I want to share a secret with you about unrelated nonsense

I want to share a secret with you.

Take a close look at this map and think about each of these states.

US Map Rug Rectangle 36" X 80" | Classroom Map Rug

What you see on TV, in the news, doesn’t necessarily reflect the beliefs of all of us.

Do you think they have the same concerns in Montana as New York City?

Do Tennesseans really care what they think in Los Angeles?

Does someone living in the Florida Keys need to be told by people in Minnesota how to live their life?

Successful people, especially wealthy people who we advise, focus on what’s inside their own boat.

Where are you getting the information you feed your mind?

Because the algorithm is very simple;

Garbage in, garbage out.

That is all.

Make it a great day.

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

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

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

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

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

Florida COVID hospitalizations continue in a 45-degree uptrend.

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

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

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

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

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

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

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

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

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

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

Be informed, and prepared, not afraid.

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

Everything is Relative: Florida COVID – 19 Trend Update

“It doesn’t matter what we think about a trend, it matters what the crowd thinks about it, but more importantly, how they will respond to it.”

– Mike Shell

For a quick update on the Coronavirus COVID – 19 trend, I’ll use my home state of Florida as the example.

The first cases of Coronavirus (COVID-19) were confirmed on March 1st, 2020, which occurred in Manatee and Hillsborough County. During the initial outbreak of Coronavirus in the United States, Florida’s public beaches and theme parks were under scrutiny as being areas of large crowds. Some in the news media criticized Florida for being relatively late in issuing a “Shelter-At-Home” order, finally putting it in place beginning April 3rd, 2020. Cases ramped quickly from 2 on March 4th, to over 5000 by the end of the month. Since then, however, the number of cases in Florida has leveled off, slowing the rate of change.

I focus on the direction of the trend and its rate of change.

The COVID Tracking Project has now tracked 85,826 cumulative Florida Coronavirus cases , up from 82,719 Thursday. This is a change of 3.88%. Here, I show the standard arithmetic scale on the chart.

The concern I see in the above chart is it seems to be forming a rough S-shaped curve. That is, cases trended up though April and May around the same pace, but this month the rate of change is notably stronger in the  linear price scale of an arithmetic chart. The arithmetic or linear chart doesn’t illustrate or scale movements in relation to their percent change, but instead, the linear price scale plots price level changes with each unit change according to a constant unit value. So, there is an equal distance between the data points as each unit of a change on the chart is represented by the same movement up the scale, vertical distance, regardless of what the level when the change happened. The arithmetic chart is the standard basic chart, especially over shorter time series, and it shows absolute trends.

To see how the time series unfolds with a focus on percentage of change, we changed the scale to logarithmic. The logarithmic chart is plotted so that two equal percent changes are plotted as the same vertical distance on the scale. Logarithmic scales are better than linear scales for normalizing less severe increases or decreases. Applying a logarithmic scale, the vertical distance between the data on the scale the percent change, so we can better identify changes in rates of change. Here, we see a strong uptrend in March, then the rate of change has since leveled off. The trouble, however, is it is still trending up and at its high.

Florida Coronavirus Tests Administered is at a current level of 1.5 million, which up from 1.486 million the day before, an increase of 1.72%.

COIVD – 19 Deaths have increased 1.4% since Thursday. Deaths are obviously an essential factor to track. Florida Coronavirus Deaths is at a current level of 3,154.00, up from 3,110.00 yesterday.

The steep uptrend in deaths is scary looking using the arithmetic scale showing the absolute trend in cumulative deaths. In the next chart, we observe the same trend as a log scale, which shows the rate of change is in an uptend, but has been slowing. I labeled the highest high (now) and the average over the period for reference.

Florida Coronavirus Hospitalizations is at 12,862, up from 12,673 the prior day, which is a change of 1.49%. To focus on the rate of change, here is the log scale chart.

Keep in mind, my objective here isn’t to rehash the research of others, but instead to share what I see in the trends and rates of change. As such, this isn’t a complete analysis of the virus. It’s my observations, as a quant and trend system developer and operator. The data source is The COVID Tracking Project which can only report the data as provided by the states.

ZOOMING IN TO PER DAY

The per day trends are important if we want to spot a change in trend quickly. As I warned in “In addition to the equity markets entering a higher risk level of a drawdown and volatility expansion, we now have a renewed risk of the scary COVID narrative driving more fear” a week ago, the uptrend got some attention last week. It doesn’t matter what we think about a trend, it matters what the crowd thinks about it, but more importantly, how they will respond to it.

The uptrend in Florida Coronavirus cases per day has indeed continued and with a notable new high.

I don’t like to see an uptrend like this because it’s a virus, and viruses are contagious, so they spread. In the case of Coronavirus, we can get an idea of the speed and rate of spread by the reproductive number (R0), or ‘R-naught’, represents the number of new infections estimated to stem from a single case. The reproductive number (R0) is relatively high, according to a research paper on the CDC: Assuming a serial interval of 6–9 days, we calculated a median R0 value of 5.7 (95% CI 3.8–8.9). 

I’m not going into the details here, but, with a reproductive value of 5.7, an increase in new cases is material in my opinion. That is, once it trends up as we are seeing now, it seems more likely to continue.

Are new cases a function of increased testing?

Some say the increase in new cases per day is a result of more testing. That doesn’t seem to be the case. Below is a charge of cases per day with a time series of tests administered per day under it. Visually, we see no correlation. However, there are many caveats to the data. So, anyone who wants to make a cased leaning one way or another can find ways to skew it, but it is what it is. We have a material increase in cases in Florida.

QUANTIATIVE ANALYTICS

Now, we’ll take a deeper dive and apply some analytics to the trends by observing some ratios.

The Florida COVID – 19 Death Rate has been gradually trending down. Florida Coronavirus Death Rate is at 3.67%.

In the past two weeks of May, the death rate was 4.6%, so it is falling.

In our investment management, I’ve been drawing ratio charts for over two decades to determine which market or stocks has greater trend momentum than another. When the numerator (top) is trending stronger than the denominator (bottom value) we say it has stronger relative strength or momentum. In this case, I have used Florida Coronavirus Cases Per Day as the numerator (top value) and Florida Coronavirus Tests Per Day as the denominator (bottom value), which shows a clear uptrend in the cases per day relative to the tests per day. This concerns me because of the rate of spread. As you look at the ratio chart, consider that a value of 0 would mean new cases per day is the same as new tests per day. Instead, new cases is currently trending higher than testing.

Florida cumulative cases relative to tests administered is also showing some change in trend. the past few weeks. Again, not of the date collected is perfect, but it’s still representative of a statistically significant sample of the population.

My objective for trend following is to identify a trend early in its stage to capitalize on it until it changes.

Comparing per day cases to other states doesn’t mean a lot, since the data needs to be normalized. For example, what President Trump said a few weeks ago is a true statement: the number of cases are a function of testing. If we didn’t test and didn’t categorize a case as COVID, there would be no “COVID cases.” Some people, politically motivated, seem to have difficult understanding that simple statement. I’m not politically motivated, so I just say it like it is. With that said, California is winning the match of the most cases per day followed by Texas. Florida is above Arizona.

Again, this doesn’t tell us anything aside from the absolute number. A relative comparison is often necessary and this is an example. For example, we could first calculate per day cases relative to tests or population, then compare them. That’s beyond the scope of my objective today.

Here are the states that reported over 500 new cases. We are seeing some large bubbles in the southwestern United States right now.

Image

The bottom line is, we want to see these levels drifting down, not up. We want to see this trend down.

People who are at high risk should continue to operate according to the risks, but also keep it in perspective that at this point, it isn’t yet so wide spread.

In the big picture, the population in Florida is 22 million and about 86 thousand cases have been labeled COVID 19. 86,0000 out of 22 million is about 4 tenths of a percent, or 0.40%.

That’s 40 cents of $100.

Our changes of contracting COVID 19 in Florida, then, is less than half of 1% at this point.

Everything is relative.

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

In addition to the equity markets entering a higher risk level of a drawdown and volatility expansion, we now have a renewed risk of the scary COVID narrative driving more fear

People tend to overreact and under-react to new information.

We observe it in the global capital markets more frequently than anywhere, and with immediate feedback.

So, those of us who are adept at identifying and monitoring directional trends in global markets have an advantage in researching trends of all kinds if our quantitative trend methods are robust, and our qualitative judgment and decision-making process is repeatable.

Intellectual skills that are associated with acquiring reliable information about nature are parts of the scientific process. Scientists of all kinds need skills like: communicating, observing, classifying, measuring, predicting, inferring, and researching.

Science isn’t just science, there’s also some art to it. I believe the first skills are more art, such as communicating, observing, classifying.

Many say investing and investment management is both art and a science. Some believe investment management is more art than science, others believe it’s more science than art. Quants try to make it more scientific than artistic.

I do a combination. I am Man + Machine.

The way I look at trends and how time series interact with each other is a robust process that may be applied to anything.

I don’t read articles in Bloomberg or The Wall Street Journal to hear the opinions of others to decide what I believe for myself. When I was a young rookie I did read a lot at first, as we all do, then learned the hard way to focus my efforts on my own original research and thinking.

I do best when I do my own work, as an independent thinker.

So, over the decades as a professional researcher, I first inspect the data to observe any trends and then make sense of it afterward. Sometimes my intention is for predictive analytics, other times it’s just prescriptive. predictive and prescriptive analytics. Predictive analytics provides us with the raw information for making informed decisions, while prescriptive analytics provides us with data-backed, evidence-based decision points that we can weigh against one another.

The scientific method is an empirical method of acquiring knowledge through careful observation, and applying rigorous skepticism about what is observed, realizing how cognitive assumptions and bias can distort how one interprets the observation.

  • Descriptive Analytics, applying data aggregation and data mining to provide observations and insight into the past to answer:
    • What has happened?”
  • Predictive Analytics, applying statistical models and probabilistic forecasting methods to understand the future and answer:
    • “What could happen?”
  • Prescriptive Analytics, applying simulation and testing algorithms to advise on possible outcomes and answer:
    • “What should we do?”

The Scientific Method and experimenting is a systematic approach to problem-solving and decision-making.

An algorithm may look something like this:

Problem —> Hypothesis —-> Prediction —-> Test Predictions —> Evaluation

We all have biases. All industries have biases. Sometimes these biases gave blindspots. Our biases that can narrow our vision and influence behavior and beliefs. It’s why in asset management, we often consult with researchers outside the industry to help avoid blind spots from industry bias. For example, the personal financial planning profession has a tendency to blindly say “balance your risks and rewards” and “balance your portfolios”, which is about the silliest things I’ve ever heard.

If you balance your risk and reward, you get symmetry on your statement.

If we want asymmetry, we have to skew the risk and reward positively.

It’s essential to identify blind spots, own them without being defensive, and adjust our behavior to avoid it.

MY OBSERVATIONS OF COVID 19

I have an advantage, because I observe COVID 19 trends and rates of change as it is, without any bias as to beliefs about the disease and such. That is, I’m just purely looking at the data we collect and feed into our systems for observation.

It’s like this:

  • I focus on; what has changed?
  • I look for extremes in levels, like new high or low breakouts.
  • I also monitor the rates of change. Fast breakouts are more likely to form an ongoing trend than slow.

FLORIDA COVID 19 UPDATE

As COVID 19 and the mass quarantine strategy for suppressing the spread has become a political debate lately, so some of you may perceive what you are about to read that way.

Don’t.

I have no political bias about this whatsoever. My personal preference is to get past this virus as quickly as possible with as little human suffering as possible. Ignoring the data and facts doesn’t get us there. Exaggerating the data and facts doesn’t either. So, I suggest you try to see the trends for what they are, as I am.

My home state of Florida is now, unfortunately, trending in the wrong direction. I pointed it out with some fellow money manager friends last week of a potential breakout in the trend and it has since trended higher for a meaningful and material breakout. No one wants businesses to open and get back to normal more than me, but what is, is. The cases per day is in a strong uptrend. The prior high was 1575 on April 3rd and 1601 on May 16th. Yesterday was 2581. I hope to see this trend down.

NEW UPTREND IN FLORIDA CASES NOT DRIVEN BY NEW TESTING

The first hypothesis we think of is, well, maybe the uptrend in driven by an increase in testing. Naturally, increasing the absolute testing also should increase the number of positive tests. That isn’t the case. The high in testing was May 20th in Florida. The testing per day remains materially below that level according to the most recent data.

Keep in mind, the lower line is tests administered per day, so there is a lag between testing and the classification of a positive case. In fact, there are natural lags in all of this data. For example, I don’t expect to see the results of the protests until a week or two afterward to account for the lag in showing symptoms, going to get tested, and getting the test results. If there is any increase in the protesting areas, we’ll hear about it next week or later.

FLORIDA COVID 19 HOSPITALIZATIONS AT AN ALL TIME HIGH

Not much to add here. It is what it is.

I can try to make it seem better with a logarithmic based chart, which draws the chart in a way that two equal percent changes are plotted as the same vertical distance on the scale. It visually normalizes the rate of change. The good news is the rate of change overall is slowing. The bad news is this could look like an S-curve later, which would be typical of a spread.

By the way, here is the log chart of the new cases per day. We normally use a logarithmic chart scale for long term charts to normalize the data especially if I’m comparing it to something else where relative strength (rate of change) is measured. But here, we still see a breakout in rate of change. So, it’s a material breakout in my opinion, but I hope it breaks down.

Unfortunately, three of the new uptrends are in states were we have clients; Florida, California, and Texas. Next up is Texas.

TEXAS COVID 19 UPTREND

New cases in Texas is trending up to all time highs. I think Houston, Texas is now at risk of another stay-at-home order.

CALIFORNIA COVID 19 TREND

California new cases per day has trended up to the all time high again. It doesn’t seem to be in direct result of more testing per day, either.

ARIZONA COVID 19 CASES AT NEW HIGH

Arizona is at a high in new daily cases reported, but also in tests per day. The trouble in Arizona is the material new uptrend in hospitalizations.

The momentum in hospitalizations in Arizona is a real problem, and I’m using a logarithmic scale below, but it doesn’t help.

So, we are seeing new hospitalization highs in Texas, Arizona, and North Carolina. We’re showing Louisiana here as well for context, since it had an early COVID-19 outbreak.

We saw 3 states report more than 2,000 cases yesterday: California, Florida, and Texas. A picture speaks a thousand words.

Image

 COVID HAS HIT THE NORTH MUCH HARDER THAN THE SOUTH

But the South is now seeing a surge in cases…

And it doesn’t seem to be an increase in testing.

Can hospitalizations keep falling if cases are rising?

Because hospitalizations are rising rapidly in some Southern states.

I expect we’ll be hearing a lot about these new high breakouts in Arizona, Florida, Texas, and California. All of which, by the way, are the hottest and most humid states in the U.S., so much for the heat and humidity killing the virus.

What we have here is, a a notable uptrend across the South. I hope to see it fade, but based on what I’m seeing, it’s more likely to continue. Only time will tell.

If you are at risk, I recommend remaining cautious, wearing the dang mask, and treating this virus with respect.

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Speaking of the scientific method used for decision-making.

If you want to get as technical as possible, here’s some homework for the wannabe scientists and armchair mathematicians who really want to get into the maths of the matter. The virus has sparked a lot of important debates around the globe among though leaders. As researchers, we argue and debate our beliefs in hopes to gain new knowledge. One of the most heated public debates has been Taleb and Ioannidis.

The International Journal of Forecasting (IJF) is organizing a special section devoted to “Epidemics and forecasting with focus on COVID-19”. Based on their blog posts, John P. Ioannidis and Nassim N. Taleb will be given the opportunity to think of each other’s arguments about the COVID data and how to use it. Consequently, they will both be invited to write a full paper to better detail their views and why they think the opposite side’s views may not be adequate under the current circumstances. These opinion papers will then appear in the IJF, after scientific review by their peers. IJF should reserve the right to publish a closure based on this debate. This debate will not only allow us to better understand the points of view of the two great scientists but be also left as a guide for how to deal with future pandemics.

Nassim N. Taleb believes that all efforts and resources should be directed to halt its spread and reduce the number of infected and deaths without any concern about forecasting its future course as the uncertainty of doing so cannot be measured and the risks involved are highly asymmetric. See “On single point forecasts for fat tailed variable by Nassim Nicholas Taleb.”

 John P. Ioannidis, on the other hand, claims that more reliable information is needed to make multiple billion-dollar decisions and that forecasting has failed us by being too pessimistic about the future growth of the pandemic and by exaggerating its negative effects. See “Forecasting for COVID-19 has failed”

Both of their observations are well worth a read.

In addition to the equity markets entering a higher risk level of a drawdown and volatility expansion, we now have a renewed risk of the scary COVID narrative driving more fear.

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

It’s not so different this time, except in ’69, they didn’t miss the Woodstock Music Festival

Did you know the Woodstock Music Festival in 1969 took place during a global pandemic?

It killed about 100,000 people in the U.S. and a million worldwide.

According to Jeffrey A. Tucker, the Editorial Director for the American Institute for Economic Research:

“The flu spread from Hong Kong to the United States, arriving December 1968 and peaking a year later. It ultimately killed 100,000 people in the U.S., mostly over the age of 65, and one million worldwide.”

And yeah, it was fact checked by Reuters:

“It is true that Woodstock occurred during the Hong Kong flu pandemic, which was a global outbreak.”

In “True claim: Woodstock took place in the middle of a pandemic,” Reuters Fact Check makes the verdict:

“True. The 1969 Woodstock music festival did take place during a global pandemic, the Hong Kong flu, which started the previous year.”

The U.S. Centers for Disease Control and Prevention (CDC) explains on its website:

“It was first noted in the United States in September 1968. The estimated number of deaths was 1 million worldwide and about 100,000 in the United States. Most excess deaths were in people 65 years and older. The H3N2 virus continues to circulate worldwide as a seasonal influenza A virus.”

Woman running through the mud at the Woodstock Music Festival, New York, US, 17th August 1969. (Photo by Owen Franken/Corbis via Getty Images))

So, there you go.

It’s not so different this time, except in ’69 they still carried on with concerts like Woodstock and such.

According to Tucker;

“Nothing was closed by force. Schools mostly stayed open. Businesses did too. You could go to the movies. You could go to bars and restaurants.” 

I’ve not had a problem with the Stay at Home orders, and it hasn’t changed my life much, other than we miss hanging out with friends and going out to dinner.

But, he also says;

“Stock markets didn’t crash. Congress passed no legislation. The Federal Reserve did nothing. Not a single governor acted to enforce social distancing, curve flattening (even though hundreds of thousands of people were hospitalized), or banning of crowds. No mothers were arrested for taking their kids to other homes. No surfers were arrested. No daycares were shut even though there were more infant deaths with this virus than the one we are experiencing now. There were no suicides, no unemployment, no drug overdoses.”

So, yeah, maybe the modern day connectivity has amplified the outcome and caused some initial under-reaction and then overreaction?

I’m not surprised.

It’s just the people, doing what they do.

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Read the whole story, it’s been fact checked and found to be accurate: Woodstock Occurred in the Middle of a Pandemic.

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

Here is how you will get exactly what you want

We tend to find information that confirms our existing beliefs.

We’re seeing it more than ever, if we pay attention and recognize it.

If you feel we should stay on lock down and maintain the quarantine, you find news and opinions that support yours.

If you feel it’s all just a hoax and the quarantine has been a disaster, you find news and opinions that support yours.

If you feel the lock down has been necessary, but now the curve has flattened, so it’s time to open the United States for business, you find news and opinions that support yours.

Yes, I said “we”, because I do it, too, but the difference may be; I know it do, so I’m aware of it.

Awareness allows us to recognize it, then we get to decide if we want to do it, or not.

In other words, we decide if we want it, or not.

Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that confirms or strengthens one’s prior personal beliefs or hypotheses. It is a type of cognitive bias.

One says about cognitive bias:

cognitive bias is a systematic error in thinking that affects the decisions and judgments that people make. Some of these biases are related to memory. The way you remember an event may be biased for a number of reasons and that in turn can lead to biased thinking and decision-making.

Another defines it as:

A cognitive bias is a systematic pattern of deviation from norm or rationality in judgment. Individuals create their own “subjective reality” from their perception of the input. An individual’s construction of reality, not the objective input, may dictate their behavior in the world.

I like the “subjective reality” part.

We aren’t objective, unless we want to be.

Wikipedia says;

Objectivity is a philosophical concept of being true independently from individual subjectivity caused by perception, emotions, or imagination. A proposition is considered to have objective truth when its truth conditions are met without bias caused by a sentient subject. 

Simply put, objectivity is when our judgment isn’t influenced by personal feelings or opinions in considering and representing facts.

Yeah, tell me how often you are objective about things, leaving out your feelings and opinions, or considering the facts as you see them.

So, to be objective is not being influenced by personal feelings, interpretations, or prejudice; based on facts; and unbiased.

An objective opinion is an intention of dealing with things without taking into considering our own beliefs, thoughts, opinions, and feelings.

Who does that?

I think we’re going to feel our feelings, experience them, one way or another.

I also think it’s hard to ignore our own judgement and perceptions.

And then there’s feelings. If the topic drives our emotions, it makes us scared, mad, or happy, then it’s hard to get past it, unless we really want to.

Common Causes of Cognitive Bias

We sometimes get lazy, and we just don’t want to pay attention anymore, so we just take those mental shortcuts. The easy way it is so, easy.

When it comes to the lockdown, Physicians who are concerned about their hospitals being overwhelmed may prefer it this way, so they’ll find information that supports their own individual motivations.

Other Physicians may earn their living doing surgeries that aren’t labeled a necessity, so their motivation is to get back to work. They may be more biased toward finding information that supports opening for business.

What is wrong with having your own opinion or personal motivations?

Nothing.

It’s useful to pay attention and know we have it.

It’s an example of how we find ways to get what we want.

We decide what we get.

Our cognitive biases influence how we think and act, so it’s useful to be aware of what it is we want, because we’re going to find information that supports what we want.

Sometimes we just don’t have time to think for ourselves, so we just find information from trusted people and go with it. My observations here is an example, especially when it comes to market trends and such.

We have to be selective in how we pay attention to what’s going on the world around us because we simply don’t have time to observe it all. I realized this two decades ago, so I developed systems for monitoring what has changed, systematically. I don’t have to sit around and look for it manually, I get alerts. When something has changed enough to send me a signal, then I look to see if I believe it matters.

Should you listen to others?

Only if they’re better at it than you are, and have more focus. Concentration is key, to me. My track record speaks for itself, especially during bear markets and volatility expansions. I’ve now operated through three major bear markets and a hundred volatility expansion. This isn’t new for me.

More importantly, I didn’t just “hunker down” and buy and hold through market crashes like 2000-03 or 2007-09. I tactically traded through them, successfully, and managed my drawdowns within a tolerable level. Past performance is never a guarantee of future results, but I’d rather drive my own boat through this storm than ride with anyone else. I’ve learned many lessons that should add to my skill and experience, so I’m likely to get what I want, but likely isn’t a sure thing.

What we believe about the virus and the lockdown depends on our personal beliefs, and we probably find things that support what we already believe. Nothing I write is guaranteed change your mind. You’ll instead compare it to the observations and opinions of others, but most importantly, you own.

That is, unless you intentionally look at the data with determination to be objective.

I know, it’s hard. Who does that?

A simple equation: Intentions = results.

In Market Wizards: Interviews with Top Traders, Ed Seykota, one of the famous traders interviewed, said:

“Win or lose, everyone gets what they want from the market.”

It means our intentions equals our results. Our intentions create our results.

For example, you have an opinion about the stock market right now. You have a feeling about it. You have beliefs. You may draw from the beliefs and opinions of others. You’re certainly focused on finding what confirms what you already believe, if you recognize it.

If you believe the stock market can’t possibly trend higher, you look for confirming information and opinions. If the market trends down and you avoided the loss, you got what you wanted. If the market trends up and you missed out, you got what you wanted. You wanted to avoid the downtrend you believe should happen. It doesn’t matter if it does, or not.

If you believe the stock market will go to the moon again because the Fed is intent on it, you’ll expose your portfolio to your belief. If the market trends up and you participate in its profits, you got what you wanted. If the market instead trends up and you participate in its losses, you got what you wanted. You believed it should trend up and you wanted exposure to what you believe should happen. It doesn’t matter if it does, or not.

What you believe is true, for you.

It’s how we get what we want.

We decide what we get. So, if we want to be empowered, create our own outcomes, we must necessarily take responsibility for them. When we take responsibility for our outcomes, we get the results we want.

Knowing what I know, having operate through times like this before, you’re going to need it. That is, unless you choose to be a victim. But I just made you aware that’s a choice, too.

I want to use my skills and experience to make the best of what is going to happen next.

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

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

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

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

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

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

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

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

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

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

What could go wrong?

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

A quick glance at headlines shows:

BREAKING NEWS

CDC expected to announce first US case of deadly Wuhan coronavirus

Changes to impeachment rules

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

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

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

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

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

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

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

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

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

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

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

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

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

Let’s take a look at each of them.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Applying the formula:

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

The Denominator

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

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

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

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

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

Models Misbehaving

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

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

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

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

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

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

What about the stock market?

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

Don’t miss out:

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

Most people get it wrong at extremes

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

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

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

– Professor Irving Fisher, October 15, 1929

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

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

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

Make No Mistake: We are at war

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

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

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

In Quantitative Technical Analysis of the Coronavirus COVID – 19 Trend I said I expect to see the speed of new Coronavirus COVID – 19 cases to increase exponentially, I’m going to start sharing my observations on it from the lens of a “quant” and a technical chartist. I was planning to have already shared some observations, but I found some issues in the state level data that have now been resolved. Of course, all of the data we are reviewing is deemed to be reliable but none of it is guaranteed. I believe it’s clear the US and the world were not well prepared for a pandemic of this magnitude, which is disappointing considering leaders like George W. Bush and Bill Gates warned of it years ago.

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

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

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

World Coronavirus Cases: 1.381 million for Apr 07 2020

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

World Coronavirus Cases is at a current level of 1.381 million, up from 1.345M yesterday. This is a change of 2.67% from yesterday. I’m drawing the charts with a logarithmic scale to illustrate the trend as percentage moves for spacing, rather than number of cases, so a log scale emphasizes the rate of change in a way that linear scales do not.

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

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

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

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

The United STATES of America

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

Which states have seen the most cases of coronavirus?

The northeast by a wide margin at this point.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The time series chart allows us to compare Kinsa’s observations of the influenza-like illness level in the U.S., in orange and red, against where we’d expect them to be, in blue, and see how that relationship has changed over the past few weeks. The red zone were I drew the arrow below was an early warning of what is likely to be Coronavirus.

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

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

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

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

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

Some good news is 300,000 have recovered.

Image

WE ARE AT WAR

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

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

Image

Are we wining the WAR?

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

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OUR BATTLE PLAN

Here is what we are doing at Camp Shell.

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

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

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

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

It’s very simple.

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

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

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

WE WILL WIN THIS.

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

SEMPER FI

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

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

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

Data Science

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

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

Twitter Poll Q

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

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

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

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

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

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

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

HEALTH WEATHER MAP KINSA

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

time series chart allows you to compare Kinsa observations

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

kinsa health weather map

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

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

The CDC says:

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

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

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

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

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

COVID 19 CASES US

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

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

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

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

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

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

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

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

Today, they announced:

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

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

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

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

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

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

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

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

In comparison, here is the faster response from California.

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

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

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

LET’S KEEP DOING IT AMERICA!

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Read the full report from the Kinsa Data Team: Social Distancing and its Effect on Reducing the Spread of Illness.

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

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

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

In other words, it appears to have predictive value.

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

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

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

Kinsa explains on the website:

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

They go on to explain:

The map shows two key data points:

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

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

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

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

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

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

I like the direction of this trend.

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

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

Let’s see how it trends from here.

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

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

Good news for the stock market

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

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

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

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

I wrote:

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

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

Is it another regime of irrational exuberance?

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

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

Is the stock market at a level of irrational exuberance?

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

shiller pe ratio are stocks overvalued

Before that, on January 17, 2020 in

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

Is it another regime of irrational exuberance?

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

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

Is the stock market at a level of irrational exuberance?

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

shiller pe ratio are stocks overvalued

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

THE BIG PICTURE 

First, I start with the big picture.

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

Shiller PE ratio for the S&P 500

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

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

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

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

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

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

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

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

I followed with;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Let us know if we can help.

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

Remembering the other wall

As we approach the Memorial Day weekend, someone reminded me today of a statement made by President Ronald Reagan on June 12, 1987:

“Mr. Gorbachev – tear down this wall”

I had enlisted in the U.S. Marines and would enter training a year later. So,  for the first time in my life, I was paying attention to world events.

It’s probably hard for most people to conceive, but young men and women joining the U.S. Marines were hoping for the opportunity to fight the Communist Party of the Soviet Union after high school. #TheFewTheProud

But here we are 30 years later and we probably have as many who would rather fight for it. #ComingApart

Socialism and communism

The Difference Between Communism and Socialism

“Communism and socialism are economic and political structures that promote equality and seek to eliminate social classes. The two are interchangeable in some ways, but different in others.In a communist society, the working class owns everything, and everyone works toward the same communal goal. There are no wealthy or poor people — all are equal, and the community distributes what it produces based only on need. Nothing is obtained by working more than what is required. Communism frequently results in low production, mass poverty and limited advancement. Poverty spread so widely in the Soviet Union in the 1980s that its citizens revolted. Like communism, socialism’s main focus is on equality (symmetry). But workers earn wages they can spend as they choose, while the government, not citizens, owns and operates the means for production. Workers receive what they need to produce and survive, but there’s no incentive to achieve more, leaving little motivation. Some countries have adopted aspects of socialism. The United Kingdom provides basic needs like healthcare to everyone regardless of their time or effort at work. In the U.S., welfare and the public education system are a form of socialism. Both are the opposite of capitalism, where limitations don’t exist and reward comes to those who go beyond the minimum. In capitalist societies, owners are allowed to keep the excess production they earn. And competition occurs naturally, which fosters advancement. Capitalism tends to create asymmetry between the wealthiest citizens and the poorest, however, with the wealthiest owning the majority of the nation’s resources.”

 

 

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.

Uncharted Territory

Uncharted Territory is trending on @Twitter as the government shutdown becomes the longest in U.S. history.

Everything about the future is always uncharted territory.

Uncharted is unexplored or unknown. To chart is to map, so uncharted is not yet on the map.

The future is always uncertain, so we must deal with uncharted territory.

uncharted territory

Uncharted Territory should not be confused with unchartERed, which means lacking a charter.

The charter, in this case, is something that authorizes someone to work in a specific role.

So, unchartered is unauthorized. It isn’t unchartered territory it’s uncharted territory.

Considering the future is unknowable since it doesn’t exist yet.

We are always in uncharted territory.

We can draw our charts and maps, but future events aren’t like physical places.

We deal with the certainty of uncertainty It’s all we have, so we may as well embrace it.

I don’t know what’s going to happen next to make tactical decisions that result in asymmetric risk/reward. I only need my average gains to be larger than my losses.

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.

The Big Picture Stock and Bond Market Valuation and Outlook

Wondering what to expect from this starting point for stocks and bonds?

The starting point matters. From this starting point, the expected return is a calculation of earnings growth, dividend yield, and P/E ratio.

Below is the current Shiller PE Ratio for the S&P 500 stock index. The Shiller PE Ratio is the second highest level it’s ever been. It’s second only to the stock market bubble 1995-2000 and higher than Black Tuesday before the Great Depression. This measure suggests investors are highly optimistic as they have priced in high expectations about stock prices and earnings.

Current PE price earnings ratio historical pe average hi low

Below are the historical average (mean) and the highest and lowest level of the PE ratio of the S&P 500 based on Shiller. The median is around 15, undervalued is below 10, overvalued it above 20.

Current Shiller PE ratio for the S&P 500

Next, we observe the 10 Year Treasury Yield. Interest rates are about as low as they’ve ever been. So, investors buying bonds and holding today are yielding about as little as they ever have. The challenge going forward is if interest rates rise, the value of current bond holdings will fall, so their price of bonds will fall. When we observe this chart, it’s a reminder of how low interest rates are and how high they could go for investors who buy and hold bonds or bond funds.

10 Year Treasury Rate Yield

Though it is unlikley we’ll see the extremely high interest rates of the late 1970s, the current rate is 2.82% which is much lower than the 4.57% long-term average and 3.85% long-term median. The point is: interest rates could easily trend up to the 3% to 5% range which would drive the current bond values down. As bond prices fall, it will have a negative impact on fixed asset allocations to bond or bond funds.

10 Year Treasury Rate Current long term average low high maximum

The interest rate was only 1.5% in July 2016. Since then, interest rates have already trended up to 2.82%. How has that 1.32% increase impacted the price of the bonds?

The iShares 7-10 Year Treasury Bond ETF (IEF) seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities between seven and ten years. If you had invested in this ETF in July 2016 at the low, it’s down -9.33%. It’s been down over -10% from it’s high.

It’s a little worse for the longer-dated bonds. The iShares 20+ Year Treasury Bond ETF seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years. If you had invested in this ETF in July 2016 at the low, it’s down -13.8%. It has been down about -20% from its 2016 high.

From this starting point, we observe a historical extreme stock valuation levels, the second highest level, ever. Observing this high valuation level provides us situational awareness that volatility expansion and a bear market is a real possibility from these levels.

What makes for an even more challenging situation for investors is interest rates are at a historical extreme low looking back over a century. At such low interest rates, we shouldn’t be surprised to see them rise. As interest rates rise, bond prices fall. Falling bond values will have a negative impact for buy and hold investors in a fixed allocation to bonds. So, bonds may not be the crutch they are expected to provide diversified portfolios when stocks fall. Diversification does not guarantee investment returns and does not eliminate the risk of loss.

Going forward from this starting point, traditional diversification of a stock and bond portfolio is unlikely to provide the investment returns investors want.

We believe risky markets require active risk management and tactical decisions with a focus on asymmetric risk/reward. To discover what we call ASYMMETRY®, contact us.

 

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

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

Front-running S&P 500 Resistance

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

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

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

Is the S&P 500 at resistance? 

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

S&P 500 stock index at resitance SPY SPX

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

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

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

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

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

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

But, it gets worse.

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

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

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

or

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

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

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

Is the S&P 500 at resistance? 

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

SPY SPX TOTAL RETURN RESISTANCE

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

spy spx S&P 500 resistance

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

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

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

Is the S&P 500 at resistance? 

We’ll see…

 

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

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

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

Trend following applied to stocks

A stock must be in a positive trend to earn a huge gain…

A stock must be in a downtrend to produce a large loss…

The common factor? the direction of the trend…

That’s what investors like about the concept of trend following.

We want to have capital in trends that are rising and out of trends that are falling.

 

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

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

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

 

 

 

Happy Birthday, America!

242 years ago, the British told Americans to put down their guns.

How did that work out?

Happy Birthday, America!

Please enjoy your freedom and have a happy 4th of July

land of the free because of the brave .jpg

Is the economy, stupid?

Many investment professionals admit they are unable to “time the market.”

What is “market timing,” anyway? Wikipedia says:

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

One reason they “can’t time the market” is they are looking at the wrong things. The first step in any endeavor to discover what may be true is to determine what isn’t. The first step in any endeavor to discover what may work is to determine what doesn’t.

For example, someone recently said:

“A bear market is always preceded by an economic recession.”

That is far from the truth…

The gray in the chart is recessions. These recessions were declared long after the fact and the new recovering expansion was declared after the fact.

The most recent recession:

“On December 1, 2008, the National Bureau of Economic Research (NBER) declared that the United States entered a recession in December 2007, citing employment and production figures as well as the third quarter decline in GDP.”

So, the economist didn’t declare the recession until December 1, 2008, though the recession started a year earlier.

In the meantime, the S&P 500 stock market index declined -48% as they waited.

While the recession officially lasted from December 2007 to June 2009, it took several years for the economy to recover to pre-crisis levels of employment and output.

The stock market was below it’s October 2007 high for nearly six years.

Economists declared the recession had ended in June 2009, only in hindsight do we know the stock market had bottomed on March 9, 2009. The chart below shows the 40% gain from the stock market low to the time they declared the recession over. But, they didn’t announce the recession ended in June 2009 until over a year later in September 2010.

Don’t forget for years afterward the fear the economy will enter a double-dip recession.

If you do believe some of us can predict a coming stock market decline or recession, it doesn’t seem it’s going to be based on the economy. Waiting for economics and economic indicators to put a time stamp on it doesn’t seem to have enough predictive ability to “time the market” to avoid a crash.

I suggest the directional price trend of the stock market itself is a better indicator of the economy, not the other way around. Then, some other signals begin to warn in advance like a shot across the bow.

But, for me, it’s my risk management systems and drawdown controls that make all the difference.

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.

What’s going to happen next?

S&P 500 has declined to the 200-day moving average. I don’t trade the moving average, but include it as a reference for the chart. More importantly, the stock index is also near its low in February.

By my measures, it’s also reached the point of short-term oversold and at the lower price range that I consider is within a “normal” correction.

I know many traders and investors were expecting to see a retest of that low and now they have it. So, I expect to see buying interest next week. If not, look out below… who knows how low it will need to go to attract buying demand.

 

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.

The is no guarantee that any strategy will meet its objective.  Past performance is no guarantee of future results. The observations shared are for general information only and are not intended to provide specific advice or recommendations for any individual.

The enthusiasm to sell overwhelmed the desire to buy March 19, 2018

The enthusiasm to sell overwhelmed the desire to buy. The S&P 500 stock index closed down -1.42% today. Stocks trended down most of the day and at 2:35pm it was down -2%. As you can see on the chart, it reversed up in the last 90 minutes and closed with positive directional movement. It almost closed above its Volume Weighted Average Price (VWAP).

There are many notable economic reports out this week, so maybe investors are concerned about to the jobs report and the Fed FOMC Meeting. The options market has priced in a 94% chance of a rate hike, so it shouldn’t be a surprise. But, this week is the first FOMC meeting for the new Chairman Powell.

Implied volatility in recent weeks is one of many signals that suggest a volatility regime change. The CBOE Volatility Index® (VIX® Index®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The VIX® doesn’t seem to want to go back to those prior low levels, so the expectation is higher volatlity.

At this point, the decline today was nothing too abnormal. The stock index is -3.% off it’s high a few weeks ago and -5.4% off its all-time high. However, as you can see below it is within a normal trading range. Speaking of trading range, notice the bands of realized volatility I added to the chart are drifting sideways rather than trending up or down. I see higher lows, but equal highs in the most recent trend and lower highs looking back to January. The VIX is expected volatility, the blue bands are realized volatility.

My systems 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. It is useful for me to identify the market regime because different trend systems have different results based on the situation. For example, non-trending volatile market conditions can be hostile situations for both passive and trend following strategies. However, countertrend systems like the swings of a non-trending volatile market.

Trend following systems thrive in markets that are trending and smooth. When a market is trending and smooth, the trend following system can earn gains without having to deal with significant adverse price action. When a market trend shifts to non-trending and volatile, the trend following signals can result in whipsaws. A whipsaw is when the price was moving in one direction (and the trend follower buys) but then quickly reverses in the opposite direction (and maybe the trend follower exits with a loss). Even if the trend following system doesn’t enter and exit with a loss, in a non-trending volatile market the trend follower has to deal with the same hostile conditions as a passive investor as the market swings up and down.

My U. S. equity exposure since early February has come from my shorter term countertrend systems. My focus and the focus of my systems isn’t to predict the direction of markets but instead to identify when a market is undergoing a regime change or shifts to a distinct environment. I don’t analyze the markets to try to predict what it will do next. I look at what the market is actually doing and react to it.

 

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 @MikeWShell

The is no guarantee that any strategy will meet its objective.  Past performance is no guarantee of future results.

 

My Introduction to Trend Following

I have noticed more investors are talking about “trend following” these days and more traders and advisors are calling themselves trend followers. As a professional portfolio manager who has been applying trend systems to global markets for two decades, one of the most common questions I get asked is “how did you get started?” Specifically, how my investment strategy, risk management, and trend systems evolved over time.

I’ll explain it here, so you know where I am coming from.

Why do you think we learn math by hand before using a machine?

We learn to do the math manually because it teaches us the basics before we use a computer. We learn to ask the right questions, turn problems into math formulas, then do the calculations. By working it out manually by hand, we get a feel for the math, an instinct for it.

I learned trend following the same way.

What is trend following?

Trend following or trend trading is a trading strategy according to which one should buy an asset when its price trend goes up, and sell when its trend goes down, expecting price movements to continue.”

My first introduction to the term “trend following” was John Murphy‘s Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications published by New York Institute of Finance in 1999. It was the first book I read clearly dedicated to charting price trends and technical analysis.

In the early 1990’s the first book I read on investment and trading was How to Make Money in Stocks: A Winning System in Good Times and Bad by William J. O’Neil. He described a systematic quantitative approach to screen for stocks with high relative price strength, high earnings growth, and then determine the entry and exit viewing a price chart. O’Neil’s research discovered the best stocks display seven common traits just before they make their biggest gains.  O’Neil calls his strategy the CAN SLIM® Investment System. The CAN SLIM® system for deciding what to buy is based on things like strong earnings growth, which is believed to be the primary driver of a stocks price trend. Once he has screened for this criteria, O’Neil applies trend following to stocks because he requires them to be in a positive trend.

After researching and applying his investment system for years in the late 1990’s, I wanted to create my own system that fit me.  My first interest was to become more advanced in understanding and identifying directional price trends. Naturally, that was the beginning of my extensive research that began with studying every book I could find on technical analysis and completing every training program I could.

I went on to read over 500 books covering a broad range of portfolio management topics including trading, technical analysis, and maths like probability and statistics. I wanted to understand how markets interact with each other, what typically drives trends, and what trends look like. Studying price trends naturally led me to investigate investor sentiment, trading psychology, and investor psychology. I have always had a strong interest in math and I think in terms of systems and algorithms, so fifteen years ago I shifted from looking at charts visually to testing and developing trading systems based on price trends.

By 2006, I had already been testing and developing quantitative computerized trading systems for a few years, but I was still also working on the craft of charting and CAN SLIM®. In 2006, I flew out to Santa Monica, CA to attend the first CAN SLIM® Masters Program training with O’Neil and his portfolio managers and passed the exam for the CAN SLIM® Masters certification. I also had become skilled at all kinds of charting including bar charts, point & figure charting, and candlestick charting. I believe becoming a craftsman at all of these different methods provided me with unique skills to understand price trends, how markets interact, and developing computerized trading systems.

I have spent over two decades fully immersed in learning about methods of identifying trends and systems and how to trade them across multiple time frames and multiple markets. My own experience started with basic charting, evolved with more technical analysis tools, then I developed computerized trading systems based on the knowledge and skills I cultivated. Reading books (or writing them) only discovers knowledge. The only way to develop skill is through the intentional practice of actually doing it.

Before I share one of the first things I read on trend following, I want to explain there is more than one way to execute a trend system.

Whether you are an investor who invests in an investment program or a trader who makes the portfolio management decisions in an investment program, you have to choose which fits you and your own beliefs. I can only tell you what I believe. What you believe is true, for you. As I have been successful doing what I do, I can only tell you that the key to success if finding what fits you. Reading information like this is intended to help you decide what you believe and what you don’t believe.

I see tactical traders applying two main methods for trend following.

Some of them say they are “rules-based” others say they are “systematic”, but we don’t often see them say they are “discretionary” even if they are. Here is how I see it.

Discretionary trend following trading and investment decisions can include a wide range of operations, but I’m specifically talking about a discretionary trend follower. A discretionary trend follower is someone who looks at a chart, sees the signal, sees that it looks right, and pulls the trigger. The discretionary trend follower may be rules-based and may have a systematic process, but the discretionary trend follower is ultimately making the decision to buy or sell.

Systematic trend following trading and investment decisions apply a set of rules and procedures for trading and investment decisions. To me, a trend follower can be systematic but also be discretionary. A systematic “discretionary” trend follower may be still discretionary but has rules and a process. For example, they look at a chart, see the signal, see that it looks right, and pulls the trigger. Or, a trend follower can be systematic and automated by a computerized trading system that generates the signals. However, when the professional investment industry says “systematic trading” or “systematic trend following” we usually mean more automated and mechanical.

Automated Systematic trend following is necessarily systematic because it’s when we use a computer program to generate the signals automatically. But, a fully systematic trend follower who is automated has a program that not only generates a trend following signal but also generates trade instructions to the broker. A fully mechanical and automated trend following system is computerized to the point that it enters the trades.

I explained these operational methods so you will know where I am coming from as you read about trend following in a technical analysis book. Which of these you believe is best is up to you. I believe that either discretionary trend following or systematic with automation both have the potential to work. It’s just a matter of which method fits you. There are potential advantages and disadvantages of both methods of application and depending on your personal preference, you’ll see them that way. If you are an investor in an investment program, you need to invest with a portfolio manager that fits your preference. If you are a trend following trader, you may lean toward one or the other.

Some traders simply like looking at charts and making their decision that way. They need to see the signal and see that it looks right according to their rules to get the confidence to execute. Others may not be so skilled at seeing the signal on a chart, or maybe they don’t want to spend their time doing it so we can program a computerized system. It seems many new systematic traders weren’t good at discretionary decisions using charts, so their backtesting makes them feel more confident. Only time will tell if these newer systematic traders will be able to follow their automated systems when they invariably don’t perform as they hoped all the time.

Ultimately, it comes down to beliefs and confidence. If you aren’t confident in your ability to see the signal and execute from a chart consistently, then an automated system may help. Some trend followers gain more confidence seeing the signal and pulling the trigger. Those same trend followers would likely have difficulty executing system generated trades.

I often hear things like “our systematic model removes the emotion”, which is far from the truth. Anyone who believes an automated system will remove their emotional issues will eventually experience a whole new set of emotions they may not have felt yet. But, some have a real problem with pulling the trigger, so an automated system may help if they have someone else execute the trades. For example, a professional money management firm like mine has professional traders who execute our trades. But, this still doesn’t assure anyone the trend follower will be able to follow the system through different market conditions.

If someone lacks the self-discipline required to pull the trigger, execute the trades, and follow whatever systems they follow, no method or automation will help. If a trader or investor lacks self-discipline, that issue has to be resolved another way before they’ll find success.

I know at least 100 or so professional investment managers who have been tactical trading including trend following a few decades. I’ve seen a range of experiences and outcomes. I can tell you that it isn’t easy. The only people who will say it is are those who aren’t actually doing it. Developing an edge either personally as a discretionary trader or through an automated trading system requires a tremendous amount of knowledge, skills, and self-discipline. Few have it, but some of us do. I believe in human performance because I’ve experienced it first hand. It’s like hockey or Indy racing. Anyone can attempt it, but only the most dedicated will achieve long-term success. Rest assured, discretionary or systematic, it’s still a human endeavor as long as it’s their money.

By now, you may be wondering what I believe and what I do.

I do a combination of these. I am Man + Machine.

I started charting over two decades ago and applied what I knew to develop computerized systems fifteen years ago. I still enjoy drawing charts like I share here on ASYMMETRY® Observations to see how trends are unfolding. I have several systems that are fully automated that trade all kinds of markets. I’ve learned a lot from just operating them for so long. But ultimately, I use my systems to inform decisions and generate signals and I have the necessary discipline to pull the trigger by sending instructions to my professional traders who execute my trades. That’s what works for me. What works for others may be different. I know where I am sitting right now and it’s where I want to be.

Without further ado, I present one of the first things I read on trend following published in 1999. As you will see, trend following and technical analysis are related. Trend following uses technical indicators like trend lines, moving averages, directional movement, and momentum to generate signals for following trends.

John Murphy is a well-known technical analyst whose books I have read for over two decades. His first book I read was Technical Analysis of the Futures Markets published in 1986 which was charting applied to commodities futures. One of my first introductions to the “trend following” strategy was John Murphy’s Technical Analysis of the Financial Markets published in 1999. I share the following with permission from John Murphy. He starts with the philosophy or rationale of technical analysis, which has an objective of following trends in hopes they will continue. The rest of the book describes many ways to actually identify trends.

Excerpt from Technical Analysis of the Financial Markets:

“There are three premises on which the technical approach is based:

  • Market action discounts everything.
  • Prices move in trends.
  • History repeats itself.

The statement “market action discounts everything” forms what is probably the cornerstone of technical analysis. Unless the full significance of this first premise is fully understood and accepted, nothing else that follows makes much sense. The technician believes that anything that can possibly affect the price— fundamentally, politically, psychologically, or otherwise— is actually reflected in the price of that market. It follows, therefore, that a study of price action is all that is required.

All the technician is really claiming is that price action should reflect shifts in supply and demand. If demand exceeds supply, prices should rise. If supply exceeds demand, prices should fall.

The technician then turns this statement around to arrive at the conclusion that if prices are rising, for whatever the specific reasons, demand must exceed supply and the fundamentals must be bullish. If prices fall, the fundamentals must be bearish.

Most technicians would probably agree that it is the underlying forces of supply and demand, the economic fundamentals of a market, that cause bull and bear markets. The charts do not in themselves cause markets to move up or down. They simply reflect the bullish or bearish psychology of the marketplace.

As a rule, chartists do not concern themselves with the reasons why prices rise or fall. Very often, in the early stages of a price trend or at critical turning points, no one seems to know exactly why a market is performing a certain way.

While the technical approach may sometimes seem overly simplistic in its claims, the logic behind this first premise— that markets discount everything— becomes more compelling the more market experience one gains.

It follows then that if everything that affects market price is ultimately reflected in market price, then the study of that market price is all that is necessary.

By studying price charts and a host of supporting technical indicators, the chartist in effect lets the market tell him or her which way it is most likely to go. The chartist does not necessarily try to outsmart or outguess the market.

All of the technical tools discussed later on are simply techniques used to aid the chartist in the process of studying market action.

The chartist knows there are reasons why markets go up or down. He or she just doesn’t believe that knowing what those reasons are is necessary in the forecasting process.

Prices Move in Trends

The concept of trend is absolutely essential to the technical approach. Here again, unless one accepts the premise that markets do in fact trend, there’s no point in reading any further.

The whole purpose of charting the price action of a market is to identify trends in early stages of their development for the purpose of trading in the direction of those trends. In fact, most of the techniques used in this approach are trend following in nature, meaning that their intent is to identify and follow existing trends.

There is a corollary to the premise that prices move in trends— a trend in motion is more likely to continue than to reverse. This corollary is, of course, an adaptation of Newton’s first law of motion. Another way to state this corollary is that a trend in motion will continue in the same direction until it reverses.

This is another one of those technical claims that seems almost circular. But the entire trend following approach is predicated on riding an existing trend until it shows signs of reversing.”

 

He explained the philosophy or rationale of technical analysis, which has an objective of following trends in hopes they will continue. The rest of the book describes many ways to actually identify trends.

As I see it, trend following uses technical indicators to generate signals for following trends.

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.

Asymmetric force was with the buyers

In Asymmetric force direction and size determines a trend, I explained how the net force of all the forces acting on a trend is the force that determines the direction. The force must be asymmetric as to direction and size to change the price and drive a directional trend.

The asymmetric force was with buyers as they dominated the directional trend on Friday.

Friday’s gain helped to push the stock market to a strong week and every sector gained.

The S&P 500 stock index is about -3% from it’s January high and closed slightly above the prior high last week. I consider this a short-term uptrend that will resume it’s longer-term uptrend if it can break into a new high above the January peak.

After declining sharply -10% to -12%, global equity markets are recovering. The good news for U.S. stocks is the Russell 2000 small company index is closest to its prior high. Small company leadership is considered bullish because it suggests equity investors are taking a risk on the smaller more nimble stocks.

As you can see in the chart, the Dow Jones Industrial Average and International Developed Countries (MSCI EAFE Europe, Australasia and Far East) are lagging so far off their lows but still recovering.

So far, so good, but only time will tell if these markets can exceed their old highs and breakout into new highs, or if they discover some resistance force at those levels and reverse back down. As we discussed in Asymmetric force direction and size determines a trend it’s going to depend on the direction and size of the buyers vs. sellers.

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.

Asymmetric force direction and size determines trend

In physical science, force is used to describe the motion of a push or pull. Newton’s first law of motion – sometimes referred to as the law of inertia. Newton’s first law of motion is stated as:

“An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.” —Newton’s First Law of Motion

Unbalanced force? well well, there’s another asymmetry.

A push or pull is a force. To define a force, we must know its direction and size. It works similar to supply and demand on market prices. If there is enough size in a direction, a price will move in that direction. If there isn’t enough price size in a direction, the price will stay the same.

There are two kinds of forces:

Symmetrical (balanced) forces are equal in size, but opposite in direction. Symmetric forces are balanced, so they lack the direction and size to cause a change a motion. The push and pull are equal and offsets each other. Applying the concept of force to price trends in the market, when balanced forces act on a market price at rest, the market price will not move. When buying enthusiasm and selling pressure are the same, the price will stay the same.

Asymmetrical (unbalanced) forces are not equal and are opposite in direction, so they cause a change in the motion. The size of one directional force is greater than the other, so it’s going to trend in that direction. Some examples of these unbalanced forces can be observed in physical science.

More than one force can be acting at the same time, so the forces are combined into the net force. The net force is the combination of all the forces acting on a trend. The net force determines the direction. If forces are trending in opposite directions, then the net force is the difference between the forces, and it will trend in the direction of the larger force. You can probably see how that is visible in a chart of a price trend.

If buyers are willing to buy more than sellers are willing to sell, the buying pressure is a force that forces up the price until it gets high enough to push sellers to sell.

If sellers are ready to sell more than buyers are willing to buy, the selling pressure is a force that pulls down the price until it gets low enough to pull in buyers to buy.

So, Newton’s first law of motion and inertia is related to Economics 101: When the size of the force of buyers or sellers is larger in one direction, the price will trend. We can observe who is more dominant by simply looking at a price trend chart or quantifying it in a trading system.

 

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.

Investment results are probabilistic, never a sure thing. Past performance is no guarantee of future results.

 

 

In remembrance of euphoria: Whatever happened to Stuart and Mr. P?

I have recently found myself reminiscing about the late 1990’s – specifically the grand euphoric year of 1999. If you aren’t sure why then maybe you aren’t paying attention. Sometimes not paying attention is a good thing if it prevents you from following a herd off a cliff.

The four most expensive words in the English language are “this time it’s different.” – John Templeton

Lately, I’ve been reminiscing about the tech stock bubble, the .com’s, and how the Nasdaq QQQ replaced the Dow Jones Industrial Average as the favorite index by 1999. Then there were all the infamous statements like “you don’t understand the New Economy”. We’ve been talking about the funny commercials from the baby trader to the college-age guy helping the mature executive start trading online, to “Be Bullish”.

Do you remember Stuart and Mr. P? Back in 1999, there were traditional “stockbrokers” who were registered with a brokerage firm, who bought and sold stocks, bonds, and options for individual and institutional clients. If you were a stockbroker back then, like I was, you probably remember it well. Online trading was the beginning of the end for the traditional “stockbroker” firms earning a $200 commission to buy or sell 100 shares. The great thing about the evolution of online trading is it lowered trading costs dramatically. For someone like me who wanted to be a tactical money manager anyway, that was a great thing. I embraced it and went on to start my investment management company. But the point of this observation is the investor sentiment in 1999. The video below is amazing to watch 20 years later. But what fascinates me the most is how it reminds me of today; different subjects, same sentiment.

Watch:

 

That may remind you of some of the things we hear today.

Those type of commercials flooded the financial news and evening news channels in 1999. To be sure, below is a WSJ article printed about the “Let’s Light This Candle” ad on December 7, 1999. I’ll tell ya what… that’s about as close to the top as you can get.

So, I wondered, what happened to Stuart and Mr. P? 

Stuart was helping Mr. P buy Kmart stock online. Kmart was then one of America’s leading discount retailers. The Kmart Corporation was the second largest U.S. discount retailer and major competitor to Walmart. Kmart filed for Chapter 11 bankruptcy protection in January 2002. Just two years after Stuart helped Mr. P buy shares online it filed for the largest ever retail bankruptcyKmart was later bought by Sears, which is now a failing company. At least Mr. P was wise enough to only buy 100 shares, young Stuart wanted him to buy 500 shares! They had no position size method to determine how much to buy based on risk, which would include a predefined exit. It is unlikely Mr. P had a predefined exit in place to exit the stock to cut the loss short. During that time, investors were only thinking about what to buy. They rarely considered how and when to exit a stock with a small loss to avoid a larger loss. After such a strong bull market, who is thinking about the risk of loss?

For those of us who remember, in the late 1990’s most investors weren’t just buying the largest retailers – they were buying technology. In hindsight, that period is now referred to as the “tech boom” or “tech bubble”. That’s because almost everyone wanted to buy tech stocks. Literally, even the most conservative seniors were cashing out bank CD’s to buy tech stock.  And… I’m not even going to get into the .com stocks, most of which no longer exist from that time.

Whether you remember the trend as my friends and I do or not, we can use historical price charts to see what happened. Below is the Technology Select Sector SPDR® ETF  since its inception 12/16/1998 to today. I’m starting with the full history to see the initial gain, before the waterfall decline. The Technology Select Sector SPDR® Fund seeks to:

“Provide precise exposure to companies from technology hardware, storage, and peripherals; software; diversified telecommunication services; communications equipment; semiconductors and semiconductor equipment; internet software and services; IT services; electronic equipment, instruments, and components; and wireless telecommunication services.”

Those were the most popular sectors, aside from the actual Internet stocks.

Below is what happened from December 9, 1999, when WSJ printed the article about the ad because it was so interesting and popular, to now. After nearly 20 years an investor buying the diversified tech sector would have just recently realized a profit, assuming they held on for 19 years.

Here is what that -80% drawdown looked like that lasted 19 years.

“Those who cannot remember the past are condemned to repeat it. “

George Santayana

 

This is a kickoff of a series of articles on this topic I have in queue on current global market conditions. Stay tuned…

Mike Shell is the founder of Shell Capital Management, LLC, a registered investment manager and portfolio manager of ASYMMETRY® Global Tactical.

All Eyes are Now on the Potential Government Shutdown

If the U. S. Government shuts down, it will be the 19th time. Looking at the table below, it doesn’t seem a big deal. The table shows the 18 prior government shutdowns going back to 1976. It lists the start and end date of the shutdown and the gain or loss for the S&P 500 stock index. The average is only a -0.60% loss from beginning to end of the shutdown.

But, here are some considerations: 
1. It is too small of a sample size to draw a statistically significant inference. Basic probability needs 30 data points.
2. It only shows the gain/loss from beginning and end of the shutdown.
3. It doesn’t show what happened before and after those dates. Was there more movement/drawdown before or after?
4. It doesn’t show what happened in between the start and end date so it may have been worse.
5. It doesn’t consider market stage at the time of shutdown. Was it overvalued and overbought? Or was it undervalued and oversold?

The truth is; anything can happen.
We don’t know for sure how it will play out. With such a small sample size of prior events and without factoring in the market conditions at the time, what it did in the past doesn’t provide us with a good expectation.

The current condition: if the government shuts down this time:
1. It will be when the U.S. stock market is at the second most expensive fundamental valuation, ever.
2. When investor and advisor bullish sentiment has reached record highs, at this point a contrary indicator.
3. As recent momentum indicators are at the highest levels ever seen before, at this point a contrary indicator.

My solution? always be prepared that anything can happen.
I know how much risk I’m willing to take given the possible outcomes and define my risk by knowing when I’ll hedge or exit.

 

Mike Shell is the founder of Shell Capital and the Portfolio Manager of ASYMMETRY® Global Tactical.

Counting down to the New Year

Doesn’t it seem the years are flying by?

It’s partially just math. It’s asymmetric!

We perceive that time seems to pass faster as we age because, at four years old, a year was 25% of our life. At 40 a year is only 2.5% of our life. The older we get, we perceive the years go by faster because each year is relatively less of our life.

Maybe we can’t control time, but we can make each year BETTER!

Or… maybe we can control our time?

As we get older, we tend to become more stable, so life can become routine. The more familiar we become with our day-to-day activities, the faster the days seem to pass by.

Want to slow down time? and have more fun?

Change things up! Create new experiences! Do new things!

What do wealthy people do differently?

This morning a financial planner who knows we are the investment manager to wealthy families asked me a great question:

“What do wealthy people do differently?”

I thought I would just sit here and write it out. These are my own observations over a few decades.

First, let’s define “wealthy”.

I’m going to define “wealthy” as someone who has already achieved “freedom”. Notice I said “freedom”, not just “financial freedom”. I’ve asked thousands of people over the past two decades “what is important about money to you?”. Ultimately, the question leads to one single word: “freedom”. So, there doesn’t seem to be a need to add “financial” in front of “freedom”. But, that isn’t to say you can’t have plenty of money without much freedom. You could say “Some people have far more money than they ever need but they still don’t enjoy their freedom because they keep working for more”. You may consider that person is still getting what they want. Some people just want to produce, and they never stop. They are still free. They have the freedom to keep doing what they love doing. In fact, some wealthy people are driven to create more wealth for a charity. No matter what our goals are in life, traveling, relaxing, time with family and friends, helping others, having enough capital to do what we want seems essential.

Having enough money to do what we want, when we want, seems to be the primary goal of most of us.

So, I define “wealthy” as someone who has already achieved “freedom”, regardless how he or she chooses to enjoy his or her freedom.

What do these people do differently than those who haven’t accumulated enough capital to say they are “wealthy”?

1. They save and invest money. The first thing that I have observed is that they simply save part of their income and invest it.

a. Save: They save it because they don’t spend more than they should. They save a large amount of themselves to use later. Even if they earn $X a year, they don’t the most they can for their home or carts. For example, a person earning $1 million a year may live in a $1 million neighborhood and a neighbor who earns $200,000 a year. Who do you think will be “wealthy”? One is stretched, the other is saving.

b. Invest: People who achieve “freedom” and the “wealthy” status don’t stop and just saving money in a bank account, they invest it. Wealthy people take the time to invest their money. Most of them invest with an investment manager who is fully committed to investment management.

2. Wealthy people care about their money. I know a lot of wealthy people, and I know just as many who aren’t. Those who are wealthy save and invest money, those who don’t spend it. As investment management clients, wealthy families are the first to complete forms, etc. as needed because they care about their money. They also appreciate investment managers who are on top of things as they would be.

3. Wealthy people are focused on that ONE thing they do best. Just like the book The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results says: they are focused. If they are a Physician, they focus on being a great Physician. If they own a company, they focus on their business. If they are a country music artist, they focus on being the best they can be. If they are an engineer, that’s their focus. They do what they do best and they find other people to do the things they don’t want to do like lawn maintenance or whatever. If you want to earn more money to save and invest, focus on what earns you the most and pay others for the things you aren’t so great at or don’t want to do.

4. They take some risks and manage their risk. To achieve wealth, we have to be both risk-takers and risk managers. If we take no risks in life, we’ll have no chance of reward. Not graduating from college has some risks, but so does attending. Who we marry, how we title our assets, how we insure our assets, and how we manage our assets all have risks and the potential for reward. Wealthy people tend to take risks in that one thing they are best at. They go “all in”. But wealthy people also direct and control their risks. They try to take good risks that are worth taking. It doesn’t matter how much wealth we accumulate if we aren’t able to keep it. For example, many people can remember how much wealth they created on paper up to 2000 only to see it cut in half. They did it again up to 2007 through 2009, and it took years to break even. Wealthy people know to realize a real profit, you have to take a profit. To avoid a large loss, we have to cut losses off at some point. Proper planning and risk management are essential.

5. Everything is relative, but yet it isn’t to them. I know business owners as well as Physicians who I consider wealthy as well as musicians, and athletes. But, you don’t have to earn $500,000 a year all your life to become wealthy. You don’t have to earn it all in a short time, either. I know people who have a total $500,000 invested who are wealthy. They have “enough”, for them. Depending on the lifestyle, others may not become wealthy until they have over $5 million if they spend a few hundred thousand a year traveling, etc. I also know families with several hundred million. Everything is relative, but wealthy people don’t compare their wealth and assets to others. They aren’t “keeping up with the Joneses”. People who do that often have large debts because they buy things they can’t afford with money they don’t have. Or, they save and invest less.  Wealthy people don’t buy a new car or house because their friend does, or compare their investment account to others. Wealthy people may be more introverted when it comes to personal finance – their focus is on their own family needs.

What do the wealthy do differently? They discover how much capital they need to enable the freedom to do what they want when they want, whatever that may be. Income alone, or the neighborhood we live in, or the cars we drive, or memberships don’t signal that we are wealthy. Some wealthy people are still operating their business, practice,  or “working”. A distinction is that they want to and they could choose to do something else with their time if they want. Wealthy families have saved and invested enough money to have achieved freedom. To do that, they focus on the thing they do best. They delegate the other stuff to someone else. They care about accumulating and managing their money and managing their risks. They appreciate investment managers and wealth managers who help them do it.

Resolving Conflicts with Relative Strength

In “Relative Strength can be a source of conflict for Tactical Traders” I explained how two different momentum indicators are in conflict with each other and can lead to conflict in tactical trading decisions. Tactical traders may use many different indicators and methods to determine whether to enter, hold, or exit a position. If we look at two conflicting indicators like this, we have to avoid becoming conflicted ourselves.

To avoid the conflicts, define clearly what they are and how to use them. To do that, I’m going to mix up a bowl of Physics and Psychology.

The indicators essentially represent the same thing. They apply a different algorithm, but both are momentum measures that determine the speed of change in price movements. A key difference is that the basic Relative Strength I used is a simple price change over a period. That simple Relative Strength algorithm simply compares the price change over a period to determine which trends are stronger and which are weaker. Tactical Traders using this method of Relative Strength expect the stronger trends will continue to be stronger and the weaker trends will continue to be weaker. A trend in motion is expected to continue in that direction until some inertia comes along and changes it. You may recognize this from Physics:

Newton’s first law of motion states that “An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.” Objects tend to “keep on doing what they’re doing.” In fact, it is the natural tendency of objects to resist changes in their state of motion. This tendency to resist changes in their state of motion is described as inertia.

Inertia: the resistance an object has to a change in its state of motion.

We can say the same about investor behavior and beliefs when we look at confirmation bias.

Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that confirms one’s preexisting beliefs or hypotheses.

That psychological bias is similar to the physics law of motion;

“Objects tend to keep on doing what they’re doing. In fact, it is the natural tendency of objects to resist changes in their state of motion.”

Investor and trader behavior and Confirmation Bias seems to agree with the first law of motion.

You can probably see how we may develop our beliefs because of our environment. If we observe over time the natural tendency of objects to resist changes in their state of motion then we may expect a trend to continue.

It gets more interesting. According to The Physics Classroom:

Newton’s conception of inertia stood in direct opposition to more popular conceptions about motion. The dominant thought prior to Newton’s day was that it was the natural tendency of objects to come to a rest position. Moving objects, so it was believed, would eventually stop moving; a force was necessary to keep an object moving. But if left to itself, a moving object would eventually come to rest and an object at rest would stay at rest; thus, the idea that dominated people’s thinking for nearly 2000 years prior to Newton was that it was the natural tendency of all objects to assume a rest position.

So, up until Newton’s first law of motion, people believed trends would eventually end instead of continue. In that same way, some people look for and expect recent price trends to change rather than continue.

We have discovered two different beliefs.

  • A trend in motion will stay in motion with the same speed and direction (unless acted upon by an unbalanced force).
  • A trend will eventually stop moving (a force is necessary to keep an object moving).

A Tactical Trader using Relative Strength based on the rate of change assumes that trend speed and direction will continue into the future. This is more in agreement with Newton’s first law.

A Tactical Trader using the Relative Strength Indicator, an oscillator,  assumes that trend speed and direction will oscillate between a range. If it reaches “oversold” it may reverse back up and if it reaches “overbought” it may reverse back down. This is more like the Physics beliefs prior to Newton’s first law when they expected a trend or motion to change.

To avoid conflicts between these two concepts and indicators, I define them separately as Trend Following and Countertrend.

Trend Following systems are methods that aim to buy securities that are rising and sell securities that are declining. Trend following is directional – it focuses on the direction of prices. Not all measures of Relative Strength are directional, but the one I used is. I simply ranked the sectors based on their price change over 3 months. That is an absolute ranking, but also a relative ranking. I may require the price change to be positive to enter a position. Some Relative Strength methods are only relative, so they don’t require a positive trend. They may enter the sectors that have a better price change over the period even if it’s negative.

Countertrend systems aim to bet against the recent price trend for the purpose of pursuing a capital gain or for hedging. In a strongly rising market, a countertrend strategy may believe the price is more likely to reverse. For example, the RSI is “overbought.” In a  declining market, a countertrend strategy may indicate the trend is likely to reverse back up. For example, RSI is “oversold.” The risk is, an oversold market can keep trending lower and an overbought market may keep trending up!

I believe there are directional trends that are more likely to continue than to reverse – so I apply Trend Following to them. That necessarily means I believe investors may underreact to new information causing the price trend to drift gradually over time to match supply and demand.

I also believe that trends can reach an extreme, especially in the short run, by overreacting to information or extremes in sentiments like fear and greed. Because I have observed trends reaching an extreme, I may apply overbought and oversold methods for countertrend trading.

When I see the chart below, I think:

“The trend is up, it has moved up fast enough to be overbought in the short term, so it may pull back some and then the trend may resume to the upside”.

I combine the two, rather than them necessarily being in conflict with each other. I believe the high RSI number is confirming the strong trend, but I also believe it suggests it may not be the best entry point if you care about entering a position that may decline a few percent after you enter it.

So, I believe both of these systems can be applied at different times depending on the market state of the trend type. When a price trend is oscillating up and down over time but not necessarily making a major new high or low, a Countertrend method may capture profits from those swings. When a trend is moving up or down for a prolonged period that same Countertrend system may catch some of the profits and miss some as well. That is because it expects the trend to reverse at certain points and it doesn’t. However, a Trend Following system may better capture the overall trend when it keeps trending. But, none of them are perfect. If a Trend Following system captures the bigger trend it also means it will likely participate in a drawdown when the trend does end. If the Trend Following algorithm is loose enough to ride the trend without whipsaws, it will also be loose enough to lose some gains when the trend does change to the other direction.

If Tactical Traders and investors have useful definitions like these and can apply these different methods to different types of markets, with the right mindset and expectations we can avoid the conflicts.

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.

Relative Strength can be a source of conflict for Tactical Traders

Relative Strength can be a source of conflict for Tactical Traders. I was talking to another tactical trader who manages a hedge fund. He said:

“Industrials are a leading sector, but it’s overbought”.

Relative Strength is a simple measurement to determine which stock, sector, or market has trended up the most over a period of time.  For example, when we rank U.S. sectors over a period of 3 months to see which sectors have been trending the strongest, we see sectors like Financials, Energy, Materials, and Industrials have been the leaders over the past three months. Of course, past performance doesn’t necessarily indicate it will continue into the future. As with any trend indicator, Relative Strength is always looking at the past, never the unknowable future.

To see a different visual, below is how those same sectors appear in a line chart over the past 3 months. We observe that most of the sectors have trended in a wide range over the past few months.

 

When ranked by Relative Strength, the Industrial Sector is a leader compared to other sectors and its directional trend can also be seen in its price chart.

No, wait.

Now that I’ve pulled the chart up: The Industrial sector is overbought right now based on the Relative Strength Index. I highlighted the indicator over 70 with the red line.

So, one “Relative Strength” indicator says it’s in a strong relative trend, the other suggests its “overbought”.

These two indicators sound the same, but they are different, but also the same. It depends on what you think it represents. Both of them actually represent the same thing, but the expectation from them is the opposite.

Relative Strength as I used above, is just a simple comparison of the price trends over the past 3 months, or whatever time frame you want to use.

The Relative Strength Index is a momentum oscillator that measures the speed and change of price movements. That doesn’t sound much different than Relative Strength. The equation is different. The way it is used is different. RSI oscillates between zero and 100. The default time frame is only 14 days. Without writing a book on it, I’ll share that RSI is intended to capture the shorter term swings in a price trend. Since it’s using 14 days, it’s assuming a cycle of 28 days.

When the RSI exceeds 70 it’s considered “overbought” because, mathematically, it has moved a little too far, too fast. When it gets “overbought” it’s expected to either drift sideways for some time or reverse back down. We may indeed observe the price trend stalling at overbought levels. The trouble is, it isn’t perfect. A strong trending price with a lot of inertia can continue trending up and just get more and more overbought. I find that investors who pay a lot of attention to it are concerned their profit will be erased, so they are looking to take profits when it appears overbought.

When the RSI declines below 30 it’s considered “oversold” because, mathematically, it has moved down a little too far, too fast. When it gets “oversold” it’s expected to either drift sideways for some time or reverse back up. We may indeed observe the price trend stalling at oversold levels. The trouble is, a waterfall declining price trend with a lot of inertia like panic can continue trending down and just get more and more oversold. Buying oversold markets, sectors, or stocks can lead to profits, but it’s like catching a falling knife. When I buy oversold markets, I focus on the high dividend yield positions whos yield gets higher as the price falls.

Tactical traders use many different indicators and methods to determine whether to enter, hold, or exit a position. If we look at two conflicting indicators like this, we have to avoid becoming conflicted ourselves. Many tactical traders may experience Confirmation Bias, looking for an indicator that agrees with what they already believe.

So, let’s look at that chart again. On the one hand, it’s trending up! On the other hand, it’s overbought! Will the trend continue or will it reverse down?

We don’t know, but different tactical traders use different methods to enter, hold, and exit positions. I know tactical traders who use only Relative Strength. I know others who mainly use RSI. They are buying and selling each other’s positions and both of them could be profitable overall. If you don’t like to enter a position that may decline in the weeks ahead you may want to avoid high RSI “overbought” markets if you believe they may decline in the short term. If you are a trend following purist who loves to buy new breakouts you’ll ignore the RSI and instead realize a high RSI indicators a strong trend and go for it. Said another way: do you fear missing a trend or fear losing money short term.

It’s easy to say “Don’t get conflicted and biased!” but another to shed more light on the conflict.

Tomorrow I’m going to share with you how I see it.

Stay tuned.

Read Part 2: Resolving Conflicts with Relative Strength

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.

Name ONE thing money can’t buy?

money business finance investment

Name ONE thing money can’t buy? asked a friend on Facebook that got responses like happiness, respect, health, love, freedom, and class.

My answer:

Anything.

Money itself can’t buy anything.

Money is a medium of exchange. It is used to facilitate the trade of things between people.

For example, we can trade our time for money or our money for time.

It is people who buys things with it, saves it, or invests it.

Money itself doesn’t buy anything.

It’s what people do with their money that determines its usefulness for them. Perceptions about money are an individual preference based on individual circumstances.

Let’s consider the replies about happiness, respect, health, love, freedom, and class.

Money can’t buy happiness?

Happiness is a mental or emotional state of well-being defined by positive or pleasant emotions ranging from contentment to intense joy.

So, it depends on what makes you happy.

If being at home with the family makes you happy, having more money can facilitate that if you don’t have to leave home for work. If traveling and new experiences make you happy, money can allow you to do it. If playing more golf makes you happy then having an abundance of money allows you the freedom to do the things makes you happy.

But, you have to use your money in a way that makes you happy. Money itself doesn’t do it for you.

Money can’t buy respect?

Respect is a feeling of deep admiration for someone or something elicited by their abilities, qualities, or achievements. Money itself isn’t going to buy us any respect. However, the source of our money and what we do with it may lead to greater respect.

Money itself isn’t going to buy us any respect. However, the source of our money and what we do with it may lead to greater respect. If respect is admiration of abilities, qualities, or achievements, then those things may also lead to more money than less. Money is a medium of exchange, so money is measured and valued to be exchanged for other things.

We have to admit that some of our abilities and achievements can be measured in monetary terms. Professionally, money is the direct exchange from our abilities and achievements. So, someone may not respect us for how much money we have, but they may respect us for what we did to earn it. Money is the measure of whether or not our abilities, qualities, or achievements have paid off. Maybe you know someone who speaks highly of their abilities, qualities, and achievements but never has money, wants to borrow money from you, or is jealous of other people who have money.

Money can’t buy Love?

Can’t buy me love, love
Can’t buy me love

I’ll buy you a diamond ring my friend if it makes you feel alright
I’ll get you anything my friend if it makes you feel alright
Cos I don’t care too much for money, and money can’t buy me love

I’ll give you all I got to give if you say you’ll love me too
I may not have a lot to give but what I got I’ll give to you
I don’t care too much for money, money can’t buy me love
Can’t buy me love, everybody tells me so
Can’t buy me love, no no no, no

Love is or warm personal attachment or an intense feeling of deep affection.

Money doesn’t buy anything itself, so it doesn’t buy love.

But, if you spend your money buying flowers or golf balls to express your affection for another you may discover it leads to greater love.

To be sure, just try it.

If that doesn’t work, buy them some wine.

The reality is, when we spend some money expressing our affection for others we may get some affection in return.

Or, maybe a day hug and kiss will do.

Money can’t buy health?

Health is a state of complete physical, mental, and social well-being and not merely the absence of disease or infirmity.

Since much of health is about staying fit, eating healthy, and a good state of mind, it seems that more money can lead to better health than less. For example, if we have the freedom with our time to get out and walk or train in a gym we may stay more healthy. If we have the money to afford medical care and advanced treatment we may live more healthy. If we don’t have the stress that comes with a lack of money we may have a better overall well-being. But, we have to choose a healthier lifestyle.

We can have less stress and better health without money I suppose, but it seems we need some level of money to achieve good health.

Money can’t buy class?

Classy means elegant, stylish, or having high standards of personal behavior. So, “classy” is certainly relative and dependent.

Class is a tricky one, since “being classy” is very relative and a personal preference.

For example, an aristocratic Southern family may consider going out hunting on horseback to be “classy”. Someone living on a golf course and country club considers their lifestyle to be “classy” and may think horseback riding and hunting is the opposite of “classy”. Those aristocratic Southerners who live on fine farms that ride horses and hunt believe those who live on golf courses are far from “classy”. Someone in New York City may believe walking on concrete to eat in a crowded restaurant in a suit and dress is “classy”.Maybe all of them are “classy”, but in different ways.

Money doesn’t buy anything, so it can’t buy class, either. But, if you want to be classy I suppose you could buy some classes on being classy or money buys the time to spend learning how to be classy if you aren’t already “classy”.  But, class is a relative thing. What is considered classy depends on the person.

My suggestion: be who you really are. Some may consider you classy, others may not. You may not care – if you have enough money!

Money can’t buy freedom?

freedom

Freedom is the power or right to act, speak, or think as one wants without hindrance or restraint.

To better understand who can do that, consider who can’t. Who can’t act, speak, or think as one wants without hindrance or restraint? What may prevent someone from acting, speaking, or thinking as one wants without hindrance or restraint?

You got it.

When you have financial freedom, you not only have the abundance of money to do what you want, when you want, but you also have more freedom to act, speak, or think as one wants without hindrance or restraint.

Money itself can’t buy anything.

It is people who buys things with it, saves it, or invests it.

Money is just the medium of exchange.

What you choose to do with it determines its usefulness, to you.

What you choose to do with money determines if it leads to happiness, respect, health, love, and freedom, for you.

If you have enough money that it allows you the freedom to do what you want, when you want, and with whom you want, you decide what you get in exchange from it.

The reality is, saving and investing money and spending it wisely can lead to greater happiness, freedom, health, respect, and even love if that’s what you want.

On Sheep, Wolves and Sheepdogs

I consider On Sheep, Wolves and Sheepdogs from the book, On Combat, by Lt. Col. Dave Grossman, to be essential. It is absolutely necessary to understand the concepts so that we know who we are, where we fit in, and how we interact with each other. It’s one of the greatest concepts and helps to understand all kinds of situations in life. If you are a sheep, find and support a sheepdog. If you are a sheepdog, find and support the sheep. There is nothing wrong with being a sheep or a sheepdog, it’s a choice and it’s your choice. But if you are the wolf, the sheepdogs are waiting for you.

on-sheep-wolves-and-sheepdogs

On Sheep, Wolves and Sheepdogs by Lt. Col. Dave Grossman (reprinted with permission)

“Honor never grows old, and honor rejoices the heart of age. It does so because honor is, finally, about defending those noble and worthy things that deserve defending, even if it comes at a high cost. In our time, that may mean social disapproval, public scorn, hardship, persecution, or as always, even death itself. The question remains: What is worth defending? What is worth dying for? What is worth living for?”

– William J. Bennett
In a lecture to the United States Naval Academy
November 24, 1997

One Vietnam veteran, an old retired colonel, once said this to me: “Most of the people in our society are sheep. They are kind, gentle, productive creatures who can only hurt one another by accident.” This is true. Remember, the murder rate is six per 100,000 per year, and the aggravated assault rate is four per 1,000 per year. What this means is that the vast majority of Americans are not inclined to hurt one another.

Some estimates say that two million Americans are victims of violent crimes every year, a tragic, staggering number, perhaps an all-time record rate of violent crime. But there are almost 300 million Americans, which means that the odds of being a victim of violent crime is considerably less than one in a hundred on any given year. Furthermore, since many violent crimes are committed by repeat offenders, the actual number of violent citizens is considerably less than two million.

Thus there is a paradox, and we must grasp both ends of the situation: We may well be in the most violent times in history, but violence is still remarkably rare. This is because most citizens are kind, decent people who are not capable of hurting each other, except by accident or under extreme provocation. They are sheep.

I mean nothing negative by calling them sheep. To me it is like the pretty, blue robin’s egg. Inside it is soft and gooey but someday it will grow into something wonderful. But the egg cannot survive without its hard blue shell. Police officers, soldiers and other warriors are like that shell, and someday the civilization they protect will grow into something wonderful. For now, though, they need warriors to protect them from the predators.

“Then there are the wolves,” the old war veteran said, “and the wolves feed on the sheep without mercy.” Do you believe there are wolves out there who will feed on the flock without mercy? You better believe it. There are evil men in this world and they are capable of evil deeds. The moment you forget that or pretend it is not so, you become a sheep. There is no safety in denial.

“Then there are sheepdogs,” he went on, “and I’m a sheepdog. I live to protect the flock and confront the wolf.” Or, as a sign in one California law enforcement agency put it, “We intimidate those who intimidate others.”

If you have no capacity for violence then you are a healthy productive citizen: a sheep. If you have a capacity for violence and no empathy for your fellow citizens, then you have defined an aggressive sociopath–a wolf. But what if you have a capacity for violence, and a deep love for your fellow citizens? Then you are a sheepdog, a warrior, someone who is walking the hero’s path. Someone who can walk into the heart of darkness, into the universal human phobia, and walk out unscathed.

The gift of aggression

“What goes on around you… compares little with what goes on inside you.”
– Ralph Waldo Emerson

Everyone has been given a gift in life. Some people have a gift for science and some have a flair for art. And warriors have been given the gift of aggression. They would no more misuse this gift than a doctor would misuse his healing arts, but they yearn for the opportunity to use their gift to help others. These people, the ones who have been blessed with the gift of aggression and a love for others, are our sheepdogs. These are our warriors.

One career police officer wrote to me about this after attending one of my Bulletproof Mind training sessions:

“I want to say thank you for finally shedding some light on why it is that I can do what I do. I always knew why I did it. I love my [citizens], even the bad ones, and had a talent that I could return to my community. I just couldn’t put my finger on why I could wade through the chaos, the gore, the sadness, if given a chance try to make it all better, and walk right out the other side.”

Let me expand on this old soldier’s excellent model of the sheep, wolves, and sheepdogs. We know that the sheep live in denial; that is what makes them sheep. They do not want to believe that there is evil in the world. They can accept the fact that fires can happen, which is why they want fire extinguishers, fire sprinklers, fire alarms and fire exits throughout their kids’ schools. But many of them are outraged at the idea of putting an armed police officer in their kid’s school. Our children are dozens of times more likely to be killed, and thousands of times more likely to be seriously injured, by school violence than by school fires, but the sheep’s only response to the possibility of violence is denial. The idea of someone coming to kill or harm their children is just too hard, so they choose the path of denial.

The sheep generally do not like the sheepdog. He looks a lot like the wolf. He has fangs and the capacity for violence. The difference, though, is that the sheepdog must not, cannot and will not ever harm the sheep. Any sheepdog who intentionally harms the lowliest little lamb will be punished and removed. The world cannot work any other way, at least not in a representative democracy or a republic such as ours.

Still, the sheepdog disturbs the sheep. He is a constant reminder that there are wolves in the land. They would prefer that he didn’t tell them where to go, or give them traffic tickets, or stand at the ready in our airports in camouflage fatigues holding an M-16. The sheep would much rather have the sheepdog cash in his fangs, spray paint himself white, and go, “Baa.”

Until the wolf shows up. Then the entire flock tries desperately to hide behind one lonely sheepdog. As Kipling said in his poem about “Tommy” the British soldier:

While it’s Tommy this, an’ Tommy that, an’ “Tommy, fall be’ind,”
But it’s “Please to walk in front, sir,” when there’s trouble in the wind,
There’s trouble in the wind, my boys, there’s trouble in the wind,
O it’s “Please to walk in front, sir,” when there’s trouble in the wind.

The students, the victims, at Columbine High School were big, tough high school students, and under ordinary circumstances they would not have had the time of day for a police officer. They were not bad kids; they just had nothing to say to a cop. When the school was under attack, however, and SWAT teams were clearing the rooms and hallways, the officers had to physically peel those clinging, sobbing kids off of them. This is how the little lambs feel about their sheepdog when the wolf is at the door. Look at what happened after September 11, 2001, when the wolf pounded hard on the door. Remember how America, more than ever before, felt differently about their law enforcement officers and military personnel? Remember how many times you heard the word hero?

Understand that there is nothing morally superior about being a sheepdog; it is just what you choose to be. Also understand that a sheepdog is a funny critter: He is always sniffing around out on the perimeter, checking the breeze, barking at things that go bump in the night, and yearning for a righteous battle. That is, the young sheepdogs yearn for a righteous battle. The old sheepdogs are a little older and wiser, but they move to the sound of the guns when needed right along with the young ones.

Here is how the sheep and the sheepdog think differently. The sheep pretend the wolf will never come, but the sheepdog lives for that day. After the attacks on September 11, 2001, most of the sheep, that is, most citizens in America said, “Thank God I wasn’t on one of those planes.” The sheepdogs, the warriors, said, “Dear God, I wish I could have been on one of those planes. Maybe I could have made a difference.” When you are truly transformed into a warrior and have truly invested yourself into warriorhood, you want to be there. You want to be able to make a difference.

While there is nothing morally superior about the sheepdog, the warrior, he does have one real advantage. Only one. He is able to survive and thrive in an environment that destroys 98 percent of the population.

There was research conducted a few years ago with individuals convicted of violent crimes. These cons were in prison for serious, predatory acts of violence: assaults, murders and killing law enforcement officers. The vast majority said that they specifically targeted victims by body language: slumped walk, passive behavior and lack of awareness. They chose their victims like big cats do in Africa, when they select one out of the herd that is least able to protect itself.

However, when there were cues given by potential victims that indicated they would not go easily, the cons said that they would walk away. If the cons sensed that the target was a “counter-predator,” that is, a sheepdog, they would leave him alone unless there was no other choice but to engage.

One police officer told me that he rode a commuter train to work each day. One day, as was his usual, he was standing in the crowded car, dressed in blue jeans, T-shirt and jacket, holding onto a pole and reading a paperback. At one of the stops, two street toughs boarded, shouting and cursing and doing every obnoxious thing possible to intimidate the other riders. The officer continued to read his book, though he kept a watchful eye on the two punks as they strolled along the aisle making comments to female passengers, and banging shoulders with men as they passed.

As they approached the officer, he lowered his novel and made eye contact with them. “You got a problem, man?” one of the IQ-challenged punks asked. “You think you’re tough, or somethin’?” the other asked, obviously offended that this one was not shirking away from them.

“As a matter of fact, I am tough,” the officer said, calmly and with a steady gaze.

The two looked at him for a long moment, and then without saying a word, turned and moved back down the aisle to continue their taunting of the other passengers, the sheep.

Some people may be destined to be sheep and others might be genetically primed to be wolves or sheepdogs. But I believe that most people can choose which one they want to be, and I’m proud to say that more and more Americans are choosing to become sheepdogs.

Seven months after the attack on September 11, 2001, Todd Beamer was honored in his hometown of Cranbury, New Jersey. Todd, as you recall, was the man on Flight 93 over Pennsylvania who called on his cell phone to alert an operator from United Airlines about the hijacking. When he learned of the other three passenger planes that had been used as weapons, Todd dropped his phone and uttered the words, “Let’s roll,” which authorities believe was a signal to the other passengers to confront the terrorist hijackers. In one hour, a transformation occurred among the passengers–athletes, business people and parents–from sheep to sheepdogs and together they fought the wolves, ultimately saving an unknown number of lives on the ground.

“Do you have any idea how hard it would be to live with yourself after that?” 

“There is no safety for honest men except by believing all possible evil of evil men.”
– Edmund Burke

Reflections on the Revolution in France

Here is the point I like to emphasize, especially to the thousands of police officers and soldiers I speak to each year. In nature the sheep, real sheep, are born as sheep. Sheepdogs are born that way, and so are wolves. They didn’t have a choice. But you are not a critter. As a human being, you can be whatever you want to be. It is a conscious, moral decision.

If you want to be a sheep, then you can be a sheep and that is okay, but you must understand the price you pay. When the wolf comes, you and your loved ones are going to die if there is not a sheepdog there to protect you. If you want to be a wolf, you can be one, but the sheepdogs are going to hunt you down and you will never have rest, safety, trust or love. But if you want to be a sheepdog and walk the warrior’s path, then you must make a conscious and moral decision every day to dedicate, equip and prepare yourself to thrive in that toxic, corrosive moment when the wolf comes knocking at the door.

For example, many officers carry their weapons in church. They are well concealed in ankle holsters, shoulder holsters or inside-the-belt holsters tucked into the small of their backs. Anytime you go to some form of religious service, there is a very good chance that a police officer in your congregation is carrying. You will never know if there is such an individual in your place of worship, until the wolf appears to slaughter you and your loved ones.

I was training a group of police officers in Texas, and during the break, one officer asked his friend if he carried his weapon in church. The other cop replied, “I will never be caught without my gun in church.” I asked why he felt so strongly about this, and he told me about a police officer he knew who was at a church massacre in Ft. Worth, Texas, in 1999. In that incident, a mentally deranged individual came into the church and opened fire, gunning down 14 people. He said that officer believed he could have saved every life that day if he had been carrying his gun. His own son was shot, and all he could do was throw himself on the boy’s body and wait to die. That cop looked me in the eye and said, “Do you have any idea how hard it would be to live with yourself after that?”

Some individuals would be horrified if they knew this police officer was carrying a weapon in church. They might call him paranoid and would probably scorn him. Yet these same individuals would be enraged and would call for “heads to roll” if they found out that the airbags in their cars were defective, or that the fire extinguisher and fire sprinklers in their kids’ school did not work. They can accept the fact that fires and traffic accidents can happen and that there must be safeguards against them. Their only response to the wolf, though, is denial, and all too often their response to the sheepdog is scorn and disdain. But the sheepdog quietly asks himself, “Do you have any idea how hard it would be to live with yourself if your loved ones were attacked and killed, and you had to stand there helplessly because you were unprepared for that day?”

The warrior must cleanse denial from his thinking. Coach Bob Lindsey, a renowned law enforcement trainer, says that warriors must practice “when/then” thinking, not “if/when.” Instead of saying,“If it happens then I will take action,” the warrior says, “When it happens then I will be ready.”

It is denial that turns people into sheep. Sheep are psychologically destroyed by combat because their only defense is denial, which is counterproductive and destructive, resulting in fear, helplessness and horror when the wolf shows up.

Denial kills you twice. It kills you once, at your moment of truth when you are not physically prepared: You didn’t bring your gun; you didn’t train. Your only defense was wishful thinking. Hope is not a strategy. Denial kills you a second time because even if you do physically survive, you are psychologically shattered by fear, helplessness, horror and shame at your moment of truth.

Chuck Yeager, the famous test pilot and first man to fly faster than the speed of sound, says that he knew he could die. There was no denial for him. He did not allow himself the luxury of denial. This acceptance of reality can cause fear, but it is a healthy, controlled fear that will keep you alive:

“I was always afraid of dying. Always. It was my fear that made me learn everything I could about my airplane and my emergency equipment, and kept me flying respectful of my machine and always alert in the cockpit.”

– Brigadier General Chuck Yeager
Yeager, An Autobiography

Gavin de Becker puts it like this in Fear Less, his superb post-9/11 book, which should be required reading for anyone trying to come to terms with our current world situation:

“..denial can be seductive, but it has an insidious side effect. For all the peace of mind deniers think they get by saying it isn’t so, the fall they take when faced with new violence is all the more unsettling. Denial is a save-now-pay-later scheme, a contract written entirely in small print, for in the long run, the denying person knows the truth on some level.”

And so the warrior must strive to confront denial in all aspects of his life, and prepare himself for the day when evil comes.

If you are a warrior who is legally authorized to carry a weapon and you step outside without that weapon, then you become a sheep, pretending that the bad man will not come today. No one can be “on” 24/7 for a lifetime. Everyone needs down time. But if you are authorized to carry a weapon, and you walk outside without it, just take a deep breath, and say this to yourself… “Baa.”

This business of being a sheep or a sheepdog is not a yes-no dichotomy. It is not an all-or-nothing, either-or choice. It is a matter of degrees, a continuum. On one end is an abject, head-in-the-grass sheep and on the other end is the ultimate warrior. Few people exist completely on one end or the other. Most of us live somewhere in between. Since 9-11 almost everyone in America took a step up that continuum, away from denial. The sheep took a few steps toward accepting and appreciating their warriors, and the warriors started taking their job more seriously. The degree to which you move up that continuum, away from sheephood and denial, is the degree to which you and your loved ones will survive, physically and psychologically at your moment of truth.

Source: On Combat The Psychology and Physiology of Deadly Conflict in War and in Peace by Dave Grossman 

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.

Asymmetric Volatility

Volatility is how quickly and how far data points spread out.

Asymmetric is not identical on both sides, imbalanced, unequal, lacking symmetry.

This time of year we are reminded of asymmetric volatility in the weather. The wide range in the temperature is highlighted in the morning news.

This morning, it’s 72 degrees and sunny down south and below freezing and snowing up north.

asymmetric-volatility

Source: MyRadar

Some of the news media presents the variation in a way that invites relative thinking. Just like the financial news programs that show what has gained and lost the most today, the weather shows the extreme highs and lows.

Those who watch the financial news may feel like they missed out on the stock or market that gained the most, then be glad they weren’t in one that lost the most. Some feelings may be more asymmetric: they feel one more than the other.

Prospect Theory says most of us feel a loss much greater that we do a gain. It’s another asymmetry: losses hurt more than gains feel good (loss aversion).

If you are up north trying to stay warm, you may wish you were down south sitting on the beach.

If you are down south trying to stay cool, you may wish you were up north playing in the snow!

It really doesn’t matter how extreme the difference is (the volatility). The volatility is what it is. Volatility is just a range.

What matters is what we want to experience.

If we want to experience snow we can fly up north.

If we want to experience sunny warmth we can fly down south.

If we want less volatility, we could live down south in the winter and up north in the summer.

We get to decide what we experience.

Investors feel and do the wrong thing at the wrong time…

Investors feel and do the wrong thing at the wrong time…

Many studies show that investors have poor results over the long haul including both bull and bear markets. For example, DALBAR has been conducting their annual Quantitative Analysis Of Investor Behavior study for 22 years now.

DALBAR’s Quantitative Analysis of Investor Behavior (QAIB) has been measuring the effects of investor decisions to buy, sell and switch into and out of mutual funds over both short and long-term time frames. The results consistently show that the average investor earns less – in many cases, much less – than mutual fund performance reports would suggest.

Their goal of QAIB is to improve investor performance by pointing out the factors that influence behaviors that determine the outcome of investment or savings strategies. They conclude individuals have poor results for two primary reasons:

  1. Lack of capital investment.
  2. Investor Psychology.

If someone doesn’t save and invest some of their money, they’ll never have a chance to have good long-term results. However, they find the biggest reason for poor results by investors who do invest in the markets over time is investor psychology. Investors tend to do the wrong thing at the wrong time, especially at market extremes.

The chart below illustrates how investors tend to let their emotions lead them astray. The typical “bull market” for stocks may last four or five years. After investors keep hearing of rising market prices and headlines of “new highs” they want to invest more and more – they become euphoric. The may get more “aggressive”. However, those gains are in the past. Market trends are a good thing, but they can move to an extreme high (or low) and then reverse. Investors feel euphoria just as the stock market is getting “overvalued” at the end of a market cycle.

Look at that chart: what big trend do you think happens next? 

do-your-emotions-lead-you-astraySource: Investing and Emotions

On the downside, investors panic after large losses. There are many ways that investors get caught in this loss trap. For example, some are told to “stay in the market” so they hold on beyond their uncle point and then tap out. After they sell at much lower prices, they are too afraid to “get back in.”  They are “Panic-Stricken.” They don’t discover the actual risk of their passive asset allocation until it’s too late and their losses are larger than they expected.

Investors need to know their real tolerance for loss before the loss happens. Then, they need to invest in a program that offers a matching level of risk management, so they don’t lose so much they tap out and lock in significant losses. If they reach their uncle point and tap out, they have an even more difficult challenge to get back on track.

You want to be greedy when others are fearful. You want to be fearful when others are greedy. It’s that simple. – Warren Buffett

The chart above shows twenty-one years of the historical return of the S&P 500 stock index. Look at the graph above to see the points this happens. It shows an idealized example of investor emotions as prices trend up and down. As prices trend up, investors initially feel cautious, then hopeful, encouraged, positive, and as prices move higher and higher, they feel confident and thrilled to the point of euphoric. That’s when they want to get “more aggressive” when they should be doing the opposite. The worst investors actually do get more aggressive as they become euphoric at new highs, and then they get caught in those “more aggressive” holdings as the markets decline -20%, -30%, -40%, or more than -50%.

After such investment losses investors first feel surprised, then as their losses mount they feel nervous, then worried, then panic-stricken. But this doesn’t happen so quickly. You see, larger market declines often take a year or two to play out. The most significant declines don’t fall in just a few months then recover. The significant declines we point out above are -50% declines that took 3 – 5 years or more to get back to where they started. So, they are made up of many swings up and down along the way. If you look close at the chart, you’ll see those swings. It’s a long process – not an event. So few investors notice what is happening until it’s well in the past. They are watching the daily moves (the leaf on a tree) rather than the bigger picture (the forest).

So, investors get caught in a loss trap because the swings along the way lead them astray.  Their emotions make them oscillate between the fear missing out and the fear of losing money and that’s why investors have poor results over a full market cycle. A full market cycle includes a major peak like the Euphoric points on the chart and major lows like the Panic-Stricken points. Some investors make their mistakes by getting euphoric at the tops, and others make them by holding on to falling positions too long and then panicking after the losses are too large for them.

At Shell Capital, I manage an investment program that intends to avoid these mistakes. I prefer to avoid the massive losses, so I don’t have panicked investors. And, we don’t have to dig out of large holes. That also necessarily means we don’t want to get euphoric at the tops. I want to do the opposite of what DALBAR finds most people do. To do that, I must necessarily be believing and doing things different than most people – a requirement for good long term results. But, creating exceptional investment performance over an extended period of ten years or more isn’t enough. We also have to help our investor clients avoid the same mistakes most people make. You see, if I am doing things very differently than most people, then I’m also doing it at nearly the opposite of what they feel should be done. Our investors have to be able to deal with that, too.

If you are like-minded, believe what we believe, and want investment managementcontact us. This is not investment advice. If you need individualized advice, please contact us  

 

Source for the chart: BlackRock; Informa Investment Solutions. Emotions are hypothetical and for illustrative purposes only. The S&P 500 Index is an unmanaged index that consists of the common stock of 500 large-capitalization companies, within various industrial sectors, most of which are listed on the New York Stock Exchange. Returns assume reinvestment of dividends. It is not possible to invest directly in an index. Past performance is no guarantee of future results. The information provided is for illustrative purposes only.

A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.”

Max Planck, Nobel Prize-winning physicist

Max Planck

Source: https://en.wikiquote.org/wiki/Max_Planck

 

Systems trading is ultimately discretionary. The manager still has to decide how much risk to accept, which markets to play, and how aggressively to increase and decrease the trading base as a function of equity change. These decisions are quite important – often more important than trade timing.”

Ed Seykota in Market Wizards: Interviews with Top Traders By Jack D. Schwager

Market Wizards Interviews with Top Traders

Essence of Portfolio Management

Essence of Portfolio Management

“The essence of investment management is the management of risks, not the management of returns. Well-managed portfolios start with this precept.”

– Benjamin Graham

The problem is many portfolio managers believe they manage risk through their investment selection. That is, they believe their rotation from one seemingly risky position to another they believe is less risk is a reduction in risk. But, the risk is the exposure to the chance of a loss. The exposure is still there. Only the perception has changed: they just believe their risk is less. For example, for the last thirty years, the primary price trend for bonds has been up because interest rates have been falling. If a portfolio manager shifts from stocks to bonds when stocks are falling, bonds would often be rising. It appears that trend may be changing at some point. Portfolio managers who have relied on bonds as their safe haven may rotate out of stocks into bonds and then their bonds lose money too. That’s not risk management.

They don’t know in advance if the position they rotate to will result in a lower possibility of loss. Before 2008, American International Group (AIG) carried the highest rating for an insurance company. What if they rotated to AIG? Or to any of the other banks? Many investors believed those banks were great values as their prices were falling. They instead fell even more. It has taken them a long time to recover some of their losses. Just like tech and telecom stocks in 2000.

All risks cannot be hedged away if you pursue a profit. If you leave no chance at all for a potential profit, you earn nothing for that certainty. The risk is exposure to an unknown outcome that could result in a loss. If there is no exposure or uncertainty, there is no risk. The only way to manage risk is to increase and decrease the exposure to the possibility of loss. That means buying and selling (or hedging).  When you hear someone speaking otherwise, they are not talking of active risk management. For example, asset allocation and Modern Portfolio Theory is not active risk management. The exposure to loss remains. They just shift their risk to more things. Those markets can all fall together, as they do in real bear markets.

It’s required to accomplish what the family office Chief Investment Officer said in “What a family office looks for in a hedge fund portfolio manager” when he said:

“I like analogies. And one of the analogies in 2008 brings to me it’s like a sailor setting his course on a sea. He’s got a great sonar system, he’s got great maps and charts and he’s perhaps got a great GPS so he knows exactly where he is. He knows what’s ahead of him in the ocean but his heads down and he’s not seeing these awesomely black storm clouds building up on the horizon are about to come over top of him. Some of those managers we did not stay with. Managers who saw that, who changed course, trimmed their exposure, or sailed to safer territory. One, they survived; they truly preserved capital in difficult times and my benchmark for preserving capital is you had less than a double-digit loss in 08, you get to claim you preserved capital. I’ve heard people who’ve lost as much as 25% of investor capital argue that they preserved capital… but I don’t believe you can claim that.Understanding how a manager managed and was nimble during a period of time it gives me great comfort, a higher level of comfort, on what a manager may do in the next difficult period. So again it’s a it’s a very qualitative sort of trying to come to an understanding of what happened… and then make our best guess what we anticipate may happen next time.”

I made bold the parts I think are essential.

If you are like-minded and believe what we believe, contact us.

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

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

We see the world not as it is but as we are

Rugged individualism

Rugged individualism was the phrase used often by Herbert Hoover during his time as president. It refers to the idea that each individual should be able to help themselves out, and that the government does not need to involve itself in people’s economic lives nor in national economics in general.

Rugged individualism is the belief that all individuals, or nearly all individuals, can succeed on their own and that government help for people should be minimal.

Source: https://en.wikipedia.org/wiki/Rugged_individualism

 

The successful will do on a daily basis…

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

What is Freedom?

One day after the Marine Corps 240th birthday comes Veterans Day. There is no stronger way to thank a Veteran than to exercise your freedom. Happy Veterans Day to my fellow Veterans and Happy Birthday to my fellow Marines.

Freedom

Source: search “freedom” at http://www.google.com

The four most dangerous words…

Every new moment is necessarily unique – we’ve never been “here” before. Probabilities and potential payoffs change based on the stage of the trend or cycle. For example, the current decline in stocks is no surprise, given the stage and magnitude of the prior trends. A few see evidence of the early stages of a bigger move, others believe it’s different this time. We’ll see how it all unfolds. I don’t have to know what’s going to happen next – I am absolutely certain of what I will do given different conditions.

To quote from fellow Tennessean, Sir John Templeton:

“The four most dangerous words in investing are, it’s different this time.”

Sir John Templeton

Sir John Templeton

source: http://www.templeton.org

The markets always go back up?

Someone recently said: “the markets always go back up!”.

I replied: “Tell that to the Japanese”.

The chart below speaks for itself. Japan was the leading country up until 1990. The NIKKEI 225, the Japanese stock market index, has been in a “Secular Bear Market” for about 25 years now. I believe all markets require active risk management. I suggest avoiding any strategy that requires a market “always go back up” because it is possible that it may not. Or, it may not in your lifetime

Long Term Japan Stock Market Index NIKKEI

Source: http://www.tradingeconomics.com/japan/stock-market

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investing involves risk a client must be willing to bear.

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

Steve Jobs

Steve Jobs

The person who says it cannot be done should not interrupt the person doing it.

– Chinese Proverb

The person who says it cannot be done Should not interupt the person doing it

Source: https://www.pinterest.com/explore/chinese-proverbs/

Using the Month of September to Understand Probability and Expectation

probabilty-coin-flip

September is the month when the U.S. stock market’s three most popular indexes usually perform the poorest. So say the headlines every September.

I first wrote this in September 2013 after many commentators had published information about the seasonality of the month of September. Seasonality is the historical tendency for certain calendar periods to gain or lose value. However, when commentators speak of such probabilities, they rarely provide a clear probability and almost never the full mathematical expectation.  Without the mathematical expectation, probability alone is of little value or no value. I’ll explain why.

For those of us focused on actual directional price trends it may seem a little silly to discuss the historical probability of gain or loss for a single month. However, even though I wouldn’t make decisions based on it, we can use the seasonal theme to explain the critical importance of both probability and mathematical expectation.

“From 1928-2012 the S&P 500 was up 39 months and down 46 months in September. It is down 55% of the time in September…”

“Dow Jones Industrial Average 1886-2004 (116 years) 49 years the Dow was up in September, in 67 years the Dow was down in September. It’s down 58% of the time in September…”

Those are probability statements. But they say nothing about how much it was up or down.

First, let’s define probability.

Probability is likelihood. It is a measure or estimation of how likely it is that something will happen or that a statement is true. Probabilities are given a range of value between 0% chance (it will not happen) and 100% chance (it will happen). There are few things so certain as 0% and 100%, so most probabilities fall in between. The higher the degree of probability, the more likely the event is to happen, or, in a longer series of samples, the greater the number of times such event is expected to happen.

But that says nothing about how to calculate probability and apply it. One thing to realize about probability is that it is the math for dealing with uncertainty. When we don’t know an outcome, it is uncertain. It is probabilistic, not a sure thing. Probability provides us our best estimation of the outcome.

As I see it, there are two ways to calculate probability: subjectively and objectively.

Subjective Probability: assigns a likelihood based on opinions and confidence (degree of belief) in those opinions. It may include “expert” knowledge as well as experimental data. For example, the majority of the research and news is based on “expert opinion”. They may state their belief and then assign a probability: “I believe the stock market has a X% chance of going down.” They may go on to add a good sounding story to support their hypothesis. You may see how that is subjective.

Objective Probability: assigns a likelihood based on numbers. Objective probability is data-driven. The popular method is frequentist probability: the probability of a random event means the relative frequency of occurrence of an experiment’s outcome when the experiment is repeated. This method believes probability is the relative frequency of outcomes over the long run. We can think of it as the historical tendency of the outcome. For example, if we flip a fair coin, its probability of landing on heads is 50% and tails is 50%. If we flip it 10 times, it could land on heads 7 and tails 3. That outcome implies 70%/30%. To prove the coin is “fair” (balanced on both sides), we would need to flip it more times to get a large enough sample size to realize the full probability. If we flip it 30 times or more it is likely to get closer and closer to 50%/50%. The more frequency, the closer it gets to its probability. You may see see why I say this is more objective: it’s based on actual historical data.

If you are a math person and logical thinker, you may get this. I have a hunch many people don’t like math, so they’d rather hear a good story. Rather than checking the stats on a game, they’d rather hear some guru’s opinion about who will win.

Which has more predictive power? An expert opinion or the fact that historically the month of September has been down more often than it’s up? Predictive ability needs to be quantified by math to determine if it exists and opinions are often far too subjective to do that. We can do the math based on historical data and determine if it is probable, or not.

As I said in September is statistically the worst month for the stock market the data shows it is indeed statistically significant and does indeed have predictive ability, but not necessarily enough to act on it. Instead, I suggest it be used to set expectations of what may happen: the month of September has historically been the worst performance month for the stock indexes. So, we shouldn’t be surprised if it ends in the red. It’s that simple.

Theory-driven researchers want a cause and effect story to go with their beliefs. If they can’t figure out a good reason behind the phenomenon, they may reject it even though the data is what it is. One person commented to me that he didn’t believe the September data has predictive value, even though it does, and he provided nothing to disprove it. Probabilities do need to make sense. Correlations can occur randomly, so logical reasoning behind the numbers may be useful. For example, one theory for a losing September is it is the fiscal year end of many mutual funds and fund managers typically sell losing positions before year end to realize losses to offset gains.

I previously stated a few different probabilities about September: what percentage of time the month is down. In September is statistically the worst month for the stock market I didn’t mention the percent of time the month is negative, only that on average it’s down X% since Y. It occurred to me that most people don’t seem to understand probability and more importantly, the more complete equation of expectation.

Expectation

There are many different ways to define expectation. We may initially think of it as “what we expect to happen”. In many ways, it’s best not to have expectations about the future. Our expectations may not play out as we’d hoped. If we base our investment decisions on opinion and expectations don’t pan out, we may stick with our opinion anyway and eventually lose money. The expectation I’m talking about is the kind that I apply: mathematical expectation.

So far, we have determined probability of September based on how many months it’s down or up. However, probability alone isn’t enough information to make a logical decision. First of all, going back to 1950 using the S&P 500 stock index, the month of September is down about 53% of the time and ends the month positive about 47% of the time. That alone isn’t a huge difference, but what makes it more meaningful is the expectation. When it’s down 53% of the time, it’s down -3.8% and when it’s up 47% of the time it’s up an average of 3.3%. That results in an expected value of -0.50% for the month of September. If we go back further to 1928, which includes the Great Depression, it’s about  -1.12%.

The bottom line is the math says “based on historical data, September has been the worst month for the stock market”. We could then say “it can be expected to be”. But as I said before, it may not be! And, another point I have made is the use of multiple time frames for looking at the data, which is a reminder that by intention: probability is not exact. It can’t be, it’s not supposed to be, and doesn’t need to be! Probability and expectation are the maths of uncertainty. We don’t know in advance many outcomes in life, but we can estimate them mathematically and that provides a sound logic and a mathematical basis for believing what we do.

We’ve made a whole lot of the month of September, but I think it made for a good opportunity to explain probability and expectation that are the essence of portfolio management. It doesn’t matter so much how often we are right or wrong, but instead the probability and the magnitude. Asymmetric returns are created by more profit, less loss. Mathematical expectation provides us a mathematical basis for believing a method works, or not. Not knowing the future; it’s the best we have.

Rather than seasonal tendencies, I prefer to focus on the actual direction of global price trends and directly manage the risk in individual my positions.

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The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge.

Paul Tudor Jones

Paul Tudor Jones

Source: http://www.newtraderu.com/2015/04/07/paul-tudor-jones-10-trading-principles/

“Nobody who ever gave his best regretted it.”

– George Halas

Nobody who ever gave his best regretted it

Image source: https://www.pinterest.com/pin/375346950164355711/

The right to disagree…

ayn rand the right to agree with others is not the problem in any society it is the right to disagree that is crucial