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

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

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

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

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

It certainly seems to be happening now.

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

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

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

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

The three premises on which the technical approach is based:

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

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

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

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

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

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

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

The swings are the danger.

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

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

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

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

Is this the time to buy?

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

What if it doesn’t?

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

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

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

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

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

 Oops.

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

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

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

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

S&P Trend Allocator Index Construction

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

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

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

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

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

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

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

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

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

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

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

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

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

Volatility is a measure of speed; how quickly prices spread out

Volatility is a measure of speed.

As options traders, we are sensitive to the velocity of a price trend.

If the market doesn’t trend with enough momentum, an options contract may have less value.

Volatility is also a measure of how quickly and wide prices spread out.

For example, the bell curve shows three possible distributions around the current price of an option.

Source: Natenberg, Sheldon. Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition . McGraw-Hill Education.

If we are researching the value of the call option, it will depend on the amount of the distribution to the right of the exercise price. As it shifts from low-volatility, to moderate-volatility, to high-volatility, more of the price distribution is on the right side, and the option price trends up to an increasingly greater value. I highlighted in green the area where the higher volatility level results in a higher call option price.

Markets move fast in a volatility expansion, and VIX the continues to imply greater than average speed.

So, we should expect to see a continued higher range of prices, and faster moves up and down.

The three widely followed stock indexes closed slightly down for the week after peaking on Wednesday.

We’ll soon see if this is the beginning of an inflection point as many expect to see a lower low, or at least a retest of the March 2020 low.

If this is a prolonged bear market to go along with recession, as it may well be, I expect we’ll experience many swings up and down along the way. As I successfully traded tactically through the 2008 to 2009 period, many investment managers I know who didn’t do so well had trouble with the swings and whipsaws.

To actively manage risk, and capitalize on trends in bear markets requires flexibility and nimbleness. It also requires shortening the time frames. As the implied volatility remains very elevated at 37, investors should prepare to see these swings until volatility contracts again.

We know many investors are afraid of more losses in their portfolios if they hold stocks or funds they otherwise want to keep, rather than sell. We are making my ASYMMETRY® Portfolio Hedging program available as an advisory service for accredited investors with an investment portfolio of $1 million or more. To see if your portfolio qualifies, contact us here.

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

Global Macro: Unemployment and jobless claims make 2008 look good

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

We can use initial jobless claims to gauge the economy with respect to employment. As more new people file for unemployment benefits, fewer individuals in the economy have jobs.

Historically, initial jobless claims tended to reach peaks towards the end of recessionary periods such as on March 21, 2009 with a value of 661,000 new filings.

The initial jobless claims at the end of the “global financial crisis” is nothing compared to what we are seeing today.

US Initial Jobless Claims is at a current level of 3.839 million, down from 4.442 million last week and up from 230,000.0 one year ago. Over 30 million Americans have no filed for unemployment.

Continued jobless claims is about 18 million.

It’s in uncharted territory. We’ve never seen job losses to this magnitude.

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

What you believe is true, for you

Projection makes perception.

The world you see is what you gave it, nothing more than that.

But though it is no more than that, it is not less.

Therefore, to you it is important.

It is the witness to your state of mind, the outside picture of an inward condition.

As a man thinketh, so does he perceive.

Therefore, seek not to change the world, but choose to change your mind about the world.

-A Course in Miracles – Chapter 21: Reason and Perception

What you believe is true, for you.

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#FloridaMorons is trending on Twitter, so let’s take a look at the Florida Coronavirus trends

I woke up this Saturday morning to see #FloridaMorons trending on Twitter, so yes, being a Tampa Bay resident, I had to look.

I really like Twitter. Over the years, Twitter has become the modern day message board. A decade ago, professional money managers communicated our thoughts and ideas with each other via email or on private (password-protected) message boards. Today many of us similarly share our observations on Twitter. So, I have Twitter running on one of my screens most of the time.

I typically glance over at the “Trends for you”, after all, I do like trends, ya now. But, I’ve noticed the “trending” is typically “Politics”, even thought it’s a subject I follow the least. My observation is the trending political tweets have tended to be more left leaning, so it’s asymmetric, but not the asymmetry I am interested in. I’m more a libertarian, focusing on taking responsibility for my own and preferring to be left alone to do so. No, let me be more asymmetric on the matter: I’ll fight over it, to the death. You should expect nothing less from anyone joining the US military out of high school, even less of someone joining at 17 before graduation, needing the parents permission, and expect no less whatsoever from someone joining the US Marines. I knew what I was getting myself in to as a young man from a long line of Veterans, so I’m pretty serious about standing firm on what I believe in. If I was then, you can bet it’s only increased since then. But, although I’m a global macro tactical trader, I don’t worry too much about politics at the national level. I vote, and encourage others to, but the politicians don’t control my life and I don’t want them to. Actually, I won’t let them. It’s simple. They can keep increasing my tax bills and changing the rules of the game, but I keep focusing on the things I can change and move past them. I encourage others to do the same. Politics and politicians don’t define me and never will. Over my dead body, as my forefathers put it, and I continue to believe it. So, don’t waste your time trying to debate me about politics. Focus instead on what you can control and take responsibly for yourself. I’ll keep doing the same.

Here is an example today of “Trends for you” on Twitter. I notice most of them are political, so maybe I need to change my settings in the little gear you see at the top right, or remove the “Trends for you” from the page if it’s an option. But, if I didn’t hear from the other side, I wouldn’t have this missive to write about. In reality, I like seeing what the other side believes. It helps me to decide what I believe. If they make sense, I may change my mind. I’m always flexible and adapt my beliefs as circumstances change, but my core beliefs tend to stay the same, which is why they are “core.”

#FloridaMorons is trending, so let’s take a look at the trends from available data.

The trend is your friend until the end when it bends.

Florida Coronavirus Cases is at a current level of 24,119.00, up from 22,897 yesterday. This is a change of 5.34% from yesterday. The total number of cases initially trended up with great momentum, but since April the rate of growth slowed. To understand directional trends, we focus on the rate of change. I used a logarithmic chart as explained in “Quantitative Technical Analysis of the Coronavirus COVID – 19 Trend Shows the Rate of Growth is Slowing” to normalize the rate of change.

As the number of cases slow, politicians probably need to prepare to put Florida and the Unite States back to work and back to business. By now, most people are probably in panic mode and can’t believe I’d say such a thing. However, once a trend is underway and beings to show it may have reached an inflection point, it’s time to prepare for the next direction of the trend. Keep in mind, I pointed out the risks of Coronavirus and COVID – 19 early on as I believed it was an asymmetric risk and shared my observations on January 21, 2020: What could go wrong I shared this observation:

What could go wrong?

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

A quick glance at headlines shows:

BREAKING NEWS

CDC expected to announce first US case of deadly Wuhan coronavirus

Changes to impeachment rules

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

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

Again, that was January 21st, when the CDC was about to announce the first death in the United States from the Wuhan Coronavirus, long before it seemed to be a major issue in the US.

Laster, on March 8th in Coronavirus quick take and useful resources to track COVID-19 I wrote:

“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)

I’ve been monitoring it ever since and we eventually got the data feeds into our charting systems to draw our own charts.

Continuing to look at the trends in the data, the first cases of Coronavirus (COVID-19) were confirmed on March 1st, 2020, which occurred in Manatee and Hillsborough County. During the initial outbreak of Coronavirus in the United States, Florida’s public beaches and theme parks were under scrutiny as being areas of large crowds. The state was relatively late in issuing a “Shelter-At-Home” order, finally putting it in place beginning April 3rd, 2020. Cases ramped quickly from 2 on March 4th, to over 5000 by the end of the month.

When I analyze trends qualitatively, I first observe the absolute direction of the trend as I did above to determine is it up, down, or sideways. It’s also essential to define the rate of change to see if an uptrend is slowing, or speeding up. Momentum is pervasive is most data, no matter what it is, so increasing momentum means the strength of the trend is pervasive, so it’s probably going to continue by spreading. It’s true for stock price trends and also true for a pandemic. It’s all about people and our behavior, you see. So, I compare Florida to the US in terms of relative strength by drawing a percent change chart comparing the two data sets. Here, we see the month of March when both the US and Florida cases were trending up sharply. This time, I used the arithmetic chart instead of the logarithmic chart because we want to visually see the absolute difference between two percentage changes in growth.

The percent change in the rate of change in cases was actually trending similarly in terms of rate of change. Yeah, I could have left this one out. It’s like the relative strength of momentum, a second-order derivative or slope of the slope. Nevermind, just keep reading. I won’t go down that rabbit hole.

As of this writing, here is the table for Florida from my data source, which is the COVID Tracking Project. The data feed we get was last updated yesterday, Apr 17 2020, 18:00 EDT and will be updated again today at 18:00 EDT.

Let’s take a look at each of them.

Drawing trend lines is an essential basic skill for trend following to observe, visually, the direction of a trend. Here you can see I drew a few lines to note the change in trend a few times. The trend in new cases per day in Florida was slowing and even trending down, until yesterday, it spiked up after a spike down. Note that we can only track tests that a state reports. And not all states report all tests. As my focus here is a quantitative analysis, I’m not going to look for the answer to why the new cases dropped below trend and then spiked back up, but we could find the answer qualitatively by looking for the story. I know you proably perfer the story, it’s human nature, but I’m going to keep with obsevations of the quantitative trends.

Next up is the number of tests administered per day here in Florida. Again, we see a spike up in the trend.

And just like that, I start to notice something in the quantitative analysis that could be interpreted qualitatively to be some cause and effect relationship. Just like global macro trends in capital markets. As the number of new tests administered trended up, so did the number of cases per day.

I could go search to find a provocative sounding narrative to put here in an attempt to qualitatively explain why, but your guess is as good as mine for now. Quantitative analysis is looking at data and as long as we have a large enough sample size, the rates of change will normalize and be similar over time.

Well, actually, the above chart was a trick. I showed the trend in absolute terms, rather than a logarithmic scale which focuses on rates of change. When we normalize the data and compare these two, they remain in a sideways drifting trend, even with the jump. The momentum, or rate of change, isn’t enough to call it a break out.

Next up is deaths. The number of deaths viewed as a logarithmic chart is trending up, but the upward momentum seen before is slowing. The high lowers seem to define the trend here, with the higher highs showing some decline.

Florida deaths per day are trending up as expected. Naturally, the deaths and deaths per day will be on a lag after cases and hospitalizations. I drew a simple line around the center of the trend here just to show the uptrend and it isn’t slowing or stabilizing yet.

Florida coronavirus hospitalizations is showing a slowing rate of change, though in an uptrend.

Charting the test administered with the tests per day shows the per day tests slowing is gradually slowing down the test administered trend. I’m showing this to point out how some data will be leading, others will be lagging. The number of tests per day will change the bigger trend over time.

Finally, we get to the Florida Coronavirus death rate. Florida Coronavirus Death Rate is at 2.90%. The death rate is the most important trend.

Data is rarely perfect. But, garbage in, garbage out. I’ve had to explain the imperfections of data several times. Below is show the US death rates from two sources compared to Florida. I’m putting them on the same chart to point out a quick observation that the Johns Hopkins death rate is different from the COVID Tracking Project data we’ve used to track states.

I know you want perfection, and I know we won’t ever have it, so I modify your behavior with examples imperfections like this. Does it give you a whirl? Do you lose your train of thought? Does it make you believe not of this is useful if it’s imperfect? If so, you’re never happy with the outcomes of anything and unlikely have any edge in portfolio management. I embrace imperfections and the unknowable, which is what drives my active risk management and such.

Others are still trying to get it right, I just cut my loss short when I get it wrong.

Here in the sunshine states, we’ve now had 699 COVID – 19 deaths in Florida out of 24,119 cases reported.

Applying the formula:

Florida Coronavirus Deaths x 100.00 / Florida Coronavirus Cases = The Coronavirus Death Rate.

The Denominator

I keep hearing about “the denominator” and how it isn’t accurate. They say it as though we need an exact total number of cases. It simply isn’t true. Clearly, more and more accurate data is better than fewer data and less accurate data. However, we have now entered the realm of simple quantitative analysis.

Quantitative analysis (QA) is a technique that seeks to understand behavior by using mathematical and statistical modeling, measurement, and research. Quantitative analysts or “quants” aim to express a given reality in terms of a numerical value.

Qualitative research is a scientific method of observation to gather non-numerical data while focusing on meaning-making. When we do qualitative research, we are focused on trying to explain “why” what is, is.

The number of cases is still a sample size of the population, so the rate of change should be similar with a large enough sample.

People who wanted to minimize the virus have asked for the percentage of the population. It is true that as a percent of the population, the number of cases is so small the chart of the ratio isn’t so useful. There are about 331 million people in the US and US Coronavirus Cases are 699,706 according to Johns Hopkins Center for Systems Science and Engineering, so it’s less than 1%. In fact, it’s less than 1% of 1%.

Models Misbehaving

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

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

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

Here is their forecast of deaths in Florida along with actual deaths.

Should the governor of Florida allow people to go to Florida beaches? That’s for him to decide. It’s way outside my boat. I focus on my own boat. That’s his boat. If I don’t want to catch the virus at the beach, I simply won’t go to the beach. The Governor of Florida, however, has a bigger picture to consider than me. He’s got to factor in the potential stain on hospital and the healthcare industry, which have been lower than expected in many cases.

This has been a wonderful time to teach and learn maths, especially statistics and a little algebra (y = mx + b) and I hope everyone is taking advantage of it. My first interest in maths was sparked by probability and statistics. When I was a kid, I thought it was fascinating we could predict the likelihood of behavior or an outcome by having just a sample of a population.

What about the stock market?

It’s trending up, for now, and we’re participating in the uptrend, for now, but this too may change trend and when it does, so will I.

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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.

Most people get it wrong at extremes

Irving Fisher was probably considered, by some, to be one of the smarter people of his time. Fisher was an American economist, statistician, inventor, and Progressive social campaigner. 

But, even with all his schooling at the turn of the century, he was just as silly as everyone else. In 1929, just before the -86% crash, he said:

“Stock prices have reached what looks like a permanently high plateau.”

– Professor Irving Fisher, October 15, 1929

At the time, US equity valuations had never been higher.

The moral of the story is; if you don’t have your mind right, you’re probably wrong.

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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 Shows the Rate of Growth is Slowing

Who would have believed a few months ago the United States of America and most of the world would be shut down over a global pandemic?

Who would have believed if you said Americans would be ordered to stay at home, not have family and friends visit, and to do this “social distancing” thing?

Who would have believed golfers here in Floria at Pelican Golf Club in Belleair would be headline news saying “golfers strolled down the fairways as they would on a normal golf outing” in these United States of America?

Anything is possible, as every new moment is unique, it’s never existed before.

Sure enough, ABC News Tampa Bay:

Florida golfers caught ignoring social distancing rules at golf course

Golf considered ‘essential’ in stay-at-home order

I’m starting to hear some talk about our freedoms as American’s, and I can see how many business owners being forced to shut down their businesses view it.

But, right now we’ve got to hunker down and get through this.

The good news is, it’s working.

Joining TODAY live, Dr. Anthony Fauci says that even though the number of deaths validate that this is a bad week in the coronavirus battle, there are “some glimmers of hope” such as stabilizing numbers of hospitalizations in New York. He says that social distancing and behavior changes are “starting to have a real effect” and that the virus death toll may look “more like 60,000 than the 100,000 to 200,000” initially predicted. He dismisses “conspiracy theories” that coronavirus death tolls are inflated and says he’s “cautiously optimistic” that the country may be able to begin reopening by summer.

Today there were 30659 new cases and 1757 new deaths in the United States

New York remains the epicenter of the US:

799 new deaths. Highest number of new deaths to date.

18,279 hospitalized, with a 200 net increase in the last day (lowest number in the last period).  New ICU admissions: lowest number since March 19.

  • 18 days since the stay at home order in New York
  • 39 days since the first case in New York
  • 80 days since the first case in the US

Here are the hot spots ranked by New Cases in the US from Worldometers:

Next, we rank them by Total Cases per 1 million of population: the trend is correlated to the total cases in these states with New York and the northeast leading the way and Louisiana is the only southern state ranked in the top ten. Georgia is next and even Florida is down there.

When we rank the Tests per 1 million population, however, we also see New York, Louisiana, and other states with a high Total Cases has given more tests per capita of their populations. My home state, Florida, is down there. Florida has tested about 0.8% of the population while New York is 2%. That’s a material difference, so I expect we may see Florida present a higher number of cases if we tested a similar sample size of the population.

Let’s move from ranking tables to observing the trends in charts.

If we look at the trend as a linear chart, New York Coronavirus cases is blowing away the other states with the most cases.

To quantify the trends, however, we instead draw a logarithmic chart to compare then based on rate of change. Now we see the trends normalized by their rate of change, which gives us a better visual of direction and velocity.

I added some more states next, to see the trends are generally trending similarly and their rates of change are correlated. My home state of Tennessee is actually slowing down more.

Looking at the US, the rate of growth continues to slow. It broke the uptrend (red arrow) about two weeks ago as social distancing ramped up more.

I’ve been concerned with New York as the epicenter since we have investment management clients there as well as many people and companies we do business with. I guess it’s a good thing trading at the New York Stock Exchange is mostly electronic, rather than traders in the pit shouting our orders. If it weren’t for electronic trading, the stock market would probably be closed.

Hang in there New Yorkers – you’re flattening the curve!

At this rate of change, we’ll see New York curve into a downtrend in the coming weeks.

The northeastern states of NY, New Jersey, Massachusetts, and Connecticut are flattening the curve. Connecticut, however, not quite as much.

The rate of growth in Florida total cases is rounding off, too.

So, we are observing the flatting of the curve as a result of social distancing.

Let’s hope it declines sharply in the next week or so before the citizens get too restless.

I’m not thrilled with the US death rate. US Coronavirus Death Rate is at 3.43%.

US Coronavirus Death Rate is at 3.43%, but so far it’s still materially less than other major countries and the world death rate, which is about 6%, according to the Johns Hopkins Department of Civil and Systems Engineering Coronavirus Tracker data.

Around the world, Italy is another country that is struggling, but their percentage change in recovering was their best change today.

Now that we have more data, I’m also monitoring Coronavirus Recoveries. Our complete data from other countries comes in around 10 PM at night, so I’ll have to wait for the next observations to share more detail on Coronavirus Recoveries. Here is what we have based on yesterday, expect we already have Italy. Recoveries is the trend we want to see rising with high momentum, and I’m happy to share the World, US, and Italy are in recovery uptrends and the US recoveries have high velocity.

I hope everyone has a wonderful long Easter weekend, Good Friday, and Passover. As a Christian, it’s Easter for me. Christianity’s most important day has similar main points as Passover. Both holidays face head-on the daunting power of death—and both announce God’s greater power of life.

Passover is a celebration of spring, of birth and rebirth, of a journey from slavery to freedom, and of taking responsibility for yourself, the community, and the world.

This year, it’s best to focus on the similarities between Easter and Passover. It’s not just that the Last Supper was a Passover Seder. Both holidays are about the dead rising to new life.

Wondering about the stock market? check out: What’s going to happen next with the stock market?

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

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

I respect history. The past is no guarantee of future results, but it’s all we have to draw statistical inference from, so we need to understand its risks and rewards. We use past data to determine future possibilities. If we don’t know where we’ve been, we unlikely know where we’re going. It’s essential to have a deep understanding of time, the past, the present, and the future that doesn’t exist. I have great respect for the past, but I’m always here, now, at this moment. As a professional decision-maker, I can only do something now or not now. I can’t do anything in the past. I can’t do anything in the future. It’s now, or not. This alone has removed a lot of behavioral issues for decision making. I review historical trends and my decisions, but I don’t get stuck there at a time I can’t actually do anything. It is what it is, so I accept it and learn from it. If we want to learn from the past, we necessarily must know what it was. That’s why I observe charts of price trends, investor sentiment, global macroeconomic trends, volaltity, and momentum.

A global macro strategy is a hedge fund style investment and trading strategy typically focused on the overall economic and political views of various countries or their macroeconomic principles. Positions in a global macro portfolio may include long and short positions in various equity, fixed income, currency, commodities, and other alternatives like volatility. Although most global macro hedge fund strategies may be focused on views of macroeconomic trends, my focus is on directional price trends.

The price trend is the final arbiter, if you keep disagreeing with the trend, you’ll lose.

The longer you disagree with the trend, the more you lose.

Other indicators like sentiment, rate of change (momentum/relative strength), and volatility are confirming indicators for the price trend. For me, they signal when a trend may be reaching an extreme, becoming more likely to reverse. I like to be positioned in the direction of the price trend, but I’m situational aware of when the trends may be reaching an extreme and likely to result in a countertrend.

So, let’s see what in the world is going on. I concentrate on what has changed. If a trend or level hasn’t changed, it doesn’t warrant the attention, so my systems signal when something has changed. I then examine the rate of change, which is why I speak of momentum, velocity, and relative strength. The trend tells us the direction of change, but the rate of change indicates how fast it’s changing.

Investor Sentiment: are investors bullish, feeling positive about the future direction of stock price trends? or bearish, feeling stock prices will fall?

US Investor Sentiment, % Bullish is an indicator that is a part of the AAII Sentiment Survey. It indicates the percentage of investors surveyed that had a bullish outlook on the market. An investor that is bullish believes the stock market will trend higher. The AAII Sentiment Survey is a weekly survey of its members which asks if they are “Bullish,” “Bearish,” or “Neutral” on the stock market over the next six months. The percent of bullish investors is slightly below average, so the bullish individual investors haven’t really changed much.

US Investor Sentiment, % Bearish is at 49.73%, compared to 52.07% last week and 27.20% last year. Pessimistic investor sentiment materially higher than the long term average of 30.4%, so this is a change. Individual investors are generally more bearish than they were. When their bearishness reaches a historical extreme, they’ll likely be wrong. As you see in the chart, investors are abnormally negative on the future of stock price trends right now.

The stock market will reverse its current trend when prices are pushed down to a low enough point to attract new buying demand.

Stock prices will also reach their bottom when investors who want to sell have sold, so there is no overhead resistance.

Nothing tells us more about market dynamics better than the price trend itself, but investor sentiment measures like AAII Investor Sentiment Survey indicates if do-it-yourself individual investors are capitulating. When their bearishness is at a historical high it may confirm with the price trend those who want to sell have probably already sold. So, their desire to sell has less impact on an uptrend.

If most of the investors with a desire to sell have already sold they won’t be selling as prices trend up, so the market will have less resistance as it trends up. For example, the S&P 500 stock index had gained nearly 5% in the first two months this year. It peaked on February 19th. then all hell broke loose. The S&P 500 dropped -34% in just three weeks, so the S&P 500 was down -31% for the year at that point.

Some of the selling pressure was driven by systematic trading, such as trend following and momentum. As rules-based systematic trading pushed prices lower and lower, other investors were panic selling to avoid more losses. The trouble is, individual investors tend to sell into the bloodbath when prices reach their lowest points. Emotional reactions are driven by falling prices. People sell because prices are falling and they are losing money. Systmatic rules-based systems also sell to avoid more loss, but do so based on predefined exits to manage risk and drawdown controls.

What I observed in the early stage of this waterfall decline is what seemed to be an overreaction from an initial under-reaction.

At the peak on February 19th, here is what the stock index looked like as it trended to an all-time high. This is three months of history. What I noticed, then, was the relative strength indicator didn’t follow it up. This was a very negative divergence.

At the same time, I was seeing other bearish signs of a major market top. To be sure, here are the observations I shared in January and February.

I was a little early with my boldest statement on January 18th: Now, THIS is what a stock market top looks like! Stock Market Risk is Elevated.

But, fortunately, I acted on it. Seeing a very bullish cover of one of my favorite investment publications was the final straw, along with all the other things I observed that seemed to signal a major top in stock prices.

I don’t always sell my stocks because the market risk seems elevated, but when I do it’s because the weight of the evidence is overwhelming.

But, it didn’t work out perfectly and it never does, so I don’t have an expectation of perfection. If I did, I could have never created the asymmetric risk/reward return profile I have, especially the downside risk management and drawdown control. It’s an imperfect science with a dash of art.

I’m okay with that.

Asymmetric investment returns are created from a positive mathematical expectation, not being right more often than wrong, but instead losing less when I’m wrong and earning more when I’m right. The rest of you are simply focused on the wrong thing. You want to be right, and it ain’t happin’. I’m not right all the time, either. But when I’m wrong, I cut it short. I don’t let the wrong become really wrong. I take the loss. I love taking losses. I do it all the time. It’s how and why I have smaller losses, rather than large ones. It’s the only Holy Grail that exists. The Holy Grail is asymmetry: larger average gains than losses. This positive mathematical expectation doesn’t require me to know the future and be right all the time. Instead, I focus on what I can actually control, and that’s mainly the size of my losses. If I limit the size of my losses, I’m left to focus on the upside of profits. That’s my edge, and it isn’t just a mathematical edge, it’s a psychological edge, a behavioral edge. It’s not easy to execute for most people because you want to be right, so you’ll hold those losses hoping they’ll recover. If they do and the price trends back up, then you may sell, if you remember you wish you had before at those higher prices, before you saw a -30% loss.

That’s resistance.

If you wait to sell when the price trends back up some, you’re selling creates resistance if there are enough of you driving the volume of selling pressure. If you instead feel more bullish now that prices trended up some, you may hold on, hoping it continues up. In that case, you’re not the overhead resistance at higher prices causing the halt that prevents the price from trending higher. If enough volume is like you, prices will keep trending up because the rising prices aren’t met with a stronger desire to sell than the enthusiasm to buy.

Here is the full -34% downtrend. It was the fastest downtrend of this magnitude in history.

What in the world was going on? The first leg down, which we only know in hindsight it was the “first”, was a sharp downtrend of -13%. The stock market falls so far, so fast, it becomes deeply oversold with the relative strength index at only 19. The relative strength of 30 is low. Below 30 is oversold and below 20 is extremely oversold. Under normal circumstances, this results in a short term bounce at a minimum, and when I say normal, I’m talking about looking at over a century of history.

To make the point clear, using a simple measure of relative strength as an indicator in the lower section of the chart below, the last times it reached such an oversold level were the lows in late 2018.

But, if you notice, the second time the SPX got so oversold in 2018, the price trend was significantly lower. So, the risk of a countertrend signal like this is even after the price trend reverses back up, it may later reverse back down to an even lower low. It did then, and it did it again this time.

To illustrate what happened from there, I’ve marked up the next chart pretty well. Keep in mind, I don’t necessarily trade the S&P 500 index. I’m simply using it as a proxy for the overall market. I focus more on more granular ETFs like sectors and individual equities. To see the trends play out, walking through time, the first part is the red vertical arrow to point out the first level of extreme oversold conditions as the stock market dropped -13%. My managed portfolio was in short term US Treasuries during this because I hold sold weeks ago.

So, because of my risk management from elevated risk levels, we were in a position of strength, as I call it. I mean we were not participating in the -13% waterfall decline, so as others (who are losing money quickly) are getting more and more bearish, I’m getting bullish. Once stocks got oversold, however, I invested in stocks again. Of course, you can see what happened afterward. The next leg down was even worse and we got caught in it. Like I said, my tactical trading decisions are never perfect timing, nor does it have to be. I just need my average profits to be larger than my average losses to create positive asymmetry. I eventually reduce risk exposure again to zero and then I’m back to looking to buy again, which I have. This is for educational purposes, so I’m leaving out all the other things going on, too, such as buying US Treasuries, etc. The point is, this is what in the world was going on.

Looking at the chart again, a few more points to make. Notice the two red horizontal lines I drew are showing a price range that could be resistance. I say that because of 1. it’s the first area of a prior high, so those who wish they’d sold there may sell now. 2. the relative strength is now at its halfway point and specifically, its average level, so we may see some mean reversion. We’ll see.

This image has an empty alt attribute; its file name is image-41.png

On the bullish side, however, just as individual investors are really bearish, I’m seeing some divergence again in the price momentum. The green arrow shows it. As the stock market reached a low, down -34% off its high, the momentum didn’t make a new low. It didn’t even reach the prior low or even close to it. Instead, it’s making a higher low and higher high.

If I claim the February divergence was bearish because the relative strength didn’t confirm the all-time new high, then I’ll also claim the opposite is true: this is a bullish divergence.

What’s going to happen next with the US stock market?

We’re about to find out!

Only time will tell, but from what I’m seeing, the crowd is expecting a retest of the lows or even lower lows, and that seems reasonable. A global recessional is imminent at this point. But, the stock market has already fallen -34% from its high, so anything is possible. This could be it, for all we know. If most people believe it will get worse, the capital markets have a funny way of proving the crowd wrong. At least temporarily, as it’s doing right now. But, the big picture isn’t real positive.

We now have unprecedented jobless claims and unemployment. American’s are going to be hurting without jobs. That chart is so ugly I don’t want to show it.

We also have unprecedented intervention from the federal government and the Federal Reserve. So have central banks around the world responded.

I believe the last five years of this bull market and economic expansion were driven by the Federal Reserve Zero Interest Rates Policy and other forms of quantitative easing. What was then unprecedented Fed action drove the longest bull market and economic expansion in US history. It also drove the stock index to its second-highest price to earnings valuation in 140 years. I’ve pointed out many times before the Shiller PE Ratio for the S&P 500 was over 30 and the only time it was “more expensive” was the late 1990s. That didn’t end well. It was higher than 1929 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 of the S&P 500’s current price divided by the 10-year moving average of inflation-adjusted earnings. The metric was invented by American economist Robert Shiller and has become a popular way to understand long-term stock market valuations. It is used as a valuation metric to forecast future returns, where a higher CAPE ratio could reflect lower returns over the next couple of decades, whereas a lower CAPE ratio could reflect higher returns over the next couple of decades, as the ratio reverts back to the mean.

The S&P 500 Shiller CAPE Ratio was at a high level of 33, which was higher than the long term average of about 17. Today is has declined to 25.42, while still well above an “overvalued” level, it could be justified by the low inflation we are seeing. Right now, we are looking at deflation as prices of stuff are falling.

I don’t have to correctly predict with the direction the stock market will trend next. I instead increase and decrease exposure to the possibility of risk/reward aiming for asymmetric risk-reward. I tactically trade the cycles and swings as I’ve done many times before. We achieve an asymmetric risk-reward when the downside potential is less than the upside. We achieve asymmetric investment returns when our average profits exceed our average losses. I call it ASYMMETRY® and everything I do centers around it.

Do you really want to know the harsh reality of what the stock market is going to do next?

Most likely the opposite of what you think.

Contact us here if we can help.

Join 49,329 other followers

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


Make No Mistake: We are at war

Surgeon General Jerome Adams said Sunday that this week could be the nation’s “hardest and saddest” thus far. “This is going to be our Pearl Harbor moment, our 9/11 moment, only it’s not going to be localized,” Adams said.

As a US Marine Corps Veteran myself, of course, calling this a WAR is in no way minimizing a real combat zone our great nations warriors have endured for generations. But this IS a WAR in my option, it’s just a very different kind of WAR against an invisible enemy. It’s a kind of asymmetric warfare, as opposed to the traditional combat threats. We are under attack right here in our own communities and it’s our turn to do the fighting, but the way we attack it isn’t the same as how it attacks us. The good news is, fighting and winning this WAR is relatively simple.

In US we have 12,844 deaths from coronavirus and 396,223 confirmed cases. The entire east coast is now red on the map from Coronavirus COVID-19 Cases Tracker by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University (JHU).

In Quantitative Technical Analysis of the Coronavirus COVID – 19 Trend I said 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 was planning to have already shared some observations, but I found some issues in the state level data that have now been resolved. Of course, all of the data we are reviewing is deemed to be reliable but none of it is guaranteed. I believe it’s clear the US and the world were not well prepared for a pandemic of this magnitude, which is disappointing considering leaders like George W. Bush and Bill Gates warned of it years ago.

I’m concerned many American’s will become overwhelmed at the sheer speed of the growth of coronavirus in the next week. Although I’m seeing some evidence the rate of change has slowed as a result of “social distancing” and such, it’s still spreading very fast as expected. The key is to realize it is expected, so don’t be too alarmed. I’m going to share some charts for a visual of what is going on with the trend and rate of change. I’ll also share how we are combating it here at the Shell compound. If you haven’t already, I encourage your to read my prior observation Quantitative Technical Analysis of the Coronavirus COVID – 19 Trend since I”m not going to repeat myself here.

I’m taking a top down Global Macro approach to looking at the trends and momentum, just as I review price trends of global capital markets.

As you will see the data source noted in the charts, we are pulling in world and US data from Johns Hopkins Center for Systems Science and Engineering and for state level data from The COVID Tracking Project. I’ve also been monitoring other data sources such as the model referenced in a White House press briefing as the “Chris Murray Model,” which is IHME’s COVID-19 projections show demand for hospital services in each state. The demand for these services is expected to exceed capacity soon, so we’ll take a look at it. I’ve been in touch with quantitative analyst, data scientist, etc. all over the country discussing some of this so it’s been nice to see such solidarity as we enter the early stages of this battle. But, this WAR isn’t just going on here in the United States, it’s a pandemic all over the world and humans are all fighting it.

World Coronavirus Cases: 1.381 million for Apr 07 2020

Coronavirus (COVID-19) is a global pandemic that originated in Wuhan, China in 2019. The virus sparked a global economic slowdown because of various 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 1.381 million, up from 1.345M yesterday. This is a change of 2.67% from yesterday. I’m drawing the charts with a logarithmic scale to illustrate the trend as 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.

Unfortunately, in the US, we are leading the world in the number of cases.

The rate of change and trend in China, where it originated, has supposedly slowed down. Here is China’s reported total cases and deaths.

If China is reporting their data accurately, we can see the cases reported per day and deaths per day have trended down the past few weeks.

When we compare data and directional trends, it’s sometimes useful to view a relative comparison to see who trends compare across countries, in this case. Below is the death rate of the world relative to China. The current death rate at the world level is 5.67% while China’s reported death rate has stabilized at 4% for weeks. We shouldn’t be alarmed by the death rate of other counties and around the world, however, since different countries have varying ages of population and health care. I expect to see some divergence.

The United STATES of America

Let’s look at the states. Keep in mind the data isn’t perfect. Since the Centers for Disease Control and Prevention hasn’t yet begun publicly releasing the number of people who have been tested, The COVID Tracking Project is pulling data from state health departments, which can vary in the way they report tests and infections. This COVID Tracking Project was launched out of The Atlantic to fill a major gap in publicly available COVID-19 testing data. Johns Hopkins University maintains a comprehensive case count, but no governmental or institutional source is publishing complete testing data—including not just identified cases, but how many people have been tested, and where. Without this data, we can’t make informed decisions or accurately communicate risks. 

Which states have seen the most cases of coronavirus?

The northeast by a wide margin at this point.

Here are the relative trends of New York, New Jersey, and Michigan on a log scale. Notice the rate of change is slowing.

I drew some trends lines to see the slope changing around April 1st in New York.

I put the New York number of tests administered, hospitalizations, and death rate on one chart.

New York is expected to reach its peak resource use tomorrow. I’m going to keep this observation high level and brief without getting into too much weeds, but the next image is from IHME’s COVID-19 projections. They show demand for hospital services in each state. The demand for these services is expected to exceed capacity. Tomorrow, New York is expected to have a hospital bed shortage of 12,476 beds and a shortage of 5,946 ICU beds. IHME predicts 5,664 ventilators will be needed. Keep in mind, this is their educated guess, so their projections may not prove accurate, but we’ll find out soon.

  • The numbers for All beds needed and All beds available include ICU beds.
  • All beds available is the total number of hospital beds available for COVID patients minus the average historical bed use.
  • ICU beds available is the total number of ICU beds available for COVID patients minus the average historical ICU bed use.
  • Invasive ventilators needed does not account for the number of ventilators available (ventilator capacity data are not available at this time).

Taking a closer look at the bell shaped curve in the chart, notice there is a colored range around the dotted lines. It’s like the cone of uncertainly we see late summer for hurricanes here in Florida. It shows a range of possible outcomes.

Uncertainty is the range of values that is likely to include the correct projected estimate for a given data category. Larger uncertainty intervals can result from limited data availability, small studies, and conflicting data, while smaller uncertainty intervals can result from extensive data availability, large studies, and data that are consistent across sources. The model presented in this tool has a 95% uncertainty interval and is represented by the shaded area(s) on each chart. The range of outcomes is necessarily wide because of the asymmetric uncertainty. The truth is; we just don’t have a lot of data and information yet, so we make the best of what we do have.

A major concern is the shortage of hospital beds and ventilators, so it’s essential to fight this WAR by simply staying at home and distancing from others for a while. We have clients in New York, so I hope everyone is hunkered down to slow the spread.

Next up is my current home state of Florida. I included all of the data expect the death rate and I see a lot of uptrends.

The death rates are around 2% to 4% at this point. I included the US, New York, and Florida.

Going back to hospital resource use, here is the projections for the US. The country is expected to reach peak resource use a week from now. According to the projections, there will be a significant shortage of beds and ventilators. I don’t want to be alarming, this simply tells us the best way to fight this WAR is to avoid it. We don’t want to be the one needing a ICU bed or ventilator, so we have a choice to avoid it by distancing.

I’m most concerned about Florida. Not because I live in Tampa Bay, but because we have an older population of retirees across the state. I also see evidence of strong infections in Miami-Dade, thanks to spring breakers from New York.

In Florida, we were issued a stay at home order on April 3rd and non-essential services are closed. Florida is expected to reach peak resource use two weeks from today on April 21st, later than most of the country. The good news is, if their projections are accurate, we don’t have as much of a shortage probability here. I supposed Gods waiting room has more beds and such. But we are expected to have a shortage of ventilators.

The possibility band for Florida, however, is tall, which means it could be much higher.

Since we’re looking at Florida, this brings me to another data source I’ve been monitoring. As I discussed in more detail in my last post on COVID – 19, one of the most interesting data I’ve seen is the U.S. health map from Kinsa smart thermometers. The Cumulative Atypical Illness map shows the amount of cumulative unexpected illness, expressed as additional share of the population affected by influenza-like illness, above the expected values.

This is how much influenza-like illness above the normal expected levels they have detected since March 1st. The hot spots are the northeast, Michigan, and south Florida. But, we’re now seeing more red ares all over.

When someone who is using a Kinsa smart thermometer with their phone to track the data, it shows up as atypical when their fever is above what is expected.

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. The red zone were I drew the arrow below was an early warning of what is likely to be Coronavirus.

The good news is the observed data has trended below expected now and we attribute it to social distancing.

Inder Singh is the founder & CEO of Kinsa. Kinsa’s mission is to create a real-time map of human health to track — and curb — the spread of infectious illnesses Inder wrote an article on Medium last week titled “Your Sacrifices are Saving Lives” showing how their research finds social distancing is working. If you need to see the evidence, I encourage you to read it.

I don’t like what I’m seeing here in Florida. Take a look at how high the atypical illness trend was recently. The slope was high and steep. At its peak on March 18th, the atypical illness detected was about 7 and the expected range was 2.5, it was about 300% higher that expected. This data tends to be a week or two ahead of new cases.

Miami-Dade, Broward, Palm Beach County, Duval, and Orange county look similar.

So, the Coronavirus is just getting ramped up and will spread more in the coming days and weeks. It’s probably going to be alarming to many, especially the deaths.

Some good news is 300,000 have recovered.

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WE ARE AT WAR

If you want to win this WAR, it’s a matter of distancing and treating everything like it’s infected. Just like the markets, people initially underreact, then they panic because they underreacted, then they overreact.

It reminds me of Maslow’s Hierarchy of Needs as we are all focused on the bottom two right now, no matter who you are or how much money we have. Health, air, water, employment, and personal security are top of mind.

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Are we wining the WAR?

David Ingles at Bloomberg shared this chart and points out one ratio to watch is recoveries to infections. A rising trend is good, a declining trend is bad.

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OUR BATTLE PLAN

Here is what we are doing at Camp Shell.

We had already started stocking extra bottled water and food, which we would have done anyway in preparations for hurricane season.

It’s mainly been business as usual for us. The only thing different is we aren’t going out to eat with friends or the grocery store. I haven’t left in a car in two weeks, but we still do our daily walk with the dog and cycle for exercise.

We have gloves, masks, and even suits if necessary.

We’ve stopped bringing the mail and packages in through the front door and instead take them into the garage. We put on gloves to handle them and open them. We open all mail and packages at the trash can in the garage and then wipe it all down with spray and then clean off our rubber gloves. We treat it like it’s infected with a deadly virus. Better safe than sorry. We throw away the mail after anything important is scanned using our iPhone and the Dropbox scanner. Nothing comes in without being wiped down. When we need groceries, we order it online from Publix and they deliver. We handle the groceries the same – nothing enters Camp Shell without being wiped down.

It’s very simple.

If we do this and keep social distancing in the days and weeks ahead, we’ll likely avoid the enemy and win the WAR.

This is a relatively easy WAR to win if you want to win it. As with any combat situation, find the weak link and make is strong.

I hope you are taking this seriously and doing the same.

WE WILL WIN THIS.

It reminds me of US Marine Recon: Swift, Silent, and Deadly.

SEMPER FI

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.

Periods of high volatility are followed by volatility contractions

Prior to the volatility expansion that started a month ago, my mantra was:

Periods of low volatility are followed by volatility expansions.

The other side to it is:

Periods of high volatility are followed by volatility contractions.

Yes, indeed, after the CBOE S&P 500 Volatility Index (VIX) shattered it’s former all-time high when implied volatility spiked to 83, it is now settling down retracing about half of what it gained. For now, it’s a volatility contraction.

For a closer look, here is the trend zoomed in to the one year chart.

The stock market as measured by the S&P 500 made a solid advance today by any measure. According to Walter Deemer, today was a 90.3% upside day with 2732 advances and 276 declines. So far, March 23rd was the lowest point and the stock market is trying to recover some of the losses. The day after the low was March 24 was a 93.9% upside day with 2791 up and 244 down, which was even stronger. So, the advance off the low is showing some thrust, but only time will tell if it can continue, or if this is just an oversold bounce.

Getting more technical with the charting, the candlesticks show some bullish patterns. However, the S&P 500 has already reached the mid way point in my momentum measures were I expect if it’s going to stall, this is where it happens.

Many people believe the news headlines drive stocks prices, but today is yet another example that it isn’t necessarily that case. The news was bad today, with headlines like “U.S. Death Toll From Coronavirus Tops 10,000” and “U.K. Prime Minister Boris Johnson Moved to Intensive Care” and then “Virus Puts a Prison Under Siege.”

US Initial Jobless Claims last week was off the charts. Provided by the US Department of Labor, US Initial Jobless Claim provides underlying data on how many new people have filed for unemployment benefits in the previous week. Given this, one can gauge market conditions in the US economy with respect to employment; as more new individuals file for unemployment benefits, fewer individuals in the economy have jobs. Historically, initial jobless claims tended to reach peaks towards the end of recessionary periods such as on March 21, 2009, with a value of 661,000 new filings.

US Initial Jobless Claims is at a current level of 6.648M, an increase of 3.341M or 101.0% from last week. This is an increase of 6.436M or 3,004% from last year and is higher than the long term average of 353698.

If there was anything we learned from the last 11 years is the truth behind the axiom “don’t fight the Fed.” Fed intervention and the passage of a record-breaking $2.3 trillion US fiscal stimulus has supported fragile consolidation across many markets, including Treasuries, agency mortgage-backed securities and money markets.

A global recession is now imminent.

They won’t call it for another year or two, but I will now. We’ll see negative GDP growth across the world, although it may well recover as sharply as it fell. Once restaurants, etc. finally open back up, they will be in high demand. So, if restaurants can hang in there, there will be brighter days ahead. Right now, we just don’t know how long it may take.

As for the Coronavirus and data, we’ve discovered many issues with the data being reported by states. I’ve been monitoring it waiting for some improvements before sharing any more quantitative analysis.

This ain’t my first rodeo riding a bucking bear. I operated successfully through the 2008-09 bear market as well as the 2000-03 bear market. Both of them included ugly recessions with people losing their jobs, etc.

This one will be worse. But, again, there’s also a good chance the recovery is just as stunning as the waterfall decline.

So, stay tuned.

Periods of high volatility are often followed by volatility contractions and that’s what we’re seeing now. However, it is highly likely we won’t be seeing a VIX at 12 anytime soon as I expect elevated implied volatility for a long time, driven by demand for hedging with options. It’s likely to be similar to post 1987 when the risk of a price shock remains price into options.

I’ve got a lot more to share, but timing is everything.

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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.

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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.

Increasing evidence social distancing policies at the state level are causing decreases in the viral transmission of Coronavirus COVID 19

We continue to monitor the incredible data coming from the Kinsa Data Team.

Today, they announced:

We are seeing increasing evidence that social distancing policies enacted at the state level are causing decreases in viral transmission. This analysis is based on our real-time illness signal collected over the last two weeks which is highly correlated with the national influenza-like illness (ILI) reported by the Center for Disease Control (CDC)”

They interpret these declines in presumed flu infections to be a promising indication that social distancing measures will be effective at slowing the spread of COVID-19. 

What we are seeing here is likely an overwhelming decrease in seasonal cold and flu transmission rather than any effect specific to COVID-19.

They go on to share comparisons of roughly four weeks of influenza-like illness levels for three states — Florida, Washington and California — that first reported COVID-19 infections.

The first confirmed COVID-19 case in the U.S. was in Washington state on Jan 21. The first COVID-19 related death was in Washington state on Feb. 29. Washington was also the first state to implement widespread social distancing policies. Here is the timeline.

Washington state and California have aggressively instituted social distancing measures and have shown declines in influenza-like illness in the subsequent days and weeks.

In Florida, the limited implementation of social distancing measures is associated with a prolonged and sustained increase in illness levels.

On March 1, Florida reported its first confirmed case of COVID-19. Although the governor declared a state of emergency the same day, there were no mandatory restrictions implemented at the state level until March 17, when all bars and nightclubs were ordered closed. Public universities started canceling in-person classes on March 17 and 18 and public beaches, as well as restaurants and gyms, were ordered closed on March 20.

In comparison, here is the faster response from California.

Since I’m in Florida, here is their chart of atypical Illness Levels for Hillsborough County, FL and surrounding areas as of March 24, 2020.

Compare Tampa Bay above to the atypical Illness Levels for Los Angeles County, CA and surrounding areas below. LA is benefiting from the quick response to social distancing over Tampa Bay.

The bottom line is the evidence shown above for Washington state, California and Florida, strict social distancing measures appear to have an effect on reducing the total influenza-like illness.

LET’S KEEP DOING IT AMERICA!

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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.

You probably want to sell stocks, now

On January 11, I shared an observation “You probably want to invest in stocks

The great thing about sharing written observations is the ability to go back and read what was going on in the past to learn from it.

On January 11, I wrote:

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

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

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

Then, included the Fear & Greed Index dialed all the way up to 97, Extreme Greed.

fear greed index

I went on to write; (I’m bolding the key points this time)

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

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

I included this chart of the stock index at all time highs.

stocks stock market at all time high

I then wrote: (I added the bold this time)

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

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

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

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

What has changed?

A lot has changed since then.

First, the S&P 500 stock index which most investors use as a proxy for “the stock market” is down -34% from it’s high reached on February 19th. To put the fall into context, I included the history going all the way back to the 50s. This is now the 4th deepest decline since then.

The speed of the decline was most impressive.

The next chart is the price trend of the S&P and Dow Jones year-to-date. The decline happened very fast, in just a few weeks.

By March 12, the Fear & Greed Index was pegged back to 1 indicating “Extreme Fear.”

 “Be fearful when others are greedy and greedy when others are fearful.”

 ― Warren Buffett

I know. It’s much harder than it sounds!

But at the extremes, which is what I mostly point out here on ASYMMETRY® Observations, is when we want to step away from the crowd and shift from trend following to countertrend tactics.

That’s what I’ve been doing.

I know you think “it’s different this time” because of the Coronavirus COVID – 19 and such. Now, the Federal Reserve has committed to taking unprecedented actions even more than after 2008. The US government is printing even more money than before.

It all seems so uncertain, but it always is.

“Don’t fight the Fed.”

“Don’t fight the Fed” suggests investors can do well by getting in synch with monetary policies of the Federal Reserve Board, rather than against them. The Fed has lowered rates to zero and announced it will be buying traditional securities including bonds and ETFs as “The Fed Goes All In With Unlimited Bond-Buying Plan.” I’ll share my detailed observations of it later.

Yesterday, I had a significant cash position, so was looking for the most likely asymmetric risk/reward positions to take. Tactical trading isn’t easy. It requires tremendous discipline, stoicism, patience, skill, ability to be wrong, and acceptance of the uncertainty.

RISK MANAGER / RISK TAKER

I’m a tactical risk manager and also a risk-taker. I increase and decrease exposure to the possibility of profit or loss based on my estimates of asymmetric risk-reward. After prices have already fallen over -30%, we have to realize the risk level decreases. It doesn’t seem that way, because of the volatility expansion. Prices swing wider up and down at the lowest lows, so there is nothing easy about taking a risk when its the lowest.

If you are like the majority of investors, you are feeling “Extreme Fear” right now as you fear taking on more loss. Below is the Fear & Greed index over time. Notice it oscillates between fear and greed. After prices trend up, it enters the red zone I colored. After prices fall, it enters the green zone.

Clearly, this has been one of the most staggering waterfall declines in American history. As such, investor sentiment has followed the price trends down.

So, you probably want to sell your stocks right now.

I’ve been hearing from other financial advisors who aren’t tactical like me and don’t increase and decrease exposure to asymmetric risk/reward as I do, saying their clients were tapping out on these big down days the past week.

That’s what I hope to avoid with our clients.

If you tap out, I would NEVER know when you could get back in.

Would you feel better of prices fall another -30%?

Or, would you buy back if prices trend back up to all time new highs?

What would it take?

I have no idea.

I want to avoid that situation because I have no idea how to resolve it. So, I prefer to try to apply my drawdown controls to manage the downside the best we can to keep it within our clients tolerance and capacity for risk.

This is why I actively manage risk by increasing exposure to risk and reward over time. It ain’t perfect, but it doesn’t have to be, as evidenced by my 16-year track record. I just need the average gains to be larger than the average loss over time.

It’s what I call ASYMMETRY®.

That’s all for now. I’ve got some good stuff in the queue, so if you haven’t already, I encourage you to sign up for automatic email alerts of new observations.

I also encourage you to go back and read You probably want to invest in stocks from January 11th and think about what has changed since then. This has been one of the most fascinating swings in US history, so let’s learn all we can from it!

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.

Bolted to the chair

Mark Twain’s mother said:

“I only wish Mark had spent more time making money rather than just writing about it”.

I am no Mark Twain.

I’m a tactical trader, so that’s my first purpose.

I’m not always going to take the time to write it out in a format I can share here.

I’ve been bolted to the chair this week but didn’t spend any time sharing my observations.

Instead, I encourage you to do what I did. I went back and reread some observations from January to see what I was seeing and thinking then.

I think about:

What has changed?

How has sentiment changed?

How has the trend direction changed?

Has volatility changed?

Has momentum changed?

Has the narrative changed?

What didn’t we know then we do today?

Is what we believe today congruent with what we believed then?

Here’s what I read:

 

If you do this, you’ll see why.

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.

This is when passive indexing becomes active

I have long said that many indexes are a black box. If we don’t know what will be added or deleted from the index in advance, the rules driving the changes must be a black box.  I especially believe the Dow Jones Industrial Average is a Black Box.

I’ve also said most of the indexes are simply systematic investment strategies that apply some rules-based strategy and most of them are quantitative. That isn’t the case with all indices, however, since some of the additions and deletions (buys and sells) in the index are decided by a committee. However, even the committee uses some quantitative rules-based method to some degree.

But, it’s still people, making decisions, deciding which stocks to add or remove. As such, there is both a degree of quantitative rules-based system and some elements of discretionary decision-making. To be sure, read their notices of index changes.

S&P Dow Jones Indices recently announced their quarterly rebalance for S&P and Dow Jones equity indices scheduled to take effect prior to the open Monday, March 23, 2020, are being postponed. 

S&P Dow Jones Indices postpone delay index update march 2020

Specifically, they said:

S&P DJI made this decision following thorough consideration of how best to support our clients and govern our indices during this period of extreme global market volatility, market-wide circuit breaker events and exchange closures.

Below is a summary of the changes that will impact certain indices.

  • The majority of quarterly shares outstanding and investable weight factor (IWF) updates are postponed.

  • Membership changes (i.e., adds/drops) for select indices will be postponed.

  • Capping constraints that enable consistency with certain diversification requirements will be applied by the end of March.

This is an example of what I call Man + Machine. As most of the S&P Dow Jones Indices is systematic, applying a rules-based strategy for adding and deleting stocks in the index much like the manager of a fund does, this action is the result of the discretionary overlay of people making active decisions.

The recent volatility across global markets is one of the most extreme volatility expansions we’ve ever seen before as prices are spreading out everywhere. No index company is more known than S&P Dow Jones Indices, and even they have made a big discretionary active decision in response to changing market conditions.

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.

Historic day for the stock market

Today was just a reversal of Friday’s late-day surge.

SPX SPY TRADING

The stock market is even more washed out.

With the Federal Reserve lowering interest rates and buying back bonds, the long term US Treasury Index reversed back up.

long term treasuries

The stock indexes are down to their 2018 lows and if the selling doesn’t dry up, we may see a mean reversion of the last 10 years. It wouldn’t be surprising for many reasons, especially when we see it happens to be the area of trouble in 2015-16. Keep in mind, the Fed has been a key return driver for the last several years. It doesn’t seem to be working anymore.

spx mean reversion

I’m a risk manager, risk-taker, so I increase and decrease exposure to asymmetric risk/reward as conditions change over time. When I see signs of the selling pressure drying up or buying enthusiasm overwhelming the selling pressure, I’ll be looking to buy stocks again.

That is all.

Let me know if we can help.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global 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 week in review

What a week!

US Stock indexes declined over -13% this week. The S&P and Dow are in a bear market, down over -20%.

Here are the observations this week, I hope you find them helpful.

Panic selling drove a waterfall decline and washout for the stock market

Growing up in East Tennessee and the Great Smoky Mountains, I observed a lot of waterfalls.

Wiki says a fall of water is an area where water flows over a vertical drop or a series of steep declines in the course of a stream or river.

According to National Geographic, a waterfall is a river or other body of water’s steep fall over a rocky ledge into a plunge pool below. Waterfalls are also called cascades. The process of erosion, the wearing away of earth, plays an essential part in the formation of waterfalls.

waterfall decline in stocks stock market

What we have witnessed in the global equity markets is a waterfall decline, the question now is if the plunge pool has developed.

water fallAn overhang in a waterfall can sometimes protrude out enough to form a base, or even drive the water to flow upward for a while, but the waterfall isn’t over until the plunge pool develops.

waterfall overhang spring hill

Using the S&P 500 stock index as a proxy, it’s pretty clear there wasn’t much of an overhang along the way. For example, in the middle of this 3-year chart, we see how the decline in late 2018 played out. It had a lot of overhangs as the stock market was swinging up and down for several weeks.  Now, compare that to this time…

SPY SPX

What we have here is panic selling.

Investors tend to underreact and overreact to new information.

Underreaction: Trends begin to drift in a direction as people initially underreact to change, so the price trend unfolds gradually.

Overreaction: Sometimes, investors overreact to new information, so the price is driven too far, too fast. When the market overreacts, prices overshoot too high, or too low.

At the bottom of a waterfall is a plunge pool, where the water settles. What does the plunge pool look like as it develops? It’s a floor that has enough support the water stays were it is.

The trouble is, in the market, we don’t physically see the rock bottom. Unlike in physical science, an exchange market is a social science because it’s human behavior. Don’t think this is humans? Maybe it’s the computer algorithms? They are created and operated by humans.

I apply quantitative tools to get a read on how extreme investor sentiment is.

In analyzing market trends and price action, we can see what is going on with market internals, such as breadth. The NYSE Bullish Percent was developed by Abe Cohen was the first breadth indicator. Abe Cohen was an early pioneer of Point & Figure charting and created the NYSE BP in the mid-1950s. The NYSE Bullish Percent is a market risk barometer that measures the percent of stocks listed on the New York Stock Exchange that have a Point & Figure buy signal, so they making higher highs, so they are in uptrends. The NYSE Bullish Percent is washed out. It hasn’t been this low since the waterfall decline in October 2008.

NYSE BULLISH PERCENT

The challenge with countertrends is they can also trend farther than you would ever believe is possible. It’s because markets don’t follow a normal distribution. Instead, market trends have fat tails, meaning some gains and losses exceed an otherwise normal distribution, as we see in physical science. As such, the overreactions can overshoot and just keep overshooting. We never know for sure when a trend has stopped. What we can do, however, is apply quantitative tools to gauge and guide. I use these as a guide and barometer for overall market risk.

The percent of the S&P 500 stocks above the 50-day moving average is washed out to 1%. In fact, only 7 of the 505 stocks in the S&P 500 are in a short term uptrend. While in a big bear market such as 2008-09, these conditions can continue for a long time, historically, this lower level of risk eventually offers the potential for asymmetric risk/reward. That is, the possibility for reward is greater than the risk it takes the achieve it. Or, the magnitude for a reward is greater than the downside risk, which can be predetermined with options or an exit (i.e., stop-loss.)

$SPXA50R breadth is washed out crash 2020

A material change that has occurred the past week is the percent of S&P 500 stocks above their 200 day moving average, or longer-term uptrends have washed out. Only 5% of the stocks are in uptrends now, so 95% of them are in long term downtrends. That doesn’t sound good, but when it reaches an extreme, it suggests to me the selling pressure is intense and could eventually dry up.

percent of stocks above 200 day

This is about as oversold the stock market gets, both internally looking at the individual stocks and the indexes. Sure, it can get more oversold and stay there for as long as sellers have the desire to sell, but it has reached the point the odds of a short term reversal is increasing the lower it goes.

Yesterday I asked: where do you think we are in the cycle of market emotions?

THE CYCLE OF MARKET EMOTIONS

Clearly, when stock indexes drop 8-10% in a single day after already well off their highs, it is driven by emotional panic.

The US Investor Sentiment poll from AAII is released on a few day’s time lag, but Bearish % of those polled is another measure up to 2008-09 levels.

AAII INVESTOR SENTIMENT MARKET CRASH 2020

 

To no surprise, the Fear & Greed Index was penned all the way back to 1 after yesterday’s close.

fear greed panic market crash 2020

What we have here is a washout. A washout is an event or period that is spoiled by constant or heavy rain. We may see more rain, but it’s a washout nonetheless. A washout in the stock market is when prices have been flooding down so hard, so broad, it seems like a washout of rain.

As you can imagine, with a waterfall, heavy rains increase the volume and speed of water flow. A washout pushes the river to its limits.

The desire to sell has been overwhelming any buying interest that remains for a few weeks now. This has been the fastest decline in US stock market history. I guess we shouldn’t be so surprised if we believe a trend stretched far in one direction is more prone to snap back harder and faster. That’s what we’ve seen here.

This is the end of the longest bear market in US history, and it has indeed ended with a bang. That also means this is the beginning of a bear market. What we don’t know in advance is how long it will last or how low it will go. If we knew it would be -50%, we could simply sell short and profit from the fall. If we knew this was “the bottom,” we could use leverage to maximize gains on the upside. But, none of us know the outcome in advance, not the biggest banks, not the largest asset managers, and neither you nor I. The edge I do have is accepting this reality and embracing it to the point I drove me to create risk management systems to limit the downside when I’m wrong and focus on the things I can control. I’ve operated tactically through periods like this many times before in the last two decades, so I’ll just do what I do, which means I’ll execute many entries and exits until we find the trend. In conditions like we’ve seen this year, they’ll be countertrends. Once trends do develop, they’ll be trend following.

What I’ve typically seen in past bear markets is many cycles up and down along the way. That isn’t what we’ve seen this time, so far. This reminds me more of September 11, 2001, after the World Trade Center was attacked. The difference is, the S&P 500 was already down about -17%, and since the planes hit the World Trade Center in New York, the NYSE was closed. The New York Stock Exchange remained closed until the following Monday. This was the third time in history that the NYSE experienced prolonged closure, the first time being in the early months of World War I[2][3] and the second being March 1933 during the Great Depression.

It may not play out this way this time, but countertrends should be expected. Here is what the stock market did after the exchange opened after September 11. The SPX dropped -12% quickly, but then investors become patriotic, and it recovered a few weeks later. Of course, this happened inside a bear market that started in 2000 and didn’t end until 2003.

stock market v recovery september 11 9:11

Is this so different than 9/11? Of course, it is. Every new moment is always different. But, we’ve experienced these things before. I was much more of a rookie 20 years ago when I walked into my investment firm office to see the planes hit. It was an incredibly emotional and panicked time in American history. At the time, it wasn’t just the one attack, we wondered what would be next. It was the Pentagon, and another plane was hijacked. We didn’t know what to expect, it was uncertain. When would we be attacked again? Where? Would it wipe us out?

We didn’t know.

Portfolio managers and tactical traders must be here, now, in the present moment, not dwelling on the recent past, there will be time for that later when things are calm and quiet. But even then, we can’t do anything in the past, we can only do it now.

I hope this helps.

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

 

 

 

Self-discipline, Panic Selling, and the Cycle of Emotions

At the moment, the popular US stock market indexes are down over 25% from their years year-to-date.

STOCK MARKET CRASH 2020

Looking at the Cycle of Market Emotions, where do you think we are at this moment?

THE CYCLE OF MARKET EMOTIONS

The magnitude and speed of the decline are impressive by any measure. For example, below I charted two different historical (realized) volatility measures around the stock index.  The green area is a channel of average true range, which I used to define the normal noise of the market. The waterfall decline has been anything but normal, as it has exceeded two times its average true range several times. We can say the same for the standard deviation, which is the red line.

stock maket crash volatility

This price action is a “black swan” outside anything ‘normal’, so this is an extreme level of panic selling.

Looking at the Cycle of Market Emotions, this is the panic phase

Based on price action across global markets including many alternative assets like Real Estate, Energy MLPs, and investor sentiment measures, this is the panic, capitulation, and despondency phase. The reality of a bear market has to the fore and investors are panicking. Many panic and tap-out from the market from of fear of further losses. Those who stay in and endure the decline may become despondent and wonder whether the markets are ever going to recover. They’ll start to think “this time is different” and we’ve never seen anything like this before.

We haven’t, and this time is necessarily different, as it’s a new moment that never before existed. All market trends are unique because all new momentums are unique – never existed before. But, that doesn’t mean we can use the past to understand future possibilities. History is all we have as a guide and our past experience is essential at times like this.  As my focus is on investor behavior and how it drives market trends, momentum, and volatility, I’ll be sharing my beliefs on this in the days ahead.

Ironically, it’s times like this investors fail to realize markets also reach the point of maximum asymmetric risk/reward after such a radical waterfall decline. We never know in advance if it will keep trending down or reverse. This downtrend has been a fine example as it wasn’t interrupted my much of a countertrend back up. But in the big picture, the more extreme a price move, the higher the likelihood of a swing the other way – at least short term. I said the same about the uptrend. I like uptrends, but sometimes when it comes to momentum; the higher they go, the lower they fall. That’s what we’re seeing now. Investors should also be prepared for the opposite; the speed and magnitude of this decline may result in correspondingly strong countertrend reversals.

THE CYCLE OF MARKET EMOTIONS

This is panic level selling.

This is a volatility expansion, so expect prices to swing up and down.

This price trend will reverse when the selling pressure has exhausted and has driven prices down to a low enough point to attract the enthusiasm to buy.

Surely the trend is nearing that level at least on a short term basis. Market trends are a process, not an event, but this one has been a much faster and deeper process – and it feels like an event.

At times like this, it’s essential to be stoic. For me, as a professional investment manager who has tactically operated through many times like this before, a stoic is being calm,  emotionally intelligent, focus on the things I can control and let go of those I can’t and most of all self-discipline.

Self-discipline is the ability to control one’s feelings and overcome one’s weaknesses; the ability to pursue what one thinks is right despite temptations to abandon it.

I started increasing exposure to stocks after they fell because my managed portfolio was in a position of strength. I was in US Treasuries at the January stock market high, so we missed the first big leg down. We’re participating now as I increased exposure the last two weeks, so my tactical decisions are never perfect and never a sure thing. I don’t have to get it perfectly right every time, which is impossible. I just keep doing what I do, over and over, with great self-discipline and the calm of a stoic.

Hang in there friends, this too shall pass.

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.

 

 

 

Why I’m not surprised to see such a volatility expansion

On November 15, 2019, I published “Periods of low volatility are often followed by volatility expansions” and included the below chart.

The point is just as the title said, when stock prices trend up quietly, they are eventually interrupted by the loud bang of falling prices.

Average True Range ATR use in portfolio management trading volatlity

In this case, it took a few months to see it play out.

Below, I updated the chart so it still has the same starting date, but shows us what happened after I posted it. The 11/15/19 day is labeled on the chart. It had a small decline shortly after, but then resumed the uptrend.

2020 stock market crash volatility expansion

In fact, the stock index went on to gain 9% from that point and was interrupted by only two small countertrend declines of 3-4%.

That is, until February 19th.

Since the peak, the stock index has declined -19% and volatility has exploded.

The volatility measure I used in the chart is an average of the true range, which accounts for a full price range of the period. The average true range is also what I used to draw the channels above and below the price trend to define “normal” price action.

The average true range of the price trend has increased by 420% since December, from 17 to 97. I know it shocked most people in the market and while I didn’t expect a -19% waterfall in just three weeks, I expected a volatility expansion and mean reversion. As I exited stocks a little early, we see now it didn’t matter this time as the stock market has given up far more upside than we missed out on over those few weeks.

Next, let’s look at a chart of implied volatility as indicated by the VIX based on how the market is pricing options. Implied vol spiked over 200%. I also included the 30-Day rolling volatility of the S&P 500 ETF. Implied volatility lead realized, historical, volatility to the upside.

volatilty expansion vix realized

So, the condition of the US stock market is volatile one as prices and swinging up and down, and only December 2008 in the middle of the Financial Crisis was it higher.

vix volatility trading asymmetric risk reward

If the VIX is a fear gauge, it’s signaling a lot of fear.

Again, “Periods of low volatility are often followed by volatility expansions” and that’s what we got. This time it got stretched on the upside so far it has snapped back to very quickly and violently correct it.

The good news is, the opposite is also true; periods of high volaltity are eventually followed by volatility contractions.

But, just as before, as it took time for the volatility contraction to become a volatility expansion, we’ll probably see a continuation of price swings and elevated volatility for a while.

Eventually, this too shall pass.

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.

 

 

Wrong narrative? Feeling the Bern of socialism may have been even scarier

Yesterday, after the “emergency” interest rate cut by the Federal Reserve, the US stock market trended down to close -2.8%.

Top news headlines looked like this:

fed rate cut march 2020

They were rather alarming, the largest since the financial crisis, and “emergency cut” and “to combat virus fear.”

What if much of the selling pressure in the stock market has been more by “Fear the Bern” more than coronavirus? Stock index futures are up about as much as they fell yesterday after Joe Biden beat Bernie Sanders on Super Tuesday.

stock market feared bernie sanders fear the bern

Prior to last night, Sanders appeared highly likely to secure the nomination; the odds plunged from 65% to 16% now.

You may consider the possibility large stock market investors were more concerned about the recent Bernie Sanders lead over Joe Biden than coronavirus.

Feeling the Bern of socialism may have been even scarier. 

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 Fed did what?

At 10 AM yesterday morning, the Fed cut rates.

The actual statement is worth reading.

March 03, 2020

Federal Reserve issues FOMC statement

For release at 10:00 a.m. EST

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

 

I highlighted in green the 10 AM spike up in the S&P 500 stock index. Then, after the initial reaction, the stock market trended down to close -2.8%.

stock market declined fed rate cut

Normally, an interest rate cut is positive for stocks. But, this time it was considered an “emergency” rate cut (the media term for it today) “In light of these risks and in support of achieving its maximum employment and price stability goals.” 

The headlines were negative.

fed rate cut march 2020

Every new bear markets need a catalyst to get the blame. If this decline were to unfold into a material bear market, down -20% or more, it would be because of its valuation level of this aged bull market in stocks. As stated before, this economic expansion and the bear market is the longest ever in history in terms of time. At elevated valuation levels, we can expect higher volaltity expansion and deeper price swings. Although, these swings can also produce potential tactical trading proprieties.

According to the CME Fed Funds Futures Probability Tree, the futures market seems to expect rates are going much lower, like zero.

Fed Funds Futures Probability Tree Calculator

FOMC meetings probabilities are determined from the corresponding CME Group Fed Fund futures contracts. Probabilities of possible Fed Funds target rates are based on Fed Fund futures contract prices assuming that the rate hike is 0.25% (25 basis points) and assumes the Fed Funds Effective Rate (FFER) will react by a like amount. The probability of a rate hike is calculated by adding the probabilities of all target rate levels above the current target rate.

The Effective Fed Funds Rate long term historical trends are in the next chart.

Effective Fed Funds Rate March 2020

The US 10 Year Treasury Rate has fallen to its lowest level, ever, so it’s not in uncharted territory. With the 10 Year Treasury Rate at about 1%, it was 2.72% a year ago, and the long term average is 4.5%.

uncharted territory 10 year treasury rate

The 10-year treasury is the benchmark used to determine mortgage rates and the most liquid and most traded bond in the world. Financial analyst use the 10-year yield as their “risk-free” rate when valuing a stock, bond, or markets.

Low-interest rates are great for borrowers, but not savers. The continuation of the downtrend in interest rates will continue to punish those who save their money in the bank rather than invest it in stocks, bonds, etc.

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.

 

 

Expect wider price swings in a volatility expansion

I know, it sounds obvious, but yeah, expect wider price swings in a volatility expansion.

The CBOE S&P 500 Volatility Index (VIX) is a popular measure of the stock market’s expectation of volatility based on S&P 500 index options. The VIX Index is a calculation designed to produce a measure of a constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of the S&P 500® Index (SPXSM) call and put options.

The VIX index shows us the 30-day expected volatility increased 200% during the February 2020 volatility expansion. I may have to define this rate of change as a volatility explosion. Expansion is the act or process of expanding to become or make larger or more extensive. An explosion is a rapid increase in volume and release of energy in an extreme manner. This looks explosive.

February 2020 stock market decline volatility exansion

Viewing it over a wide range of the past 10 years, the 30-day expected volatility is elevated to the second-highest level seen since the 2007-09 stock market crash. In 2011, the VIX spiked to 48.

VIX 1 year volatility expansion trading asymmetric

Putting it into an even broader perspective with the larger sample size of 26 years of historical data, the recent 40 level is about as elevated as 30-day expected volatility gets.

30-day expected volatility

I observe volatility from a perspective of both implied (expected) volatility and historical (realized) volatility. Implied volatility a measured by the VIX Index, is typically priced at a premium since options trading sentiment tends to have more of a hedging tilt. In theory, the VIX at 40 suggested expected 30-day volatility of 40%, which is much higher than the 21.5% realized vol as measured by 30-day Rolling Volatility derived from the actual past 30 days of price action. This is just an idealized, overly simplified example, but the point is both realized and expected vol is elevated.

implied vs realized volatility

Asymmetric volatility is what we see when equities fall sharply. The asymmetric volatility phenomenon is the observed tendency of equity market volatility to be higher in declining markets than in rising markets. Volatility tends to decrease after prices have trended up as investors and traders (the market) become more and more complacent, expecting a smooth uptrend will continue. Then, after prices decline, complacent investors and traders are caught off guard and surprised when prices trend down, and the more prices fall, the more they fear losing more money. The fear of losing money, then, is another driver of asymmetric volatility; Investors experience the pain of loss twice as much as the joy of gains. Nobel Prize-winning behavioral research finds that losses loom larger than gains and that people are loss averse. So, after prices have fallen, investors and traders sell simply because prices are falling, to cut their losses, and avoid larger losses. This selling pressure becomes a serial correlation, contagion, and prices keep falling until the desire to sell has dried up. It’s what I believe, at least, after studying and observing price trends in real-time professionally over two decades.

We saw asymmetric volatility expansion after the astonishingly smooth uptrend in 2017. In the chart, I overlay the 30 Day Rolling Volatility to visualize how the realized vol declined as the S&P 500 trended up quietly. But lower and falling volatility periods tend to be followed by periods of rising volatility.

asymmetric volatility trading exansion hedge hedging

US equities went on to recover two major price shocks and asymmetric volatility expansions in 2018, but here we are in 2020 seeing another smooth uptrend with great momentum interrupted by volatility expansion driven by a waterfall decline in stocks. 

Februrary stock market volatilty what caused crash

Asymmetric volatility is when prices drift (trend) up and then crash down.

When realized and implied volatility is elevated, we should expect to see price swings both up and down. Recovery from a downtrend like this is a process, not an event. We’ll probably see many swings up and down along the way, which is especially true if this unfolds into a bigger bear market level downtrend. Although anything can happen, bear markets don’t just happen all at once. The worst bear markets like 2007 to 2009 unfolded with price swings over many years, not just in 2008.

Only time will tell if this is the early stage of a bigger move, but in the meantime, expect larger price swings as prices spread out and the weight of investors decide which direction to lean.

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.

Global Asset Allocation: Risk and reward isn’t a knob we turn to get what we want. 

I don’t believe I know anyone who invests all of their money in the stock market, all the time.

In order to invest all of your money in the stock market all the time, you’d have to be willing and able to accept a downside loss (drawdown) of -50% or worse. I say that because it’s the historical drawdown.

S&P 500 Stock Index Historical Drawdowns

In the S&P 500 Stock Index Historical Drawdowns chart below, we see -20% several times, -30% a few times, and -45% or more three times. It happens, it can happen, and it will happen again. It’s why I prefer to instead actively manage my risk for drawdown control.

Losses are exponential the deeper they get and too hard to overcome.

To truly understand the risk, I think we have to know if a market has fallen -50% in the past, it could certainly do it again in the future, or even worse. So, the risk isn’t some multiple times a volatility measure like Value at Risk, but instead, the possible loss is at least the worst historical drawdown. Past performance doesn’t guarantee future returns, so it could be worse next time, for all we know.

Since most people probably don’t have the risk tolerance, risk capacity, or financial ability to take that much risk, most investors invest in some fixed allocation of cash, bonds, and stocks. If they use an advisor, they most likely are further diversified into International markets to make it a diversified portfolio of Global Asset Allocation (GAA). To track Global Asset Allocation, I use the S&P Target Risk Indexes for Global Asset Allocation.

The short story is, S&P allocates between equities and fixed income.

TARGET RISK ALLOCATION

How has a Global Asset Allocation performed so far in 2020 through February?

To answer, I look at these S&P Target Risk Index. But, keep in mind, these indexes do not include fees such as advisory fees or trading costs. Clearly, more risk is not always compensated with more return. All of them are down, but the more aggressive allocation to stocks hasn’t resulted in more return, but less, so far.

Global Asset Allocation GAA performance 2020

In fact, the % off high shows the drawdown for each of the Target Risk Indexes. You can probably see why “growth” and “aggressive” isn’t always as it sounds.

Global Asset Allocation GAA Target Risk Drawdown

Risk and reward isn’t a knob we get to turn to get what we want.

I prefer to rotate, rather than allocation, and actively increase and decrease my exposure to the possibility of risk and reward. It’s the only way I know that has the potential for my objective of asymmetric risk-reward.

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.

I’ve been here before; stocks are entering the zone

Based on breadth and short term momentum indicators, the U.S. stock market is entering what I consider to be the green zone. The green zone is the lower risk area, which is the opposite of the higher risk red zone. As I pursue asymmetric risk-reward by structuring trades with asymmetric payoffs, I’d rather lower my risk in the red zone and increase it in the green zone. Said another way, to structure trades with an asymmetric payoff, I believe the positive asymmetry comes from increasing exposure in the green zone and reducing exposure in the red zone. However, it isn’t a buy or sell signal for me, but instead a risk indicator. My buying and selling is an individual position decision, but my stock portfolio is probably going to be in synch with these overall market risk analysis at extremes.

S&P 500 Percent of Stocks Above 50 Day Moving Average is an indicator showing the percentage of stocks in the S&P 500 that closed at a higher price than the 50-day simple moving average. The chart below was updated after Friday’s close. Only 3% of the stocks in the S&P 500 Index are trading above their 50-day moving average, a short term trend line.

BREADTH PERCENT ABOVE 50 DAY MOVING AVERAGE SPX 500

If you want to see how I applied it in the last big stock market decline, read “An exhaustive analysis of the U.S. stock market” late December 2018 when I suggested the probability was in favor of reversal back up was high. The next day, on December 24, 2018, in “An exhaustive stock market analysis… continued,” I shared:

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

I’ve been here before.

I’m seeing similar signals now, as you can see in the above chart, the participation in the downtrend has now reached the same level as the price lows of 2018.

Now, make no mistake, trends downtrends can continue. Price trends can unfold unlike anything ever seen in the past as every new moment is unique, having never existed before – so past performance is no guarantee of future results. I have never actually been here before, no one has, but I’ve experienced this kind of condition many times before.

I’ve shared many times, my indicators measure buying and selling demand, so when most stocks are already participating in uptrends, it signals those who wanted to buy have already. I believe the same is true for downtrends; aftermost stocks are already in downtrends, those who wanted to sell may have already sold, their selling becomes exhausted, and when prices are pushed down low enough, it attracts buyers to buy. It’s all probabilistic, never a sure thing. It seems many investors were shocked by the speed and magnitude of his waterfall decline – I was not. If you’ve followed my observations, you’ve read enough to know anything is possible.

The S&P 500 Percent of Stocks Above 500 Day Moving Average is also entering what I considered the green zone.

spx trading advisor

As such, the stock market looks deeply oversold to me. Since I already reducted exposure before this decline, we view this period from a position of strength. It doesn’t always work out so well, it’s always imperfect, but I’m not sitting here down -13% from two weeks ago taking a beating hoping the losses stop.

stock loss 2020 drawdown

Managing risk when it’s at a high level for drawdown control offers the potential to be in a position of strength at times like this, and it’s my preference. Portfolio managers with cash or profits from hedging now can enter stocks and markets at lower-risk entry points with a more favorable asymmetric risk-reward profile than before.

Although, as John Galt shared with me this next chart this morning on Twitter and said, “These are the pros & they were blindsided,” not all professionals are in a position of strength. The chart shows the net exposure to stock index futures at a high level.

spx futures exposure

Everyone gets what we want from the market; as we decide what we get.

If we want to avoid drawdowns, we reduce the risk of drawdown.

If we want to avoid missing out on gains, we stay invested to avoid missing out on gains.

Regardless of choice, it’s never going to be perfect. Those who expect it to be are always disappointed and unable to execute as a tactical operator. This is a human performance that prefers the “C” students. If we weren’t included to get perfect “A,” we have an edge for this skill. I focus my perfection on execution, but not on the individual outcomes.

I accept losses, so I’m able to cut them short. I’ve never taken a loss that was a mistake.

For me, not taking the loss as I had predetermined would be the mistake.

I love taking losses.

It’s why I have smaller ones. I prefer to cut my losses short, rather than let them become big losses.

If I didn’t love taking losses, I would have large losses like others do. Most investors hold on to their losses, hoping to recover from them. Sometimes it works, but when the big one comes, it doesn’t. I prefer more control, so I make active decisions and manage accordingly. Never expecting it to be perfect, accepting the imperfections.

My energy goes into my focus and discipline. For me, it’s all about mindset. I’m a perfectionist on how I execute my tactical trading decisions, which is the activity within my control.

When I enter a position, I can’t control what it will do afterward, but my exit will determine the result every time.

When I exit a position, I can’t control what the security does afterward, but I can re-enter it again if I want, or be glad I got out. Or, I may imperfectly not re-enter and later notice it trended up more. I still didn’t miss out, I made my choice.

So, yeah, I’ve been here before, in this kind of situation. All new moments are always unique. This time has never existed yet, so it’s necessarily unknowable and uncertain. When we accept it and embrace it, we can make decisions and go with the flow. The good news is, this seems like a lower risk level, and though it may make an even lower low at some point and yet unfold into a major bear market, it’s an asymmetric trading opportunity for me.

I enter my positions with predetermined exits in case I’m wrong, and let it rip.

Oh, and I glance at headlines and make note of them at extremes.

bearish bloomberg news coronavirus

I’ll just leave this right here for later reference.

WSJ bearish coronavirus news

I hope this helps.

Have questions? Need help? 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.

 

What a week! here’s a review

Below are some observations I shared this week, in case you missed them.

cropped-asymmetry-logo1.jpg

My observations seem especially important this week since global markets are in a volaltity expansion and the US stock market dropped over -10% in a fast waterfall decline. Trends and volatility conditions like this are excellent opportunities to learn from the market price action and trends. It’s always a good time to evaluate portfolio risk levels for exposure to the possibility of loss to have informed consent as to your exposure to risks.

Don’t miss any observations, sign up for automatic email notices. Questions? Comments? Contact us here:

Permabear delight

I love music, so it plays in the background in my office, instead of financial news. Sure, I have Bloomberg playing on a TV, but with the volume down. I rarely turn it up, unless someone I know is speaking of something I’m interested in. My day is filled with music, a wide range of music, so when I thought “delight” and typed out “permabear delight,” I heard three different songs.

A permabear is an investment manager or investor who is always negative about the future direction of the markets and the economy in general, no matter what. The parts of the word help us understand its meaning: “Perma,” which means permanent and “bear,” which is someone who believes the market will fall (a “bear” market.) 

I’ve never been called a permabear in my 20+ year investment management career. But recently, a new follower asked if I am a permabear. It’s understandable because all he’d read was the past few months of my observations, and I have indeed been increasingly bearish. I got utterly bearish late January as my tactical trading signals, risk management, and drawdown control systems guided me to remove our stock market exposure to zero. The signals from my signals drive any “feeling” of bearishness I may have. Additional factors are extreme investor bullishness, implied volatility at extremes, and people wanting to get more aggressive. This is the part I often share here, hoping to help people observe how they feel the wrong feeling at the wrong time, and by doing so, they may eventually learn to feel the right feeling at the right time.

I tend to feel the right feeling at the right time. It’s something I’ve intentionally worked on, daily, for over two decades now, and with repetition comes increased skill and experience. For long term readers of my observations, I hope you’ve observed that. For our investment management clients, they’ve seen it in action in real-time. So, I become increasingly bearish as my quantitative systems signal risk levels are elevated. But, I also become bullish when the algorithms signal a price trend and volatility may have moved too far, too fast. When price trends move too far, too fast, I consider it an overreaction to information. I’ve discussed it a few times lately, especially regarding the coronavirus outbreak. I believe we witnessed an initial underreaction to how investors may eventually react, and then what appears to be an overreaction. At least in the short term.

So, now, I’m far from a permabear myself. I have investment manager friends who are permabears, and their performance reflects it. I also have friends who are permabears and have been unable to invest their money outside an FDIC insured bank account. That has been a big risk to them over the decades, but they may not know it, but to each their own. Banks need CD savers so they can lend the money out to borrowers at higher rates. It all seems to work out as everyone gets what they want.

At this point, the widely followed stock indexes have declined sharply with speed. The S&P 500 is down -14% from its recent all-time high, and the Dow is down over -15%.  The chart below is the % off high to put these drawdowns into context. It still isn’t as deep as late 2018, but it is now very close and happened much faster.

stock market drawdown 2020

While this may be a buying opportunity for those of us who had cash to increase exposure at these lower prices, it’s always possible it could trend lower. What seems more likely at this point is prices get low enough to attract buying enthusiasm, and if it’s enough, it reverses this waterfall decline, at least temporarily. After that, this may well be the bigging of the next big bear market. It’s a process, not an event, although this decline does look much more like an event than usual since it was so far, so fast.

I’ve now become short term bullish on the stock market. My systems which have been quantified and scientifically tested for robustness are now signaling prices are now at a level we consider oversold and a countertrend back up, at least retracing some of the recent waterfall declines that appear to be an overreaction. For example, below is the current chart of the S&P 500, which is down another -3% today. Below the price trend is a  simple 14-day measure of relative strength, a momentum indicator measuring the magnitude of recent price changes to evaluate overbought or oversold conditions. Today it has reached 20, which is the point I consider oversold. In fact, it’s now as low as it was during the late 2018 -19% waterfall decline.

stock market crash februrary 2020

Of course, after prices fall, so does investor enthusiasm to invest in stocks. It is no surprise to see the Fear & Greed Index made up of seven different sentiment measures reach the “Extreme Fear” level.

cnn fear greed Warren Buffett said when it comes to investing in stocks, it is smart to be “Fearful when others are greedy and greedy when others are fearful.” Although I do a lot more tactical strategies that he does, at these extremes we have something in common.

We don’t invest our grocery money in stocks, but this may eventually prove to be a positive asymmetric risk-reward opportunity when risk is defined with a predetermined exit (stop loss) or positions structured in a way that define or limit downside risk.

A permabear, on the other hand, are maybe singing “Don’t go chasing waterfalls” by TLC, I’m hearing a diversified genre of some Rapper’s Delight by The Sugar Hill Gang, Afternoon Delight by Starland Vocal Band, and Dixieland Delight by Alabama if you want to follow along.

I’m about to take the longest trip to Florida to Tennessee of my life. I hope you have a great weekend. As always, next week will be fascinating. Investors will either fear losing more money or fear missing out if they tapped out at low prices. I have bypassed both in our managed portfolios as we avoided the waterfall decline, so we’re in a position of strength to increase exposure to risk and reward. If you sell higher, you can buy lower. At this point, we can tolerate some downside from any new exposure from here as we know its mathematically becoming less likely, and we are now positioned to not have any fear of missing out if the trend reverses up.

I hope this helps!

Have questions? Need help? Contact us 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.

 

Is the panic selling drying up?

After yesterday’s continued selling pressure, only 7% of the S&P 500 stocks remain in uptrends as measured by the 50-day moving average.

percent of stocks above moving average

As most stocks are participating in the downtrend, this breadth measure is about as low as it was in December 2018.

In case you are wondering, here are some of the few stocks in the index that are still above their trend line. I don’t consider this a buy list and we don’t own any of them directly.

stocks above moving average

Another sign of a strong desire to sell is the new highs-new lows as a percentage. It’s as low as it’s been the past year, as new lows are dominating.

new highs new lows percent

As expected, a chart of advance – declining stocks as a percentage is at the low end of its range and about as low as it can get as declining stocks are dominant.

advance decline percent

When investors are panic selling, prices can always trend lower, but this data shows mathematically prices have reached an extreme level on the downside that now appears to be an overreaction. We should be close to seeing this panic selling dry up as selling becomes exhausted and these lower prices attract buyers. After that, we’ll see if any countertrend back up continues, or eventually reverses back down. As I’ve said recently, given this bull market is very aged and we’ve seen the longest economic expansion in history, I believe the years ahead will require tactical trading and risk management.

I hope this helps!

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike Shell and Shell Capital Management, LLC is a registered investment advisor 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. 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 stock index falls below its long-term trend, but stocks are now getting oversold

The stock index falls below its long-term trend, but just as stocks are getting oversold. The 200-day moving average was about 11% below the high February 19th, just eight days ago.

spx spy 200 day moving average trend 11 percent Feb 2020

As you can see in the chart, this has been a sharp waterfall decline and one I’m glad we avoided so far. For those of us in a position of strength, we stalk the market actively looking for a lower-risk entry point that offers the potential for asymmetric risk-reward payoff. An asymmetric payoff is when we structure our positions so our potential for downside loss is limited to much less than the potential for capital gains.

The stock market is now getting more oversold on a short term basis.

Only 21% of S&P 500 stocks are above their 50 day moving average. That’s a lot of broken uptrend lines shifting into downtrends.

stock market oversold

In the chart, I colored the “buy zone” in green. As you can see, it’s now down to a level I consider an indication that selling pressure may become exhausted as long as prices have been sold down to a low enough level to attract buying demand.

The stock market, and stock prices, are driven by supply and demand. It’s that simple. Measuring supply and demand isn’t so simple for most investors.

In the bigger picture, the longer-term trend lines are still at the 50-yard line, which is where all but one of the past five declines stopped. Of course, the one time stocks really got sold down was late 2018. Only time will tell if this becomes another period like that, but right now, those of us who had reduced or removed exposure to the market losses are probably looking to buy.

stock market breadth

The longer-term trend lines are holding better, which is no surprise because stocks had trended up well above their longer trend lines. For example, the S&P 500 index was trading about 11% above its own 200 day moving average and it just now crossed below it. When many stocks are trending that far above their trend line, it takes more of a price decline to trigger the percent of stocks to fall.

february 2020 stock market loss decline

Stocks market declines to tend to be asymmetric. Prices trend down faster than they trend up. After prices trend down, contagion sets in the lower prices fall. Prices then get driven down even more simply because investors are selling to avoid further loss. But, someone has to be on the other side of their panic selling. It’s those who had the cash to buy.

If you sell higher, you can buy lower.

Need help? Contact us here.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike Shell and Shell Capital Management, LLC is a registered investment advisor in Florida, Tennessee, and Texas focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. 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.

Dow Jones is down -10% off its high

Dow Jones is down -10% off its high. I don’t pay much attention to the Dow Jones Industrial Average as it’s a price-weighted index of 30 stocks. But, the S&P 500 capitalization-weighted index of approximately 500 stocks seems a better proxy for “the market,” and it’s not far behind.

Here is the percent off high (drawdown) chart year to date.

dow jones down over 10 %

We don’t own either of these ETFs, they are for illustration only. In fact, our portfolio is was 85% U.S. Treasuries, and 15% invested in high dividend-yielding positions. One of them has a dividend yield of 9.8% and the other 11.9%, so while their prices may be falling with the stock market, we have some margin of safety from the high yield. In fact, as the prices fall, the yield rises from that starting point.

Speaking of dividend yield below is a visual of the dividend yield of the S&P 500 (1.84’%) and the Dow (2.27%), which are relatively low historically. But, as prices fall, the yields will rise, assuming the stocks in the index keep paying dividends.

stock dividend yield

In the above chart, I’m using the ETF dividend yields as they are real-time. Since the ETFs have only been trading for two or three decades, to see what I mean by “long term” I look at the S&P 500 Stock Index dividend yield (calculated as 12-month dividend per share)/price) to see how low the yield has been the past twenty years.

long term stock dividend yield

So, the future expected return from dividend yields on these stocks indexes is relatively low, looking back 150 years. The spikes you see are after stock market crashes as the price falls, the yield rises, as with bonds. Low dividend yield also suggests the stock market is overvalued. A higher dividend yield indicates the stock market is undervalued, and if nothing else, investors earn a higher income from the dividends from a lower starting price.

Back to the year to date, the short term, the S&P 500 is now down -5% in 2020, and the Dow Jones is down -7%.

stock market drop 2020

I believe this may be the fastest -10% decline in the history of the Dow Jones Industrial average.

I’m just glad we aren’t in it.

This is when drawdown controls and risk management pays. More importantly, it’s when discipline pays. While some investment managers want to manage risk to limit their drawdowns, they don’t always excel at doing it. Discipline is a personal edge. It doesn’t matter how good our scientifically tested quantitative models with a mathematical basis for believing in them are if we lack the discipline to execute them with precision. I can also say it isn’t enough for me to have all the discipline either, as we must necessarily help our investment management clients stick with it, too. So, investor behavior modification is part of our wealth management services. It’s why Christi Shell is not only a Certified Wealth Strategist® with over twenty-six years of experience helping high net worth families with the overall management of assets but also a certified Behavioral Financial Advisor® (BFA®) to help them manage themselves.

It’s what we do.

Need help? Contact us here.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike Shell and Shell Capital Management, LLC is a registered investment advisor in Florida, Tennessee, and Texas focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. 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.

What volatility expansions tell us about expectations for stock market trends

A volatility expansion implies that stock prices are expected to spread out more, as measured by the (VIX) CBOE Volatility Index. Currently, it’s at 28, which would imply a 28% expected volatility over the next 30 days, except it tends to be priced at a premium above realized vol.

vix volatility expansion asymmetric hedge options

Then, historical volatility, or realized actual volatility,  such as the 30-day rolling volatility, suggests prices are indeed spreading out. So, expect a wider range up AND down in volatility expansions. In the chart below, 30 Day Rolling Volatility = Standard Deviation of the last 30 percentage changes in Total Return Price * Square-root of 252. At this point, it’s at 17.71% when applied to the S&P 500 stock index data.

asymmetric volatility trading hedge

Here they are together, expected volatility on top of realized volatility.

vol expansion

A volatility expansion like this suggests in the near term stock prices are expected to spread out more, but up and down.

We are seeing a broad range of prices today, form up 1.4% to down -0.60%, as seen below.

SPY SPX TRADING

So, if you are invested in the stock market, prepare yourself accordingly. Need help? Contact us here.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike Shell and Shell Capital Management, LLC is a registered investment advisor in Florida, Tennessee, and Texas focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. 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.

Stock market recoveries are a process, not an event

After yesterday’s close, the popular stock market indexes, including the S&P 500, Dow Jones Industrial Average, and NASDAQ were down around -3% for the day.

stock market

Adding volatility bands around the price trend and its 20 day moving average illustrates a volatility expansion as prices have spread out to a wider trading range. The S&P 500 stock index traded below its lower volatility band, which expands as the price action becomes volatile. Volatility bands and channels help to answer: Are prices high or low on a short term relative basis? The recent price action is relatively high at the upper band and low at the lower band. By the way, 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. 

volatility expansion bollinger band

At this point, the stock index has traded below its band, demonstrating panic level selling pressure outside what I consider a normal range of price action. 

Volatility channels are even more useful when combined with other indicators for confirmation. Next, I add a momentum measure for confirmation the index is oversold on a short-term basis. It can get more oversold, but a short term reversal now becomes likely if the desire to sell has become exhausted. 

spx spy countertrend trend following asymmetric risk reward

The potential good news for those with exposure to loss, in the short term, we may see a countertrend move back up to retrace some of the stock market losses. However, this will be the test to see if selling pressure has been exhausted or if prices have been driven down low enough to attract sufficient buying interest to push the price trends back up.

Another observation I’ll share is after the close, we recalculated the percent of S&P 500 stocks above their 200 day moving average using the end of day prices. The percent of stocks above their 200 day moving average is now at the 50-yard line, whit bout half of the SPX stocks in a longer-term uptrend and a half in a downtrend. Obviously, that’s more stocks now below the trend line than when I shared it yesterday.

percent of spx stocks above below 200 day moving average

A more significant decline is seen in the percent of stocks above their 50-day moving averages, which fell 38% to only 23% of S&P 500 stocks trading above their shorter-term moving average trend line.

percent of stocks above below 50 day moving average breadth

So, at least on a short term basis, selling pressure has pushed stocks down to the point more are in downtrends than uptrends.

Next, we’ll see if sellers have pushed prices low enough to attract significant buying demand. I expect to see at least a short term countertrend back up, as investors overreacted to the downside, but only time will tell if any countertrend up is sustainable long term. My longer-term indicators are neutral at this point, so there could be more selling if investors and traders anchor to prior highs wishing they’d sold previously and sell into an uptrend.

My objective is asymmetric returns, so I focus on asymmetric risk-reward. After prices seem to trend up too far, too fast, by my quantitative mathematical calculations, the asymmetric returns from future prices are limited, and the asymmetric risk is increased. After prices seem to fall too far, too fast, by my quantitative mathematical calculations, the asymmetric risk-reward profile becomes more positive. And, all of it is probabilistic, none of it is ever a sure thing.

It’s a process, not an event.

As I shared yesterday; Stock prices may not be finished falling, but some opportunities for asymmetric risk-reward may be present for those willing to take risks.  

Need help? Contact us here

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike Shell and Shell Capital Management, LLC is a registered investment advisor in Florida, Tennessee, and Texas focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. 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.

 

Stock prices may not be finished falling, but some opportunities for asymmetric risk-reward may be present for those willing to take risks

Based on my velocity measuring algorithms, the stock indexes are now starting to get oversold. That is, the stock indexes are reaching a point we could see at least a short term countertrend back up, on a short term basis. These measures are based on short term market overreactions, such as when price decline sharply beyond a point we expect mathematically over a period. It certainly doesn’t mean the price trend can’t fall farther as they often do but instead signals a potential countertrend that could drive prices to retrace some of their loss. However, if the downtrend price trend becomes a prolonged and deeper downtrend, these countertrend measures fail to perfectly time the low. Investment management is probabilistic, never a sure thing, so I never expect anything more.

What matters most is if I wanted to take some risk right now on a short term oversold market, I would predefine my exit to cut my loss short if it doesn’t work out and let it rip. We never know for sure in advance when prices will reverse, I can only determine when it is more likely.

The challenge right now, in addition to some other observations I’ve shared recently about valuation, etc. is stock market breadth is far from oversold. So, my breadth measures do not yet suggest any significant selling pressure has been exhausted. I believe when investors sell stocks with great enthusiasm, it shows up in the percent of stocks above and below the trend lines. After prices have plummeted and most of the stocks have fallen into downtrends I start to wonder if the desire to sell is losing steam. At this point, these indicators don’t yet signal a significant panic level selling, so that’s the risk from this point.

I’ll share some of the price trends and indicators I look at when stock prices are falling.

First up is the percent of S&P 500 stocks above their 50-day moving averages. As the chart shows, last month about 82% of the stocks were above their shorter-term trend line. I consider levels above 80% to be a higher risk zone. As we see below, the percent of S&P 500 stocks above their 50-day moving averages made a lower high since January and now is falling at 38%.

breadth percent of stocks below 50 day

While we don’t use it as a market timing indicator, it instead provides some situational awareness of the risk of decline. After most stock prices have already risen, where does more demand come from? At higher levels, I consider the enthusiasm to buy may be becoming exhausted. It once again seems to be what has happened here as investors were enthusiastic about stocks until recently.

Another warning shot across the bow was when this breadth measure failed to confirm an all-time new high in the stock market. Below is the same indicator as above, but I overlayed it with the price trend of the S&P 500. As the SPX trended up to an all-time new high, the percent of S&P 500 stocks above their 50-day moving averages showed a material divergence, indicating fewer stocks were participating in the uptrend. I’ve been monitoring these indicators for two decades now and from my experience, a divergence like this that indicates less participation and “breadth” of the trend is a warning sign. In a healthy uptrend, most stocks are trending higher, so the percent of S&P 500 stocks above their 50-day moving averages is increasing, not decreasing.

breadth failed to confirm new stock market high february 2020

For a longer-term context, below is the percent of S&P 500 stocks above their 200 day moving averages. I consider below 20 or 30% to be an overreaction to the downside, but currently, 66% of stocks are above this longer-term trend line. On the one hand, higher participation is positive, but it’s declining from a relatively high level, which makes it more negative. It also provides us with the awareness that stocks could certainly fall a lot more. The times when less than 20% of these stocks were above their 200-day moving average was periods of notable stock market drawdowns.

percent of stocks above 200 day moving average long term breadth

So, these are some examples of why I started reducing our exposure to zero a month ago and only recently have been increasing exposure by rotating back out of US Treasuries into high dividend yield positions. The nice thing about high dividend yield positions is as the price falls, the dividend yield increases. It’s one time when I buy after prices fall, so we earn the dividend yield from that point forward. My timing is rarely perfect and it doesn’t have to be.

By way of example only, below is a chart of the Alerian MLP Index price and dividend yield. MLP’s are Master Limited Partnerships and in this case, they are publically traded. The Alerian MLP Index is the leading gauge of energy infrastructure Master Limited Partnerships (MLPs). The capped, float-adjusted, capitalization-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities, is disseminated in real-time. I’m using this index for illustration to show how (1) the price trend of the MLP index has fallen with energy prices and (2) since its holdings pay high dividend yield, as the price falls, the yield trends up as seen in the chart.

MLP high dividend yield strategy

The purple line shows the dividend yield is 9.41% based on the current price and the price is making a new low. This is one of the most extreme examples right now to make the point. It not only makes the point that buying lower prices in high yield securities can potentially capture asymmetric risk-reward, but also these high yielding securities are not without risks that need to be managed. The risk is made obvious by the price trend chart, which is down -27% over the past year.

As with most things in life, timing is everything. If we had entered a position with the risk/reward profile that existed a year ago, it was more risk than reward, as the high yield income from dividends wouldn’t have been enough to offset the loss from the price decline. But, in the case of exposures that provide higher potential income streams from dividend yield at lower prices, you can probably see how to offset the potential from asymmetric returns from an asymmetric risk-reward payoff. But again, it isn’t so simple and requires risk management, because there is no guarantee stocks, bonds, or MLPs will always keep paying their yields.

In summary, my short term velocity algorithms suggest the popular stock indexes are nearing a short term level we could see a countertrend, but the bigger picture isn’t so positive as there remains plenty enthusiasm to be exhausted. In other words, in late December 2018, my indicators suggested an extreme level of panic selling has happened and it was likely becoming exhausting. It turned out to be exactly what happened. The current measures are nowhere near that level of oversold, but if sellers aren’t panicking to sell it will not get there, either.

At this point, the stock index is only -6% off its high, which is just short of the decline last summer and well within a normal decline. We typically see 2-3 price declines of -5% annually.

february 2020 stock market decline drawdown amount

To put it into context, the current stock market decline is less than 1/3rd of the waterfall decline over a year ago.

stock market historical drawdowns

Only time will tell if the desire to sell is being exhausted. Fortunately, we had already de-risked our portfolio before this started and are now looking to take on new asymmetric risk-reward positions as they present themselves. My risk management and drawdown control systems handle the rest.

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.

Investor sentiment and feelings can be data-driven, quantitative, applying the scientific method, supported by a mathematical basis for feeling and believing

Investor sentiment and feelings can be data-driven, quantitative, applying the scientific method, supported by a mathematical basis for feeling and believing

Individual investors are notably less bearish now, according to the AAII Sentiment Survey.

US Investor Sentiment, % Bearish is an indicator that is a part of the AAII Sentiment Survey. It indicates the percentage of investors surveyed that had a bearish outlook on the market. An investor that is bearish, will primarily believe the US stock market will trend lower in the next six months.

Bearish US Investor Sentiment dropped 25%, so only 26.4% of the investors surveyed expect the stock market to fall in the next 6 months. Bearish sentiment is now below its average over the past year, but far from an extreme reading. I marked the high, low, and average on the chart.

Investor Sentiment less bearish

The most extreme level of bearish sentiment historically going back to 1989 is all the way down to only 6% Bearish, which we haven’t seen since 2003.

bearish extreme sentiment

If you notice, the Bearish level has held a higher low the past decade. That is, recent stock market peaks haven’t resulted in those extreme lows since the investor survey started 22 years ago. So, behavior and sentiment surveys aren’t an exact science, nor are they intended to be. Below we see a Bearish level of 20% has been the common low in Bearish sentiment.

bearish investor sentiment signal

I could put the data into a table format and show a mode analysis, which is a study that shows when Bearish sentiment spikes or falls, what happens to the stock market. Since I apply the scientific approach to trends and cycles, I have certainly tested the indicators I observe scientific for quantitative analysis. I require a mathematical basis behind believing what I believe. If it doesn’t test out mathematically using the scientific approach, it would be of little use. To know what is of use, or not, requires quantitative testing. I don’t share my quant work, but instead, prefer to show observations of the trends in the data. When presenting my research, I do so visually.

In the chart below I overlay the % Bearish sentiment in orange over the S&P 500 % off high (the drawdown) in purple. We can visually see how they interact with each other. As the stock market falls, Bearish investor sentiment % spikes up. I highlighted these times.

stock market drawdowns bearish sentiment

Investors become more afraid of falling prices after they fall. Investors also extrapolate the recent past into the future, so they expect falling prices to beget further falling prices. We can hypothesize this because investors are more Bearish at lower prices, less so at higher prices.

Okay, so far I’ve only shown the Bearish sentiment.

What about Bullish investor sentiment? 

US Investor Sentiment, % Bullish is a gauge of the AAII Sentiment Survey. It registers the percentage of investors surveyed that had a bullish outlook on the market the past week. An investor that is bullish, will primarily believe the market will trend higher in the next six months.

US Investor Sentiment, % Bullish increased 41.33% the week of February 13, 2020. The % Bullish investor sentiment was the most notable change over the last week. Individual investors are notably more Bullish. However, although the Bullish sentiment is well above the average of the past year, individual investor enthusiasm isn’t yet at the highest level reached over the past year, which I marked in the chart.

bullish investor sentiment 2020

Meanwhile, the Fear & Greed Index, driven by 7 market sentiment indicators, is Neutral.

cnn fear greed index predictive

So, while individual investors are becoming more bullish about the stock market trend for the next 6 months, they haven’t quite yet reached an extreme level that often signals buying enthusiasm is becoming exhausted. But, the rate of change in Bullish investor sentiment is worth making note of for situational awareness as investors usually believe and do the wrong things and the wrong time at extremes.

coronavirus headlines

So far, the US stock market has been resilient, especially considering the headlines have been dominated by the virus updates and images of people around the globe bearing masks.

“When the facts change, I change my mind. What do you do, sir?”

John Maynard Keynes

I’ve kept more of my market risk hedged-off than I’d like (in hindsight) if market prices don’t fall to a lower-risk point, but we’ll see how it unfolds from here.

My edge is discipline and my tactical decisions are completely intentional and come from a fully committed state, so I don’t fear losing money or missing out. I tend to feel the right feeling at the right time, as my feelings are data-driven, quantitative, applying the scientific method, supported by maths for a mathematical basis for feeling and believing. Oh, and a heavy dose of stoicism.

I also change as the facts do, and the only facts that ultimately matter are price trends.

Have a Happy Valentines Day and weekend, friends!

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 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.