ASYMMETRY® Observations are Mike Shell’s observations of investor behavior causing directional price trends, global macro, tactical ETF trading, momentum stock trading, hedging, volatility trading, and risk management that creates asymmetric investment returns. An asymmetric return profile is a risk/reward profile with a positive asymmetry between profit and loss. Mike Shell is the founder of Shell Capital Management, LLC and the portfolio manager of ASYMMETRY® Global Tactical
Bridgewater Associates, Inc.Co-CIO Karen Karniol-Tambour joins Positive Sum CEO Patrick O’Shaughnessy at the 2023 Sohn Investment Conference. Below is the interview she says the market is very asymmetric right now because of the asymmetry between the upside vs. the downside, and I agree.
I’ll summarize:
If the economy enters a recession, it’s very bad for stocks, and this time the Fed is unlikely to immediately respond by lowering rates since inflation is a problem. So, the downside risk is large. It’s already priced-in to the stock market, so it won’t be a big surprise. Not a lot of upside potential.
If the economy doesn’t enter a recession, the Fed will be in a tough decision point, because inflation is unlikely to come down without a recession. If the Fed doesn’t ease like it’s already price-in, the market is going to be disappointed.
It’s asymmetric because the downside potential is greater than the upside.
The interview:
Patrick O’Shaughnessy:
What do you think that prevailing valuations, let’s say, just on like the big asset classes tell us about what the market thinks is going on? Like, what does it seem like is in prices right now, if you will, as you look at S&P 500 you know, multiples or something very basic like that?
Bridgewater Co-CIO Karen Karniol-Tambour:
WellI think the stock market is telling you that there’s going to be a modest economic slowdown, a pretty contained economic slowdown, nothing like you know a significant recession or anything like that, With that slowdown alone, the Federal Reserve is going to find that sufficient to go ease from you know, 5% to 3% extremely quickly, and that its going to do that despite where inflation is today because inflation is going to go back to totally reasonable levels that they want very very quickly. You see that kind of across stock and bond pricing you know bond pricing is telling you in places to be fine we’re not there’s no inflation from anything like resembling long term and the Fed’s about to ease pretty significantly without a significant slowdown.
Where that sort of leaves you is if the market I believe is asymmetric it’s very asymmetric because it you actually get an economic slowdown; that’s obviously very bad for stocks. I don’t have to tell you that that would be you know pretty bad for stocks. But there’s really not much of a recession priced into them it would be pretty bad. Usually the way you get out of that (as I was saying) is that every time there’s a slowdown the Central Bank just comes and eases right away. Now, not only will it be much harder for them to ease because inflation’s been more a problem. Tension is there, but that easing is already priced in and so even if they do kind of bite the bullet and say “I’m not going to worry about inflation” and ease, it’s already in the market prices it’s not going to surprise the market so much.
Then, on the other hand, if the market doesn’t slow, if the economy doesn’t slow so much, if we don’t get that kind of recession if the equity prices are right that you’re not going to get a big recession and the fed’s going to be a tough spot because I don’t really see why inflation’s going to come down with no recession. You have a very very strong labor market if nothing slows and so if they don’t ease like it’s already price they’re going to be disappointing. So, every day once we hit summer the Federal Reserve doesn’t pivot and ease that’s effectively a tightening relative to what’s priced in that’s also disappointing.
That’s a lot of room for disappointment that can happen whether the economy is strong or weak.
Patrick O’Shaughnessy:
That’s all sort of like what I’ll call you know relatively near to intermediate term future how do you think about portfolio positioning in light of that general view when you know like you for a long time it’s paid to just be long risk and have a very simple portfolio because of everything you’ve discussed. How’s that different today like how would you how do you think about positioning against this asymmetric setup that you described
Karen Karniol-Tambour:
I think it’s one of the toughest times to be an investor in many years because you know as you’re saying risk assets has been so good and I think risk assets are about as unattractive as we’ve seen a very long time and they’ve and that’s we’re seeing that come to fruition they don’t just bounce back you don’t just get kind of automatic rallies no matter what so it’s a hard time to be an investor I think as an investor you have to think about diversification in a different way diversification just wasn’t that important because the one asset people hold “equities” was just the strongest outperformer and the different places investors can kind of look they can look at geographically so they can look at geographies that have less of this tension places like Japan or China where you’re in a different situation you’re not about to hit a big Central Bank tension Japanese Central Bankers are pretty excited about getting higher inflation they’ve won for a long time and it’s far from, you know, out of control.
She basically suggests U.S. stocks are overrated and Japan stocks, Emerging Markets stocks, and Gold, are underrated.
“Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week, waiting for just the right moment.
It will wait for a baby antelope, and not just any baby antelope, but preferably one that is also sick or lame; only then, when there is no chance it can lose its prey, does it attack.
That, to me, is the epitome of professional trading.
When I trade at home, I often watch the sparrows in my garden.
When I feed them bread, they take just a little piece at a time and fly away. They keep on flying back and forth, taking small bits of bread. They may have to make a hundred stabs at a piece of bread to get what a pigeon gets at one time, but that is why a pigeon is a pigeon.
You will never be able to shoot a sparrow, it is just too fast.
That is the way I day trade.
For example, there are times during the day when I am sure that the S&P is going up, but I don’t try to pick the bottom, and I am out before it tops. I just take the mid-range where the momentum is greatest.
We’re entering a point in the stock market trend that could be an inflection point. My market risk indicators are elevated, suggesting DEFENSE, but they’re imperfect. In bear markets, we’ll see lots of whipsaws and head fakes, and OVERBOUGHT and EXTENDED can continue.
Our objective is asymmetric risk/reward for asymmetric investment returns; we are unconstrained as to strategy or market.
A skillful trend follower wants to catch a trend early in its stage and capitalize on it until it ends, so if we want to identify them early, we must necessarily focus on short-term trends to see if they can become longer-term trends and asymmetric profits.
With that said, in the month of October 2022, eight of the eleven sectors tracked by S&P sector indices are in the green, and three are in the red.
Volatility measures the frequency and magnitude of price movements, both up and down, that a financial instrument experiences over a certain period of time. The more dramatic the price swings in that instrument, the higher the level of volatility. Volatility can be measured using actual historical price changes (realized volatility) or it can be a measure of expected future volatility that is implied by option prices.
A whipsaw in trading and investment management is when you enter a trend and it almost immediately reverses in the other direction, resulting in a loss.
Whipsaws are a normal part of any trend system because trends do reverse, and sometimes sooner than you expect.
“The breadth thrusts we’ve seen are typical of a new uptrend — unless* it’s a prolonged bear market. *IF this is the early stage of a prolonged bear market that is likely accompanied by a recession, then we’ll see many swings like this as it unfolds along the way.”
The stock index and the most weighted sectors like technology and consumer discretionary are very close to breaking price levels that should be short-term support.
Any further decline will increase the odds the U.S. is in the early stage of a prolonged bear market, which will include many swings up and down of 10 to 20% lasting several weeks.
Such swings lead to whipsaws for many tactical traders as they enter just in time to catch the top, and/or sell just in time the trend reverses in the other direction.
I’ve tactically operated through this many times before over more than two decades, and I’ve historically shown my edge during these conditions.
I have a hunch we’re going to hear the word “whipsaw” a lot in the coming months, so let’s go ahead and kick it off with The Whipsaw Song I had fun with back in April 2008 when Ed Seykota published it.
Give it a listen!
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
The stock market is now reaching its first short-term higher probability of a countertrend pullback.
The S&P 500 stock index tapped its 200-day average and reached a short-term overbought level based on relative strength and volatility and is now stalling.
The S&P 500 Equal Weight, which gives an equal weighting to all 500 stocks instead of more exposure to the largest companies based on capitalization, crossed above its 200-day average but was reaching an overbought level at the same time.
So, it’s not surprising to see these market proxies roll over at this level.
Two weeks ago I pointed out in The stock market is at an inflection point the S&P 500 was stalling as if there is resistance at this price level, and there’s a lot of potential supply for those in a loss trap, and it was getting overbought as measured by the relative strength index. The index trended up a few more percent before pulling back today.
I don’t normally trade the S&P 500 index, I just use it as a proxy for the overall stock market.
For portfolio management, I get more granular into the sectors inside, and the stocks.
I also include global markets like commodities, bonds, and other alternatives, to provide a global unconstrained opportunity set to find potentially profitable trends.
Trend systems just want to be fed some trends, so the system can extract the parts it wants from the parts it doesn’t want. It’s best to provide a wide range of uncorrelated price trends for trend systems to create a unique return stream from them.
From the broad index like the S&P 500 it’s useful to look inside to see the percentage of stocks that are trending above their 50-day and 200-day averages to gauge the strength of participation in the uptrend.
The percent of S&P 500 stocks trending above the 50-day average has quickly trended up to the red zone.
Multiple overbought levels in breadth and relative strength oscillators are a sign of strength, not weakness.
The breadth thrusts we’ve seen are typical of a new uptrend — unless* it’s a prolonged bear market. *IF this is the early stage of a prolonged bear market that is likely accompanied by a recession, then we’ll see many swings like this as it unfolds along the way.
However, once most stocks are already in uptrends, the enthusiasm to buy may have run out, so I consider the level above 80% to be a higher risk zone. If we are looking for a lower risk entry, it’s below 30%. A strong breadth thrust like this is bullish when it starts and is typical off the lows after stocks have already trended down as much as they have.
At this point, despite the S&P 500 being down 1.5% today, it appears to be a normal pullback from overbought levels. Our relative strength index signals the index was moving up with such velocity it was a little too far, too fast, which is good in the longer term but increased the odds of a retrench in the short term.
I reduced exposure earlier this week, and the price action next week will determine if we reduce further or buy the dip at lower prices.
In the big picture, we’re strolling into the seasonally weakest month for the stock market after a big rally and no shortage of risks to the short-term uptrend, so it’s essential to determine an exit, hedge, or reduce exposure.
On the positive side, the recent decline in volatility and new uptrends suggest systematic trend-following investment programs could provide inflows of several billion dollars a day in stocks for the next few months if it continues.
While everyone else is trying to figure out what’s going to happen next with inflation, rates, and other global macro issues, we focus on keeping our hard-earned capital invested in the direction of the trend.
If the trends change, so will we.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
During the waterfall decline in March 2020, the Cboe S&P 500 5% Put Protection IndexSM (PPUT) successfully hedged off stock market beta, but it hasn’t done the same in 2022.
The green highlight shows the Cboe S&P 500 5% Put Protection IndexSM in black and S&P 500 stock index in red. Clearly, the systematic put protection index helped to hedge off downside risk in the SPX during the waterfall decline of March 2020, but that same hedge hasn’t protected long beta portfolios in 2022.
Cboe S&P 500 5% Put Protection IndexSM (PPUT) tracks the value of a hypothetical portfolio of securities (PPUT portfolio) designed to protect an investor from negative S&P 500 returns. The PPUT portfolio is composed of S&P 500® stocks and of a long position in a one-month 5% out-of-the-money put option on the S&P 500 (SPX put).
Let’s see what happened over these two very different outcomes, and I’ll share my observations of what changed that impacted the outcomes.
Using data from YCharts, we see the full year 2020 in the chart comparing the S&P 500 Total Return Index (SPX) to the Cboe S&P 500 5% Put Protection IndexSM (PPUT) which is long the SPX, but adds one-month 5% out-of-the-money put option on the S&P 500 (SPX puts) options to hedge.
For the systematic put hedge strategy, 2020 was a fine example of risk management resulting in not only drawdown control, but also how avoiding large losses can increase the portfolio return in some conditions.
The S&P 500 declined over -30% around March 2020 as COVID spread, but the 5% SPX put lowered the drawdown to -16.52%.
That’s asymmetry and a key part of creating asymmetric investment returns.
The 5% put hedging strategy limited the downside by 50%, then went on to allow the long-only exposure to the S&P 500 to nearly double the stock index.
Naturally, the incredible performance of this very simple systematic hedging strategy tracked by PPUT got some attention after it performed so well. But, no method is perfect, and all strategies are fallible.
Fast forward to 2022, and the outcome has been completely different. Investors and traders who relied on a 5% monthly put option have fully participated in the downside of the SPX this year.
This phenomenon has driven many to ask, why such a radically different outcome?
I’ll attempt to explain my observations as succinctly as possible because understanding derivatives like options is the most complex task in the capital markets for most people.
For more than two decades, I’ve focused on alternative trading strategies in pursuit of asymmetric payoffs that lead to asymmetric investment returns.
Asymmetry isn’t just about finding low-risk positions that offer a higher expected payoff, like a 2-to-1 reward to risk.
Instead, asymmetry is even more focused on limiting the downside in hopes to avoid the negative asymmetry of loss.
Losses compound against us exponentially the deeper we allow losses to get.
So, my focus has been actively trading momentum growth stocks, tactically trading more systematically a global universe of ETFs, and volatility trading/hedging, all of which are unconstrained in my primary portfolio.
So, I have a unique perspective on this topic.
The short and sweet answer to why this time was so different than 2020 is a function of these issues.
During the waterfall decline of March 2020, prices spread out (to the downside) very quickly. It was one of the sharpest waterfalls in history. When prices spread out, I call it a volatility expansion, and rising vol increases the premium for options. For the same reason, the VIX spiked to > 80 in March 2020, but it’s been constrained under 40 so far in 2022.
This year, the stock indices have declined over -20%, but it’s been a much slower grind down. SPX is down about -20% over six months instead of down over -30% in three weeks. The speed of prices spreading out is volatility, and volatility is a significant driver of option premiums. Think of it this way: home insurance in Florida is expected to be cheaper before a catastrophic hurricane when people are complacent than after the hurricane does its damage. The good news is, that options pricing allows for better timing of relative value if you have a system for it.
Another difference is the luck of roll and expiration dates for this systematic strategy that executes about every 30 days. My friend Russell Rhoads, who is one of the most well-known VIX experts, pointed out to me that the ability to use a series that expires on days that don’t contribute to the VIX calculation would have been helpful this year. That is, the systematic strategy of buying 30-day SPX put options has the potential to fall on days that aren’t efficient. The roll is a risk.
Finally, we believe most institutional money managers were already hedged. This has been a long drawn-out decline, a lower vol downtrend, so it’s given time for money managers to add protection, so demand for puts hasn’t been a spike, but instead more methodical.
The bottom line is the asymmetric volatility phenomenon has impacted the put option hedging strategy.
The asymmetric volatility phenomenon suggests that prices trend down faster and sharper than they trend up, which can be an advantage of put option hedging, or a disadvantage when it’s calmer like this year.
All of the above has also kept the VIX below 40 this year.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
Nothing drives investor sentiment like a strong price trend.
The S&P 500 stock index is down over -20% this year, and it was down -24% YTD just two weeks ago.
The stock index peaked at the end of last year and is down about -13% over the past 12 months.
But that’s not all.
This time it’s different.
I’ve been warning here for years all the Fed intervention would eventually have to stop, and it would also drive down bond prices, too.
The ICE US Treasury 20+ Year Index is down -23% this year, so long-term U.S. Treasury bonds are down even more than the stock index.
The ICE US Treasury 20+ Year Index peaked July 27, 2020, and has since declined by -32%, far more than stocks.
As warned, bonds are no longer a crutch for declining stocks.
Bonds have been worse.
The Federal Reserve FOMC and U.S. Treasury are no longer accommodating higher stock and bond prices, or applying the “Fed Put” as we call it.
Since 2008, the Feds have stepped in to support the economy and the markets by providing unpreceded liquidity, which has eased selling pressure in waterfall declines and made the market more optimistic.
Fed intervention has resulted in a windfall for stock and bond investors since.
You can no longer rely on the Fed to step in to support market prices.
The challenge today is we’ve never seen the Fed provide such support for stocks and bonds as it has post-2008, so the windfall stock/bond investors have received has now come due.
I had been warning of it:
It’s eventually going to be payback time for the windfall stock market investors have received over the last decade – if you don’t actively manage risk for drawdown control.
Stocks had reached the second-highest most expensive valuation in 140 years, and as you can see in the above chart, and stayed there for the last decade.
High valuations could previously be justified by low inflation, but clearly, that’s no longer the case.
Nothing drives investor sentiment like a strong price trend.
As prices are trending up, investors and traders get more and more bullish, optimistic, and confident.
As prices fall into downtrends, investors and traders get more and more bearish, pessimistic, unsure, doubtful, and outright scared.
Although we tilt more optimistic or pessimistic as a personality trait, by and large investor behavior changes more in downtrends than uptrends.
The prospect theory says that investors value gains and losses differently, placing more weight on perceived gains versus perceived losses.
Prospect theory is also known as the loss-aversion theory.
With Prospect Theory, the work for which Daniel Kahneman won the Nobel Prize, he proposed a change to the way we think about decisions when facing risk, especially financial. Alongside Tversky, they found that people aren’t first and the optimal utility maximizes, but instead react to changes in terms of gains and losses.
In short, Prospect Theory suggests investors are loss-averse, so our risk reward preferences are asymmetric.
We prefer asymmetric investment returns; we want more of the upside, and less of the downside.
Clearly, want can’t receive asymmetric investment returns from just buying and holding risky markets, bonds included.
I believe asymmetric investment returns are pursued by our focus on asymmetric payoffs and positive mathematical expectation over many trades.
ASYMMETRY® is about more upside than downside, an average, over a period of many buys and sells.
ASYMMETRY® is about producing higher average gains than losses, or a positive expectancy.
Back to investor sentiment.
AAII Investor Sentiment remains very asymmetric, though it has shifted more neutral, it remains BEARISH.
The Fear & Greed IndexFear & Greed Index, which is driven by 7 market indicators instead of a sentiment survey, remains in the EXTREME FEAR zone.
EXTREME levels of FEAR or GREED are usually a contrary indicator, but in a prolonged bear market, bearish sentiment is like a pressure cooker.
Investors who hold their losses too long get caught in a LOSS TRAP.
A loss trap is like the Chinese Finger Pull game.
The harder you pull, the tighter the loss trap.
It’s why I predefined my risk in advance, to cut losses short rather than allow losses to grow large and larger.
The LOSS TRAP is not fun, and can be very costly.
Don’t let smaller losses become larger and larger losses, or you’ll be caught in the trap, and the harder you resist, the tighter it gets.
The Fear & Greed Index peaked on November 9th and has since printed lower highs and lower lows; a downtrend.
At this point, the prolonged trend in investor fear suggests this may be the early stages of a prolonged bear market, so govern yourself accordingly.
It’s why I tactically trade market trends.
It’s why I actively manage my risk in each position and across the entire portfolio for drawdown control.
The windfall buy-and-hold passive investors have received from the U.S. stock market from Fed action is due for payback.
Our ASYMMETRY Managed Portfolio has been positive for the year.
Though past performance is never a guarantee of future results, this is when I’ve historically revealed an edge.
When the wind is blowing, we can cast the sail ride and enjoy the ride.
But when the wind stops blowing, we have to get out the oars or risk sinking.
We are a fiduciary money manager fully committed to guiding our clients.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
Implied volatility is indicating another possible volatility expansion.
The VIX index is a calculation designed to produce a measure of a constant 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPX) call and put options.
The VIX had drifted below its long-term average of around 20, but as you can see in the chart, it’s printed a lower high.
As the VIX remains elevated and in an uptrend as defined as higher lows and higher highs, it suggests the market expects stock prices to be more volatile.
In Following the Trend of Inflation and Risk of Bonds I mentioned we are closely monitoring the 10-2 Year Treasury Yield Spread because an inverted yield curve has a track record of predicting future recessions 6 – 24 months in advance.
The 10-2 Year Treasury Yield Spread is declining fast and has now trended to 0.24%, meaning the 2 Year U.S. Treasury Yield is nearly the same yield as the Year 10 U.S. Treasury Yield.
For information about our proactive investment management, active risk management, hedging your risks, and ASYMMETRY® Managed Portfolios, contact us.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
We measure investor sentiment in many ways from indicators that illustrate the result of investor actions from trading such as the Cboe Volatility Index® (VIX®), the first index to measure the market’s expectation of future volatility. Volatility can be measured using actual historical price changes (realized volatility) or it can be a measure of expected future volatility that is implied by option prices. The VIX Index is a measure of expected future volatility as implied by options.
The VIX Index is a calculation designed to produce a measure of constant 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPX℠) call and put options. On a global basis, it is one of the most recognized measures of volatility — widely reported by financial media and closely followed by a variety of market participants as a daily market indicator.
Currently, the VIX has trended around 30, which I consider a volatility expansion. As you can see in the chart, the long-term average is around 20, so levels above average are periods expected to see a wider range of prices as prices, and more indecision.
When the VIX is elevated, it suggests the market is paying more for the protection of options, so many consider the VIX a “fear gauge.”
The good news is stock market returns have historically been higher after VIX trends above 30. Because it’s a sentiment indicator, the market eventually gets so bearish investors who desire to sell have already sold, and those who want to hedge (with options) have hedged.
Today’s VIX at 30 is far from an extreme spike we’ve seen before, but still elevated.
We’re going to venture far beyond the VIX today.
The VIX is one of 7 indicators included in the CNN Fear & Greed Index we have been monitoring for years. The Fear & Greed Index isn’t designed for market timing per se, but it can be a useful reminder of your own sentiment. At the extremes, you may consider feeling more contrarian and following the most famous contrarians mantra:
“Be fearful when others are greedy, and greedy when others are fearful.” – Warren Buffett
Right now, the Fear & Greed Index suggests Extreme Fear is driving the stock market.
Looking inside the Fear & Greed Index the CBOE Volatility Index (VIX) at 30 is part of the weight of the evidence used to drive the gauge. It uses a moving average applied to the VIX level and as of yesterday, it has changed from “Extreme Fear” to Neutral as implied volatility declined.
Another option-related indicator included is the CBOE 5-day average Put/Call Ratio. It now says, “during the last five trading days, volume in put options has lagged volume in call options by 65.73% as investors make bullish bets in their portfolios. This is a lower level of put buying than has been the norm during the last two years and is a neutral indication.”
Put options are used mostly to hedge portfolios against price declines. When investors hedge more, it’s a signal they are bearish, and when they hedge less, it’s assumed by and large they are less bearish.
Below is the trend of the Fear & Greed over time. As you can see, it’s down to the Extreme Fear level, which proceeds a low in the stock market, and eventually a new uptrend.
Once investors who want to sell have sold, we eventually see prices trend down to a low enough level it attracts buying demand.
To get an indication of when this may be near, we look at a wide range of investor/trader sentiment indicators, but also the price chart itself for clues.
I like to use the Fear & Greed Index here because it’s publically and freely available so anyone can observe and follow it, but there are many more we monitor that isn’t.
Advisor Sentiment from Investors Intelligenceis one of my favorite investor sentiment indicators.
As you can see in the chart, bearish investment advisors now outnumber the bulls. The bull-bear spread narrowed to -4.6% and the first negative level since early April 2020. This is an extreme reading of bearishness, and historically precedes a reversal of a downtrend as it suggests those who have sold have sold, leaving buying demand in the dominant position.
According to Investors Intelligence, this extreme reading signals a lower risk level than before for tactical trading opportunities.
However, the caveat is it could absolutely get much worse because every eventual -50% decline in the stock market necessarily involves such extreme fear to drive prices lower. So, it’s essential to understand contrarian indicators are a windsock, but no indicator is flawless.
Sentiment indicators could remain extremely bearish for months in a long-lasting waterfall decline.
It’s essential to realize bearish sentiment necessarily proceeds large declines in the stock market, but eventually, the extreme pessimism signals the desire to sell may have faded enough for the demand to buy to become dominant.
When a market is falling, the prices trends are eventually driven down to a low enough point to attract new buying demand, and the trend reverses.
Indicators can be helpful to gauge sentiment and behavior, but nothing drives sentiment like a change it the price trend.
The price trend is the final arbiter.
“The trend is your friend until the end when it bends.” – Ed Seykota
Aguing with the trend is like arguing with a guard rail on a motorcycle. You can test it and try it, but it’s probably going to be a bad outcome.
A simple interpretation of the price trend of the stock market using the S&P 500 Index as a proxy is what was a low volatility primary uptrend has changed to a downtrend as defined by its lower highs, and lower lows.
Below we see my line in the sand, which shows the index is at a level it’s seen several times before.
For now, the stock market is attempting an uptrend.
If the S&P 500 declines below 4200 I’ll consider it a continuation of the downtrend.
The moving average of the price is a common technical indicator used for trend following. The 50 day and 200 day are the most popular. As you can see, the S&P 500 is also defined as a downtrend using these trend following indicators.
The SPX is down about -9% from its high, and was down as much as -12% as of last week. That’s far from a major decline, but enough to help drive a lot of fear of a further loss of value.
The bottom line is investor and advisor sentiment has reached an extreme level of pessimism that could proceed at least a short-term retracement of the stock market decline.
“Over the weekend, as his military laid siege to Ukraine for the fourth day, President Vladimir Putin ordered Russia’s nuclear forces into a higher state of alert, the first time the Kremlin has done so since the Russian Federation was established in 1991.”
And then there are actions from The Federal Open Market Committee (FOMC) of the Federal Reserve. Few things drive prices and sentiment more than changing interest rates.
Next up, I’ll take a look at what the stocks inside the index is doing to gauge how far they’ve trended and how far they may go.
Let’s see how it all plays out, but right now, we’re seeing early evidence of a possible capitulation, at least in the short term, barring no unknown, unknown, or nuclear attack.
In the meantime, I’m taking advance of some asymmetric risk-reward opportunities in our tactical trading.
For information about our proactive investment management, active risk management, hedging your risks, and ASYMMETRY® Managed Portfolios, contact us.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
In How We’ll Know if a Recession is Imminent I said if the 10-2 Year Treasury Yield Spread crosses below zero, and the yield curve becomes inverted, that’s what will signal a recession is probably imminent, but a recession may not be identified until 6 – 24 months later.
We can’t wait until a recession is called to manage our investment risks; the stock market has historically been the leading indicator, declining well in advance.
After U. S. inflation was reported today that inflation accelerated last month to a 7.5% annual rate to a 40-year high, U.S. Treasury Yields trended up to 2%.
Since the 10-2 Year Treasury Yield Spread is the difference between the 2 year U. S. Treasury and the 10 year U. S. Treasury, the spread will tighten as the shorter-term interest rate converges with the longer-term rate.
Recently both yields have been increasing, but the 10-2 Year Treasury Yield Spread is still falling.
The U.S. inflation momentum is driven by rising price trends for autos, household furniture, appliances, as well as for other long-lasting goods we buy.
For example, here is the U. S. Consumer Price Index for used cars and trucks.
It is well known certain consumer prices have been trending up since the pandemic, so the question for the second-level thinker is whether or not these rising inflation trends are already reflected in the prices of stocks and bonds.
So far this year, 2022 has started off with stock markets trending down.
For example, the S&P 500 declined nearly -10% in the few weeks before retracing about half the loss over the past two weeks.
Longer downtrends often retrace about half of their decline before turning down again, so we’ll soon see if this is the early stage of a deeper decline for stocks or a continuation of the primary uptrend.
The Nasdaq 100, which is weighted heavier in large-cap growth stocks and the technology sector, has reacted to more selling pressure down -14% before retracing some of the decline.
Emerging country stocks as measured by the MSCI Emerging Markets Index have finally shown some relative strength against U. S. stocks.
The MSCI Emerging Markets Index trended up at first, then only declined about -3%, and is now positive YTD.
Rising interest rates have a direct negative impact on bond prices, and that is especially true for longer-term bonds.
If you buy and hold bonds, you’re going to learn the risks of bonds and bond funds in a rising rate regime.
Many investors today haven’t invested long enough to have experienced the possible losses that can be driven by this kind of rising inflation, rising interest rates, regime.
Investing involves risks you must be willing to bear, and if you aren’t willing and able to take the risk, you may consider reducing or hedging your risks.
For information about our proactive investment management, active risk management, hedging your risks, and ASYMMETRY® Managed Portfolios, contact us.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
I focus most of my attention on my own positions or those on my lists for portfolio management.
Nothing is more telling than what the stocks on my lists that meet certain fundamental earnings growth and technical criteria are doing.
Nothing is more important than the trend, momentum, and volatility of our actual positions.
However, it doesn’t mean we don’t also observe all the other stocks, bonds, commodities, and currencies for signs of strength or weakness.
Even though it may not impact my exposures or drive any change in our positions, I still enjoy taking the time to see what “the market” is doing, overall, in the big picture. That’s what I mostly share here, for informational purposes only.
Below is a chart of the percent of U. S. stocks trending about the 50-day moving average, an intermediate-term trend signal.
Percent of U.S. Stocks Trending Above the 50 Day Moving Average
A few observations of asymmetry are:
Only 30% of stocks are trending above the 50 day moving average.
As we can see in the charge giong back 20 years, its at the low end of its historical range.
In signficant stock market declines, it gets much worse. For example, in March 2020, more than 90% of stocks were in downtrends, the worst in two decades, including 2008.
About 8 times this Market Breadth indicator stopped at this level before trending back up, as stocks trended back up.
About 13 times this Market Breadth indicator didn’t stop here at this level, but instead kept trending loweer as stocks trended lower.
Overall, my observation from this asymmetry (imbalance) is many stocks have already entered downtrends.
Overall, stock market participation started showing weakness after the May 2020 advance, then improved into late 2010 before reaching a peak, and it’s been trending down since.
We may start to hear some call it a “Stealth Bear Market,” a phrase used to describe stock market conditions when the overall indexes are by and large trending higher, but many stocks are trending lower.
A “Stealth Bear Market” may define a trend like this because the S&P 500 stock index has been trending up, as the percent of stocks participating in the uptrend has declined.
Regardless of what we call it, the bottom line is most stocks are already in downtrends, so we’ve been stalking to see when they start trending back up again.
I think it’s essential to actively manage risk and adapt to changing market trends. If you need help, contact us. We manage accounts titled in your own name at an independent custodian of Goldman Sachs.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information, as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
And time is different, too, because of rising inflation and interest rates, which means falling bond prices.
So bonds aren’t going to be a crutch in a falling stock market.
Why do I think it’s a bubble?
A picture is worth 1,000 words.
S&P 500 Shiller CAPE Ratio was created by Yale University economist Robert Shiller as a way to understand long-term stock market valuations.
The S&P 500 Shiller CAPE Ratio, also known as the Cyclically Adjusted Price-Earnings ratio, is calculated as the ratio of the S&P 500’s current level divided by the 10-year moving average of inflation-adjusted earnings.
The S&P 500 Shiller CAPE Ratio may be used as a valuation method to forecast future expected returns.
– Higher CAPE ratio could indicate lower returns over the next couple of decades, – Lower CAPE ratio could reflect higher returns over the next couple of decades, as the ratio reverts back to the mean.
S&P 500 Shiller CAPE Ratio is at a current level of 39.60, and as you can see in the chart, it suggests the stock market is the second most expensive since 1881, the last 140 years. It’s more than 200% higher than its long-term average, and far from the low levels that historically preceded long-term bull markets.
The current risk for investors is it plays out similar to the past but without bonds trending up, acting as a crutch to hedge some of the stock market losses.
There’s never been a more critical time to row, not sail, so we’ve got out the oars.
It’s an exciting time to be an investment advisor and portfolio manager. We are empowered with a broader, more robust suite of tools to define and manage risk than at any other time in history.
Is this the beginning of a bear market?
Maybe, we’ll see, only time will tell.
Even if it is the early stage of a bear market, it’ll likely unfold with many swings up and down along the way.
But I think we’ll see all the speculation unwind in the years ahead.
For the tactical trader, investment success isn’t so much what the market is doing to you, but what you are doing with the market.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information, as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
“Purpose is a more powerful motivator than money. When you are not paid as much as you would like, your purpose will provide you a reason to continue producing excellence in your work. When you have more money than you ever thought possible, your purpose will provide you with a reason to continue producing excellence in your work.” – William J. O’Neil
“The market has a simple way of whittling all excessive pride and overblown egos down to size. After all, the whole idea is to be completely objective and recognize what the marketplace is telling you, rather than try to prove that the thing you said or did yesterday or six weeks ago was right. The fastest way to take a bath in the stock market or go broke is to try to prove that you are right and the market is wrong.”
The S&P 500 Equal Weight Index is like the S&P 500, except the 500 stocks are equally weighted instead of market cap weighted. For example, the stock exposure of the S&P 500 everyone quotes is based on market capitalization of the stocks, so the largest stocks are weighed heavier than smaller stocks.
Below are the top 10 holdings of the S&P 500 and their weightings. The top 10 out of about 500 holdings is 28% of the index.
All of the 500 holdings of the S&P 500 Equal Weight Index are allocated at 0.25% no matter how large or small the company.
Said another way, the Equal Weight Index gives much more exposure to smaller stocks.
Up until now, the S&P 500 was trending with greater momentum than the Equal Weight Index.
As of today, the S&P 500 Equal Weight has finally trended above its prior high and breaking out of a base going back to May.
It’s a positive sign for stocks.
One of the bearish signs we’ve seen lately has been poor breadth of participation as measured by the percent of stocks above their 50 day moving average.
The S&P 500 Percent of Stocks Above 50 Day Moving Average is an indicator showing the percentage of stocks in the S&P 500 that closed at a higher price than the 50-day simple moving average.
We’ve heard a lot of concern on Wall Street about the divergence between the S&P 500 and the percent of the stocks in the index above their 50-day average price. The red arrow shows the falling breadth indicator S&P 500 Percent of Stocks Above 50 Day Moving Average signaling only about 54% of the stock are in a short term uptrend.
Such divergence is normally considered bearish, but not so this time.
Those who are concerned about this bearish divergence may consider instead comparing the percent of stocks above the 50 day to the Equal Weight Index because the S&P 500 Percent of Stocks Above 50 Day Moving Average itself is equally weighted, not cap-weighted. It’s a percentage and cares nothing about the size of the company.
With that in mind, here is the S&P 500 Equal Weight Index giving each stock the same 0.25% weighting compared to the S&P 500 Percent of Stocks Above 50 Day Moving Average, which gives each stock the same weight.
What I see here is the S&P 500 Equal Weight price trend peaked in early May, but it was preceded by a divergence in the S&P 500 Percent of Stocks Above 50 Day Moving Average. That is, the S&P 500 Percent of Stocks Above 50 Day Moving Average started trending down in April as the index was making new highs for a few more weeks. It signaled some of the stocks had peaked and started trending down, and then the whole index finally paused and has trended sideways for two months, until today.
I’m not real bullish right now about the stock market, and we had reduced our exposure significantly, but this is a positive sign. I’ll be watching for more stocks to trend up showing increasing participation so if this continues the wind will be in the markets sails again.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
“So understand that chart reading and technical analysis is not some arcane science. It’s not black magic or astrology. Very simply, it is learning to read the cardiograms of the market’s health. Your physician runs X rays, blood tests, and EKGs on you before making a diagnosis. The competent technical analyst does the same to the market. Neither one is a witch doctor, though I have some reservations about certain MDs I’ve known.”
Stan Weinstein’s Secrets For Profiting in Bull and Bear Markets – January 1, 1988
I’ve been busy making improvements to my systems the past several months, so I haven’t shared any of my market observations with the public.
Although we’ve certainly had many requests for it, I’ve waited until I notice a material change in the risk level.
I think we are now entering a materially higher risk level.
First, I’ve gotten a call from two different friends, two days in a row, who have no investment management experience, and both were asking my opinion about investing in speculative stocks.
Ruh-roh.
Talking with other hedge fund managers lately, I’ve mentioned the investor sentiment reminds me of 1999. Back in the late 90s everyone was a stock market genius, and that seems to be the belief again as price trend up confirming their expertise.
We know how that played out, and it will again.
Those who don’t believe it have a lesson to learn, and they will.
I prefer to follow the trend until the end when it bends, but sometimes trends, which are driven by an under-reaction that takes time to catch up can eventually result in an overreaction and an extreme. This uptrend hasn’t yet reached a major extreme by some measures, but it’s getting there enough to be a warning of a higher risk level.
As of now, the percent of S&P 500 stocks trending above their average price of the past 50 days has reached about 90%, so most of the stocks are already in an intermediate term uptrend. Broad participation in an uptrend is a positive sign, but once most of the stocks are already trending up, I start to wonder when the trend will pause and reverse. This breadth indicator signals investor sentiment at the extremes, and it’s reached the point we should be prepared for an interruption of this uptrend. Of course, the market can remain irrational longer than you can remain solvent, so this doesn’t require a reversal, it’s a warning shot across the bow.
Next up is the percent of S&P 500 stocks above the 200 day moving average, which is a longer term uptrend signal. Here we highlight it reaching its highest level in over a year at 95% of the stocks in a long term uptrend. Again, it’s a positive sign that all but 5% of these stocks are in an uptrend, but once they’ve mostly trended up like this, it’s prone to be the end of the cycle.
Anyone who has been following along with my observations the past two decades know I love me some volatility trading, so my systems monitor for volatility expansions and contractions. What we have here is, a volatility contraction seen in the CBOE Volatility Index (VIX) fading down to the 17 handle range.
After prices have trended up for a while, I’ve observed the price trends tighten up as investors become more and more confident the trend will continue. Once something happens to cause a reaction, we’ll see prices spread out, which is volatility, and specially, a volatility expansion. The 17 range is far from an extreme low in the expected volatility over the next 30 days, which is what VIX indicates based on options prices, but as seen in the charge above, it’s trended to a new low.
Volatility contractions are eventually followed by volatility expansions. As soon as something surprises the market, we’ll probably see indecision, which leads to prices spreading out as investors and traders try to figure out what’s going to happen next.
Looking at a longer time frame of the past decade, here we see volatility can contract down to the 12% range, so an overall tightening of the range of prices can always continue longer than expected.
Next up is the fundamental valuation of the stock index. I’m not a fundamental analyst, despite my advanced accounting degree. I learned the hard way a long time ago a stock price can trend far away from anyones perception of fundamental value.
If you’re an analyst at Goldman Sachs researching a company to see if they can pay for the loan the investment bank is considering giving them, you want to discover the potential to pay, and it’s a fundamental analysis to make an educated guess. When that company has stock trading on an exchange, it’s an auction market determined by supply and demand, which is driven by sentiment as much as anything. Many momentum stocks like Tesla are bid up based on enthusiasm for what may eventually be, not what is today.
With that said, I do believe the fundamental valuation level does have some predictive ability in the long run. When the S&P 500 Shiller CAPE Ratio is at its second highest level in 139 years, it suggest to me the corrections may be deeper in magnitude and quicker to unfold. We’ve seen that these past several years, and I expect to see it more.
Because stocks are generally expensive based on the price to earnings ratio, it suggests we row, not sail.
If you wait for the wind to keep blowing, you may find yourself in the middle of the ocean running out of resources to stay afloat.
I prefer to get out the oars and start rowing to get where we want to be.
Speaking of the price to earnings ratio of S&P 500 stocks, here is another interesting observation. The S&P PE Indicator shows the average P/E Ratio for stocks in the S&P 500. It’s essentially a fundamental breadth indicator, similar to the percent of SPX stocks above their moving averages, which is price based breadth. This indicator is calculated by dividing the closing value of the S&P 500 by the trailing twelve months (TTM) of GAAP earnings for SPX, and multiplying the result by 100.
As you can see in the chart, it’s in uncharted territory of the past decade.
Of course, a high price to earnings ratio may be more justified as long as inflation is low, as it is now. If inflation begins to trend up, it’ll likely put longer term pressure on these price trends.
For these reason and more, I think it’s a good time to reduce exposure to the possibility of loss and/or hedge off downside risk.
I hope this helps!
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
“The trend is your friend, until the end when it bends.”
Stock indexes making higher highs and higher lows is a good thing – until it isn’t.
I run a combination of systems. Most of them are trend following in nature, meaning the objective is to enter a trend early in its stage to capitalize on it until it changes.
But when trends reach an extreme it’s time to take note.
For me, what follows is what I consider market analysis, which doesn’t necessarily result in an specific trades, per se, but instead, it’s my intellectual exercise to understand what’s going on. And it’s nice to have an idea of when a trend may be ready to change.
In law,weight of evidence “refers to the measure of credible proof on one side of a dispute as compared with the credible proof on the other.
It is the probative evidence considered by a judge or jury during a trial.
In this case, the jury are active investors in the market.
Probative evidence is having the effect of proof, tending to prove, or actually proving. So, when a legal controversy goes to trial, the parties seek to prove their cases by the introduction of evidence. If so, the evidence is deemed probative.
Probativeevidence establishes or contributes to proof.
The weight of evidence, then, is based on the believability or persuasiveness of evidence.
Since we never know the future in advance, when we engage in market analysis, we necessarily have to apply the weight of the evidence to establish the probability.
After monitoring price trends and a range of indicators intended to measure the strength of a trend for more than two decades, I’ve got a feel for the weight of the evidence. So, my confidence in these observations has increased over time, even as imperfect as it is.
Let’s see some evidence to weight.
By the first of June, 98% of the S&P 500 stocks were trending up, above their short term trend 50 day moving average. Since then, we’ve seen some divergence between the stocks in an uptrend and the stock index.
It tells us fewer stocks are participating in the uptrend.
The advantage of monitoring breadth measures like % of stocks above a moving average or bullish percent is it’s a high level barometer that may highlight what is changing. Sometimes, it’s what is diverging.
In this case, the price trend of the stock index is diverging with the percent of stocks in a positive trend.
One of the warning signs in January and February was this same divergence between the uptrend in $SPY and the breadth of participation of the individual stocks in the index.
When I see divergence, it reminds me to look inside to see what has changed.
It’s usually explained by sector rotation.
For example, over the past month, Technology and Communications have shown relative strength, but the momentum in Consumer Discretionary and Utilities are the laggards.
As a new trend gets underway, some of the component sectors within the S&P 500 diverge, so we also see it show up in the percent of stocks trending up vs. down.
After watching quantitive technical indicators like this since the 90s, I can also tell you we commonly see a breadth thrust in the early stages of a new uptrend. We did in January to February 2019 after the waterfall decline at the end of 2018.
A breadth thrust is bullish confirmation.
How long the trend may last, well, we’ve always preferred to see more stocks parts-cation in an uptrend than less. The theory is a broad uptrend that lifts all boats has more true momentum. An example of elevated breadth was 2017, when the stock index trended up with very little volatility or setbacks.
But if you look real close, that yellow highlight of 2017 also shows the percent of stocks above their 50 day moving average oscillated between the 50 and 95% zone throughout the year. It’s an oscillator, so it swings between 0% and 100%, but the fact it stayed above 50% in 2017 was a signal of internal strength. It often swings wider in a typical year, but 2017 was far from typical.
The bottom line is, what we have here, now, is fewer of the S&P 500 stocks trending up, which means more are crossing down below their intermediate trend trend line.
So, my interpretation is the trends are weakening, and it’s likely to be more reflected in the stock index eventually.
Investor sentiment is another essential measure.
Nothing drives investor sentiment like a price trend. As prices trend up, people get more bullish (or greedy) and as prices trend down, they feel more fear (of losing more money.)
The Fear & Greed Index tracks seven indicators of investor sentiment. It’s gradually dialing back up to Greed, but not yet Extreme Greed.
But when we take a look inside, and understand how it works, I see the main holdout is VIX . At around 22, the VIX still indicates a moderate level of FEAR, but we have to consider VIX is fading from its highest level, ever, so its absolute level may not be as indicative.
On the other hand, the level of the Put/Call Ratio is among the lowest levels of put buying seen during the last two years, indicating EXTREME GREED on the part of investors.
Junk Bond Demand has reached EXTREME GREED. Investors in junk bonds are accepting 2.05% in additional yield over safer investment grade bonds. This spread is much lower than what has been typical during the last two years and indicates that investors are pursuing higher risk strategies.
The 3rd EXTREME GREED indicator is the S&P 500 is 15.28% above its 125-day average. This is further above the average than has been typical during the last two years and rapid increases like this often indicate extreme greed, according to the Fear & Greed Indicator.
Aside from neutral $VIX, some other moderate hold outs of the 7 indicators include breadth. The Fear & Greed Indicator uses the McClellan Volume Summation Index, which measures advancing and declining volume on the NYSE. It has fallen from EXTREME GREED just over a week ago.
Stock Price Strength is another moderate GREED level. It says the number of stocks hitting 52-week highs exceeds the number hitting lows and is at the upper end of its range, indicating greed.
Safe Haven Demand is at a bullish investor sentiment level. Stocks have outperformed bonds by 6.87% during the last 20 trading days, close to the strongest performance for stocks/bonds in the past 2 years – investors are rotating into stocks from the relative safety of bonds.
THE BOTTOM LINE IS: The seven indications of investor sentiment are dialing up to a very optimistic level, signaling investors are bullish on stocks.
Though some of it isn’t yet extreme, when we put it in context, anything can happen from here, but its now at a higher risk zone.
Another measure of investor sentiment is put volume. Puts are listed options on stocks and indexes that may be used to hedge the downside. The CBOE Total Put Volume is at the lowest level this year, which suggests there isn’t a lot of hedging taking place.
The NAAIM Exposure Index represents the average exposure to US Equity markets reported by the members of the National Association of Active Investment Managers. They are fully invested for the first time since December. Their exposure to the stock market has followed the trend of the stock index.
Another sentiment poll is the Advisors Sentiment, which was devised by Abe Cohen of Chartcraft in 1963 and is still operated by Chartcraft, now under their brand name of Investors Intelligence. This survey has been widely adopted by the investment community as a contrarian indicator. They say since its inception in 1963, the indicator has a consistent record for predicting the major market turning points. It has reached that point.
Speaking of Abe Cohen, another indicator he developed in the mid 1950s is the Bullish Percent Index. He originally applied it to stocks listed on the NYSE, but we have been doing the same for other listed stocks and sectors since. The NYSE Bullish Percent is an example of another gauge of overall market risk. A common analogy applied to the NYSE Bullish Percent is that of a football game: level of the bullish % represents the current field position and the “end-zones” are above 70% and below 30%.
Currently, at 70%, it has entered the higher risk zone, suggesting it’s time to put the defensive team on the field.
Many of these indicators are measuring the same thing; investor sentiment.
After everyone has already gotten bullish and put their money to work in stocks, we have to wonder where future demand for shares will come from.
It’s been a nice run, but stars are aligning to look more and more bearish in my opinion. Uptrends are great, but all good things eventually come to an end.
If we want to protect our profits, it is probably time to reduce expose or hedge.
And that’s likely right about the time most people are excited about their stocks and wanting to buy more.
What could go wrong?
As of this writing, we have a CAT 4 hurricane just hours from hitting Texas and Louisiana, the Fed meeting tomorrow, and China firing missiles into disputed sea.
That’s the weight of the evidence as I see it.
You can be the judge if the evidence is believable and persuasiveness enough, but the final arbiter will be the price trend in the coming weeks.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
I pay more attention to macroeconomic trends when we are in a recession.
Though my tactical investment decisions are driven by the direction of price trends, momentum, sentiment, and volatility, it’s useful to take a moment to see what in the world is going on.
Clearly, employment and payrolls seem to be one of the main macroeconomic risks right now.
The July ADP employment report showed private employment increased by 167,000, far less than the expectations of the street of 1.2 million. It’s a big disappointment.
Today, we see the US Continuing Claims for Unemployment Insurance is at a current level of 16.11 million, down from 16.95 million last week, which is a change of -4.98% from last week and -35% from the peak in May.
For a long term perspective, here is US Continuing Claims for Unemployment Insurance going back to 1967, the past 53 years. It averaged 2.8 million over the period, reached 10 times higher than average, and is still 5 times higher than the long term average.
Of course, the average over 53 years doesn’t mean much when such an outlier is present, but maybe it helps put the trend into perspective.
Prior to now, the highest continuing claims for unemployment insurance from the Department of Labor was 6.6 million. That’s 10 million less than now. So, for perspective, todays level is nearly three times what it was at the peak in 2009. Said another way, the worst claims for unemployment insurance in 2009 was only 1/3 of today.
But hey, today’s 16.1 million is better than the peak at 25 million just a few months ago.
By the way, that 25 million was more than four times the highest level it reached in 2009.
So yeah, employment is an issue that certainly has my attention as a macroeconomic trend guy.
Next up is US Initial Claims for Unemployment Insurance. US Initial Jobless Claims, as tracked and reported by the US Department of Labor, provides data on how many new people have filed for unemployment benefits in the previous week. It allows us to gauge economic conditions in regard to employment.
As more new people file for unemployment benefits, fewer people in the economy have jobs. Of course, initial jobless claims tended to peak at the end of recessionary periods such as the last cycle peak on March 21, 2009 when it reached 661,000 new filings.
US Initial Claims for Unemployment Insurance is at a current level of 1.186 million, which is nearly double the 2009 peak, but it’s -83% below the stunning March 2020 high of 6.8 million.
I know I just shared some of these numbers a few days ago, but these are updated data this morning.
The next big issue I think we’ll see comes tomorrow.
If tomorrows payroll numbers are similar to these ADP numbers, the job growth will be way below Wall Street expectations of 1.5 million.
We’ll see how it unfolds in the morning.
In the meantime, the resiliency of US stock market has been remarkable. Though anyone paying attention knows the driver is the US government intervention, the S&P 500 has now recovered from its -34% loss in March.
The Dow Jones Industrial Average remains about -5% from the February peak.
The equal weight S&P 500, which gives far more weighting to the smaller and mid size stocks, is about -6.4% from its prior high.
To the layman, it would seem the stock market has all but recovered.
If we didn’t know better, the bear market is over.
Do we know better? or is it over?
Will 2020 go down as the sharpest decline in modern history and the fastest recovery?
We’ll see.
But, over the long run, the stock market is driven by fundamentals. The challenge with fundaments like earnings growth, dividend yield, and the price-to-earnings multiple (optimism) they trade at.
Here is a chart of the rate of change of the S&P 500 price trend normalized with the Shiller S&P 500 CAPE Ratio, which is a measure of valuation. I’ve pointed out many times the valuation level was extremely high, though it has been since 2013. Look when it peaked in the relative chart compared to the SPX at the start of 2018.
What’s happened since then?
Swings.
Massive swings.
And sharp sudden drawdowns.
While the S&P 500 Shiller CAPE Ratio is now down to about 30, which is -10% below where it was at the start of 2018, the valuation level is still as high as it was before the Great Depression.
The markets are going to swing up and down and motivate a lot of mistakes along the way, but if history is a guide, we may be in for a much longer bear market and recession than is currently reflected.
You can probably see why my investment strategy is unconstrained, so I can go anywhere, including cash and treasuries, and apply different tactics for tactical decisions in pursuit of asymmetric risk/reward.
It’s never perfect, but I just keep doing what I do.
In hindsight, I’ve been underinvested in stocks the past few weeks, but we’ll see how it plays out from here.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
US coronavirus new cases per day are in a downtrend, and trend in US hospitalizations is following the downtrend in new cases.
Taking a closer look, here is the past 30 days.
US cases per day is -31% off its high and US currently hospitalized is down about -5% from its peak.
Sure, the reported data has its fair share if issues, but we are probably observing a large enough sample size of the population to draw meaningful statistical inference.
Of course, nothing is more important than deaths per day, so here is a logarithmic chart. I’m using a logarithmic scale to respond to the skewness of the larger values by normalizing the scale of the trend based on percent change.
The equation for COVID is new tests administered drives new reported cases, which leads to hospitalizations with a lag, and then deaths lag hospitalizations.
Since we are observing a trend change from a peak level, we can expect to see deaths peak in about two weeks.
Of course, the trends of this virus are driven by human behavior.
So, the future direction depends on all of us, and each of us individually.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
I’m hearing a lot of talk about the CBOE Equity Put/Call Ratio tapping an extreme low again. At 0.38, the ratio between equity puts and calls has once again reached its lowest level of the past year.
For a broader perspective, here is the CBOE Equity Put/Call Ratio going back to 2006. Indeed, the current ratio between equity puts and calls is as low as it gets. The lowest level was in 2010, when it reached 0.32, barely lower than the current 0.38 reading. Yes, indeed, the CBOE Equity Put/Call Ratio reaching an extremely low level. In fact, it’s as low as it has ever been going back to 2006.
Normally, we consider such a low level to be an example of extreme complacency and GREED DRIVING THE MARKET. For example, the CBOE Equity Put/Call Ratio is the first of seven indicators used in the Fear & Greed Index.
When the ratio is trending down and at a low level, it’s because equity Call option volume is greater than the equity Put option volume. When there’s more trading volume in equity calls, we assume options traders buying speculative calls, so they are bullish. VERY bullish now.
When the market is so one-sidedly bullish, it’s a contrarian indicator suggesting over-enthusiasm. That is, we assume the calls are mostly speculative positions and puts are defensive, so the demand is on the long side. It’s an imperfect assumption, but I generally agree.
I pointed out a similar extreme read out early June, when Call Volume spiked up to a historically high level. Indeed, the stock market had a -6% down day afterward. This time is a little different, and the chart shows why. Call volume isn’t nearly as high, relatively speaking.
Call volume isn’t as high as it was in June, but put volume is also lower. So, the ratio is at the same low level at 0.38, but the absolute volume is different. It’s still probably an indication of enthusiasm and complacency, but it may not have the delta it had last time.
Keep in mind, even though a call option gives the buyer the right, but not the obligation, to buy a stock at a specified price within a specific time period, call volume also includes sellers of call options. So, the dominant demand could be the selling of call options instead of buying them, but every seller needs a buyer, and the prevailing direction of the trend hints as to the dominant side the market is enthusiastic about.
We can say the same about put option volume. While a put option gives the buyer the right, but not the obligation, to sell a stock at a specified price within a specific time period, put volume also includes sellers of call options. Buying a put option is bearish, but selling a put option is bullish.
Still, the general direction of put/call volume is that equity call volume is assumed to be mostly speculative bets on the stock to rise and put volume is primarily speculative (or hedging) bets on the stock to fall.
So, an observation of put and call volume includes a combination of the options market belief the stocks will trend up, but also less desire to protect against stocks going down.
This time, as seen in the chart, the primary difference in the current Put/Call Ratiois a lower level of put volume, requiring less of an uptrend in call volume to drive the ratio up.
I hope this helps!
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Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
I’m in Florida, which happens to be one of the states with the highest momentum in COVID – 19 cases. So, I’m going to share my observations as I flip through the data. I’m more of a data scientist, not an epidemiologist, so my focus is purely on the direction of these trends, and their rates of change. There are many limitations or challenges in interpreting the visualization. The data source labeled on the chart is deemed reliable but is not guaranteed, and the case data is limited by test availability.
What you believe is true, for you.
I say that, because we are observing about as much bias from this data as we see every day trading global capital markets.
No matter what I show in my observations, you’ll most likely still believe what you already did.
It’s confirmation bias.
Confirmation bias is the tendency to interpret new evidence as confirmation of one’s existing beliefs or theories.
The Coronavirus has become so politically charged, we see many people judging the trends based on their political affiliation, rather than pure data science.
That’s not the case for me.
My concern is to understand the trends to make a judgment on what is going on.
Let’s see what we see.
First, let’s start with Florida COVID – 19 Cases. The trend is up.
Amazingly, the visual doesn’t change a lot when I switch from an arithmetic chart above to the logarithmic chart below. The log chart below emphasizes the rate of change, rather than the absolute number change. Even the logarithmic chart is trending notably higher, so we not only have an uptrend, but it’s been gaining momentum. That is, the steepness of the recent uptrend is just as steep as it started months ago. We’d like to see it slow down, peak, and then reverse downward.
Florida COVID – 19 Hospitalizations uptrend continues. Again, this is the arithmetic chart, so it shows the absolute change.
Next, I shifted the Florida COVID – 19 Hospitalizations chart to a log scale, to emphasize the rate of change. The rate of change slowed down for a while, but is clearly pointing up.
I pointed out an upside breakout in the trend of new cases on June 12th. Since then, new cases per day have increased from 1,698 per day to 15,300 new cases yesterday in Florida. That is, the cases per day have increased by 708% since the trend breakout 30 days ago. We are now in a new paradigm, so take your precautions accordingly. I’m hoping this is the peak, and we’ll see it turn down from here.
Florida Coronavirus Tests Administered Per Day is also in an uptrend and spiked up. Some of this recent uptrend could be due to data backlogs from the July 4th holiday weekend, but it is what it is.
Deaths per day on Florida due to COVID has generally remained stable, oscillating around average for months. On average, about 43 Floridians per day are dying of Coronavirus. This is an absolute number, but we’ll look at some ratios and rates of change.
Florida COVID-19 Deaths are at 4,346 now. Though the trend is up, everything is relative, and we are talking about 4,346 out of a population of 21.48 million to put it in perspective.
There have been 2.58 million COVID tests reported in Florida, and this is one trend we want to see continue upward. The more testing, the better prepared we are. If you are asymptomatic, you could be spreading the virus to your friends and family, unknowingly.
Now, for some good news.
The Florida COVID – 19 Death Rate is at an all-time low. To calculate the death rate, weuse the formula: Florida Coronavirus Deaths x 100.00 / Florida Coronavirus Cases. At this time, 1.6% of cases in Florida have died from the virus, and the rate has trended down. However, keep in mind deaths lag testing and cases by three to four weeks, so we may see this trend up as new cases become more mature.
Also, note the death rate was higher and increasing early on because the virus got into some assisted living and nursing homes. More recently, the average age of cases has fallen, so fewer younger people have been hospitalized and died from COVID. So, the rate of change has since been slowing.
Next up, we’ll observe some ratios, since everything is relative.
Here, I apply some of the same techniques to these trends I’ve been applying to global markets for over two decades. When looking at ratios in world markets, we call it “relative strength”, as one of the data streams is trending with greater momentum than the other.
Florida COVID cases relative to tests administered shows us about 10.5% of the tests administered are counted as positive tests. Below we see it represented as a ratio between the two. When the trend is rising, as it is now, more cases are positive. I marked the current level since it’s notably back at its prior high. Last month, only about 5% of tests were positive cases.
The next chart is drawn with per day cases vs. test data, so it’s noisier. The above chart was a cumulative total amount. I’m monitoring all of them.
How many Florida COVID – 19 cases are in the hospital?
One observation is hospitalizations relative to cases. From this trend, we can conclude about 7% of cases are hospitalized, but the trend is down since late May and early June.
Florida finally started reporting COVID cases currently hospitalized last week. We have 7,542 COVID cases in the hospital in Florida.
If we compare currently hospitalized cases relative to hospitalizations we start to get an idea of what percent of hospitalized is currently still hospitalized. The sample size is small here since they only started reporting recently, but we’ll be looking for this trend to fall.
What percent of cases are currently hospitalized? We can get an idea of the trend by comparing Florida cases currently hospitalized to cases. Again, the sample size is small, but it’s trending down at about 3%.
As time passes and we get more and more data, we’ll see directional trends and rates of change.
I’ve been focused on data science, statistics, and probably most of my life. If there is anything I think we’ve learned in 2020 is a shortfall in people’s understanding of the maths.
Many times I’ve heard people state silly things about the data being incomplete, or imperfect.
But we rarely every have perfect data, or complete data.
I’ve heard mathematically ignorant people make fun of statistics and probability, yet most everything around is is based on those very things.
The reality is, we live in an imperfect world, we live with uncertainly about most everything.
Many events can’t be predicted with certainty.
The best we can do is determine how likely they are to happen, using the concept of probability.
Probability is simply how likely something is to happen.
When we are unsure about the outcome of something, we can talk about the probabilities of certain outcomes—how likely they are.
The analysis of events with probability is called statistics.
Statistics is a mathematical body of science that pertains to the collection, analysis, interpretation or explanation, and presentation of data. It’s a branch of math.
So, we’ve got a lot of new uptrends in cases and such down south, hopefully we are seeing it peak and trend down.
It’s uncertain, so all we can do is monitor the data for directional trends and changing momentum. When the rate of change picked up last month, I suggested we’d see an uptrend in cases, as we did.
We want to see the rate of change slow down, then the spread dies off and trends down. Until we do, prepare, and protect yourself accordingly.
In the meantime, I encourage everyone to study maths like probability and statistics.
We don’t have to be sure about anything, if we are pretty sure about something, and place our bets accordingly.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
Individual investors are now bearish based on the survey and expected volatility.
Since 1987, the American Association of Individual Investors has asked the same simple question each week to see what direction individual investors think the market is headed over the next six months. The results are compiled into the AAII Investor Sentiment Survey, which offers insight into the mood of individual investors.
Since the crowd tends to get it wrong at extremes, when I see sentiment reach a historic high or low, I take note.
Falling bullish investor sentiment and rising bearish sentiment pushed the spread between bullish and bearish investors down to a low level.
Bearishness hasn’t historically trended much higher than this.
Bullish investor sentiment is about as low as it has been in history.
Neutral investor sentiment is about average.
Unlike the AAII Investor Sentiment Survey, the Fear & Greed Index, which tracks seven different investor sentiment indicators, is neutral.
Investor fear and greed oscillates over time as investors swing from the fear of missing out and the fear of losing more money. Fear and greed is neutral at mid field in the cycle and is pointing down again.
Investor sentiment gauges may not be the best market timers, but the Fear & Greed Index can be a useful gauge for investors to signal when you don’t want to be part of the crowd sentiment.
At extremes, most investors feel the wrong feeling at the wrong time, so if we are to create better results than the crowd, we must necessarily be thinking, feeling, and doing the opposite of the herd.
Expected volatility remains elevated, also signaling a higher than average level of fear.
After the biggest volatility expansion, ever, implied volatility (VIX) has settled down to 32, which is elevated. The CBOE Volatility Index (VIX) is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. The VIX is derived from the price of the S&P 500 index options, and provides a measure of market risk and investors’ sentiments.
So, I’m guessing one of two things is about to happen. Either this bearishness will prove wrong and the stock market will trend up, or it will get a lot worse.
It seems like investors are probably becoming more concerned about the new uptrend in COVID 19 cases.
I don’t believe Coronavirus was the primary driver of the stock market crash in March, but it may be more of an issue now that it continues to spread.
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Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
Indeed, the stock market indexes seem to be reflecting something negative today.
I’m guessing it may be the uptrend in new cases per day. For example, Florida has reached a significant new high.
As I’ve been saying for the past two weeks, the new uptrend breakout in cases per day is NOT driven by more testing. Below is a sample of the states with the highest new cases, and as you can see, the bars show the percent increase in new cases and testing.
This is NOT the kind of asymmetry I like to see.
Considering the elevated risk level in the stock market by my measures, it is likely we’ll see more downside for stocks.
So, we have been positioned in long U.S. Treasuries for over a week.
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Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
I’m sure there will be no shortage of criticism of the models attempting to predict things like hospital resource us such as the COVID-19 Projections from Institute for Health Metrics and Evaluation (IHME) that were widely used. The model had many assumptions, as any model would, and sometimes models get it wrong. Keep in mind, this model assumed social distancing, too, so it wasn’t a model misbehaving from our success in flattening the curve.
Below is an image I saved on April 11th, already showing Florida hospital resource use was improving.
Here it is today. Their educated guesses overestimated resource use, though it wasn’t a big surprised to me, since I paid attention to the wide range of possibilities they illustrated.
How inaccurate were they?
On March 27, 2020 the projected infections was 259, 204, but the confirmed infections was 16,576.
The brown line at the bottom is the confirmed infections, the higher line is their projections.
COVID – 19 isn’t over.
It’s still spreading, but not nearly as they predicted.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
Today’s jobs report is a mighty fine example of the market responding to positive rates and change and surprise.
The US Unemployment Rate measures the percentage of total employees in the United States that are a part of the labor force, but are without a job.
It is one of the most widely followed indicators of the health of the US labor market and the US economy as a whole. Historically, the US Unemployment Rate reached as high as 10.80% in 1982 and 9.9% in November of 2009. Both of these times were notable recessionary periods.
That is, until COVID – 19 came along.
We saw a 14.7% unemployment rate in April in the United States of America. A stunning increase from such a low level in February of 3.5%. The unemployment rate had been declining, for example, it was 5.3% five years ago.
After today’s jobs report, the US Unemployment Rate is at 13.3%, compared to 14.7% last month and 3.6% last year. It’s still nearly three times higher than the long term average of 5.75%, but a lot better than Wall Street had expected.
Wall Street expected a loss of 7.7 million jobs and a 19.8% unemployment rate today.
Bloomberg emailed sent out at 7AM this morning:
So, and Unemployment Rate at 13.3% is a huge positive surprise.
Some independent economist are already disputing the numbers.
The jobs report, as an aside, was again skewed by reporting irregularities. Not just that, the payroll pop seems to reflect businesses re-hiring so as to get the PPP loans switched to grants. So put away that champagne!
“And May’s unemployment number may be higher when it’s announced on June 5.
The stock market is said to be a discounting mechanism. The largest stock market investors who drive price trends don’t look back, they look forward.
It’s an auction market and operates on the proposition that investors and traders gaze into the future and discounts all known information about the present moment and expectations for what’s expected to happen next. So, when unexpected events happen, the market takes into account this new information very rapidly.
It certainly seems to be happening now.
Either the market is factoring in a quick recovery, or something else is driving it up.”
I think it’s safe to say the market has indeed gazed into the future and discounted a sharp recovery.
Yes, it certainly seems overly optimistic, but what is, is.
Notwithstanding a second wave of COVID-19 that hits even harder than the first, Wall Street seems to be pricing in the worst is behind for the U.S. economy.
What’s next?
It’s been a radical year. What else should we have expected out of 2020.
We’ve got to have some fun with it.
Did we skip the murder hornets? it feels like we skipped the murder hornets. 🧐 🐝
The US stock market will probably trend up today and reach an overbought level for the first time since January.
Remember: The market discounts the future, meaning it prices in future expectations. This discounting mechanism goes both ways.
The market is people. It’s large investors and small, but the largest investors drive the trends. It’s institutional investors managing money for others that are more advanced about gazing into the future.
Above all else, when it comes to forecasting or now casting a future trend, getting a grasp of what the majority of the market is thinking and doing is essential.
My guess is, the market has factored in the extremely aggressive response from the Federal Reserve and US Treasury to provide liquidity after it evaporated in March.
I know it’s very hard to go with the flow. Who would have believed this -37% decline would have recovered as much as it has so quickly?
No one.
But, it ain’t over till it’s over.
We have a new problem now.
The relative strength of stock indexes just tapped the overbought level, so the risk of a fall is now higher than it has been since this uptrend started.
Semper Gumby.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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:
Market action discounts everything.
Prices move in trends.
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.
“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 thelast 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 Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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 Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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 Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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.
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.
“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’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 ofchange 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 Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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 Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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?
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.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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.
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.
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?
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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?
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.
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.
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.
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 Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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.
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 Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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.
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 Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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 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.
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.
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.
