Its (Almost) That Time

I have found models are a key component of managing money in the markets. Not only do they keep it very mechanical and easily manageable, they help to keep a human’s natural biases out of the financial decision-making process. For client portfolios, I have created a couple of models that attempt to strike a balance between risk/losses and trading activity. The shorter term your timeframe the more trading activity will occur in the account (more signals).  Whereas longer term timeframes help reduce the trading activity, but opens an account up to much greater drawdowns (signals are fewer and slower). And then there is the fact that no model is always correct which brings in a whole new set of problems but those are worthy of their own separate blog post and won’t be addressed herein.

My two longer term client models (one based upon weekly price movement, the other on monthly) are both within a cat’s whisker of providing a US stock market sell signal. Europe, Asia, the emerging and frontier markets all triggered sells much earlier in the year so the fact the US has held up this long is a testament to its strength. It appears as if we are finally looking at the potential for substantially bigger move to the downside.

My weekly proprietary model, Sightline, triggered last week but is waiting for a final confirmation before it becomes an official sell signal (a key rule within the model). With respect to the monthly model, I thought it worth posting the chart for review.

All 4 components of the monthly model, RSI momentum crossover and negative divergence, price moving average crossover, PMO and MACD moving average crossover have all occurred, the confirmation needed to reduce exposure to US stocks. While the trigger for each component is currently in place for a sell signal, one of model’s rules require that they all have triggered at the end of the month (intra month does not count). Since we have a few more days left in November (and a chance for the expected year-end rally to reverse and put this model on hold) we need to provide both models a bit more time to activate an “official” US stock sell signal.

De-Fang’ed

While we can debate whether we are at the end of the bull market, looking back, there is no question the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) had been the leaders of rising stock prices. But ever since the broad market’s peak in September, these same stocks have been leading the market lower. In fact, collectively they have lost more than $1T in stock market capitalization since that high was put in. Based upon my methodology 4 of the 5 have put in a long term sell signal, the most recent Netflix occurred last week.

Taking a look at the Netflix, NFLX, chart it should be obvious by now the head and shoulders topping pattern that has developed. Currently, price has fallen below the pattern’s neckline triggering a sell (or short if you are aggressive) signal. The pattern’s target is down at Q4 2017’s low, labeled T1. Notice how price has fallen and has, at least so far, held below its flat 200 day moving average.  In the upper pane RSI momentum warned of a potential correction/reversal as it formed divergence with price (momentum was falling while price was rising).  All of these signals point to the potential of much further future downside.

With so much current broad-based downside momentum this is an idea on the short side for aggressive, experienced traders only. The high probability reward-risk ratio is not as favorable to meet my needs as it is just slightly less above 1.5, well below the 3:1 target as such I will be just observing this from the sidelines.

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.

Uh-Oh! A Death Cross

In case you haven’t heard “US Small cap stocks just formed a death cross”. Eee gads. Kinda grabs your attention as it sounds ominous, doesn’t it? The name conjures up thoughts of October 1929.  In technical analysis jargon a death cross is nothing more than when the 50-day moving average crosses under the 200-day average.  Those trying to grab your attention in order to sell advertising just love names like death cross. Fear pays. Another one that comes to mind is the Hindenburg omen.  Sell everything, run for cover and get into your bomb shelter we have had a number of recent Hindenburg sightings of late.  There are, of course, others but I digress.

Why make news of the death cross? There are some people (those that must not care about probabilities) that use the death cross as a signal to sell their stocks. Like all things involved with TA, sometimes it works and sometimes it doesn’t.  Either way … gotta have a plan and this is, well … at least a plan. As it turns out, not a statistically profitable one. A death cross on small cap stocks has not been historically threatening at all. In fact, it’s just the opposite. The good folks at quantifiableedges.com did a study that looked at what stock market returns had been after small cap stocks formed a death cross. Here are their comments and results regarding their death cross study …

“It is being promoted as a warning of a potential bear market. Of course, all bear markets will see this happen at some point, because a bear market is an extended decline. But the real question when considering the implications of the Death Cross are whether it serves any value in predicting a bear market. To answer this, I did an examination of past Russell Death Crosses, and what they meant for the S&P 500. Both of my data sources show Russell data back to late 1987. And since I need 200 days to calculate a 200-day moving average, the earliest the study could look back to was 1988”.

In their study, they purchased a hypothetical $100k in the SP500 stock index, each time a death cross occurred in the small cap index and sold the index once the 50 day moving average crossed back above the 200 day moving average. If the death cross were a viable stock market sell signal, this study should show a loss since we are doing just the opposite of the “signal” … here are the stats, profit curve of the hypothetical trade and ending comments. “

“Eighteen winners. Only three losers. So 86% of the “predictions” were wrong” and a total net profit of over $78,000 on a $100,000 investment. As such “I am having a hard time seeing the Russell 2000 Death Cross as a bearish indication. You would have a much easier time convincing me this is a bullish indication for the intermediate-term.”

When it’s this Obvious

Classic charting 101 shows an almost ideal (too perfect?) head and shoulders reversal pattern that has developed on Goldman Sachs, GS. When patterns are this obvious, watched by so many traders/ investors, I have found they usually don’t work. Usually ….

It’s important to note the pattern has not yet triggered so until it does, it is nothing more than a picture of beauty and something that “could be”. If, on the other hand, it does trigger and play out

1)     The pattern’s target is down at “T1”.

2)     The target decline is ~32%.

3)     It would likely occur very quickly as there is little support until you reach the $165 level.

4)     The financial sector would be in a world of hurt as it would likely mirror GS’ decline.

5)     The US stock market would likely have a much, much further fall in store as its, arguably most important sector, would be falling precipitously.

6)     It couldn’t happen to a nicer company (the “evil squid”)