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

March 4, 2020 By Mike Shell in Absolute Return, Asymmetric Observation, Asymmetric Risk Reward, Asymmetry ETF, Behavior Finance, Behavioral Finance, Behavioral Financial Advice, Behavioral Gap, Investor Behavior Modification, Investor Sentiment Leave a comment

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

Dow Jones is down -10% off its high

February 27, 2020 By Mike Shell in Absolute Return, Active Risk Management, Actively Manage Risk, Asymmetric ETF, Asymmetric Hedging, Asymmetric Observation, Asymmetric Risk Reward, Asymmetry ETF, ETF, ETF Hedging, ETF Strategist, ETFs, Investment Risk Management, Stock Momentum, Tactical ETF Managed Portfolio, tactical risk management, U.S. Stock Market Leave a comment

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

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

dow jones down over 10 %

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

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

stock dividend yield

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

long term stock dividend yield

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

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

stock market drop 2020

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

I’m just glad we aren’t in it.

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

It’s what we do.

Need help? Contact us here.

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

Volatility is expanding, a little

January 6, 2020 By Mike Shell in Asymmetric Hedge, Asymmetric Hedging, Asymmetric Observation, Asymmetric Payoff, Asymmetric Risk Reward, Asymmetry ETF, Managed Volatility, Positive Asymmetry, Risk Asymmetry, VIX CBOE Volatility Index, Volatility Expansion, Volatility Hedging, Volatility Trading Leave a comment

To no surprise, the CBOE S&P 500 Volatility Index that represents the market’s expectation of 30-day forward-looking volatility, is trending up.

VIX VOLATILITY EXPANSION ASYMMETRIC RETURNS

So far, it isn’t much of a volatility expansion, but it’s elevated somewhat higher than it was. At around 15, the VIX is also well below its long term average of 18.23, although it hasn’t historically been drawn to the 18-20 level, anyway. The average is skewed by the spikes in volatility; volatility expansion.

VIX is at a current level of 14.82, an increase of 0.80 or 5.71%% from the previous market day.

Here are the 50 and 200-day moving average values for VIX.

VIX MOVING AVERAGE

As I shared over the weekend, and it was quoted in today’s MarketWatch article “U.S.-Iran tensions will spark increased volatility — here’s how to play stocks, fund manager says“:

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

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

I was referring to the U.S. conflict with Iran, of course.

The VIX index value is derived from the price inputs of the S&P 500 index options, it provides an indication of market risk and investors’ sentiments. VIX measures the implied ‘expected’ volatility of the US stock market. So, many market strategists use the VIX as a gauge for how fearful, uncertain, or how complacent the markets are. The VIX index tends to rise when the market drops and vice versa. During the 2008-2009 bear market, the VIX trended up as high as 80.86. Although the VIX cannot be invested in directly, securities like ETFs and derivatives based on it may provide the potential for an asymmetric hedge. For example, over the past year when the S&P 500 stock index was down -1% or more on the day, some of the ETFs based on long volatility spiked 10% or more. Volatility is difficult to time right, but when we do the payoff can be asymmetric. An asymmetric payoff is achieved when the risk-reward is asymmetric: maybe we risk 1% to achieve a payoff of 5%. Since long volatility has the potential for big spikes when volatility expands, it’s asymmetric payoff doesn’t require the tactical trader and risk manager to be as ‘right’ and accurate. So, the probability of winning can be lower, but the net pay off over time is an asymmetric risk-reward.

You can probably see why I pay attention to volatility and volatility expansions.

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.

Asymmetry in yield spreads, inverted yield curve warning shot, and unemployment

December 29, 2019 By Mike Shell in Asymmetric Observation, asymmetry, Asymmetry ETF, Global Asset Allocation, Global Macro, Global Tactical Rotation, Information Asymmetry, Positive Asymmetry, Systematic Global Macro Leave a comment

The 10-2 Treasury Yield Spread is the difference between the 10-year treasury rate and the 2-year treasury rate.

A 10-2 treasury spread that approaches zero indicates a “flattening” yield curve. A flattening yield curve is when the shorter-term interest rate (2 years) is the same as longer-term interest rate (10 year).

Although many people mistakenly promote symmetry and balance as a good thing when it comes to investment management, this is another of many instances where asymmetry is preferred over symmetry.

If we balance our profit and loss, we make no progress.

So, I prefer profits over losses and profit greater than loss.

If we balance our risk and reward, we are left with no change.

So, I prefer asymmetry over symmetry: more reward, less risk, or asymmetric risk-reward.

Getting this wrong can be one of the biggest mistakes of your life. If you balance your portfolio, you’ll have periods of gains, but they may be followed by periods of losses and the losses are just enough to remove the gains. Asymmetric returns are achieved by capturing more of the good, less of the bad.

In the chart below, we can see the yield spread went negative in August. Since then, it has trended back up. The Yield Spread has become more asymmetric.

A negative 10-2 yield spread is historically considered a precursor to a recessionary period. So, symmetry is the first signal of an issue, then it turns negative. That’s why we saw these inverted yield curve headlines in August. Since yield curve inversions are scares, they get significant attention in the financial press.

inverted yield curve

Typically, long-term bonds have higher yields than short-term bonds. An inverted yield curve is seen as an indicator of an impending recession. A negative 10-2 spread predicted every recession from 1955 to 2018 but occurred 6-24 months before the recession happened, so the inverted yield curve is a leading indicator that signals far in advance. The gray area labels recessions. You can see the Yield Spread drops to a low level before the recession.

Although it isn’t currently inverted, we should take note it did invert briefly, and the spread is on the low range of its cycle historically We can see in the chart the inversion doesn’t necessarily stay flat or inverted for long. The signal, then, is the symmetry then the inversion.

The slope of the yield curve oscillates up and down with the state of the economy. The upward-sloping yield curve is observed when the economy is growing. When investors expect a recession, they also expect falling interest rates. The belief of the market that interest rates are going to fall drives the inversion. When the yield curve inverts, it’s because investors have low confidence in the economy over the near term. So, it’s an indicator of investor sentiment and behavior. Here is a visual of the historical rates between the 2 and 10 year. The 10 year should be materially higher as a reward for tying money up longer as is the case most of the time.

The 10-2 spread reached a high of 2.91% in 2011, and went as low as -2.41% in 1980. The good news is the 10-2 spread flattened to zero last September but has since spread back out.

Only time will tell if the inversion in 2019 will precede a recession. All we know now is it’s a warning shot across the bow to pay attention to other leading economic indicators that precede the next stage of the business cycle.

But, the rate of change in interest rates is probably the most important leading indicator. Falling interest rates result in a lower cost of capital and liquidity for both consumers and businesses. When money is cheaper, we’re more likely to spend. We should be more inclined to buy a new $100,000 car at 2% than 4%. When interest rates rise, as they are now, we know the economy will eventually slow down as it costs more to borrow money to fund business projects or personal spending. As interest rates rise, people spend less. Since the cost of the loan literally rises, this happens whether they know what they are doing or not, since rising rates also means people and businesses can afford less debt. When rates rise, payments rise, so the amount they can borrow, which is based on income, reduces spending.

The yield curve inversion doesn’t automatically mean a recession is in the near future.

Employment is essential, too. The U.S. Unemployment Rate is about as low as it’s ever been.

As with all cycles, it isn’t the extremely low level of the cycle we should focus on, but what’s more likely to happen next. It should be no surprise that low unemployment precedes recessions.

For me, the directional trend of the stock market will be my primary guide for the economy but I monitor many trends for situational awareness of what is going on.

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 S&P 500 stock market index is holding the line

August 26, 2019 By Mike Shell in Asymmetric ETF, Asymmetric Observation, Asymmetry ETF, ETF, ETF Strategist, Global Directional Trends, Momentum Relative Strength, S&P 500, Sector Trends, Tactical ETF Managed Portfolio, Trend Following Tags: Market Internals Leave a comment

The stock index is holding the line so far.

spx spy technical analysis trend following asymmetric risk reward retrun

You can see the percent of S&P 500 stocks trading above their 50 day moving average closed at 30% last week. It’s also testing a low trend, not it is a real trend where buying/selling pressure exists, it’s just a line showing the percent of stocks in short term uptrends are where they were at the May low.

spx percent of stocks above 50 day moving average $SPXA50R

Next, we see the percent of stocks above the longer-term trend closed at 55% last week, the same level as the March and May lows.

$SPXA200R spx percent of stocks above 200 day moving average trend following breadth

CBOE S&P 500 Volatility Index $VIX only dropped -2.77%, which is light, considering the S&P 500 closed up 1.1%.

The options market last Friday showed asymmetry between put buying and call buying with the market favoring puts 144%. Index options seem to be mostly used for hedging.

Individual equity options are more traded for speculation. Put buying was high on individual stocks last Friday, too. You can see the typical range is much lower.

This isn’t advice for anyone as this index cannot be traded directly, but I want to make a point that if I wanted to take a position here to increase explore, I would place my exit just below the red line. The red line is the May and March lows, so if the price trend falls below that, the trend changes from up to down. Lower highs and lower lows is a simple example of a downtrend. I just wanted to point that out as a very simple example of a tactical trade based on the price trend.

spx stop loss

We’ll see how it all unfolds from here.

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

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

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

August 13, 2019 By Mike Shell in Absolute Return, Asymmetric ETF, Asymmetric Observation, Asymmetric Risk Reward, Asymmetry ETF, Global Asset Allocation, Global Directional Trends, Global ETF, Global Macro, Global Tactical Rotation, Systematic Global Macro, Tactical Asset Allocation, Tactical ETF, Tactical ETF Managed Portfolio, tactical risk management Leave a comment

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

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

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

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

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

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

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

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

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

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

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

Bloomberg goes on to say:

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

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

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

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

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

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

A few observations on Global Macro and Trend Following

July 23, 2019 By Mike Shell in Absolute Return, Active Risk Management, Actively Manage Risk, Asymmetric Investment Returns, Asymmetric Observation, Asymmetric Payoff, Asymmetric Risk Reward, Asymmetry ETF, Asymmetry Ratio, Global Asset Allocation, Global Directional Trends, Global ETF, Global Macro, Global Tactical Rotation, Positive Asymmetry, Risk Asymmetry, Systematic Global Macro, Tactical Asset Allocation, Tactical ETF, Tactical ETF Managed Portfolio, Tactical ETF Portfolio Management, tactical risk management, Trend Following Leave a comment

A few observations on #GlobalMacro and #TrendFollowing

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

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

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

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

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

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

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

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

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

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

Giddy up…

March 13, 2019 By Mike Shell in Absolute Momentum, Absolute Return, Asymmetric Observation, Asymmetric Risk Reward, Asymmetry ETF, Global Directional Trends, Managed Momentum, Momentum Fund, Momentum Investing, Momentum Relative Strength, Relative Momentum, Sector Trends, Stock Momentum, Trend Following Leave a comment

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

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

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

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

global macro asymmetric risk reward .jpg

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

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

Giddy up…

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

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

Asymmetry in the CBOE Index Put/Call Ratio suggests hedging

January 24, 2019 By Mike Shell in Asymmetric Hedge, Asymmetric Hedging, Asymmetric Investment Returns, Asymmetric Observation, Asymmetric Risk Reward, Asymmetry ETF, Hedge Funds Leave a comment

I pointed out yesterday the Stock market internals are signaling an inflection point. On a short term basis, some internal indicators are suggesting the stock market is at a point I expect to see a more significant breakout in one direction or another. That may sound like a symmetrical statement, but it’s the result of a symmetrical point that I consider midfield. From here, I look for signals of which direction the momentum shifts.

The asymmetry in the CBOE Index Put/Call Ratio suggests an increase in hedging yesterday. In the chart below, we see the Put/Call Ratio on Index options is at the high end of its range. I believe index options are used more for hedging by large institutions like hedge funds and pensions than for speculation by smaller individuals. I must not be the only one who recently hedged market risk.

cboe index put:call ratio asymmetric hedging

Looking back over the full history, we see the current asymmetry of 1.55 puts to calls is a level that shows the asymmetry is on the upper range. When it gets too extreme, it can signal an overly pessimistic position.

cboe index put call long term history asymmetric hedge

The CBOE Equity Put/Call Ratio which I believe is more of a measure of individual investor speculation remains at a normal level at this point. That is, we normally see the Equity Put/Call Ratio below 1 as it indicators more (speculative) call volume than put volume.

equity put call ratio asymmetric risk reward hedging

However, when the Equity Put/Call Ratio spiked up to an extreme in late December I thought it was a good indicator of panic. That turned out to be the case as it marked the low so far.

From here, I’m looking for signs of which direction the momentum is shifting. The CBOE Index Put/Call Ratio seems to suggest professional investors like me are more concerned about hedging against downside loss. They may be like me, setting on capital gains I prefer to hold (let the winners run!) so adding a hedge can help offset a loss of value. Yet, if we see a continuation up in the recent uptrend we simply take a smaller loss on the hedges that we can tax deduct.

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

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

Stock Market Observations

December 10, 2018 By Mike Shell in Absolute Return, Asymmetric ETF, Asymmetric Observation, Asymmetry ETF, ETF Strategist, Global Directional Trends, Sector ETF, Sector Trends, Tactical ETF Managed Portfolio, Trend Following 1 Comment

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

SPY STOCK MARKET

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

SPY VWAP

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

VIX SPY SPX VOLATILITY EXPANSION ASYMMETRIC

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

SECTOR ETF ROTATION TREND FOLLOWING

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

trend following stock market sector etfs

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

The direction of the trend conveys the truth.

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

Momentum stocks need to find some buying interest

November 19, 2018 By Mike Shell in Active Risk Management, Asymmetry ETF, ETF Strategist, Global Tactical Rotation, Sector Rotation, Sector Trends, Systematic Global Macro, Tactical Asset Allocation, Tactical ETF Managed Portfolio, Trend Following 1 Comment

The U.S. stock indexes were down nearly -2% today.

Prior to today, it appeared more likely the stock market would attempt to trend higher. The only positive about today’s price action was the volume was lighter. The S&P 500 stock index is now 2% above its October low and 5.4% above its February low.

To reverse the downtrend, selling pressure must be exhausted as buying demand becomes dominant. If we don’t see selling exhausted and buying interest in the coming days, it appears we may see the October lows revisited in the large-cap stock index. It’s only 2% away.

Looking at the bigger picture, a 2-year chart of the S&P 500 stock index shows its primary trend is still up with higher highs and higher lows, despite the volatile trading range in 2018. Nevertheless, the +/- 10% swings we’ve observed this year is a much higher range than we saw last year.

The stock market is seasonally in its best period of the year. That is especially true for November and December. Although, that hasn’t been the case yet with the S&P 500 down over -4% so far in November. For example, the seasonality chart shows the SPX has closed higher than it opened 70% of the time in November and 74% of the time in December. We’ll see if this matches the favorable odds or if it’s one of the 30% of times it doesn’t close positive.

The technology sector was the weakest today and it broke just below its October low. If its price has trended down low enough to attracting buying demand it could form a double bottom reversal and trend back up. If it continues to trend down enough, it could change its primary trend from up to down. Up until now, the tech sector has been the momentum leader. Technology is also the largest weight in the S&P 500 at 20%.

It could turn out to be positive that the former leading tech sector has lead the downtrend. Reversing leadership doesn’t normally sound like a good thing, except it is one of the main sectors weighing down the overall stock market the past week. Since it’s reached its October low already, we’ll see in the days and weeks ahead if it’s reached a low enough point to attract enough buying to overwhelm the selling.

In fact, momentum stocks have become the laggards recently. The S&P 500® Momentum Index is designed to measure the performance of securities in the S&P 500 universe that exhibit persistence in their relative performance. The momentum index is an index of stocks whose price trend momentum has outperformed other stocks. Indexes can’t be invested in directly, but we can use them to observe their trends. Here we see an index of stocks that were considered the leading momentum stocks have declined nearly -14% off its high, even more than the S&P 500 large-cap stock index. The technology sector overwhelms this momentum index with a 35.4% weighting. Tech had been so strong its weight is more than double the second largest weighted sector (Consumer Discretionary 15.4%).

You can probably see why I prefer to increase and decrease my exposure to the possibility of loss rather than just buying and holding an allocation with no predetermined exit. Because we know there is a point we’ll exit losers rather than let the losses become larger, we won’t wait for losses to get too large and become the panic sellers. We observe many investors believe in buy and hold and passive asset allocation until they realize their losses get much larger than they expected and they respond more emotionally than they thought they would. I call it panic selling when they tap out because of fear rather than a predetermined exit point based on drawdown control.

The U.S. stock market remains in the range of an inflection point and we’ll soon see if it’s going to turn down into more of a downtrend or reverse back up. We’ll see how it all unfolds from here.

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

What trends are driving emerging markets into a bear market?

September 8, 2018 By Mike Shell in Active Risk Management, Adapting to Change, Alternative Investment, Asymmetric ETF, Asymmetric Observation, Asymmetric Risk Reward, Asymmetry ETF, Behavioral Finance, Critical Thinking, Global Asset Allocation, Global Directional Trends, Global ETF, Global Macro, Global Tactical Rotation, Systematic Global Macro, Tactical ETF, Tactical ETF Managed Portfolio Leave a comment

In Emerging Markets Reached a Bear Market Level we noted the emerging markets index has declined -20%, which is considered to be in bear market territory. The emerging markets index includes 24 countries classified as emerging countries.

To see the country exposure, we examine the iShares MSCI Emerging Markets ETF holdings. China is about 31%, South Korea is about 15%, Taiwan is over 12%, so the top three countries make up 58% of the country exposure. Add India at 10% and the top four countries is a dominant 68% of the exposure. Clearly, we’d expect the drift of these top holdings to dominate the trend.

what countries are emering markets ETF ETFs

Below we see the 2018 price trends of the emerging markets ETF and the top four countries that make up 68% of the emerging markets index ETF exposure. We see that South Korea and China are the primary downtrends that are trending close to the emerging markets index ETF. Taiwan and India have stronger relative momentum.

emerging markets $EEM china $FXI india south korea 2018 trend

To get a better understanding of what is driving the downtrend, we draw the % off high charts to see the drawdowns. From this observation, we can see what is really driving the trend. Of the top four countries in the index, the negative momentum of China and South Korea are driving the trend down. China is down -24% over the past year as South Korea is down -17%.

emerging market ETF trends

Taiwan and India have stronger relative momentum since they have trended up more recently since July. Prior to July, they were trending closer to China and South Korea.

You can probably see why I include the individual countries in my global universe rather than just the broad emerging markets index ETF that includes 24 countries. I want to find potentially profitable price trends, so I increase my opportunity to find them when I give myself more options.

There are 24 countries represented in the MSCI Emerging Markets Index and we’ve looked at the top 4 because they are given 68% of the exposure. That leaves only 32% in the other 20 countries. So, in regard to understanding what is driving the MSCI Emerging Markets Index, viewing the trend of the top holdings is enough to get an idea of the countries driving returns. But, in wanting to go find potentially profitable price trends, I research all the countries trends.

What about the rest of the emerging markets countries?

Looking at the other 20 countries classified as emerging markets, I’ll divide them into groups. First, we’ll look at the other countries that are down -10% or more year-to-date. Then, I’ll draw a chart of those that are down this year, but not as much. We’ll end with the few that are positive in 2018.

Emerging markets countries down the most year-to-date include Turkey, South Africa, Indonesia, Brazil, Philippines, Chile, Poland, and Peru. Priced in U.S. dollars, these countries are down between -14% and -52%. Turkey is down the most.

emerging markets countries down 2018 $EEM

Looking at their % off high shows us the drawdown over the past year, which is a different perspective. If you had held one of these ETFs, this is the amount it would be down from its highest price over the past year.

Emerging markets countries down the most 2018

Clearly, these emerging countries are in downtrends and a bear market if we define a bear market as a -20% decline. Keep in mind, these ETFs are foreign stocks priced in U.S. dollars, so to U.S. investors, this is what the trends of these countries look like.

Next, we observe emerging markets countries that are down less than -10% in 2018. Russia, Columbia, Thailand, and Malasia are down between -3% and 8% so far. Their trends are generally down: lower highs and lower lows.

emering markets year to date 2018

We can see the downtrends in a different perspective when we view their drawdowns as a % off high over the past year.

emering market countries percent off high asymmetric risk reward

I saved the best for last. The strongest trending top momentum emerging markets countries so far in 2018 are Mexico, Taiwan, Saudi Arabia, and Qatar. Saudi Arabia was previously classified as a smaller frontier market, but, this summer MSCI announced it will include the MSCI Saudi Arabia Index in the MSCI Emerging Markets Index.

top momentum emerging markets countires 2018

Hearing names like Mexico, Taiwan, Saudi Arabia, and Qatar may highlight home country bias for some investors. Home country bias is the tendency for investors to favor companies from their own countries over those from other countries or regions.

I don’t have a home country bias. I am open to finding potentially profitable price trends in any country around the world. We encourage investors to be open to global trends and not limit their choices, but if our clients don’t want exposure to any specific country, we are able to exclude it in our ASYMMETRY® Managed Portfolios.

While the United States is the single largest economy in the world, according to JP Morgan it accounts for only a small fraction of global GDP and just over 35% of the world’s capital markets. Yet, studies show that U.S. investors have nearly 75% of their investments in U.S.-based assets. As we’ve shown here, there has been a good reason to avoid emerging countries for now, but as we explain in Emerging Markets Reached a Bear Market Level there are times when these countries present strong relative momentum over U.S. stocks.

This is why I tactically shift between global markets based on their directional price trends rather than a fixed buy and hold global asset allocation.

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

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

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

Emerging Markets Reached a Bear Market Level, or is it a Continuation of a Secular Bear Market?

September 7, 2018 By Mike Shell in Asymmetric ETF, Asymmetric Observation, Asymmetry ETF, ETF, ETF Strategist, Global Asset Allocation, Global Directional Trends, Global ETF, Global Macro, Global Tactical Rotation, Systematic Global Macro, Tactical ETF Managed Portfolio, Tactical ETF Portfolio Management, Trend Following 1 Comment

An emerging market is a country that has some characteristics of a developed market but does not satisfy standards to be termed a developed market.

The MSCI Emerging Markets Index covers more than 800 securities across large and mid-cap size segments and across style and sector segments in 24 emerging markets. The 24 countries in the index represent 10% of world market capitalization. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 24 countries.

MSCI uses their MSCI Market Classification Framework to classify countries based on economic development, size and liquidity, and market accessibility criteria.

According to MSCI, it includes countries like Brazil, Chile, Colombia, and Mexico in the Americas. emerging markets in Europe, the Middle East, and Africa are countries like Hungary, Poland, Russia, and Turkey. Asia emerging markets are China, India, Korea, and Taiwan.

Now that we have clarified who the emerging markets countries are, let’s take a look at their price trends.

The MSCI Emerging Markets Index is in a bear market territory, down -20% from its high in January. The investment industry defines a “bear market” as a -20% off its recent high, so we’ll go with it.

This isn’t the first time Emerging Markets have declined -20% or more since 2009. The downtrend 2015 – 2016 was over -30%.

Looking back to 2007, we see the Emerging Markets Index has never recovered to reach its high in September 2007. It’s still down about -24% from the high 11 years ago.

So, if we define a “bear market” as -20% off its high, the Emerging Markets Index was in a bear market until January this year and has since reversed back into a bear market again. A bear market that lasts 11 years as this one did is called a “secular bear market“.

So, we could say: emerging markets have reentered their secular bear market. Or, maybe it’s just a continuation of a secular bear market if we don’t consider the temporary January 2018 breakout above its 2007 high to have ended the ongoing secular bear market.

The bottom line is, emerging markets countries as an index are trending down. They’ve been in a generally non-trending range for the last decade, though there have been many swings up and down along the way.

It is what it is, but you may now wonder; Why? I pointed out in Trend of the International Stock Market one reason International stocks are trending down for U. S. investors is the Dollar has trended up. Currency risk is a significant risk facing investors in International and emerging markets. But that isn’t the only driver of stocks in these emerging markets countries.

My focus is on the direction of the actual price trends. Any guess anyone has about what is driving the trend is just a narrative. Some guesses are better than others as there are specific return drivers that drive trends, but my decisions are made based on what the trend is now and if it’s more probable the direction will continue or reverse.

Why do I care about the trend of emerging markets?

As the portfolio manager of a global tactical investment program, I make tactical trading and investment decisions across world markets including not only U.S. stocks, bonds, commodities, and currencies, but also international stocks and bonds. My global universe includes developed countries as well as frontier markets and emerging markets.

As emerging markets are down -20% off their high, smaller frontier markets are close behind and larger developed countries are also in a downtrend.

Less experienced ETF investors and advisors sometimes ask why I include international markets in my universe, because they’ve only seen these non-trending, weak trending, and down-trending periods the last twelve years.

I include these international markets to make my universe global because there have been periods when these markets provide significantly better trends and momentum over the U.S. stock market. For example, the 2003-2007 bull market.

You can probably see how exposure to these markets added significant alpha to my global tactical portfolio prior to 2008. However, you may also notice their trends weren’t without volatility and declines along the way, so it wasn’t as simple as a buy and hold allocation to them. My Global Tactical Rotation® systems rotate between these markets trying to capture their positive trends rather than a fixed allocation to them.

As seen in the chart above, the relative strength of emerging, frontier, and developed countries were significant over domestic stock indexes in the 2003 to 2007 bull market. It was a trend driven by commodities and countries that produce natural resources.

They will have their opportunity again but for now, this trend isn’t our friend.

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

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

Asymmetry of Loss: Why Manage Risk?

July 24, 2018 By Mike Shell in Absolute Return, Active Risk Management, Actively Manage Risk, Asymmetric Hedging, Asymmetric Investment Returns, Asymmetric Observation, Asymmetric Payoff, Asymmetric Risk, Asymmetric Risk Reward, Asymmetric Sector Exposure, Asymmetry ETF, Positive Asymmetry, Risk Asymmetry, tactical risk management 2 Comments

“The essence of portfolio management is the management of risks, not the management of returns.” —Benjamin Graham

Why actively manage investment risk?

Why not just buy and hold markets and ride through their large drawdowns?

Losses are asymmetric and loss compounds exponentially.

The larger the loss, the more gain is required to recover the loss to get back to breakeven.

The negative asymmetry of loss starts quickly, losses more than -20% decline start to compound against you exponentially and with a greater magnitude the larger the loss is allowed to grow.

If your investment portfolio experiences a -20% loss, it needs a 25% gain to get back the breakeven value it was before the loss.

asymmetry of loss losses asymmetric exponential

At the -30% loss level, you need a 43% gain to get it back.

Diversification is often used as an attempt to manage risk by allocating capital across different markets and assets.

Diversification and asset allocation alone doesn’t achieve the kind of risk management needed to avoid these large declines in value. Global markets can fall together, providing no protection from loss.

For example, global markets all fell during the last two bear markets 2000-2003 and 2007-2009.

global asset allocation diversification failed 2008

It didn’t matter if you had a global allocation portfolio diversified between U.S. stocks, international stocks, commodities, and real estate REITs.

Diversification can fail when you need it most, so there is a regulatory disclosure required: Diversification does not assure a profit or protect against loss.

This is why active risk management to limit downside loss is essential for investment management.

I actively manage loss by knowing the absolute point I’ll exit each individual position and managing my risk level at the portfolio level.

Active risk management, as I use it, applies tactics and systems to actively and dynamically decrease or increase exposure to the potential for loss.

My risk management systems are asymmetric risk management systems. Asymmetric risk management intends to manage risk with the objective of a positive asymmetric risk/reward.

My asymmetric risk management systems are designed to cut losses short, but also protects and manages positions with a profit.

After markets trend up for a while without any significant interruption, investors may become complacent and forget the large damage losses can cause to their capital and their confidence. When investors lose confidence in the markets, they tap-out when their losses are allowed to grow to large.

I prefer to stop the loss before it gets too large. How much is too large depends on the client, but also the math. As seen here, I have a mathematical basis for believing I should actively manage investment risk.

It’s why I’ve been doing it for two decades. Because I understood the math, I knew I had to do it over twenty years ago and developed the systems and tactics that proved to be robust in the devastating bear markets I’ve executed through since then.

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

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

Does Your Firm Use Active ETFs?

July 9, 2018 By Mike Shell in Absolute Return, Asymmetric ETF, Asymmetric Observation, Asymmetric Payoff, Asymmetric Risk, Asymmetric Risk Reward, Asymmetry ETF, ETF, ETF Hedging, ETF Strategist, ETFs, Global ETF, Sector ETF, Tactical ETF, Tactical ETF Managed Portfolio, Tactical ETF Portfolio Management, VIX ETF ETN ETP Leave a comment

Christi Shell was recently asked by ETF.com “Does your firm use active ETFs”.

Christi Shell Capital Management

Her answer from the interview:

Our portfolio manager, Mike Shell, doesn’t currently include active ETFs in our universe of tradeable ETFs, but that doesn’t mean he’d never include them. He tactically shifts between ETFs, based on investor behavioral measures and supply/demand. So our portfolio management style itself is the active management; we are, essentially, actively managing beta.

We use ETFs to gain specific exposure to a return stream such as a sector, country, commodity or currency. With an index ETF, we pretty much know what we’re going to get inside the ETF. (Of course, indexes are reconstituted by a committee of people, so we don’t know in advance what they’ll do. However, an index follows some general rules systematically.)

Therefore, if we discover an ETF we believe has a strategy and return stream that we want access to, then we would add it, whether it’s active or not.

Christi Shell is Managing Director and Certified Wealth Strategist® at Shell Capital Management LLC. Christi has 27 years in financial services ranging from bank management to wealth management giving her a unique skill set and experience to help clients get what they want.

Source: http://www.etf.com/publications/etfr/does-your-firm-use-active-etfs

Global Stock and Bond Market Trends 2Q 2018

July 3, 2018 By Mike Shell in Absolute Return, Asymmetric ETF, Asymmetric Observation, Asymmetric Risk Reward, Asymmetric Sector Exposure, Asymmetry ETF, ETF, ETF Hedging, ETF Strategist, ETFs, Global Asset Allocation, Global Directional Trends, Global ETF, Global Macro, Global Tactical Rotation, Hiring a Portfolio Manager, Sector ETF, Systematic Global Macro, Tactical ETF, Tactical ETF Managed Portfolio, Tactical ETF Portfolio Management, VIX ETF ETN ETP Leave a comment

Yesterday we shared the 2nd Quarter 2018 Global Investment Markets Review, which used a broad range of indexes on performance tables to present the year-to-date progress of world markets. The issue with a table that simply shows a return number on it is it doesn’t properly present the path it took to get there. In the real world, investors and portfolio managers have to live with the path of the trend and we can see that only in the price trend itself. So, today we’ll look at the price trends of stocks, bonds, commodities, real estate, sectors, and other alternatives like volatility. I don’t just look for potentially profitable price trends in stocks and bonds, I scan the world.

How is the market doing this year? Which market?

First, a quick glance at global markets including commodities, stock indexes, volatility, ranked by year-to-date momentum. We wee the CBOE Volatility Index $VIX has gained the most. One clear theme about 2018 is that volatility has increased and this includes implied or expected volatility. Overall, we see some asymmetry since the markets in the green are more positive than the markets in the red. The popular S&P 500 stock index most investors point to is in the middle with only a 2% gain for the year. Commodities like Cocoa, Lumber, Orange Juice, and Crude Oil are leaders while sugar, live cattle, and soybeans are the laggards. Most investors probably don’t have exposure to these markets, unless they get it through a commodities ETF.

Most investors probably limit themselves to the broad asset classes, since that’s what most financial advisors do. So, we’ll start there. Below are the trends of broad market ETFs like the S&P 500, Aggregate Bond, Long-Term Treasury. For the year, Emerging Markets has the weakest trend – down nearly -6%. Developed Markets countries are the second weakest. The rising U.S. Dollar is helping to put pressure on International stocks. The leader this year is Commodities, as we also saw above. The Commodity index has gained 8% YTD.

What about alternative investments? We’ll use liquid alternative investments as an example since these are publicly available ETFs. I’ve included markets like Real Estate, Private Equity, Mortgage REITs, and the Energy MLP. Not a lot of progress from buying and holding these alternative investments. This is why I prefer to shift between markets trying to keep capital only in those markets trending up and out of those trending down.

liquid alternative investments

The Volatility VXX ETF/ETN that is similar to the VIX index has gained so much early in the year I left it off the following chart because it distorted the trends of the other markets. It’s one of the most complex securities to trade, but we can see it spike up to 90% when global markets fell in February.

VIX VXX

Looking at the price trend alone isn’t enough. It would be incomplete without also considering their drawdowns. That is, how much the market declined off its prior high over the period. Analyzing the drawdown is essential because investors have to live with the inevitable periods their holdings decline in value. It’s when we observe these decline we realize the need for actively managing risk. For me, actively managing risk means I have a predetermined exit point at all times in my positions. I know when I’ll exit a loser before it becomes a significant loss. Many say they do it, I’ve actually done it for two decades.

The alternative investments are in drawdowns YTD and Energy MLP, and Mortgage REIT is down over -10% from their prior highs. The Energy MLP is actually down -51% from its 2014 high, which I don’t show here.

alternative investment drawdowns risk management

Next, we go back to the global asset class ETFs to see their drawdowns year-to-date. We don’t just experience the gains, we also have to be willing to live with their declines along the way. It isn’t enough to provide an excellent investment management program, we also have to offer one that fits with investors objectives for risk and return. The most notable declines have been in Emerging Market and developed international countries. However, all of these assets are down off their prior highs.

GLOBAL ASSET CLASS RISK MANAGEMENT TREND FOLLOWING 2018

Clearly, markets don’t always go up. The trends so far in the first six months of 2018 haven’t offered many opportunities for global asset allocation to make upward progress.

This is why I rotate, rather than allocate, to shift between markets rather than allocate to them. We also trade in more markets than we covered here, like leading individual stocks. The magnitude of these drawdowns also shows why I believe it is essential to direct and control risk and drawdown.

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

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

2nd Quarter 2018 Global Investment Markets Review

July 2, 2018 By Mike Shell in Absolute Return, Asymmetric ETF, Asymmetric Observation, Asymmetry ETF, ETF, ETF Hedging, ETF Strategist, ETFs, Global Asset Allocation, Global Directional Trends, Global ETF, Global Macro, Global Tactical Rotation, Sector ETF, Systematic Global Macro, Tactical ETF, Tactical ETF Managed Portfolio, Tactical ETF Portfolio Management Leave a comment

It is no surprise to see global equity markets stall after such a positive trend last year. As we will see, the weakness is global and across both bonds and stocks.

Before we review the year-to-date gains and losses for indexes, I want to share some of the most interesting asset allocation indexes I’ve seen.

Keep in mind: we don’t offer this kind of asset allocation that allocates capital to fixed buckets of stocks and bonds and then rebalances them periodically. As a tactical portfolio manager, I don’t allocate to markets, I rotate between them to focus my exposure on markets in a positive trend and avoid (or short) those in a negative trend. I don’t need to have exposure to falling markets. We consider our portfolio a replacement (or at least a compliment) to traditional “asset allocation” offered by most investment advisors.

I want to present some global asset allocation indexes because, in the real world, most investors don’t allocate all of their investment capital to just stocks or just bonds; it’s some combination of them. If they keep their money in cash in the bank, they aren’t investors at all.

To observe what global asset allocation returns look like, we can look at the Morningstar Target Risk Indexes:

The Morningstar Target Risk Index series consists of five asset allocation indexes that span the risk spectrum from conservative to aggressive. The family of asset allocation indexes can serve as benchmarks to help with target-risk mutual fund selection and evaluation by offering an objective yardstick for performance comparison.

All of the indexes are based on a well-established asset allocation methodology from Ibbotson Associates, a Morningstar company and a leader in the field of asset allocation theory.

The family consists of five indexes covering the following equity risk preferences:

Aggressive Target Risk

Moderately Aggressive Target Risk

Moderate Target Risk

Moderately Conservative Target Risk

Conservative Target Risk

The securities selected for the asset allocation indexes are driven by the rules-based indexing methodologies that power Morningstar’s comprehensive index family. Morningstar indexes are specifically designed to be seamless, investable building blocks that deliver pure asset-class exposure. Morningstar indexes cover a global set of stocks, bonds, and commodities.

These global asset allocation models are operated by two of the best-known firms in the investment industry and the leaders in asset allocation and indexing. I believe in rotating between markets to gain exposure to the trends we want rather than a fixed allocation to them, but if I all I was going to do is asset allocation, I would use these.

Now that we know what it is, we can see the year-to-date return under the YTD column and other period returns. All five of the risk models are down YTD. So, it’s safe to say the first six months of 2018 has been challenging for even the most advanced asset allocation.

Below are the most popular U.S. stock indexes. The Dow Jones Industrial Average which gained the most last year is down this year. The Tech heavy NASDAQ and small-cap stocks of the Russell 2000 have gained the most.

The well-known bond indexes are mostly down YTD – even municipal bonds. Rising interest rates and the expectation rates will continue to rise is putting pressure on bond prices.

Morningstar has even more indexes that break bonds down into different fixed-income categories. Longer-term bonds, as expected, are responding most negatively to rising rates. The most conservative investors have the more exposure to these bonds and they are down as much as -5% the past six months. That’s a reason I don’t believe in allocating capital to markets on a fixed basis. I prefer to avoid the red.

Next, we observe the Morningstar style and size categories and sectors. As I wrote in Growth has Stronger Momentum than Value and Sector Trends are Driving Equity Returns, sectors like Technology are driving the Growth style.

International stocks seem to be reacting to the rising U.S. Dollar. As the Dollar rises, it reduced the gain of foreign stocks priced in foreign currency. Although, some of these countries are in negative trends, too. Latin America, for example, was one of the strongest trends last year and has since trended down.

At Shell Capital, we often say that our Global Tactical Rotation® portfolios are a replacement for global asset allocation and the so-called “target date” funds. Target date funds are often used in 401(k) plans as an investment option. They haven’t made much progress so far in 2018.

It is no surprise to see most global markets down or flat in 2018 after such a positive 2017.

But, only time will tell how it all unfolds the rest of the year.

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

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

The week in review

June 30, 2018 By Mike Shell in Asymmetric ETF, Asymmetric Observation, Asymmetry ETF, Behavioral Finance, Behavioral Financial Advice, Behavioral Gap, ETF, ETF Hedging, ETF Strategist, ETFs, Global ETF, Investor Behavior Modification, Tactical ETF, Tactical ETF Managed Portfolio, Tactical ETF Portfolio Management, VIX ETF ETN ETP Leave a comment

In case you missed it, below are all of the observations we shared this week. When there are more directional trend changes and volatility, I find more asymmetries to write about. That’s because I look at markets through the lens of “what has changed”?

When I observe more divergence between markets and trends, I see more asymmetries to share.

When global markets are just trending up together and quiet, investor sentiment is usually getting complacent, I typically point it out, since that often precedes a changing trend.

All of it is asymmetric observations; directional trends and changes I see with a tilt.

The opposite is symmetry, which is a balance. Symmetry doesn’t interest me enough to mention it.

When buying interest and selling pressure are the same, the price doesn’t move.

When risk equals the return, there is no gain.

When profit equals loss, there is no progress.

In all I do, I’m looking for Asymmetry®.

I want my return to exceed the risk I take to achieve it.

I want my profits to far surpass my losses.

I want my wins to be much greater than my losses.

I want more profit, less loss.

You probably get my drift.

Here are the observations we shared this week:

Growth has Stronger Momentum than Value

https://asymmetryobservations.com/2018/06/25/growth-has-stronger-momentum-than-value/

Sector Trends are Driving Equity Returns

https://asymmetryobservations.com/2018/06/25/sector-trends-are-driving-equity-returns/

Trend Analysis of the Stock Market

https://asymmetryobservations.com/2018/06/25/trend-analysis-of-the-stock-market/

Trend of the International Stock Market

https://asymmetryobservations.com/2018/06/26/trend-of-the-international-stock-market/

Interest Rate Trend and Rate Sensitive Sector Stocks

https://asymmetryobservations.com/2018/06/27/interest-rate-trend-and-rate-sensitive-sector-stocks/

Expected Volatility Stays Elevated in 2018

https://asymmetryobservations.com/2018/06/27/expected-volatility-stays-elevated-in-2018/

Sector ETF Changes: Indexes aren’t so passive

https://asymmetryobservations.com/2018/06/27/sector-etf-changes-indexes-arent-so-passive/

Commodities are trending with better momentum than stocks

https://asymmetryobservations.com/2018/06/28/commodities-are-trending-with-better-momentum-than-stocks/

Investor sentiment gets more bearish

https://asymmetryobservations.com/2018/06/28/investor-sentiment-gets-more-bearish/

Is it a stock pickers market?

https://asymmetryobservations.com/2018/06/29/is-it-a-stock-pickers-market/

Is it a stock pickers market?

June 29, 2018 By Mike Shell in Absolute Return, Absolute vs. Relative Return, Active Risk Management, Asymmetric ETF, Asymmetric Hedging, Asymmetric Investment Returns, Asymmetric Observation, Asymmetric Payoff, Asymmetric Risk, Asymmetric Risk Reward, Asymmetric Sector Exposure, Asymmetric Thinking, Asymmetry ETF, ETF, ETF Hedging, ETF Strategist, ETFs, Global Directional Trends, Global ETF, Market Breadth, Sector ETF, Sector Rotation, Sector Trends, Tactical ETF, Tactical ETF Managed Portfolio, Tactical ETF Portfolio Management, Trend Following, VIX ETF ETN ETP 1 Comment

Sometimes the stock market is trending so strongly that the rising tide lifts all boats. No matter what stocks or stock fund you invest in, it goes up. That was the case much of 2017.

Then, there are periods when we see more divergence.

When we observe more divergence, it means stocks, sectors, size, or style has become uncorrelated and are trending apart from each other.

I pointed out in Sector Trends are Driving Equity Returns; there is a notable divergence in sector performance, and that is driving divergence in size and style. Growth stocks have been outperformance value, and it’s driven by strong momentum in Technology and Consumer Discretionary sectors.

When specific sectors are showing stronger relative momentum, we can either focus more on those sectors rather than broad stock index exposure. Or, we can look inside the industry to find the leading individual stocks.

For example, Consumer Discretionary includes industries like automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailing are primarily represented in this group. The Index includes Amazon, Home Depot, Walt Disney, and Comcast. Consumer Discretionary is the momentum leader having trended up 9.7% so far this year as the S&P 500 has only gained just under 1%.

If we take a look inside the sector, we see the leaders are diverging farther away from the sector ETF and far beyond the stock market index.

In fact, all the sectors 80 stock holdings are positive in 2018.

The Consumer Discretionary sector is about 13% of the S&P 500. As you can see, if these top four or five sectors in the S&P 500 aren’t trending up it is a drag on the broad stock index.

So, Is it a stock pickers market?

When we see more divergence, it seems to be a better market for “stock pickers” to separate the winners from the losers.

Another way to measure participation in the market is through quantitative breadth indicators. Breadth indicators are a measure of trend direction “participation” of the stocks. For example, the percent of the S&P 500 stocks above or below a moving average is an indication of the momentum of participation.

Below is the percent of stocks above their 50 day moving average tells us how many stocks are trending above their moving average (an uptrend). Right now, the participation is symmetrical; 52% of the stocks in the S&P 500 are in a positive trend as defined by the 50 day moving average. We can also see where that level stands relative to the stock market lows in February and April and the all-time high in January when over 85% of stocks were in an uptrend. By this measure, only half are trending up on a shorter term basis.

The 200-day moving average looks back nearly a year to define the direction of a trend, so it takes a greater move in momentum to get the price above or below it. At this point, the participation is symmetrical; 55% of stocks are above their 200-day moving average and by this time frame, it hasn’t recovered as well from the lows. The percent of stocks above their 200-day moving average is materially below the 85% of stocks that were participating in the uptrend last year. That is, 30% fewer stocks are in longer trend uptrends.

In the above charts, I only showed a one-year look back of the trend. Next, we’ll take a step back to view the current level relative to the past three years.

The percent of stocks above their 50 day moving average is still at the upper range of the past three years. The significant stock market declines in August-September 2015 and December-January hammered the stocks down to a very washed out point. During those market declines, the participation was very asymmetric: 90% of the stocks were in downtrends and only about 10% remained in shorter-term uptrends.

The percent of stocks above their 200 day moving average also shows a much more asymmetrical situation during the declines in 2015 and 2016 when the stock index dropped around -15% or more. Only 20% of stocks remained in a positive trend.

Is it a stock pickers market?

Only about half of the stocks in the index are in uptrends, so the other half isn’t. So, if we avoid the half that are in downtrends and only maintains exposure to stocks in uptrends and the trends continue, we can create alpha.

But, keep in mind, that doesn’t necessarily mean we should have any exposure at all in the S&P 500 stock index because happens to have the highest sector exposure in the leading sectors.

But, for those who want to engage in “stock picking”, the timing has a higher probability now to diverge from the stock index than last year because so fewer stocks are in uptrends and more are in downtrends.

For individual stocks traders willing to look inside the box, this is a good thing.

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

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

Commodities are trending with better momentum than stocks

June 28, 2018 By Mike Shell in Absolute Return, Absolute vs. Relatative Return, Asymmetric ETF, Asymmetric Investment Returns, Asymmetric Observation, Asymmetric Payoff, Asymmetric Risk, Asymmetric Risk Reward, Asymmetric Sector Exposure, Asymmetry ETF, ETF, ETF Hedging, ETF Strategist, ETFs, Global Asset Allocation, Global Directional Trends, Global ETF, Global Macro, Global Tactical Rotation, Sector ETF, Systematic Global Macro, Tactical ETF, Tactical ETF Managed Portfolio, Tactical ETF Portfolio Management 1 Comment

Commodities are trending with better momentum than stocks over the past year.

A commodity is a raw material or primary agricultural product that can be bought and sold, such as copper or coffee. A commodity is a basic good used in commerce that are usually used as inputs in the production of other goods or services.

Soft commodities are goods that are grown, such as wheat, or rice.

Hard commodities are mined. Examples include gold, helium, and oil.

Energy commodities include electricity, gas, coal, and oil. Electricity has the particular characteristic that it is usually uneconomical to store, and must, therefore, be consumed as soon as it is processed.

The Commodity Trend

At first glance, we see in the chart commodities ETF Invesco DB Commodity Index Tracking ETF has trended meaningfully above the popular S&P 500 index of U. S. stocks. The relative outperformance is clear over this one-year time frame. Commodities, as measured by this ETF, are in an absolute positive trend and registering relative momentum.

Examining a price trend is incomplete without also considering its downside. On the downside, I look at the % off high drawdowns over the period. We see that commodities were more volatile than stocks before 2018 with four dips around -4%. Since the stock market -10% decline that started in February, commodities declined, too, but not as much as U. S. stocks.

Looking back at the trend chart, I added a simple trend line to show that communities are trending directionally better than the popular U. S. stock index. So, my quantitative Global Tactical Rotation® system that ranks an unconstrained global universe of markets including bonds, stocks, commodities, currencies, and other alternatives like real estate signaled this trend has been generating asymmetric risk/return.

What is the that Invesco DB Commodity Index Tracking ETF? (the bold emphasis is mine)

The Invesco DB Commodity Index Tracking Fund seeks to track changes, whether positive or negative, in the level of the DBIQ Optimum Yield Diversified Commodity Index Excess Return™ (DBIQ Opt Yield Diversified Comm Index ER) plus the interest income from the Fund’s holdings of primarily US Treasury securities and money market income less the Fund’s expenses. The Fund is designed for investors who want a cost-effective and convenient way to invest in commodity futures. The Index is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world. The Fund and the Index are rebalanced and reconstituted annually in November.

This Fund is not suitable for all investors due to the speculative nature of an investment based upon the Fund’s trading which takes place in very volatile markets. Because an investment in futures contracts is volatile, such frequency in the movement in market prices of the underlying futures contracts could cause large losses. Please see “Risk and Other Information” and the Prospectus for additional risk disclosures. Source: Invesco

The challenge for some investors, however, is that Invesco DB Commodity Index Tracking ETF generates a K-1 tax form for tax reporting. That isn’t a terrible issue, but it means instead of receiving the typical 1099 investors receive a K-1. Some investors aren’t familiar with a K-1, and they can obtain them later than a 1099.

Then, there may be other investors who simply prefer not to own futures for the reason in the second paragraph of the above discription: “Because an investment in futures contracts is volatile, such frequency in the movement in market prices of the underlying futures contracts could cause large losses.” In reality, all investments have risk and stocks can have just as much risk of “large losses” as commodity futures, but it’s a matter of investor preference and perception.

Since we have a wide range of investor types who invest in my ASYMMETRY® Investment Program I could gain my exposure to commodities in other ways. For example, the SPDR^® S&P^® Global Natural Resources ETF often has a similar return stream as ETFs like DBC that track a commodity futures index, except is actually invests in individual stocks instead.

Key features of the SPDR^® S&P^® Global Natural Resources ETF

The SPDR^® S&P^® Global Natural Resources ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P^® Global Natural Resources Index (the “Index”)
Seeks to provide exposure to a number of the largest market cap securities in three natural resources sectors – agriculture, energy, and metals and mining
Maximum weight of each sub-index is capped at one-third of the total weight of the Index

Below we see the price trend of this ETF of global natural resources stocks has been highly correlated to an ETF of commodities futures.

In fact, as we step the time frame out to the common inspection date of each ETF in 2011, the SPDR^® S&P^® Global Natural Resources ETF has actually outperformed Invesco DB Commodity Index Tracking ETF overall in terms of relative momentum.

The bottom line is, commodities “stuff” is trending up over the past two years and when the price of “stuff” is rising, that is called “inflation”. Commodities and global natural resources have been in a downtrend for so long it shouldn’t be a surprise to see this trend reverse up. Only time will tell if it will continue, but if we want exposure to it, we can predefine our risk by deciding at what price I would exit if it doesn’t, and let the trend unfold.Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.You can follow ASYMMETRY® Observations by click on on “Get Updates by Email” on the top right or follow us on Twitter.The observations shared in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results.Buying and Selling ETFsETFs are flexible and easy to trade. Investors buy and sell them like stocks, typically through a brokerage account. Investors can also employ traditional stock trading techniques; including stop orders, limit orders, margin purchases, and short sales using ETFs. They are listed on major US Stock Exchanges.

ETFs are subject to risk similar to those of stocks including those regarding short-selling and margin account maintenance. Ordinary brokerage commissions apply. In general, ETFs can be expected to move up or down in value with the value of the applicable index. Although ETF shares may be bought and sold on the exchange through any brokerage account, ETF shares are not individually redeemable from the Fund. Investors may acquire ETFs and tender them for redemption through the Fund in Creation Unit Aggregations only. Please see the prospectus for more details. After-tax returns are calculated based on NAV using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index. As with all stocks, you may be required to deposit more money or securities into your margin account if the equity, including the amount attributable to your ETF shares, declines. Unless otherwise noted all information contained herein is that of the SPDR S&P Global Natural Resources ETF. S&P – In net total return indices, the dividends are reinvested after the deduction of withholding tax. Tax rates are applied at the country level or at the index level.

Sector ETF Changes: Indexes aren’t so passive

June 27, 2018 By Mike Shell in Adapting to Change, Asymmetric ETF, Asymmetric Observation, Asymmetry ETF, ETF, ETF Strategist, ETFs, Global ETF, Sector ETF, Tactical ETF, Tactical ETF Managed Portfolio, Tactical ETF Portfolio Management 1 Comment

Index funds and ETFs are often called “passive”, but in reality, they aren’t. Indexes change as their committees add and remove stocks or bonds from them. Though we generally know the exposure we can expect from an index ETF and we can see its holdings, we never know for sure in advance what stocks they’ll add or remove.

Not that we need to, we don’t.

But if we did know, we could front run them. Stocks that get added to an index trend up as all the index funds tracking that index have to buy the stock.

The opposite is true for stocks removed from the index.

General Electric (GE) was the last original Dow stock and was recently removed from the Dow Jones Industrial Average. So, the 30 stocks in that index are completely different today than the stocks it held when it started.

Alternative investment strategies are sometimes criticized for being too “black box”, implying the systems and methods are proprietary and are not disclosed to investors. The truth is, we can say the same for the most popular stock indexes. Indexes are also a black box since we don’t know what they’ll do next.

There are reasons they keep some things a secret, just as some of us keep the finest details of our systems and strategies private. Some things are intellectual capital and if you want to invest with someone who has it, well, you’ll just have to settle for not knowing every precise detail. If you don’t like it, don’t invest.

The U. S. Sector indexes have some changes coming.

In November 2017, S&P Dow Jones and MSCI announced that the Global Industry Classification Standard, or GICS, telecommunication services sector would be broadened and renamed “communication services.” The communication services sector will add select media, entertainment, and consumer Internet stocks from the consumer discretionary and information technology sectors to its current telecommunication services constituents.

In mid-January 2018, SPDJI/MSCI released a list of the largest companies affected by the GICS update. SPDJI/MSCI plans to release a full list of affected securities on July 2, 2018, and provide a finalized list of affected securities on Sept. 3, 2018, before the GICS update takes effect after the market closes on Friday, Sept. 28, 2018. This classification change will impact index funds that focus on the telecommunications, information technology, and consumer discretionary sectors.

Here is a diagram of the changes.

Sector SPDRs has already launched their ETF for the communications sector.

Communication Services Sector $XLC is designed to reflect modern communication activities and information delivery mechanisms. Industries include Telecommunications, Media, Wireless, Entertainment and Internet Media. Components include Alphabet, Disney, AT&T, Verizon, Comcast and Netflix.

The media talks about the so-called “FANG” stocks, which is Facebook, Apple, Netflix, and Google. Well, this ETF is almost the FANG ETF.

So, we’ve adjusted our sector systems accordingly to adapt to these new changes.

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

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

Performance is historical and does not guarantee future results; current performance may be lower or higher. Investment returns/principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Most recent month-end performance is available in the Performance topic. Past performance does not guarantee future results.

Sector SPDRs are subject to risk similar to those of stocks including those regarding short selling and margin account maintenance. All ETFs are subject to risk, including possible loss of principal. Sector ETF products are also subject to sector risk and non-diversified risk, which will result in greater price fluctuations than the overall market.

Expected Volatility Stays Elevated in 2018

June 27, 2018 By Mike Shell in Absolute Return, Asymmetric ETF, Asymmetric Observation, Asymmetry ETF, ETF, ETF Hedging, ETF Strategist, ETFs, Global ETF, Managed Volatility, Sector ETF, Tactical ETF, Tactical ETF Managed Portfolio, Tactical ETF Portfolio Management, VIX CBOE Volatility Index, VIX ETF ETN ETP, Volatility Trading, VXX Hedging Strategy, VXX Trading Strategy 1 Comment

In late 2017, implied volatility, as measured by the VIX CBOE Volatility Index, was at abnormally low levels. I pointed out many times that vol is mean reverting, so when expected volatility is extremely low we can expect it to eventually reverse. The VIX spiked up over 200% in February and has remained more elevated than before.

In the chart, I used a 50-day moving average for observation of how the VIX has remained more elevated than pre-February.

Volatility is asymmetric; when the stock market falls, implied volatility tends to spike up.

The VIX long-term average is 20, so the current level of 15-16 still isn’t high by historical measures, but the expected volatility is elevated above where it was.

Below is the VIX so far in 2018 in percentage terms. It shows the 200% gain that has since settled down, but it’s remaining higher than before.

The VIX has spiked up 45% the past 5 days.

As I shared in The enthusiasm to sell overwhelmed the desire to buy March 19, 2018, I expect to see more swings (volatility) than last year, and that would be “normal” too. I said:

I define this as a non-trending market. When I factor in how the range of price movement has spread out more than double what it was, I call it a non-trending volatile condition.

Until we see either a new all-time high indicating a continuing longer-term uptrend or a new low below the February and April low indicating a new downtrend, the above holds true.

It’s a good time for a VIX primer from the CBOE:

What does it mean?

Some consider the VIX the “fear gauge”. When there is a demand for options, their premiums rise. Investor demand for options typically increases when they are concerned about the future, so they use options to hedge or replace their stocks with limited risk options strategies. Rising volatility also drives the VIX, since 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

What is volatility?

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. The VIX Index is a measure of expected future volatility.

What is the VIX Index?

Cboe Global Markets revolutionized investing with the creation of the Cboe Volatility Index® (VIX® Index), the first benchmark index to measure the market’s expectation of future volatility. The VIX Index is based on options of the S&P 500® Index, considered the leading indicator of the broad U.S. stock market. The VIX Index is recognized as the world’s premier gauge of U.S. equity market volatility.

How is the VIX Index calculated?

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

How is the VIX Index used?

The VIX Index is used as a barometer for market uncertainty, providing market participants and observers with a measure of constant, 30-day expected volatility of the broad U.S. stock market. The VIX Index is not directly tradable, but the VIX methodology provides a script for replicating volatility exposure with a portfolio of SPX options, a key innovation that led to the creation of tradable VIX futures and options.

To learn more about the CBOE, Volatility Index VIX visit their VIX website.

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

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

Interest Rate Trend and Rate Sensitive Sector Stocks

June 27, 2018 By Mike Shell in Asymmetric ETF, Asymmetric Observation, Asymmetry ETF, Counter trend, ETF Strategist, ETFs, Global Directional Trends, Global ETF, Sector ETF, Sector Trends, Tactical ETF, Tactical ETF Managed Portfolio, Tactical ETF Portfolio Management, Trend Following 1 Comment

The interest rate on the 10 Year Treasury has gained over 20% so far in 2018, but I noticed it’s more recently settled down a little.

One of my ASYMMETRY® systems generated a short-term momentum signal today for the Utility and Real Estate Sectors. This signal indicated the short term trend is up, but it may have reached the point they may pull back before they continue the trend.

We see in the chart below, Utility and Real Estate Sectors are down so far in 2018, but they are gradually covering.

I find it useful to understand return drivers and how markets interact with each other. The direction of interest rates, the Dollar, inflation, etc. all drive returns for markets.

In the chart below, I drew the black arrow to show where interest rates started declining this month and Utility and Real Estate Sectors trended up.

Utility and Real Estate Sectors are sensitive to interest rates. These sectors use leverage, so as interest rates rise, it increases their cost of capital. Another impact is higher interest rates on bonds compete with them as investments. Utility and Real Estate Sectors are high dividends paying sectors, so as bond yields trend higher investors may start to choose bonds over these equities.

Below is a 1-year chart. You can see how interest rates increasing over 30% over the past year has had some impact on the price trend of the Utility and Real Estate sectors.

But, at the moment, these sectors have trended up, as interest rates have settled down.

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

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

Trend of the International Stock Market

June 26, 2018 By Mike Shell in Asymmetric ETF, Asymmetry ETF, ETF, ETFs, Global ETF, Tactical ETF 2 Comments

Conventional wisdom says to create a diversified portfolio of markets. However, it doesn’t do much good if those investments tend to move in the same direction in response to changing market conditions. Combining U.S. and international investments can result in a better-diversified portfolio whose holdings don’t march in lockstep – so when some go up, others go down, and vice versa. The result: a potential reduction in the volatility of your total portfolio in the long-run. Since International stocks may not always trend the same as U. S. stocks, I prefer to rotate between these markets rather than allocate to them all the time.

International stock markets can be broadly divided into developed countries and emerging markets. The MSCI EAFE Index includes developed countries. The MSCI Emerging Markets Index includes smaller countries.

So far in 2018, International stocks are down. Developed markets are down -4.6% and Emerging Markets are down -8%.

One reason International stocks and trending down for U. S. investors is the Dollar has trended up. Currency risk is a significant risk facing investors in International and emerging markets.

This is an example of why it’s useful to understand the driver of returns and how markets interact with each other.

Below is the same change, but I’ve added the U.S. Dollar Index. The Dollar started trending up in April, which is no surprise with the interest rates rising, which means the yield on our Dollar is rising. Around the same time the Dollar trended up, we see these International stock indexes declined. These ETFs are traded in U.S. Dollars, but they are International stocks in other countries, so they are impacted by a change in currency.

If we wanted exposure to these markets, but want to hedge off the currency risk, we could instead get our exposure with the currency hedged ETF. The currency-hedged ETFs Seek to reduce the impact of foreign currencies, relative to the U.S. dollar, on your emerging markets allocation

The iShares Currency Hedged MSCI Emerging Markets ETF seeks to track the investment results of an index composed of large- and mid-capitalization equities from emerging market countries while mitigating exposure to fluctuations between the value of the component currencies and the U.S. dollar.

I’ve compared the non-currency hedged Emerging Markets ETF below to the Currency Hedged Emerging Markets ETF. I highlighted the uptrend in the Dollar with a black dotted line. You can see up until the time the Dollar started rising, where I marked with a black arrow, the two ETFs were trending close. Since then, their price trends began to diverge. As the Dollar gained and the Emerging Markets stock ETF declined, the currency-hedged ETF of the same index fell about half as much.

To be sure, I’ve zoomed in the show only the past 3 months of the price trends.

So far in 2018, the U.S. Dollar is rising, and International stocks are falling, but it doesn’t seem to be just the rising Dollar driving them down.

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

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

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