reached an even lower low.

VIX VOLATILITY expansion 2016

We are observing that same divergence in volatility this year. The VIX spiked over 100% when stocks fell -12% around February this year. The stock market recovered and printed a new high in September, then has since fallen -13% from that high. This time, however, the implied volatility VIX index hasn’t spiked up nearly as high.

divergence volatility expansion vix

What could it mean? When the VIX increases it is an indication of expected future 30-day volatility implied by the options on the stocks in the S&P 500. When the VIX increases, it means options traders are probably using options to hedge against market declines. I’m guessing it could signal that hedging and possible selling enthusiasm could be drying up. That seems to be what it suggested in 2015 to 2016 when it did the same, then the stock market trended up into 2017.

We’ll see how it all unfolds from here, but the stock market has clearly reached an inflection point. Stocks have trended down to a low enough level we should see some buying demand if it’s there. You can probably see why I believe markets require me to actively manage my risk through predefined exits and hedging to extract from it the asymmetric risk-reward I want.

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

The observations shared on this website are for general information only and are not specific advice, research, or buy or sell recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Stock Market Observations

The S&P 500 stock index retests October low for the third time. It is only 1.2% above the February and April low, but so far holding the line.

SPY STOCK MARKET

We would expect to see some potential buying support at these levels again. In fact, we’ve already observed some positive reversal today from lower levels. At one point the S&P 500 was down nearly -2% and has reversed back up to near positive. If the lower prices continue to attract buying interest and the current intraday trend continues it could close positive.

SPY VWAP

I pointed out earlier in the year the rising implied volatility indicated by the CBOE S&P 500 Volatility Index was expecting a volatility expansion. The VIX correctly predicted a volatility expansion in 2018.

VIX SPY SPX VOLATILITY EXPANSION ASYMMETRIC

At this point, the Technology, Communication Services, and Materials sectors have turned positive for the day.

SECTOR ETF ROTATION TREND FOLLOWING

Three sectors that have trended above their April lows are Technolgy, Healthcare, and Consumer Discretionary.

trend following stock market sector etfs

The bottom line is when stocks reach a low enough point to attract new buying demand that overwhelms selling pressure, we’ll see the stock market trend back up. We should soon see if the stock market trends down well below its prior lows into a potential bear market level or reverses back up to continue its longer-term uptrend.

The direction of the trend conveys the truth.

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

The observations shared on this website are for general information only and are not specific advice, research, or buy or sell recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Here comes the volatility expansion

Nine days ago in VIX level shows market’s expectation of future volatility I shared an observation that the implied volatility VIX, a measure of expected future volatility that is implied by option prices, had reached an extremely low point. I explained what that means and how I use it:

When the market expects volatility to be low in the next 30 days, I know it could be right for some time.

But, when it gets to its historically lowest levels, it raises situational awareness that a countertrend could be near.

Today we have some volatility expansion.

The VIX Volatility Index has gained 35%. It implies the market now expects higher volatility. Specifically, the market expects the range of prices to spread out over 15% instead of 12%.

VIX $VIX Volatility Expansion asymmetry asymmetric convexity divergence

The popular stock indexes are down over -1% for the first time in a while.

stock market asymmetry asymmetric risk

As I said nine days ago, it should be no surprise to see some volatility expansion. Volatility is mean reverting, which means it tends to oscillate in a high and low range and reverse back to an average after its reaches those cycle highs and lows.

Implied volatility had reached its historical low end, so it’s expanding back out. Stock prices are also spreading out and declining so we shouldn’t be surprised to see more movement in prices in the coming weeks.

At around the same time volatility was contracting and calm, my momentum indicators were signaling stock indexes and many individual stocks were reaching short-term extreme levels that often preceded a short-term decline. These systems prompt me tactically reduce exposure to stocks to dynamically manage our risk.

Only time will tell how it all plays out. We’ll 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 Tactical.

The observations shared in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. 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. 

Stanley Druckenmiller on his use of Technical Analysis and Instinct

Stanley Druckenmiller has a 30-year track record that is considered “unrivaled” by many. From 1988 to 2000, Druckenmiller was a portfolio manager for George Soros as the lead portfolio manager for Quantum Fund. He founded Duquesne Capital to manage a hedge fund in 1981 and closed the fund in August 2010.

Kiril Sokoloff of Real Vision interviewed him recently and shared parts of the interview on YouTube.

I watched the full 90-minute interview and noted some observations I’ll share.

Speaking of dealing with “algo trading” and “the machines,” Kiril Sokoloff asks Stan Druckenmiller:

“Let’s talk about the algos. We haven’t seen the algos sell, we’ve only seen them buy. We saw a little bit of it in February when there was some concentrated selling. We saw it in China in 2015, which was scary. Most people weren’t focused on that but I was and I think you were, too.

They (algos/machines) are programmed to sell when the market is down -2%. The machines are running and can’t be stopped and a huge amount of trading and money is managed that way. We’ve been operating in a bull market and a strong economy.

What happens when it’s a bear market and a bad economy, will things get out of hand?”

So, knowing that and knowing we’re at risk of that any moment… what are you watching for? …. how are you protecting yourself? What are you watching for? 

Stanley Druckenmiller answers:

“I’m going to trust my instincts and technical analysis to pick up this stuff up. 

But what I will say… the minute the risk reward gets a little dodgy I get more cautious than I probably would have been without this in the background.”

What was most fascinating about the rare interview of Stanley Druckenmiller is that some of us have figured out a successful tactical trading global macro strategy using the common elements of price trends, relative strength, risk management, and momentum combined with a dose of instinct all applied to global markets.

You can see for yourself at:

This wasn’t the first time Stan Druckenmiller spoke of his use of technical analysis and charts. In Part IV “Fund Managers and Timers” of The New Market Wizards in 1992, Jack Schwager included an interview with Stanley Druckenmiller titled “THE ART OF TOP-DOWN INVESTING.”

When asked what methods he used, he spoke of earnings, and then:

“Another discipline I learned that helped me determine whether a stock would go up or down is technical analysis. Drelles was very technically oriented, and I was probably more receptive to technical analysis than anyone else in the department. Even though Drelles was the boss, a lot of people thought he was a kook because of all the chart books he kept. However, I found that technical analysis could be very effective.”

Then, he was asked about his experiences during the 1987 stock market crash:

Jack Schwager: What determined the timing of your shift from bullish to bearish?

Stanley Druckenmiller: It was a combination of a number of factors. Valuations had gotten extremely overdone: The dividend yield was down to 2.6 percent and the price/book value ratio was at an all-time high. Also, the Fed had been tightening for a period of time. Finally, my technical analysis showed that the breadth wasn’t there—that is, the market’s strength was primarily concentrated in the high capitalization stocks, with the broad spectrum of issues lagging well behind. This factor made the rally look like a blow-off.

Jack Schwager: How can you use valuation for timing? Hadn’t the market been overdone in terms of valuation for some time before you reversed from short to long?

Stanley Druckenmiller: I never use valuation to time the market. I use liquidity considerations and technical analysis for timing. Valuation only tells me how far the market can go once a catalyst enters the picture to change the market direction.

Jack Schwager: The catalyst being what?

Stanley Druckenmiller: The catalyst is liquidity, and hopefully my technical analysis will pick it up.

Well, that sounds familiar.

What is most fascinating to me is that I’ve come to the same conclusions through my own experience over more than two decades without knowing Stanley Druckenmiller or others similar to him beforehand. I have to admit that I didn’t remember having so much in common with his strategy because I read The New Markets Wizards so long ago.

Some of us have discovered very similar beliefs and strategies through independent thinking and our own experiences. When I discover that others have found success I see the common characteristics and that confirms what drives an edge.

 

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

You can follow ASYMMETRY® Observations by click on on “Get Updates by Email” on the top right or follow us on Twitter.

 

The observations shared in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results.

VIX level shows market’s expectation of future volatility

Volatility is a measure of the frequency and magnitude of price swings up and down in a market or stock over a period of time.

  • Lower volatility is when prices are calmer and don’t swing up and down as much.
  • Higher volatility is when price movement spreads out, and prices swing up and down in a wider range.

We can measure volatility using two general methods:

  • Realized Volatility: based on actual historical price data. For example, we can see realized volatility by looking at historical standard deviation or average true range.
  • Implied Volatility: is a measure of expected future volatility that is implied by option prices. For example, the VIX Index is a measure of expected future volatility.

The VIX Index measures the market’s expected future volatility based on options of the stocks in the S&P 500® Index. The VIX Index estimates expected volatility by aggregating the weighted prices of S&P 500 Index put and call options over a range of strike prices.

The last observation I shared of the trend and level of VIX was VIX Trends Up 9th Biggest 1-day Move. I pointed out the VIX level had been very low, and it was an observation of complacency. The VIX spiked up nearly 300% – a volatility expansion. Actually, we could call it a volatility explosion.

The current level of the VIX index has settled down to a lower historical level suggesting the market expects the future range of the price of the S&P 500 to be lower. Below is the current level relative to the past year.

Looking at the current level of 12 compared to history going back to its inception in 1993, we observe its level is indeed near its lowest historical low.

The VIX Index is intended to provide a real-time measure of how much the market expects the S&P 500 Index to fluctuate over the next 30 days. The VIX Index reflects the actual order flow of traders.

Since investors tend to extrapolate the recent past into the future, they usually expect recent calm markets to continue and violent swings to persist.

After the stock market declines and volatility expands, investors extrapolate that recent experience into the future and expect volatility to continue. Sometimes it does continue, but this time it gradually declined as the price trend became calmer.

When markets have been calm, traders and investors expect volatility to remain low. Before February, the VIX implied volatility had correctly predicted low realized volatility for months. But, both realized and expected volatility was so low that many investors were shocked when stock prices fell sharply, and volatility expanded.

When the market expects volatility to be low in the next 30 days, I know it could be right for some time. But, when it gets to its historically lowest levels, it raises situational awareness that a countertrend could be near. It’s just a warning shot across the bow suggesting we hedge what we want to hedge and be sure our risk levels are appropriate.

 

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

You can follow ASYMMETRY® Observations by click on on “Get Updates by Email” on the top right or follow us on Twitter.

The observations shared in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results.

 

The Big Picture Stock and Bond Market Valuation and Outlook

Wondering what to expect from this starting point for stocks and bonds?

The starting point matters. From this starting point, the expected return is a calculation of earnings growth, dividend yield, and P/E ratio.

Below is the current Shiller PE Ratio for the S&P 500 stock index. The Shiller PE Ratio is the second highest level it’s ever been. It’s second only to the stock market bubble 1995-2000 and higher than Black Tuesday before the Great Depression. This measure suggests investors are highly optimistic as they have priced in high expectations about stock prices and earnings.

Current PE price earnings ratio historical pe average hi low

Below are the historical average (mean) and the highest and lowest level of the PE ratio of the S&P 500 based on Shiller. The median is around 15, undervalued is below 10, overvalued it above 20.

Current Shiller PE ratio for the S&P 500

Next, we observe the 10 Year Treasury Yield. Interest rates are about as low as they’ve ever been. So, investors buying bonds and holding today are yielding about as little as they ever have. The challenge going forward is if interest rates rise, the value of current bond holdings will fall, so their price of bonds will fall. When we observe this chart, it’s a reminder of how low interest rates are and how high they could go for investors who buy and hold bonds or bond funds.

10 Year Treasury Rate Yield

Though it is unlikley we’ll see the extremely high interest rates of the late 1970s, the current rate is 2.82% which is much lower than the 4.57% long-term average and 3.85% long-term median. The point is: interest rates could easily trend up to the 3% to 5% range which would drive the current bond values down. As bond prices fall, it will have a negative impact on fixed asset allocations to bond or bond funds.

10 Year Treasury Rate Current long term average low high maximum

The interest rate was only 1.5% in July 2016. Since then, interest rates have already trended up to 2.82%. How has that 1.32% increase impacted the price of the bonds?

The iShares 7-10 Year Treasury Bond ETF (IEF) seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities between seven and ten years. If you had invested in this ETF in July 2016 at the low, it’s down -9.33%. It’s been down over -10% from it’s high.

It’s a little worse for the longer-dated bonds. The iShares 20+ Year Treasury Bond ETF seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years. If you had invested in this ETF in July 2016 at the low, it’s down -13.8%. It has been down about -20% from its 2016 high.

From this starting point, we observe a historical extreme stock valuation levels, the second highest level, ever. Observing this high valuation level provides us situational awareness that volatility expansion and a bear market is a real possibility from these levels.

What makes for an even more challenging situation for investors is interest rates are at a historical extreme low looking back over a century. At such low interest rates, we shouldn’t be surprised to see them rise. As interest rates rise, bond prices fall. Falling bond values will have a negative impact for buy and hold investors in a fixed allocation to bonds. So, bonds may not be the crutch they are expected to provide diversified portfolios when stocks fall. Diversification does not guarantee investment returns and does not eliminate the risk of loss.

Going forward from this starting point, traditional diversification of a stock and bond portfolio is unlikely to provide the investment returns investors want.

We believe risky markets require active risk management and tactical decisions with a focus on asymmetric risk/reward. To discover what we call ASYMMETRY®, contact us.

 

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

The observations shared on this website are for general information only and are not specific advice, research, or buy or sell recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Global Market ETF Trends

Looking at the broad global markets, U.S. stocks are in a positive trend along with the U.S. Dollar. International stocks, commodities, and foreign currency are trending down.

With the directional trends and momentum being in U.S. stocks, though not without volatility, that has been our focus this year.

International stocks including both developed countries $EFA and emerging markets $EEM are trending down so far in 2018 as the U.S. Dollar $UUP is trending up.

The U.S. Dollar $UUP is trending similar to U.S. stocks $SPY in April.

The dollar has an inverse correlation with foreign currency like the Euro.

With the rising dollar $USD, gold $GLD is trending down even more than the Euro currency $FXE.

So, the overall broad observation of global macro picture is clearly a rising U.S. Dollar and U.S. stocks that are diverging from other markets.

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

You can follow ASYMMETRY® Observations by click on on “Get Updates by Email” on the top right or follow us on Twitter.

The observations shared in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results.

Asymmetry of Loss: Why Manage Risk?

“The essence of portfolio management is the management of risks, not the management of returns.” —Benjamin Graham

Why actively manage investment risk?

Why not just buy and hold markets and ride through their large drawdowns?

Losses are asymmetric and loss compounds exponentially.

The larger the loss, the more gain is required to recover the loss to get back to breakeven.

The negative asymmetry of loss starts quickly, losses more than -20% decline start to compound against you exponentially and with a greater magnitude the larger the loss is allowed to grow.

If your investment portfolio experiences a -20% loss, it needs a 25% gain to get back the breakeven value it was before the loss.

asymmetry of loss losses asymmetric exponential

At the -30% loss level, you need a 43% gain to get it back.

Diversification is often used as an attempt to manage risk by allocating capital across different markets and assets.

Diversification and asset allocation alone doesn’t achieve the kind of risk management needed to avoid these large declines in value. Global markets can fall together, providing no protection from loss.

For example, global markets all fell during the last two bear markets 2000-2003 and 2007-2009.

global asset allocation diversification failed 2008

It didn’t matter if you had a global allocation portfolio diversified between U.S. stocks, international stocks, commodities, and real estate REITs.

Diversification can fail when you need it most, so there is a regulatory disclosure required: Diversification does not assure a profit or protect against loss.

This is why active risk management to limit downside loss is essential for investment management.

I actively manage loss by knowing the absolute point I’ll exit each individual position and managing my risk level at the portfolio level.

Active risk management, as I use it, applies tactics and systems to actively and dynamically decrease or increase exposure to the potential for loss.

My risk management systems are asymmetric risk management systems. Asymmetric risk management intends to manage risk with the objective of a positive asymmetric risk/reward.

My asymmetric risk management systems are designed to cut losses short, but also protects and manages positions with a profit.

After markets trend up for a while without any significant interruption, investors may become complacent and forget the large damage losses can cause to their capital and their confidence. When investors lose confidence in the markets, they tap-out when their losses are allowed to grow to large.

I prefer to stop the loss before it gets too large. How much is too large depends on the client, but also the math. As seen here, I have a mathematical basis for believing I should actively manage investment risk.

It’s why I’ve been doing it for two decades. Because I understood the math, I knew I had to do it over twenty years ago and developed the systems and tactics that proved to be robust in the devastating bear markets I’ve executed through since then.

 

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

You can follow ASYMMETRY® Observations by click on on “Get Updates by Email” on the top right or follow us on Twitter.

The observations shared in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results.

Trend following applied to stocks

A stock must be in a positive trend to earn a huge gain…

A stock must be in a downtrend to produce a large loss…

The common factor? the direction of the trend…

That’s what investors like about the concept of trend following.

We want to have capital in trends that are rising and out of trends that are falling.

 

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

You can follow ASYMMETRY® Observations by click on on “Get Updates by Email” on the top right or follow us on Twitter.

The observations shared in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results.

 

 

 

Stock market investor optimism rises above historical average

“Optimism among individual investors about the short-term direction of the stock market rebounded, rising above its historical average.”

AAII Investor Sentiment Survey

The AAII Investor Sentiment Survey is a widely followed measure of the mood of individual investors. The weekly survey results are published in financial publications including Barron’s and Bloomberg and are widely followed by market strategists, investment newsletter writers, and other financial professionals.

It is my observation that investor sentiment is trend following.

Investor sentiment reaches an extreme after a price trend has made a big move.  After the stock market reaches a new high, the media is talking about and writing about the new high, which helps to drive up optimism for higher highs.

When they get high, they believe they are going higher.

At the highest high they are at their high point — euphoria.

No, I’m not talking about cannabis stocks, I’m just talking about the stock market. Cannabis stocks are a whole different kind of high and sentiment.

A few years ago, I would have never dreamed of making a joke of cannabis stocks or writing the word marijuana on a public website. Who had ever thought there would be such a thing? But here I am, laughing out loud (without any help from cannabis).

Back to investor sentiment…

Excessive investor sentiment is trend following – it just follows the price trend.

Investor sentiment can also be a useful contrarian indicator to signal a trend is near its end. As such, it can be helpful to investors who tend to experience emotions after big price moves up or down.

  • Investor sentiment can be a reminder to check yourself before you wreck yourself.
  • Investor sentiment can be a reminder to a portfolio manager like myself to be sure our risk levels are where we want them to be.

Although… rising investor optimism in its early stages can be a driver of future price gains.

Falling optimism and rising pessimism can drive prices down.

So, I believe investor sentiment is both a driver of price trends, but their measures like investor sentiment polls are trend following.

For example, below I charted the S&P 500 stock index along with bullish investor sentiment. We can see the recent spike up to 43% optimistic investors naturally followed the recent rise in the stock price trend. investor sentiment July 2018

However, in January we observed something interesting. Investor sentiment increased sharply above its historical average in December and peaked as the stock market continued to trend up.

Afterward, the stock market dropped sharply and quickly, down around -12% very fast.

Maybe the investor sentiment survey indicated those who wanted to buy stocks had already bought, so there wasn’t a lot of capital left for new buying demand to keep the price momentum going.

The S&P 500 is still about -2.4% from it’s January high, so this has been a non-trending range-bound stock market trend for index investors in 2018. The Dow Jones Industrial Average was last years more gaining index and it is still -6% from its high.

stock market 2018 level and drawdown

The stock index will need some buying enthusiasm to reach its prior high.  We’ll see if the recent increase in optimism above its historical average is enough to drive stocks to new highs, or if it’s a signal of exhaustion.

Only time will tell…

I determine my asymmetric risk/reward by focusing on the individual risk/reward in each of my positions and exposure across the portolio. For me, it’s always been about the individual positions and what they are doing.

 

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

You can follow ASYMMETRY® Observations by click on on “Get Updates by Email” on the top right or follow us on Twitter.

The observations shared in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results.

 

Does Your Firm Use Active ETFs?

Christi Shell was recently asked by ETF.com “Does your firm use active ETFs”.

Christi Shell Capital Management

Her answer from the interview:

Our portfolio manager, Mike Shell, doesn’t currently include active ETFs in our universe of tradeable ETFs, but that doesn’t mean he’d never include them. He tactically shifts between ETFs, based on investor behavioral measures and supply/demand. So our portfolio management style itself is the active management; we are, essentially, actively managing beta.

We use ETFs to gain specific exposure to a return stream such as a sector, country, commodity or currency. With an index ETF, we pretty much know what we’re going to get inside the ETF. (Of course, indexes are reconstituted by a committee of people, so we don’t know in advance what they’ll do. However, an index follows some general rules systematically.)

Therefore, if we discover an ETF we believe has a strategy and return stream that we want access to, then we would add it, whether it’s active or not.

Christi Shell is Managing Director and Certified Wealth Strategist® at Shell Capital Management LLC. Christi has 27 years in financial services ranging from bank management to wealth management giving her a unique skill set and experience to help clients get what they want.

Source: http://www.etf.com/publications/etfr/does-your-firm-use-active-etfs

Global Stock and Bond Market Trends 2Q 2018

Yesterday we shared the 2nd Quarter 2018 Global Investment Markets Review, which used a broad range of indexes on performance tables to present the year-to-date progress of world markets. The issue with a table that simply shows a return number on it is it doesn’t properly present the path it took to get there. In the real world, investors and portfolio managers have to live with the path of the trend and we can see that only in the price trend itself. So, today we’ll look at the price trends of stocks, bonds, commodities, real estate, sectors, and other alternatives like volatility. I don’t just look for potentially profitable price trends in stocks and bonds, I scan the world.

How is the market doing this year? Which market?

First, a quick glance at global markets including commodities, stock indexes, volatility, ranked by year-to-date momentum. We wee the CBOE Volatility Index $VIX has gained the most. One clear theme about 2018 is that volatility has increased and this includes implied or expected volatility. Overall, we see some asymmetry since the markets in the green are more positive than the markets in the red. The popular S&P 500 stock index most investors point to is in the middle with only a 2% gain for the year. Commodities like Cocoa, Lumber, Orange Juice, and Crude Oil are leaders while sugar, live cattle, and soybeans are the laggards. Most investors probably don’t have exposure to these markets, unless they get it through a commodities ETF.

 

Most investors probably limit themselves to the broad asset classes, since that’s what most financial advisors do. So, we’ll start there. Below are the trends of broad market ETFs like the S&P 500, Aggregate Bond, Long-Term Treasury. For the year, Emerging Markets has the weakest trend – down nearly -6%. Developed Markets countries are the second weakest. The rising U.S. Dollar is helping to put pressure on International stocks. The leader this year is Commodities, as we also saw above. The Commodity index has gained 8% YTD.

What about alternative investments? We’ll use liquid alternative investments as an example since these are publicly available ETFs. I’ve included markets like Real Estate, Private Equity, Mortgage REITs, and the Energy MLP. Not a lot of progress from buying and holding these alternative investments. This is why I prefer to shift between markets trying to keep capital only in those markets trending up and out of those trending down.

liquid alternative investments

The Volatility VXX ETF/ETN that is similar to the VIX index has gained so much early in the year I left it off the following chart because it distorted the trends of the other markets. It’s one of the most complex securities to trade, but we can see it spike up to 90% when global markets fell in February.

VIX VXX

Looking at the price trend alone isn’t enough. It would be incomplete without also considering their drawdowns. That is, how much the market declined off its prior high over the period. Analyzing the drawdown is essential because investors have to live with the inevitable periods their holdings decline in value. It’s when we observe these decline we realize the need for actively managing risk. For me, actively managing risk means I have a predetermined exit point at all times in my positions. I know when I’ll exit a loser before it becomes a significant loss. Many say they do it, I’ve actually done it for two decades.

The alternative investments are in drawdowns YTD and Energy MLP, and Mortgage REIT is down over -10% from their prior highs. The Energy MLP is actually down -51% from its 2014 high, which I don’t show here.

alternative investment drawdowns risk management

Next, we go back to the global asset class ETFs to see their drawdowns year-to-date. We don’t just experience the gains, we also have to be willing to live with their declines along the way. It isn’t enough to provide an excellent investment management program, we also have to offer one that fits with investors objectives for risk and return. The most notable declines have been in Emerging Market and developed international countries. However, all of these assets are down off their prior highs.

GLOBAL ASSET CLASS RISK MANAGEMENT TREND FOLLOWING 2018

Clearly, markets don’t always go up. The trends so far in the first six months of 2018 haven’t offered many opportunities for global asset allocation to make upward progress.

This is why I rotate, rather than allocate, to shift between markets rather than allocate to them. We also trade in more markets than we covered here, like leading individual stocks. The magnitude of these drawdowns also shows why I believe it is essential to direct and control risk and drawdown.

 

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

You can follow ASYMMETRY® Observations by click on on “Get Updates by Email” on the top right or follow us on Twitter.

The observations shared in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results.