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

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

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

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

Florida COVID hospitalizations continue in a 45-degree uptrend.

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

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

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

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

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

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

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

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

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

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

Be informed, and prepared, not afraid.

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

Quantitative Technical Analysis of the Coronavirus COVID – 19 Trend

My expertise is the quantitative and technical analysis of trends, momentum, countertrends, and volatility as well as tactical risk management and hedging. As the investment manager of ASYMMETRY® Global Tactical and ASYMMETRY® Managed Portfolios, professionally, I apply it to global market price trends for portfolio management. The methods and systems are robust, so the skills can be applied to understand trends of a pandemic, too.

Since I expect to see the speed of new Coronavirus COVID – 19 cases to increase exponentially, I’m going to start sharing my observations on it from the lens of a “quant” and a technical chartist.

I’m concerned many American’s will become overwhelmed at the sheer speed of growth.

It’s going to happen, but we have to put it into perspective. I’m going to help.

It’s essential to look for the logical fallacy of the herd and consider how they may be wrong. A logical fallacy is a flaw in reasoning. Logical fallacies are like tricks or illusions.

The herd gets trends wrong at extremes, then become shocked by the staggering swing the other way. The trend and momentum of this virus isn’t a lot different than capital markets as it contains a fundamental, in this case, physical science element, and a whole lot of human emotion and behavior.

Just like capital markets. 

People initially underreact, then they panic because they underreacted, then they overreact.

We’re seeing it now. I know people who initially laughed it off, now those same people have swung to the extreme on the other side. If you underreact, you’re likely to overreact and panic.

This pandemic is spreading at an exponential rate with no significant risk management or drawdown control tools to apply except for social distancing. For example, in investment management, we can hedge our positions or exit early to avoid more losses. Here, the risk management is to avoid contact with other people. Why? because this is an ASYMMETRIC UNCERTAINTY, as there are many parts of it we are unsure about such as whether contagious asymptomatic carriers exist. Asymptomatic carries are those not yet showing symptoms who are infected and don’t know it yet. In “Authorities should use data science tools to be precise in QUARANTINE mandates” I discuss how we can use asymptomatic data from digital thermometers as an early warning sign.

If someone has it and doesn’t show symptoms, they spread it unknowingly. So, we don’t know if taking temperatures at airports and such has any impact at this time.

It seems the most critical issue right now is N95 masks and protective supplies for our Physicians and medical professionals. This is their time and we need to support them. The next issue seems to be a ventilator shortage, and that’s a big one. If hospitals reach their capacity, especially with a limited number of ventilators, the death rate will increase, with nothing else to slow or stop it but social distancing. 

The key, right now, is to slow down the spread of Coronavirus affording more time for more testing, spread out the hospital/ventilator use, and find a vaccine. Read: Social distancing. Stay home, hunker down, it’s simple.

With that said, the next trend, then, will be the overall impact on the country and the world from shutting down for so long. All of which are asymmetric uncertainty and unknowable, just like the future of global capital markets I deal with every day.

So, here we are, at the longest economic expansion in American history and the longest bull market in stocks and bonds, and we now have a catalyst for the cycles and trends to swing the other way.

INTRODUCING: A Quantitative Technical Analysis of the Coronavirus COVID – 19 Trend

First, all of the information provided is deemed reliable but is not guaranteed. So, we immediately realize there are limits to the data, since we can’t independently verify if a country, state, or county is reporting accurately.

Now that we have enough data from which to begin to draw inference, or charting trends, we us the data from Johns Hopkins Center for Systems Science and Engineering. The Center for Systems Science and Engineering takes a multidisciplinary approach to modeling, understanding, and optimizing systems of local, national, and global importance.

First shared on January 22, 2020, the Coronavirus Tracker tracks the progression of Coronavirus (also known as 2019-nCoV or COVID 19) across the world. COVID 19 was first detected in Wuhan, China in December 2019. On January 13, 2020 Thailand reported the first international case outside China, while the first cases within China, but outside of Wuhan were reported on January 19, in Guangdong and Beijing. Since then, the virus spread across the world.

As any good chartist, we’ll start at the top and work our way down into more granular observations. This is just my first observation, so later I’ll add more detail and analysis of the trends and momentum over time.

Coronavirus (COVID-19) is a global pandemic that originated in Wuhan, China in 2019. The virus has sparked a global economic slowdown because countries including China, Italy, and Iran having more than 1000 deaths within the first few months of the virus emerging. The virus also caused many countries to provide fiscal and monetary stimulus. For example, in the United States, the Federal Reserve conducted two surprise rates cuts to lower the Federal Funds rate to nearly 0%. Additionally, parts of the world implemented a complete lockdown of cities to prevent the spread of the virus. The Coronavirus pandemic eclipsed 10,000 cases on February 1, 2020, and 100,000 cases on March 6, 2020.

World Coronavirus Cases is at a current level of 691,867, up from 660,706.0 yesterday, which is a change of 4.72% from yesterday. This first chart can be somewhat misleading, so here is lesson one. This is a linear chart, so each level on the y-axis (horizontal axis) is the spacing is equal between the number of cases.

In comparison, below is the logarithmic chart. Logarithmic scales use percentage moves for spacing, rather than number of cases, so a log scale emphasizes the rate of change in a way that linear scales do not.

Notice how different looking the trend is for the same data. The top chart, linear,  is an equally spaced grid of the number of cases. The linear chart plots the number of cases exactly as they are in person terms. For example, in the beginning there wasn’t nearly as many cases as now, so it’s at a lower level. So, when there was only 1,000 cases and now there are nearly 700,000 cases, the grid spacing on the chart doesn’t change. So, the earlier cases seem small on the chart because as a fixed number it is much smaller than more recent larger numbers.

The logarithmic chart corrects this issue and instead shows us the trend of the rate of change based on percentage moves. So, when the number of cases changes from 100 to 200, it’s a 100% change and it gets the same spacing as a change from 30,000 to 60,000, which is also a 100% change. A log chart helps us to normalize the data and see the trend in rate of change terms. The log chart is unique in that it shows a very fast uptrend early on that has sense slowed its rate of change.

Which scale is right? They both are. They just show the data in different ways. We primarily us logarithmic scales for price trends, especially longer time frames. We use linear charts with short term trends, when the data doesn’t spread out that much, or when we view an oscillator like breath indicators showing the percent of stocks in uptrends vs. downtrends.

One more example of the difference between the two, but this time with less words, more the picture. This is the World Coronavirus Cases Per Day on a linear chart, which makes me wonder if all the data is in, or it is really dropped that much. It’s possible it did, as the number of cases per day should decline at some point, so we’ll see tomorrow.

Here is the same date in the logarithmic chart. Applying the rate of change, it doesn’t look so strange because the percentage change isn’t as much as it appears in number form.

Next we look at the worst part: World Coronavirus Deaths, Death Rate, and Deaths per day. For now, I’ve put them on one chart for quick observation of the trend. The death rate at the world level is high at 4.77%, which may not be a predictor of the US death rate.

US CORONAVIRUS COVID – 19 CASES

In later observations, I’ll start analyzing the trends including ratios between them, correlations, spreads, and such, to see if we can find any signals in the noise. Next is a overall summary of US Coronavirus Cases, Deaths, Death Rate, and Cases Per Day, and Deaths Per Day. These trends are up, except the death rate, which was initially greater and has since declined. The general older age of some of the early infected on a cruise ship may have driven the higher rate initially.

The US Death Rate is an important number as it normalizes the number of deaths as a rate of change we can use to compare to other areas.

Speaking of comparison to other areas, I have other countries data, too, and also the US States. Since our clients are in the US, I’ll focus mainly here and within our states. We may eventually get more granular into county level data.

US States: Florida, Tennessee, Texas, North Carolina, California, New York

Since most of our clients are in these states, here is the percentage change to normalize the growth to compare.

New York has by far the highest number and rate of cases. California has the least! I pointed out in Increasing evidence social distancing policies at the state level are causing decreases in the viral transmission of Coronavirus COVID 19 that the quick response of California seems to have slowed their growth.

I’m in Tampa Bay, so here’s a look at Florida. As the number of tests administered is increasing, so is are the number of cases.

As we get more data over time, the number of hospitalizations will be more and more telling. At this point, it’s 526 out of 3,763 cases, or about 14%. This percentage will become much more accurate as the sample size increases.

The death rate for Coronavirus in Florida is declining, but it’s too early and we don’t have a large enough sample size to draw a statistical inference from it just yet. We hope to see the death rate stay this low.

I’m going to monitor this data once a day, just as I monitor global market trends around the world. When I observe something asymmetric or useful, I’ll share it. In addition to viewing the trends and rate of change (momentum), I’ll also do some studies of ratios, correlations, and spreads to see if we can spot any patterns. If you have any questions for charting requests, contact me at the top of the page.

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

Authorities should use data science tools to be precise in QUARANTINE mandates

As I was writing this follow up to the Kinsa data US Health Weather Map, my conclusion is it seems Authorities should use all the data science they can to be as precise as possible for any government-mandated quarantines. I thought so because I believe, although social distancing is essential to slow the spread of COVID – 19,  a government-mandated quarantine is a very big step. A government-mandated quarantine, especially one mandated at the federal level, has its risks. I’m thinking in terms of the impact on the individual mental and physical health of Americans, our communities, and the economy. At the federal level, their duty is to make decisions in the best interest of the overall situation.

Data Science

Data science is an interdisciplinary field that uses scientific methods, processes, algorithms, and systems to extract knowledge and insights from many structural and unstructured data. Data science is related to data mining and big data.

I’m doing a Twitter poll that asks: Do you believe a broad quarantine worth the cost to the individual mental/physical health, community, and the economy? As of this writing, here are the results so far.

Twitter Poll Q

Polls such as Twitter polling is crowdsourcing. Crowdsourcing is a form of data science in that it gives us an idea of the opinions and observations of a large group of people. It also starts a conversation around the topic if it’s thought-provoking.

As I said in Increasing evidence social distancing policies at the state level are causing decreases in the viral transmission of Coronavirus COVID 19 the exponential trend in new cases in the US is already underway, so I’m now focusing on the inflection point. I’m concerned many Americans will be more panicked when they see how fast the spread compounds in the weeks ahead, so you should be prepared for it. However, as the trend is adrift, I’m thinking of inertia such as social distancing and how we can potentially find any signals in the noise.

I shared in Increasing evidence social distancing policies at the state level are causing decreases in the viral transmission of Coronavirus COVID 19 the best tool I’ve seen so far that may have some useful predictive ability is the Health Weather Map by Kinsa.

The U.S. Health Weather Map is a visualization of seasonal illness linked to fever – specifically influenza-like illness. The aggregate, anonymized data visualized on the map is a product of Kinsa’s network of Smart Thermometers and accompanying mobile applications, and Kinsa is providing this map and associated charts as a public service.

Kinsa has updated its atypical Illness map to reflect the cumulative amount of atypical illnesses we’ve observed since March 1.  Previously the Health Weather Map reflected only new atypical illness, updated daily. Kinsa says:

As widespread social distancing measures take effect, feverish illness levels are dropping, and we feel this way of looking at the data gives a more accurate and comprehensive view of what’s happening. Change is effective as of March 27.

Here is the chart today. Since we are in Tampa Bay in Florida, I especially notice the red here in south Florida. The Miami-Dade area has especially active atypical data from their thermometers. The map above shows us how much influenza-like illness above the normal expected levels Kinsa has detected since March 1.

HEALTH WEATHER MAP KINSA

The time series chart allows us to compare Kinsa’s observations of the influenza-like illness level in the U.S., in orange and red, against where we’d expect them to be, in blue, and see how that relationship has changed over the past few weeks,

time series chart allows you to compare Kinsa observations

I made a gif video of the map taking a closer look around south Florida including Tampa Bay and Miami-Dade to show the level of detail.

kinsa health weather map

I’m thinking this data is likely to have predictive power and may help authorities to monitor, track, and make decisions about quarantines and such.

Just imagine the ability to electronically monitor certain health measures of thousands or millions of people around the country. That’s essentially what we have here, and it’s a  visualization of seasonal illness linked to fever, specifically influenza-like illness, which is a common characteristic of Coronavirus COVID – 19.

The CDC says:

“People may be sick with the virus for 1 to 14 days before developing symptoms. The most common symptoms of coronavirus disease (COVID-19) are fever, tiredness, and dry cough.”

So, it seems identifying and tracking the trend as soon as possible is essential.

Aside from a concern, Americans will start to panic more when they see a very fast accelerating growth of new cases, I’m now concerned about how they may react to a government-mandated lockdown. We are seeing evidence the social distancing is working and needs to continue, but a government-mandated quarantine may have more mental trama to it.

As I was writing this, I saw the President tweeted he is considering a more targeted quarantine:

It seems the more precise they can be in deciding areas to lock down the better. I believe it because when we look at the map of confirmed cases, the red areas are distinct. Much of the US doesn’t have any cases at all. So, I can see why the federal authorities hesitate to quarantine the entire country.

COVID 19 CASES US

But, if they can more precisely define the risk areas using the tools available, the data from the map from Kinsa’s network of Smart Thermometers and accompanying mobile applications may help them to see early warning signs in new areas. 

As a libertarian myself, I’m not an enthusiast of the federal government mandating a shutdown, and I prefer to at least let the state, county, and city make their own decisions. I’m also one to try to be a part of the solution rather than part of the problem, so we are self-quarantined to the extent we can and I support a more precise government-mandated quarantine.

The reality is, we don’t know if the cost of a broad quarantine is worth the cost to the individual mental/physical health, community, and the economy, so the best thing is to be as precise as possible about managing the risks.

I believe tools like the US Health Weather Map can be part of the solution.

We are working on a report of the COVID – 19 trends I’ll be sharing shortly. I’m going to start analyzing the trends quantitatively. Don’t miss out, sign up to get the email:

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

This map from Smart Thermometers may have predictive power about Coronavirus COVID – 19

As you know, I do quantitative research of trends, trend changes, and such, which are usually applied to global market trends. I have been studying some quantitative data that appears to front-run COVID – 19 by about a week.

In other words, it appears to have predictive value.

Most of what I’ve seen reported suggests the increase in hospital cases will peak in the next few weeks. Based on what I’m seeing, we may instead observe peak in hospital cases much sooner, as in the next few days.

First, the Observed Illnesses is an index of how severely the population in this area is being affected by influenza-like illness, according to Kinsa Insights.

The next map is The U.S. Health Weather Map, which is a visualization of seasonal illness linked to fever – specifically influenza-like illness, according to Kinsa. What they are calling “atypical illness”, may in some cases be connected to the COVID-19 pandemic. “The aggregate, anonymized data visualized here is a product of Kinsa’s network of Smart Thermometers and the accompanying mobile applications. Kinsa is providing this map and associated charts as a public service.

Kinsa explains on the website:

This chart allows us to compare Kinsa’s observations of the influenza-like illness level in the U.S., in orange and red, against where Kinsa expects them to be, in blue Based on their data, influenza-like illness levels in the U.S. are higher than what we’d expect at this time of year, according to the website.

They go on to explain:

The map shows two key data points:

(1) the illness levels we’re currently observing, and

(2) the degree to which those levels are higher than the typical levels we expect to see at this point in the flu season.

Please note: We are not stating that this data represents COVID-19 activity. However, we would expect to pick up higher-than-anticipated levels of flu-like symptoms in our data in areas where the pandemic is affecting large numbers of people. Taken together with other data points, we believe this data may be a helpful early indicator of where and how quickly the virus is spreading.

Notice in the map above, California is gray now, it was red before. They note: 

Due to widespread social distancing, school closures, stay-at-home orders, etc. influenza-related illness levels are dropping in many regions. In some regions (e.g. CA) they’re dropping below the expected range for this time of year — which reduces the level of atypical illness to zero on our map

I believe this is fascinating and seems to suggest it is likely we’ll see a peak in hospital cases much sooner, as in the next several days. If so, it may also mean Coronavirus passes through faster than many expect. In that case, it would be an unexpected improvement for the economy and stock market, if we aren’t shut down as long.

I like the direction of this trend.

This image has an empty alt attribute; its file name is image-20.png

Check out the incredible US Health Weather Map powered by Kinsa Insights. Also see Can Smart Thermometers Track the Spread of the Coronavirus? from The New York Times, which is where I first learned of it.

Let’s see how it trends from here.

I’m going to be sharing some very interesting observations in the weeks ahead, so I encourage you to follow along by entering your email below for notifications.

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.

Good news for the stock market

Something we have warned about for a while now is the elevated valuation level of stocks in general.

To be sure, I search for “Shiller PE” here on ASYMMETRY® Observations to mention the most recent times.

I promise I’m not just tooting my own horn here. The intent is to make the point that these things were present before this market crash and it’s starting to get cleared up. The same person who wrote about it then is now looking for the trend to change. But, to fully understand, we have to go back and see where we are coming from to know where we are now.

February 6, 2020 19 is the new 20, but is this a new low volatility regime?

I wrote:

  1. The current bull market that started in March 2009 is the longest bull market in history. It exceeded the bull market of the 1990s that lasted 113 months in terms of time, though still not as much gain as the 90s.
  2. The U.S. is in its longest economic expansion in history, breaking the record of 120 months of economic growth from March 1991 to March 2001, according to the National Bureau of Economic Research. However, this record-setting run observed GDP growth far slower than previous expansions.

The aged bull market and economic expansion can naturally lead to some level of complacency and expectation for less downside and tighter price trends. When investors are uncertain, their indecision shows up in a wide range of prices. When investors are smugger and confident, they are less indecisive and it’s usually after a smooth uptrend they expect to continue.

Is it another regime of irrational exuberance?

“Irrational exuberance” was the expression used by the former Federal Reserve Board chairman, Alan Greenspan, in a speech given during the dot-com bubble of the 1990s. The expression was interpreted as a warning that the stock market may have been overvalued. It was.

Irrational exuberance suggests investor enthusiasm drives asset prices up to levels that aren’t supported by fundamental financial conditions. The 90s ended with a Shiller PE Ratio over 40, far more than any other time in more than a century.

Is the stock market at a level of irrational exuberance?

Maybe so, as this is the second-highest valuation in the past 150 years according to the Shiller PE.

shiller pe ratio are stocks overvalued

Before that, on January 17, 2020 in

The aged bull market and economic expansion can naturally lead to some level of complacency and expectation for less downside and tighter price trends. When investors are uncertain, their indecision shows up in a wide range of prices. When investors are smugger and confident, they are less indecisive and it’s usually after a smooth uptrend they expect to continue.

Is it another regime of irrational exuberance?

“Irrational exuberance” was the expression used by the former Federal Reserve Board chairman, Alan Greenspan, in a speech given during the dot-com bubble of the 1990s. The expression was interpreted as a warning that the stock market may have been overvalued. It was.

Irrational exuberance suggests investor enthusiasm drives asset prices up to levels that aren’t supported by fundamental financial conditions. The 90s ended with a Shiller PE Ratio over 40, far more than any other time in more than a century.

Is the stock market at a level of irrational exuberance?

Maybe so, as this is the second-highest valuation in the past 150 years according to the Shiller PE.

shiller pe ratio are stocks overvalued

Before that, on January 17, 2020 in What’s the stock market going to do next? I included:

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.

As a matter of fact, I was quoted three times in Barron’s and MarketWatch in November 2019 and January 2020 warning of the elevated risk level in stocks because of their valuation, the length of the bull market that is 11 years old, and what was a very low level of volatility.

I’m a true independent thinker, and have evidence of that as well. I’m sure my friends at Barron’s may not have liked it when I poke a little fun at the cover on January 18th and made it as clear as it could be! Here is what I wrote in Now, THIS is what a stock market top looks like!

To be fair, I also included how Barron’s had been right before on their cover, but I was just using this as a confirming sign along with many other things I was already seeing.

I followed with;

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. 

Here is the good news. After more than a -30% decline, the S&P 500 Shiller PE is down to 21, which is now within a more normal range, especially if we can assume low inflation. It’s still highly valued, but not the extremely overvalued 32 I warned about several times this year.

At 32 times earnings, it was the second most expensive time for stocks in American history. Second only to the late 1990’s and above Black Tuesday, just before the Great Depression.

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

The mean is 16.70, so it still has a way to go for mean reversion.

The only good thing about falling stock prices is, if you have a lot of cash, as we’ve had, you get to buy stocks and equity ETFs at lower risk entry points. I’m not often a value investor, but I am when prices actually become fairly valued to undervalued.

Another way to observe valuations of the big picture is the S&P 500 PE Ratio. The S&P 500 PE Ratio is the price to earnings ratio of the constituents of the S&P 500. The S&P 500 includes the 500 largest companies in the United States and can be viewed as a gauge for how the US stock market is performing. The price to earnings ratio is a valuation metric that gives a general idea of how a company’s stock is priced in comparison to their earnings per share. Historically, the S&P 500 PE Ratio peaked above 120 during the financial crisis in 2009 and was at its lowest in 1988. I marketed the high, low, and average in the chart.

The trouble is, this PE metric did skyrocket in the last bear market. It’s because in recessions and bear markets, earnings decline. A picture is worth a thousand words, so here is the S&P earnings over the last twenty years with the recessionals in gray.

It all makes more sense when we see all three of the stock market return drivers in one chart. Earnings fall, price falls, dividend increases as the price decrease, and PE spikes up.

Next I show all four; price trend, PE trend, earnings cycle, and dividend yield.

So, the good news is, the US stock market is becoming less overvalued. The downside is, a recession seems imminent as earnings was already expected to slow. This is at least one less risk in the big picture, but we’ll see how it all unfolds from here.

Bear markets are difficult and with all the negative headlines right now, I know it’s hard for people to see light at the end of the tunnel. I don’t see it, either, but as a tactical investment manager, I increase and decrease exposure to the risk/reward and in a volatility expansion, I expect wider swings.

These are fascinating times and past bear markets have been the highlight of my professional investment management career, so sign up if you want to follow along with email notifications of new observations.

Let us 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 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.

Coronavirus: Preparing for the worst and hoping for the best

I’m not a Physician, I am a mathematician, so I deal with trends, velocity, momentum, exponentials, and differentials.

People tend to underreact to initial changes in new information and then overreact after they realize they underreacted. That’s when we see the panic and the madness of crowds.

The exponential growth of Coronavirus is likely to be shocking initially in the weeks ahead. As I shared with friends in January, this is an asymmetric uncertainly, and there is a chance for underestimation. So, I hope people are taking the advice of the CDC on things like social distancing, which will help.

What is asymmetric uncertainty?

Asymmetric Uncertainty: Properties of the virus that are uncertain will have a substantial impact on whether the policies implemented are effective. For instance, whether contagious asymptomatic carriers exist. These uncertainties make it unclear whether measures such as temperature screening at major ports will have the desired impact. Practically all the uncertainty tends to make the problem potentially worse, not better, as these processes are convex to uncertainty.

The funny thing is, as social distancing does help “flatten the curve,” many people will believe it wasn’t necessary to start with.

That’s okay, let them believe it.

coronavirus strategy

Christi and I are operating from our home office and prepared to hunker down as long as we need to. We prepared by stocking up supplies we need, which we do to some degree anyway in advance of hurricane season. This year, we just did it early, and more of it. If we don’t eat canned food, it’s a good donation.

In the meantime, the simple way to avoid the virus is to simply avoid situations that could attract it. Beyond that, there are many resources straight from the horse’s mouth that help to track it.

For example, here in Florida, the Florida Department of Health provides updates on its website. Here are the latest updates at this moment. I don’t make the mistake of watching it closely all day, I check it in the morning to see how it’s trending and its rate of change.

FLORIDA CORONAVIRUS Florida Department of Health

A global tracking resource I shared before is the Coronavirus COVID-19 Global Cases by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University(JHU). At this moment, here are the global numbers. I clicked on Florida to see more detail.

Coronavirus COVID-19 Global Cases by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University (JHU)

Another is the COVID-19 CORONAVIRUS OUTBREAK by Worldometers.

COVID-19 CORONAVIRUS OUTBREAK

Again, unless “social distancing” has a very dramatic impact immediately, we should expect to see the rate of change increase exponentially in the days and weeks ahead. For those who aren’t aware or prepared, it may be shocking for a while. If you want to embrace the asymmetric uncertainty, as we are, just hunker down for a while and watch it all unfold.

I have a good reason to, beyond not contracting or spreading the disease, as global markets in a downtrending volatility expansion. I’m trying to make the best of it.

Now is the time to check on our neighbors, friends, and family.

With the social media we have today, we may be physically distant, but we’ve never been more connected.

Beyond that, hang in there friends, this too shall pass. Someday we’ll look back and tell the stories just as we do about Y2K, 9/11, the Gulf Wars, and all the other things we hadn’t experienced before until it happened.

As for investment management, sign up to follow ASYMMETRY® Observations on the upper right side of this page.

I hope this helps. Let us know if we can assist. Get in touch here.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike Shell and Shell Capital Management, LLC is a registered investment advisor in Florida, Tennessee, and Texas. Shell Capital is 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. I observe the charts and graphs to visually see what is going on with price trends and volatility, it is not intended to be used in making any determination as to when to buy or sell any security, or which security to buy or sell. Instead, these are observations of the data as a visual representation of what is going on with the trend and its volatility for situational awareness. I do not necessarily make any buy or sell decisions based on it. 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.

Profiting from the Madness of Crowds

If we want to profit from the madness of crowds, we necessarily need to believe and do different things than the crowd at the extremes.

You may have heard the stock market was down a lot yesterday. I consider yesterday’s price action a black swan event.  The -8% one-day decline was the worst day for S&P500 since 2008 and the 19th worst day since 1928.

The popular S&P 500 stock index dropped -7.6%, which was enough to trigger a circuit breaker to halt trading for the first time in 23 years. Circuit breakers are the thresholds when, if reached during a single-day decline in the S&P 500, trading is halted. Circuit breakers halt trading on US stock markets during dramatic price declines and are set at 7%, 13%, and 20% of the closing price for the previous day.

After yesterday’s waterfall decline, the price trend of the S&P 500 lost the 24% gain it had achieved a month ago.

stock market lost 2020 gain

Interestingly, we’re seeing “mean reversion” as the SPX is now all the way back to the same level it reached in January 2018. In investment management, mean reversion is the theory that a stock’s price will tend to move to the average price over time. This time it did.

mean reversion SPX SPY S&P 500

US equity investors would have been better off believing the market was too overvalued then and shifting to short term Treasuries. But, who would have been able to do that? Who wouldn’t have had the urge to jump back in on some of the enormous up days the past two years? There’s the real challenge: investor behavior. And yes, some may even look back and say they knew then but didn’t do anything. If we believed it then, we can go back and read out notes we made at the time. But, it wouldn’t matter if a belief isn’t acted on. I’m a trigger puller, I pull the trigger and do what I believe I should do in pursuit of asymmetric risk/reward for asymmetry.

Dow Jones is down -16.4% YTD at this point.

dow jones 2020 loss

The Dow Jones has also experienced some “mean reversion” over the 3-year time frame.

dow jones 2020 loss bear stock market

Mid-cap stocks, as measured by the S&P 400, are down, even more, this year, in the bear market territory.

mid cap stock in bear market MDY

Small-cap stocks, considered even riskier, are now down -23% in 2020.

small cap stocks are in a bear market

Clearly, the speed and magnitude of this waterfall decline have been impressive since the February 19th top just three weeks ago. Decreases in these broad stock indexes of -20% are indications of a strong desire to sell and yesterday, panic selling.

So, -20% from peak, the stock market decline has reached bear market territory and is now nearly in-line with the typical market-sell off since 1928 that preceded an upcoming recession.

Global Equity Market Decline

And by the way, it wasn’t just US equities, the selling pressure was global with some markets like Russia, Australia, Germany, Italy, and Brazil down much more.

stock stock market selloff

Extreme Investors Fear is Driving the Stock Market 

Indeed, after Extreme Fear is driving the stock market according to investor sentiment measures. A simple gauge anyone can use is the Fear & Greed Index, which measures seven different indicators.

As of today, it shows the appetite for risk is dialed back about as close to zero it can get.

what is driving the stock market

In the next chart, we can observe the relative level of the gauge to see where it is comparable to the past. While this extreme level of fear can stay elevated for some time, it has now reached the lowest levels of 2018. It’s important to note this isn’t a market timing indicator, and it does not always provide a timely signal. As you can see, at prior extreme lows such as this, the fear remained extreme for some time as the indicator oscillated around for a while. It’s a process, not an event. Investor sentiment measures like this tell us investors are about as scared as they get at their extreme level of fear is an indication those who wanted to sell may have sold.

fear greed investor sentment over time

Monitoring Market Conditions

My objective is asymmetric investment returns, so I look to find an asymmetric risk-reward in a new position. An asymmetric return profile is created by a portfolio of asymmetric risk-reward payoffs. For me, these asymmetric payoffs are about low-risk entries created through predefined exits and how I size the positions at the portfolio level. As such, I’ve been entering what I consider to be lower risk points when I believe there is potentila for an asymmetric payoff. Sometimes these positions are entering a trend that is already underway and showing momentum. The market is right most of the time, but they get it wrong at extremes on both ends. I saw that because of my own personal observations for more than two decades of professional money management, which is confirmed, markets and behavior really haven’t changed.

Humphrey B. Neill, the legendary contrarian whose book “The Art of Contrary Thinking,” published in 1954, including the same observations nearly seventy years ago.

“The public is right more of the time than not ” … but “the crowd is right during the trends but wrong at both ends.”

As market trends reverse and develop, we see a lot of indecision about if it will keep falling or reverse back up, which results in volatility as prices spread out wider driven by this indecisiveness. Eventually, the crowd gets settled on once side and drives the price to trend more in one direction as the majority of capital shifts enough demand to overwhelm the other side.

Risk Manager, Risk Taker

At these extremes, I have the flexibility to shift from a trend following strategy to a  countertrend contrarian investment strategy. My ability to change along with conditions is why I am considered an “unconstrained” investment manager. I have the flexibility to go anywhere, do anything, within exchange-traded securities. By “go anywhere,” I mean cash, bonds, stocks, commodities, and alternatives like volatility, shorting/inverse, real estate, energy MLPs, etc. I give myself as broad of an opportunity set as possible to find potentially profitable price trends. So, as prices have been falling so sharply to extremes, I was entering new positions aiming for asymmetric risk/reward. I was able to buy at lower prices because I had also reduced exposure at prior higher prices. As trends became oversold as measured by my systems, I started increasing exposure for a potential countertrend.

On ASYMMETRY® Observations, I’m writing for a broad audience. Most of our clients read these observations as do many other investment managers. My objective isn’t to express any detail about my specific buying and selling, but instead overall observations of market conditions to help you see the bigger picture as I do. As long time readers know, I mostly use the S&P 500 stock index for illustration, even though I primarily trade sectors, stocks, countries; an unconstrained list of global markets. I also share my observations on volatility, mostly using the VIX index to demonstrate volatility expansions/contractions. At the extremes, I focus a lot of my observations on extremes in investor sentiment and breadth indicators to get an idea of buying and selling pressure that may be drying up.

Market Risk Measurement 

One of my favorite indicators to understand what is going on inside the stock market is breadth. To me, breadth indicators are an overall market risk measurement system. Here on ASYMMETRY® Observations, I try to show these indicators as simple as possible so that anyone can understand.

If we want to profit from the madness of crowds, we necessarily need to believe and do different things than the group at the extremes.

One of my favorite charts to show how the market has de-risked or dialed up risk is the percent of S&P 500 stocks above the moving average. As you see in the chart, I labeled the high range with red to signal a “higher risk” zone and the lower level in green to indicate the “lower risk” zone.

percent of s&P stocks above moving average 2020

I consider these extremes “risk” levels because it suggests to me after most of the stocks are already in long term uptrends, the buying enthusiasm may be nearing its cycle peak. And yes, it does cycle up and down, as evidenced by the chart. As of yesterday’s close, only 17% of the S&P 500 stocks are trending above their 200-day moving average, so most stocks are in a downtrend. That’s not good until it reaches an extreme level, then it suggests we may be able to profit from the madness of crowds as they tend to overreact at extremes.  The percent of S&P 500 stocks above the longer-term moving average has now declined into the green zone seen in late 2018, the 2015-16 period, 2011, but not as radical as 2008 into 2009. If this is the early stage of a big bear market, we can expect to see it look more like the 2008-09 period.

We can’t expect to ever know if equities will enter a bear market in advance. If you base your trading and investment decisions on the need to predict what’s going to happen next, you already have a failed system. You are never going to know. What I do, instead, is focus on the likelihood. More importantly, I predefined the amount of risk I’m willing to take and let it rip when the odds seem in my favor. After that, I let it all unfold. I know I’ll exit if it falls to X, and my dynamic risk management system updates this exit as the price moves up to eventually take profits.

Zooming in to the shorter trend, the percent of stocks above their 50 day moving average has fallen all the way down to only 5% in an uptrend. This means 95% of the S&P 500 stocks are in shorter-term downtrends. We can interpret is as nearly everyone who wants to sell in the short term may have already sold.

stock market breadth risk management market timing

I can always get worse. There is no magical barrier at this extreme level that prevents it from going to zero stocks in an uptrend and staying there a long time as prices fall much more. But, as you see in the charts, market breadth cycles up and down as prices trend up and down.

If we are in the early stage of a big bear market, I expect there will be countertrends along the way if history is a guide. I’ve tactically traded through bear markets before, and the highlight of my career was my performance through the 2007-09 period. I didn’t just exit the stock market and sit there, I traded the short term price trends up and down. If someone just exited the stock market and sit there, that may have been luck. If we entered and exited 8 or 10 different times throughout the period with a positive asymmetry of more significant profits than losses, it may have required more skill. I like my managed portfolio to be in synch with the current risk/reward characteristics of the market. If that is what we are achieving, we may have less (or hedged) exposure at the peak and more exposure after prices fall. I believe we should always be aware of the potential risk/reward the market itself is providing, and our investment strategy should dynamically adapt to meet these conditions.

If we want to profit from the madness of crowds, it means we have some cash or the equivalent near trend highs and reenter after prices fall. It may also be achieved by hedging near highs and using profits from the hedge to increase exposure after prices have dropped. It sounds like a contrarian investor. To be a contrarian investor at extremes to profit from a countertrend, we study crowd behavior in the stock market and aim to benefit from conditions where other investors/traders act on their emotions. These extremes of fear and greed are seen at major market turning points, presenting the disciplined contrarian with opportunities to both enter and exit the market.

This crowd psychology has been observed for many decades, and unfortunately, investors and traders are excellent lab rates to study the behavior.

Believe it or not, 179 years ago, in 1841, Charles Mackay published his book “Extraordinary Popular Delusions and the Madness of Crowds” in which discussing the South Sea Bubble and Dutch Tulip Mania as examples of this mass investment hysteria. People haven’t changed. As a crowd, we the people still underreact to initial information and then overreact at the extremes.

As Mackay observed nearly two centuries ago:

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

Once people begin to go with the crowd, their thinking can become irrational and driven by the emotional impulses of the crowd rather than on their own individual situation.

According to studies like DALBAR’s Quantitative Analysis of Investor Behavior (QAIB), individual investors have poor results over the long haul. 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 since 1994 and finds people tend to do the wrong things at the wrong time. If we want to create different results from the majority, we must necessarily believe and do things differently.

At this point, we’ve seen fund flows from stocks to bonds reach extreme levels across multiple time frames as panic selling set in. I’m glad to say, while imperfect as to timing, I have done the opposite by shifting to short term US Treasuries at the prior high stock prices and then started rebuying stocks last week. Of course, I have predetermined points I’ll exit them if they fall, so I remain flexible and may change direction quickly, at any time.

I’m seeing a lot of studies showing that history suggests single-day waterfall declines like yesterday were followed by gains over the next few weeks. Rather than hoping past performance like that simply repeats, I prefer to measure the current risk level and factor in existing conditions.

It’s important to understand, as. I have pointed out many times before, that the US stock market has been in a very aged bull market that has been running 11 years now. And the longest on record. The US is also in the longest economic expansion in history, so we should be aware these trends will eventually change. But, when it comes to the stock market, longer trends are a process, not an event. Longer trends unfold as many smaller swings up and down along the way that may offer the potential for flexible tactical traders to find some asymmetry from the asymmetric risk/reward payoffs these conditions may create.

It’s also important to be aware the volatility expansion and waterfall decline the past three weeks seems to indicate a fragile market structure with a higher range of prices, so we’re likely to observe turbulence for some time. These conditions can result in amplified downtrends and uptrends.

Falling prices create forced selling by systematic investment managers similar to what we saw in the December 2018 market crash. As I’ve seen signals from my own systematic trend following and momentum systems shift, it’s no surprise to see some increased selling pressure that may be helped by more money in these programs.

We are in another period of extremes driven by the “madness of crowds,” and my plan is to apply my skills and experience with the discipline to tactically operate through whatever unfolds.

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. Shell Capital is 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. I observe the charts and graphs to visually see what is going on with price trends and volatility, it is not intended to be used in making any determination as to when to buy or sell any security, or which security to buy or sell. Instead, these are observations of the data as a visual representation of what is going on with the trend and its volatility for situational awareness. I do not necessarily make any buy or sell decisions based on it. 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.

 

 

 

Coronavirus quick take and useful resources to track COVID-19

The Coronavirus outbreak is the current headline scare. I focus on data, data mining, analyzing trends, momentum (rate of change), and volatility. I like my information succinct and factual, so when I look at Coronavirus COVID-19, I’m not reading opinions and other nonsense, I’ve focused on the facts in the data, its trend, and rate of change. I took some time today to get my head around what is going on. Here, I share the best resources we found.

As of this writing, here are the Total Confirmed Coronavirus cases, Total Deaths, and Total Recovered. I’m using an outstanding website from Coronavirus COVID-19 Global Cases by Johns Hopkins CSSE.

CORONAVIRUS TOTAL CONFIRMED CASES

Is Coronavirus COVID-19 being overhyped?

Only time will tell. But, there are things we can do in advance to be pro-active and situationally aware.

The single best resource I’ve found is the map from Johns Hopkins University’s Center for Systems Science and Engineering. It draws data from global disease control agencies on Coronavirus cases for a worldwide view of coronavirus cases in real-time. You can zoom in on the map and get detail to monitor an area.

Here is what the Coronavirus around the world looks like.

coronavirus worldwide

Here is the Coronavirus map of the US.

coronavirus us cases

I’m in the Tampa, Florida area, so here is how we can zoom in to see the details.

coronavirus tampa florida

In the bottom right, we can observe a chart of the mainland China cases, other locations, and total recovered.

coronavirus chart of dealth cases recovery

At this time, the orange line represents China, and the rate of change has shifted from exponential growth to leveling off. However, there is a risk of a pandemic, according to the CDC. In the CDC Risk Assessment, they say two of the factors have been met for a pandemic, and; “As community spread is detected in more and more countries, the world moves closer toward meeting the third criteria, worldwide spread of the new virus.”

I’m watching for a new virus since it will trigger the label “pandemic.” 

Specifically, here is a useful passage from the CDC to know: (the bold is mine)

Risk Assessment

Outbreaks of novel virus infections among people are always of public health concern. The risk to the general public from these outbreaks depends on characteristics of the virus, including how well it spreads between people; the severity of resulting illness; and the medical or other measures available to control the impact of the virus (for example, vaccines or medications that can treat the illness). That this disease has caused severe illness, including illness resulting in death is concerning, especially since it has also shown sustained person-to-person spread in several places. These factors meet two of the criteria of a pandemic. As community spread is detected in more and more countries, the world moves closer toward meeting the third criteria, worldwide spread of the new virus.

It is important to note that current circumstances suggest it is likely that this virus will cause a pandemic. This is a rapidly evolving situation and CDC’s risk assessment will be updated as needed.

Current risk assessment:

  • For most people, the immediate risk of being exposed to the virus that causes COVID-19 is thought to be low. This virus is not currently widespread in the United States.
  • People in places where ongoing community spread of the virus that causes COVID-19 has been reported are at elevated risk of exposure, with increase in risk dependent on the location.
  • Healthcare workers caring for patients with COVID-19 are at elevated risk of exposure.
  • Close contacts of persons with COVID-19 also are at elevated risk of exposure.
  • Travelers returning from affected international locations where community spread is occurring also are at elevated risk of exposure, with increase in risk dependent on the location.

CDC has developed guidance to help in the risk assessment and management of people with potential exposures to COVID-19.

What May Happen

More cases of COVID-19 are likely to be identified in the coming days, including more cases in the United States. It’s also likely that sustained person-to-person spread will continue to occur, including throughout communities in the United States. It’s likely that at some point, widespread transmission of COVID-19 in the United States will occur.

Widespread transmission of COVID-19 would translate into large numbers of people needing medical care at the same time. Schools, childcare centers, and workplaces, may experience more absenteeism. Mass gatherings may be sparsely attended or postponed. Public health and healthcare systems may become overloaded, with elevated rates of hospitalizations and deaths. Other critical infrastructure, such as law enforcement, emergency medical services, and sectors of the transportation industry may also be affected. Healthcare providers and hospitals may be overwhelmed. At this time, there is no vaccine to protect against COVID-19 and no medications approved to treat it. Nonpharmaceutical interventions would be the most important response strategy.

According to the data from Johns Hopkins CSSE, a peak was reached on February 13, 2020, when the number of cases spiked. February 14 was also a big day of new cased reporting. However, just looking at the downtrend in the data before the spike, it seems like China may have underreported leading up to the 13th.

CORONAVIRUS DAILY

Coronavirus is getting the blame for the stock market decline. If you’ve been reading my observations here the past few months, you know I don’t believe news drives the stock market as much as people think. To be sure, we can simply look back over past observations, and it may surprise you.

So, February 19 was the peak price for the stock market index, which I labeled on the chart as well as the February 13 spike. If the news of Coronavirus is causing the stock market to fall, it underreacted.

IS CORONAVIRUS CAUSING STOCK MARKET STOCKS TO FALL

I’m not downplaying Cornonviris COVID-19 as the risks are real and it’s an asymmetric uncertainty. If we get it wrong, the risk of loss is substantial, and we just don’t know how it will unfold. What I do know is what I can control. Be prepared with situational awareness. What if it does become a pandemic? Prepare for the possibility as best you can, then let it all unfold.

I glance over headlines to see what the herd is thinking and doing, but I prefer analyzing the data myself, directly. So, I’ll continue monitoring the interactive web-based dashboard to track COVID-19 in real-time with the exceptional resource Coronavirus COVID-19 Global Cases by Johns Hopkins CSSE.

I’m also monitoring the narrative from the CDC updates at Coronavirus Disease 2019 (COVID-19). 

And then there is the Florida Health Department, which has a dynamic page that may be useful for confirmation: Florida 2019 Novel Coronavirus (COVID-19)

florida 2019 Novel Coronavirus COVID-19

 

So, those are the resources. It seems the essential thing to do is be prepared with supplies and monitor the number of outbreaks, its trend, and momentum. But, maybe more important is the possibility of it becoming a pandemic, which will be called if a new virus. It’s worth reading again from the CDC:

That this disease has caused severe illness, including illness resulting in death is concerning, especially since it has also shown sustained person-to-person spread in several places. These factors meet two of the criteria of a pandemic. As community spread is detected in more and more countries, the world moves closer toward meeting the third criteria, worldwide spread of the new virus.

It is important to note that current circumstances suggest it is likely that this virus will cause a pandemic. This is a rapidly evolving situation and CDC’s risk assessment will be updated as needed.

Is this really driving the stock market?

Go back and read my observations for the past few months and decide for yourself. I believe it was initially just the market, doing what it does. However, if this does spread rapidly in the US and cannot be contained as well in the US as they supposedly have in China, and is a pandemic, it could be just enough catalyst to tip over what is already a slowing economy.

Beyond that, I encourage you to learn from the past, as I do, by reading what was just a few weeks ago.

November 16, 2019: Periods of low volatility are often followed by volatility expansions

November 21, 2019: I was quoted in Barron’s: Investors are ignoring two major risks to stocks, warns fund manager

January 6, 2020: I was quoted in MarketWatch: U.S.-Iran tensions will spark increased volatility — here’s how to play stocks, fund manager says

January 21, 2020: What could go wrong

At the time, you have thought I was early, but… it wasn’t raining when Noah build the ark. 

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. Shell Capital is 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. I observe the charts and graphs to visually see what is going on with price trends and volatility, it is not intended to be used in making any determination as to when to buy or sell any security, or which security to buy or sell. Instead, these are observations of the data as a visual representation of what is going on with the trend and its volatility for situational awareness. I do not necessarily make any buy or sell decisions based on it. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

 

 

The trend in Coronavirus, underreactions, and overreactions

Investor sentiment oscillates between the fear of missing out and the fear of losing money.

Investor enthusiasm typically follows the recent trend.

After prices fall, enthusiasm wains as investors fear losing more money.

After prices trend up, investors fear missing out.

Some may literally oscillate between these feelings intraday, daily, or weekly, depending on how closely they watch.

I also believe investors underreact and overreact to new information, such as the “news.”

An overreaction is when price trends become overbought or oversold, driven by positive or negative investor sentiment. It’s why we see price trends crash down or rise into bubbles.

Overreactions can drive prices up or down too far, too fast.

An underreaction is when investors initially underreact to new information, so the price trend drifts up or down over time, rather than an immediate gap up or down. This underreaction drives price trends!

All of this is why my focus is on the direction of price trends, along with volatility, investor sentiment, and multiple time frame momentum.

I’ve also recently pointed out the news isn’t necessary to cause, or driver, of daily price action or price trends (directional drifts), even though most people probably believe it is.

We see an excellent example lately with Coronavirus.

Below is the latest chart from Google Trends, showing an interest in Coronavirus over time. The numbers represent search interest relative to the highest point on the chart for the given region and time.

  • A value of 100 is the peak popularity for the term.
  • A value of 50 means that the term is half as popular.
  • A score of 0 means there was not enough data for this term.

According to the data, it started January 19, 2019, and interest peaked January 28 at 100. Since then, interest in Coronavirus has trended down to a current level of 44, suggesting the term is less than half as popular as it was just three weeks ago.

coronavirus trend interest chart

It seems that news gets tiring, and people lose interest.

Or, maybe people initially overreact and spend a lot of time researching the topic, and then their enthusiasm drifts down from the peak. So perhaps they underreact later?

Or, maybe in the case of Coronavirus, the waning interest was helped by understated data?

coronavirus infections trend

Other global macro fund managers I know were relieved, but then a few of us noticed China had changed in their diagnostic criteria. We now see the spike in the above table.

Yet, the U.S. stock market blows it off. Since the first talk of Coronavirus, the U.S. equity market declined about -3% but has gained 1.5% in total. The China MSCI Index, on the other hand, dropped -10% priced in U.S. Dollars and is down about -3%. The Emerging Markets Index, including China and other emerging countries, has trended a similar path.

stock market performance since coronavirus china emerging markets

It doesn’t seem to be a terrible reaction to me. Especially when we consider much of China is shut down as they attempt to stop the spread.

I believe the small decline we saw in the U.S. was just the market, doing what it does, as the U.S. stock index was extended on the upside, and volaltity was contracted. I was expecting to see some volatility expansion and a price drop based on the mathematics of momentum, velocity, and volatility. We saw it.

At this point, the trend is your friend until the end when it bends, but after that small correction, it seems we’ll soon find out if the upward momentum can continue. It comes at a time when there doesn’t seem to be an end in sight for the slowing and stopping the Coronavirus, so direct yourself accordingly. In the meantime, the headlines have turned much more cynical.

Yahoo Finance:

At the moment, the forward volatility expected by the options market as implied by the cost of options is just below its average over the past year. It’s far below the high of 24 when it spiked in August, and well above the low of 11.54 several weeks ago.

vix volatility coronavirus impact

It will also be interesting to see if the interest in the term “Coronavirus” trends back up as the cases crow asymmetrically, or if it stays the same, or drifts down.

Either way, I believe there is a lot of asymmetric information going on here with China. Asymmetric information is a situation when one person or group has more or better information compared to another. It appears the Communist Party of China may be applying some strategic ambiguity in how they share their data. Another asymmetry is the illusion of asymmetric insight, a cognitive bias whereby people perceive their knowledge of others to surpass other people’s knowledge of them.

The below chart is the latest rest of world count with a trend line forecast through the end of the month.

coronavirus trend

I’m guessing we will find out soon if the market has underreacted to the news of rising confirmed cases and if investors then overreact on Monday after more data is released over the weekend.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike Shell and Shell Capital Management, LLC is a registered investment advisor 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.

The week in review shows some shifts

Much of the observations I shared last week are continuing to be more apparent this week.  So, in case you missed it, this may be a good time to read them.

Earnings season is tricky for momentum growth stocks

I discussed how earnings season can drive a volatility expansion in stocks, especially high growth momentum stocks. The stock market leaders can become priced for perfection, so we never know how investors will react to their earnings reports. To achieve asymmetric returns from momentum stocks, we need a higher magnitude of positive reactions than adverse reactions over time. On a quarterly basis, it can be tricky. The gains and losses as much as 20% or more in the most leading momentum stocks like Facebook ($FB), Google ($GOOGL), Twitter ($TWTR), Grub ($GRUB), and NetFlix ($NFLX) have since provided a few examples.

Front-running S&P 500 Resistance

In Front-running S&P 500 Resistance I shared an observation that many market technicians incorrectly say support and resistance appear before it actually does. We won’t know if resistance to a price breakout exists until the price actually does pause and reverse. I suggested the S&P 500 may indeed pause and reverse, but not because the index drives the 500 stocks in it, but instead because my momentum indicators suggested the $SPY was reaching a short-term overbought range “So, a pause or reversal, at least some, temporarily, would be reasonable.” As of today, the S&P 500 has paused and reversed a little. We’ll see if it turns down or reserves back up to continue an uptrend.

Asymmetry of Loss: Why Manage Risk?

asymmetry of loss losses asymmetric exponential

In Asymmetry of Loss: Why Manage Risk? I showed a simple table of how losses compound exponentially. When losses become greater than -20%, it becomes more exponential as the gains required to recover the loss are more and more asymmetric.  This simple concept is essential and a cornerstone to understanding portfolio risk management. Buy and hold type passive investors who hold a fixed allocation of stocks and bonds are always fully exposed to market risk. When the market falls and they lose -20%, -30%, -50% or more of their capital, they then face hoping (and needing) the market to go back up 25%, 43%, or 100% or more just to get back to where they were. This can take years of valuable time. Or, it could take a lifetime, or longer. Just because the markets have rebounded after being down for four or five years from their prior highs doesn’t guarantee they will next time. Past performance is no guarantee of future results.

Trend following applied to stocks

In Trend following applied to stocks, the message was short and sweet: gains are produced by being invested in stocks or markets that are trending up and losses are created by stocks trending against us. Investors prefer to be in rising stocks and out of falling stocks. But, as I showed in Earnings season is tricky for momentum growth stocks the trick is giving the big trends enough room to unfold. In fact, applying trend following and momentum methods to stocks is also tricky. It’s a skill that goes beyond just looking at a chart and it’s not just a quantitative model.

Stock market investor optimism rises above the historical average

About two weeks ago,  the measures of investor sentiment showed a lot of optimism about future stocks prices, so we shouldn’t have been surprised to see some stocks fall. When a lot of enthusiasm is already priced in, investors can respond with disappointment when their stocks don’t live up to high expectations.

Much of the momentum and trend following in stocks is driven by an overreaction to the upside that can be accompanied by an overreaction to the downside. A robust portfolio management system factors these things in.

 

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.

Front-running S&P 500 Resistance

The S&P 500 stock index closed just -1% from its all-time high it reached on January 26, 2018, and hasn’t been that high since. It’s been in a drawdown that was as much as -10% and it has taken six months to get back near its high point to break even.

SPY SPX $SPX $SPY S&P 500 STOCK INDEX

Before the madness begins saying “The S&P 500 is at resistance,” I want to point out an observation of the truth. It is one thing to draw a trend line on an index to indicate its direction, quite another to speak of “support” and “resistance” at those levels.

Is the S&P 500 at resistance? 

Depending on which stock charting service or data provider you use, it may appear the S&P 500 ETF (SPY) closed at its prior high. Many market technicians would draw a line like I did below in green and say “the S&P 500 is at resistance.”

S&P 500 stock index at resitance SPY SPX

In technical analysis applied to stock market trends, support and resistance is a concept that the movement of the price of a security will tend to stop and reverse at certain predetermined price levels.

Support is when a price trends down and stalls at a prior low. The reasoning is that investors and traders who didn’t buy the low before (or wish they’d bought more) may have buying interest at that prior low price if it reaches it again.

Resistance is when a price trends up and stalls at a prior high. The reasoning is that investors and traders who didn’t sell the high before (or wish they’d sold short to profit from a price decline) may have the desire to sell at that prior high price if it reaches it again.

Whether everyone trades this way or not, enough may that it becomes a self-fulling prophecy. I believe it works this way on stocks and other securities or markets driven by supply and demand, but an index of stocks?

To assume a market or stock will have support or resistance at some price level (or a derivative of price like a moving average) that hasn’t been reached yet is just a predictive assumption. Support and resistance don’t exist unless it is, which is only known after the fact.

One of the most fascinating logical inconsistencies I see by some technical analysts is the assumption that “support” from buying interest and “resistance” from selling pressure “is” there, already exists, before a price is even reached. Like “SPY will have resistance at $292.” We simply don’t know until the price does indeed reverse after that point is reached.

But, it gets worse.

To believe an index of 500 stocks is hindered by selling pressure at a certain price requires one to believe the price trend is controlled by the index instead of the 500 stocks in it.

Think about that for a moment. Let it sink in. 

  • Do you believe trading the stock index drives the 500 stocks inside the index?

or

  • Do you believe the 500 stocks in the index drive the price of the index?

What you believe is true for you. But, to believe an index of 500 stocks is hindered by selling pressure or buying interest at a certain price requires you believe the price trend is controlled by the index instead of the 500 stocks in it. That’s a significant belief.

To complicate it more. If we want to know the truth, we have to look a little closer.

Is the S&P 500 at resistance? 

As I said, it depends on which stock charting service or data provider we use and how we calculate the data to draw the chart. Recall in the prior chart, I used the SPDRs S&P 500 ETF (SPY) which shows the ETF closed near its prior high. I used Stockcharts.com as the data provider to draw the chart. I’ve been a subscriber of their charting program for 14 years so I can tell you the chart is based on Total Return as the default. That means it includes dividends. But, when we draw the same chart using the S&P 500 index ($SPX) it’s based on the price trend. Below is what a difference that makes. The index isn’t yet at the prior high, the SPY ETF is because the charting service includes dividends.

SPY SPX TOTAL RETURN RESISTANCE

Here is another charting service where I’m showing the S&P 500 ETF (SPY) price return, total return, and the S&P 500 stock index. Only one is at the January high.

spy spx S&P 500 resistance

So, we don’t know if the S&P 500 is at resistance and we won’t know if there exists any “resistance” there at all unless the price does pause and reverse down. It so happens, it just may pause and reverse at this point. Not because more tactical traders are looking at the total return chart of SPY or because the index or ETF drives the 500 stocks in it, but because momentum measures indicate its potentially reaching an “overbought” level. So, a pause or reversal, at least some, temporarily, would be reasonable.

Some may call this charting, others call it technical analysis, statistical analysis, or quantitative analysis. We could even say there is some behavioral finance included since it involves investor behavior and biases like anchoring. Whatever we choose to call it, it’s a visual representation of supply and demand and like most things, it’s based on what we believe to be true.

I’ve been applying charting, pattern recognition, technical analysis, statistical analysis, and quantitative analysis for over twenty years. Before I started developing computerized programs based on quantitative trend systems that apply evidence-based scientific methods, I was able to trade successfully using visual charts. I believe all of it has its usefulness. I’m neither anti-quant or anti-charting. I use both, but for different reasons. I can argue for and against both because neither is perfect. But, combining the skills together has made all the difference for me.

Is the S&P 500 at resistance? 

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.

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.

Sector Trends are Driving Equity Returns

Sector Trends are Driving Equity Returns

In Growth Stocks have Stronger Momentum than Value in 2018 I explained the divergence between the return of the two styles of Growth and Value. I suggest the real return driver between size and style is primarily the index or ETF sector exposure. To be sure, we’ll take a look inside.

As I said before, the reason I care about such divergence is when return streams spread out and become distinctive, we have more opportunity to carve out the parts we want from the piece I don’t. When a difference between price trends is present, it provides more opportunity to capture the positive trend and avoid the negative trend if it continues.

Continuing with the prior observation, I am going to use the same Morningstar size and style ETFs.

Recall the year-to-date price trends are distinctive. Large, mid, and small growth is notably exhibiting positive momentum over large, mid, and small value.

growth stock momentum over value morningtar small mid large cap

To understand how these factors interact, let’s look at their sector exposure. But first, let’s determine the sector relative momentum leaders and laggards for 2018.

The leaders are Consumer Discretionary (stocks like Netflix $NFLX and Amazon $AMZN), Information Technology (Nvidia $NVDA and Google $GOOG). In third place is Energy and then Healthcare. The laggards are Consumer Staples, Industrials, Materials, and Utilities, which are actually down for the year. Clearly, exposure to Consumer Discretionary and Information Technolgy and avoiding most of the rest would lead to more positive asymmetry.

sector trend returns 2018

Below we see strongest momentum Large Growth is heavily weighted (41%) in Technology. The second highest sector weight is Consumer Discretionary, and then Healthcare is third. Large-Cap Growth is the leader just because it has the most exposure in the top sectors.

iShares Morningstar Large-Cap Growth ETF

On the other hand, Large Value, which is down -3% YTD, has its main exposure in the lagging Financial and Consumer Staples sectors.

iShares Morningstar Large-Cap Value ETF

Dropping down to the Mid-Cap Growth style and size, similar to Large-Cap Growth, we see Information Technology and Healthcare are half of the ETFs exposure.

iShares Morningstar Mid-Cap Growth ETF

We are starting to see a trend here. Much like Large-Cap Value, the Mid-Cap Value has top holdings in Financials, Consumer Discretionary, and Utilities sectors.

 

iShares Morningstar Mid-Cap Value ETF

Can you guess the top sectors of Small-Cap Growth? Like both Large and Mid Growth, Small-Cap Growth top sector exposures are Information Technology, Healthcare, and Consumer Discretionary.

iShares Morningstar Small-Cap Growth ETF

And to no surprise, the Financial sector 26% of Small-Cap Value.

iShares Morningstar Small-Cap Value ETF

So, Information Technology, Healthcare, and most Consumer Discretionary tend to be more growth-oriented sectors. Financials, Consumer Staples, Utilities, Real Estate, that is, the higher yielding dividend paying types, tend to be classified as Value. Each sector has both Growth and Value stocks within them, but on average, some sectors tend to include more Growth stocks or more Value stocks.

Value stocks are generally defined as shares of undervalued companies with lower prospects for growth.

A growth stock has higher earnings per share and often trade at a higher multiple since the expectation of future earnings is high. Growth stocks usually don’t pay a dividend, as the company would prefer to reinvest retained earnings back into the company to grow.

The Information Technology sector includes companies that are engaged in the creation, storage, and exchange of digital information. The Information Technology sector offers potential exposure to growth with the emergence of cloud computing, mobile computing, and big data.

Another Growth sector is Consumer Discretionary sector manufactures things or provides services that people want but don’t necessarily need, such as high-definition televisions, new cars, and family vacations. Consumer Discretionary sector performance is closely tied to the strength of the overall economy. Consumer Discretionary tends to perform well at the beginning of a recovery when interest rates are low but can lag during economic slowdowns

The Health Care sector is a Growth sector involved in the production and delivery of medicine and health care-related goods and services. Healthcare companies typically have more stable demand, so they are less sensitive to the economic cycle, though it tends to perform best in the later stages of the economic cycle.

It turns out, the three primary Growth sectors that tend to best strongest at the late stage of an economic cycle have been the recent leaders.

Consumer Staples sector consists of companies that provide goods and services that people use on a daily basis, like food, clothing, or other personal products.

The Financial sector is businesses such as banking and brokerage, mortgage finance, and insurance which are sensitive to changes in the economy and interest rates. They tent to perform best at the beginning of a business cycle.

This is why I prefer to focus my U. S. equity exposure on sectors and maybe the strongest momentum stocks within those sectors. Many traditional asset allocations use style and size to get their exposure to the stock market, but as a tactical portfolio manager, I prefer to get more specific into the trending sectors and their individual stocks.

 

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 successful will do on a daily basis…

“The successful will do on a daily basis what the average won’t consider doing even once.” – Mike Shell

Each of us tends to think we see things as they are, that we are objective. But this is not the case. We see the world, not as it is, but as we are—or, as we are conditioned to see it. When we open our mouths to describe what we see, we in effect describe ourselves, our perceptions, our paradigms.”

–  The Seven Habits of Highly Effective People: Powerful Lessons in Personal Change by Stephen R. Covey, Quote Page 28 (2004)

Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They’re not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can’t do is ignore them. Because they change things. They push the human race forward. And while some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.”

Steve Jobs

Steve Jobs

The Southern Voice: What You Don’t Know About the South and the Southern Accent

Asymmetric Information is when someone has superior or more knowledge than others about a topic. The Illusion of Asymmetric Insight occurs when people perceive their knowledge of others to surpass other people’s knowledge of themselves. An asymmetric advantage goes beyond a normal advantage of knowledge into the realm of having asymmetric information and knowing things others do not.

Over the past few weeks, there has been much in the media about the Confederate Battle flag and misinformation about the South. As it turns out, it seems many people may be more ignorant about these things than they believe they are. So you think the “Southern Accent” is bad English? Au contraire.

In Southern American English, Wikipedia says:

“The Southern U.S. dialects make up the largest accent group in the United States”

Wikipedia cites PBS as the source: “Do You Speak American: What Lies Ahead.” Specifically, that article says: 

  • Due to a huge migration to the South and Southwest and the national appeal of country music, Southern speech is now the largest accent group in the United States.
  • The dominant form is what linguists call Inland Southern…

As a Southerner myself, I have always known my Southern dialect is derived from my European ancestors. If you aren’t from the South or weren’t taught its history, you may not realize that. Most of the settlers in Appalachia and the South came from Scotland, Ireland, the British Isles. If you know anything about those areas and their people, you can probably see how they may have been attracted to the mountains of Tennessee, north Georgia, and North Carolina. Its geography is similar to their motherland. Oh, and they made whiskey and moonshine.

Researchers have noted that the dialect retains a lot of vocabulary with roots in Scottish “Elizabethan English” owing to the make-up of the early European settlers to the area.

Source: “The Dialect of the Appalachian People.” Wvculture.org. Retrieved 2012-11-08.

Oh, and they sang fiddle songs like Rocky Top! This is the origin of what has evolved today as “country music.” They blended popular songs, Irish and Celtic fiddle tunes, and various musical traditions from European immigrant communities.

That leads to this very interesting video clip from the History Channel “You Don’t Know Dixie” explaining the many versions of the Southern Accent:

Want to learn more about the South? Search for the History Channel show “You Don’t Know Dixie” at your cable provider. I found it on Verizon and recorded it. Or, it’s available at Amazon.

 

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.