A Contrarian Indicator

Here's the theory behind the magazine cover indicator. By the time a something’s success or failure reaches the cover page of a major publication, it is so well known that it is fully known by everyone and those who want to capitalize financially have already done so. For example, once all the good news is out and a company makes the cover of business week, the stock is destined to underperform. The reverse holds for negative stories. It doesn’t have to just be about businesses, it can be about social themes too … remember the 2007-08 housing boom.

An academic study by three finance professors at the University of Richmond put the magazine cover story indicator to the test -- specifically as it focuses on coverage of individual companies. The professors culled headlines from stories in Business Week, Fortune, and Forbes for a 20-year period to examine whether positive cover stories are associated with superior future performance and negative stories are associated with inferior future performance. "Superior" and "inferior" were determined in comparison with an index or another company in the same industry and of the same size.

Here's what the professors found. The research supported the use of magazine cover stories as a contrarian indicator. The most negatively portrayed companies managed to beat the market by an average of 12.4%, whereas the outperformance of the media darlings fell to just 4.2%. The conclusion? Positive stories generally indicate that the stock's price performance has topped out. Negative stories often come right at the time of a turnaround.

The study confirms that it is better to bet against journalists than alongside them. It would be easy to jump to the self-congratulatory conclusion that journalists are incompetent. But that conclusion misses the point. Journalists aren't writing cover stories to make investors money. They are writing cover stories to sell magazines. And "hot topics" sell. But it also means that when a company or financial trend is featured on a magazine cover, the chances are that the trend is already widely known, and universally accepted.

With that in mind, this weeks Business Week cover should raise some eyebrows….

Just because the Government’s measured “version” of inflation, CPI, has been in stall speed for years, doesn’t meant it will always be. Additionally, and most importantly, not everything tracks the inflation rate. Health care is a great example as it has been rising almost 2x the annual “measured” inflation rate. For a what that means over time, take a look, and try not to laugh, at the hospital bill below for what it cost to have a baby in 1958. I think the total bill would be less than the cost than the charge of 2 ibuprofen in today’s medical reality (those that have had a recent surgery can attest to what I say)

Maybe This Year

On Jan 2, 2018 I walked into Melanie’s office and told her I had set a goal for myself to see if I could double my small, trading account IRA account in one year (achieve a 100% return).  An ambitious goal but something that is doable with good risk management, some leverage, active trading and of course must include a dash of luck and a cooperative market.

With 2018 now in the rearview mirror and a tally of the results I have to come clean, I did not achieve my goal. In fact, I was far below it. Disappointing no doubt as at one point in the year I was up more than 70% with about 40% of the year left to go I thought it was going to be a slam dunk. I had it all mapped out, I was going to sell everything once I hit that 100% mark and sit in cash and wait for December 31. But, alas, Q4 happened. I didn’t react fast enough to the rapid change in sentiment and so I fell hard with the market. Deal with it big boy, the market is talking and doesn’t care what I want or think. Oh yah, the “Woulda-Shoulda-Coulda” game is a waste of emotional and brain capital too so don’t do it. Its non-productive. If you don’t like the results, change your process.

My return for the year was 25.7%, not bad as I outperformed the SP500 by almost 32%. But those that know me understand “not bad” is not what drives me. So, being the uber competitive individual I am, I will, once again, set another goal to double my account for 2019. The odds are I will fail even worse than I did this year. Why? Because I am human. 2018 provided me the opportunity to fly under the radar with only one person knowing my goal. No external pressure or embarrassment if I failed, just my pride was at stake. You see the sad thing is as humans we have a tendency to act differently the more sets of eyes that are scrutinizing what we do, especially when money is involved. Even though I have the same set of trading rules, because of emotions that drive decisions, I am more than likely going deviate from them even though I know I should not***. Hopefully my genetic stubbornness, adjustments to my process and most importantly my real goal for doing this can keep my emotions in check. I want to make it clear, if I achieve the goal it’s not because I want to gloat or brag, or even because I want a bigger IRA (although I don’t mind this), instead I have something that is way more important to me. I want all clients and readers to know beating the market (and hopefully substantially) is doable in spite of Wall Street’s mantra it’s not possible. If Wall Street is too dumb (and this has nothing to do with intelligence) or lazy, that doesn’t mean it’s not possible. Peter Brandt taught me this and it changed my life. My goal is to do that same for some of you.

Let’s be real. Can beating the market be done every year?  Nope, not going to likely ever happen every year over a long run by anyone let alone me. All of my mentors and people I follow and compare methodologies and processes with do it regularly, but not every year. Each of them has experienced underperforming years, some terribly so. That is going to occur with random markets, it’s inevitable. And what is a common trait is that those individuals become better when they fail. They key-in on and learn from their mistakes/failures, something all of us should do if we want to get better at anything in life. They are also in a continuous loop, never staying idle or complacent but always improving. To be a successful investor all that is required is 1) have a process that provides positive expectancy 2) insure steadfast discipline following the process, 3) access to multiple markets to invest in (more than just stocks and bonds) and 4) an unwavering desire to outperform (a politically correct way of saying being an overly competitive pain-in-the-^%$.

Maybe this year.

Any doubters feel free to email me as I will be more than happy to provide a validation of trades and account values. And no, in case you were going to ask as others already have, I can’t do this for anyone else’s account.  Sorry. On the other hand, if you would like to learn how, please send me an email as I’d love to share with anyone what I have learned (what’s the old Chinese proverb about teaching a man to fish?).

***If you want to learn more about this human trait, there is a really interesting and true investment story you can read, just google the “turtle traders” or email me and I can send you an ebook.

5 for 5

I normally leave these types of topics for Mel to post about but this one hit close to home. Longer life expectancy and healthy habits is something that is not new, but now has a long-term study confirming what most already knew from using common sense. Ever since seeing my first Arnold Schwarzenegger book (senior year in college) I have religiously followed the 5 habits mentioned in a Harvard School of Public Health study. There is no one I know who has been a health zealot for a longer period than me. But, some 40 years later, being eventually proven right that living a healthy lifestyle is the right way (if you want to extend your life), with the prospect of a potential 30+ more years I am seriously doubting whether I want those additional years. Don’t get me wrong, I have no death wish but without knowing the quality of those future years I am now questioning whether I should have just had that slice of cheesecake rather than the carrot sticks and rice cakes 😊.  As I get older it has become clear that the focus has shifted to quality from quantity.

Here is a summary of the Harvard study findings …

Maintaining five healthy habits — eating a healthy diet, exercising regularly, keeping a healthy body weight, not drinking too much alcohol, and not smoking — during adulthood may add more than a decade to life expectancy.  It was also found that American women and men who maintained the healthiest lifestyles were 82 percent less likely to die from cardiovascular disease and 65 percent less likely to die from cancer when compared with those with the least healthy lifestyles over the course of the roughly 30-year study period.

The study is the first comprehensive analysis of the impact that adopting low-risk lifestyle factors has on life expectancy in the U.S. Americans have a shorter average life expectancy — 79.3 years — than almost all other high-income countries. The U.S. ranked 31st in the world for life expectancy in 2015. The new study aimed to quantify how much healthy lifestyle factors might be able to boost longevity in the U.S.

Harvard Chan researchers and colleagues looked at 34 years of data from 78,865 women and 27 years of data from 44,354 men participating in, respectively, the Nurses’ Health Study and the Health Professionals Follow-up Study. The researchers looked at how five low-risk lifestyle factors — not smoking, low body mass index (18.5-24.9 kg/m2), at least 30 minutes or more per day of moderate to vigorous physical activity, moderate alcohol intake (for example, up to about one 5-ounce glass of wine per day for women, or up to two glasses for men), and a healthy diet — might impact mortality.

For study participants who didn’t adopt any of the low-risk habits, the researchers estimated that life expectancy at age 50 was 29 years for women and 25.5 years for men. But for those who adopted all five, life expectancy at age 50 was projected to be 43.1 years for women and 37.6 years for men. In other words, women who maintained all five healthy habits gained, on average, 14 years of life, and men who did so gained 12 years, compared with those who didn’t maintain healthy habits.

Compared with those who didn’t follow any of the healthy lifestyle habits, those who followed all five were 74 percent less likely to die during the study period. The researchers also found that there was a dose-response relationship between each individual healthy lifestyle behavior and a reduced risk of early death, and that the combination of all five healthy behaviors was linked to the most additional years of life.

July 2018 Charts on the Move Video

US stock markets are leading the rest of the world higher.  The intermediate term rally in the dollar has either reversed or put the case for over-weighting foreign investments on hold. I think we muddle through the summer/autumn months and then rally into year-end.  Anyone thinking the same? 

July's Charts on the Move video can be viewed at the link below

https://youtu.be/lmdfJ5p16es

Nesting

When looking for investment opportunities, some of the most interesting setups can only be found when looking across multiple time frames and is why I find it a critical step. If something looks interesting short term but is in a long term downtrend, it is likely that opportunity will only be a winner if managed as a short term trade.  But when something develops in a short term view and is in alignment with the longer term, it not only increases the probability of success but also the expectation of large gains. These are borne out when a short term pattern is nested inside a much larger pattern.  A good example is what is occurring right now with Jazz Pharma, JAZZ.

The daily chart below shows price is ready to breakout above the neckline of this almost 10 month inverse head and shoulders pattern. Notice how price has held above the 200 day moving average, when its support was tested twice in April and May. When combined with the fact that RSI momentum is rising and is within the bullish zone, the weight of the evidence says a break above the blue horizontal neckline provides a compelling upside target in the 191 area above, some 19% higher.  This looks like a great set up.

When looking at the same investment on a weekly time frame something very interesting stands out as you can see below. Nesting. The inverse head and shoulders pattern that I showed above (blue) is actually the right shoulder of the same but much bigger inverse head and shoulders (green) pattern. Notice how the blue (daily time frame) target just so happens to be at the prior 2015 high. This is not unusual. That is where resistance exists. Those that purchased at or near that level in the past and are still holding will provide a huge amount of share supply which will likely either slow or stop a quick move above that level. They are currently underwater and as such, the normal desire to “break even” will induce many to sell, even though now seems like a time to accumulate.

The upside target for the larger (green) pattern has an even more attractive target near 225, doubling the smaller pattern’s return. When nesting occurs like it has here, it sets up the possibility not only for greater returns for the opportunity but also extending its holding period, a benefit for those wanting to be less active.