Archive for the ‘trend following’ Category

Risk Asset Allocation Based On Momentum Relative To T-Bills

Friday, September 7th, 2018
  • It’s more about winning by not losing in Bear markets than winning in Bull markets.
  • The approach tends to generate higher returns and lower maximum drawdowns than Buy-and-Hold when a Bear is in the study period.
  • The approach tends to underperform Buy-and-Hold in study periods that do not include Bear markets.
  • The approach with a single risk asset versus T-Bills tends to be more tax efficient in regular accounts than selecting the highest momentum of several risk assets or T-Bills due to longer in-market periods with more long-term taxable gains.
  • The approach is better suited to tax-deferred accounts than regular taxable accounts.
Questions continue to come in about systematic approaches to tactical allocation portfolio changes – methods not based on biases, media frenzy, forecasts, chart patterns, valuation or fundamentals.

Probably the simplest approach, and one that is about as objective and non-judgmental as systems can be, is to hold those risk assets that are doing best, unless none of them are doing better than T-Bills; in which case hold T-Bills until the risk assets start doing better than T-Bills.

The most reliable aspect and driver of returns of the approach is minimizing major drawdowns, as shown by the flat lines in the blue timing portfolio when the red benchmark portfolio experienced major drawdowns.

Secondarily, the approach may increase total return. However, each trade triggers a tax event, so only those cases where the average holding time between trades is over 1 year avoid ordinary income taxes on the trades; and those that have the longest position hold times benefit most by compound growth.

The approach can be used in an outright decision to hold risk assets or risk-free T-Bills (or other “cash”), or it can be used for guidance in a strategic allocation portfolio to make overweight and underweight decisions.

The approach is not tax efficient for regular taxable accounts, but in some cases the outperformance may be worth the tax cost. Trading systems such as this are best used in tax-deferred accounts.

Relative and absolute momentum can be done at an extremely simple level, such as rotating between one specific risk asset and T-Bills (e.g. the S&P 500 and T-Bills).

That method could be used in layers, with more than one pair of two assets (e.g. S&P 500 and T-Bills as one pair, and emerging markets stocks and T-Bills as another).

It is also possible with the method to choose one or more risk assets within a larger group of risk assets or T-Bills (e.g. the two strongest momentum risk assets out of five or T-Bills).

Working with simple pairs of one risk asset versus T-Bills is more likely to create longer position hold times, and therefore be more tax efficient for regular taxable accounts than alternating between risk assets or T-Bills. Alternating between risk assets creates more frequent trades and would be more suitable for in tax deferred accounts.

The method helps avoid the severity of Bear markets, but it also needs Bears to generate enough of a performance difference to make the effort and potential tax cost worthwhile.

The approach does not work with all assets. Testing is required to see if it worked in the past.

Here are some actual 09/03/18 relative return and absolute momentum indicated holdings:

It is possible to operate this approach by visual inspection of charts, but for more precision and to avoid seeing what you may want to see, using quantitative data is preferable.

You would need to find the performance evaluation period (e.g. the number of days, weeks, months quarters, years) that produces the best combination of high return and low maximum drawdown, based on long-term history, and the best frequency of decision making (e.g. daily, weekly, monthly quarterly or longer). The “best fit” evaluation period and decision frequency will probably drift over time, so it needs to be regularly evaluated for adjustment.

The information that follows gets a bit into the weeds of the approach.

The securities we used for the test were selected in part because they had adequate history to capture a sufficiently long study period:

  • VFINX: S&P 500
  • VGTSX: total international stocks
  • VEIEX: emerging markets stocks
  • VGSIX: US real estate
  • VFINX: intermediate-term Treasuries
  • Treasury Bills

ETF alternatives may be more tax efficient for current use, but did not have sufficient history for long-period analysis.  These ETFs are classes that invest in and share the same underlying portfolio as the mutual funds used in the study (except for BIL):

  • VOO: S&P 500
  • VXUS: total international stocks
  • VWO: emerging markets stocks
  • VNQ: US real estate
  • VGIT: intermediate-term Treasuries
  • BIL: Treasury Bills

If the investor wishes to use options (for example, covered Calls) on the S&P 500 position, then SPY would be needed because it has the options and liquidity that would be suitable.

There are other ETFs from other sponsors that could just as well be used instead of the Vanguard ETFs in a forward practice.

First, Portfolio Visualizer is among the sites that provide good tools for experimenting with the approach, and it is free. There are subscription sites that have a number of pre-built models that can be followed as well.

The data that follows is entirely from Portfolio Visualizer.

The tables above and below illustrate how the evaluation period and frequency might be regularly reviewed for possible adjustment, and provide evidence of the efficacy of the approaches from 1997 to 2018 YTD, as well as return, maximum drawdown and several other important metrics for the results for method and their benchmarks.

The illustrative cases are for the S&P 500 as a single risk asset versus T-Bills (above); and the best 2 of 5 risk assets versus T-Bills (below).

The charts and tables that follow are for S&P 500 versus T-Bills, and for selecting the best 2 of 5 assets (S&P 500, DM stocks, EM stocks, US REITs, and Intermediate-term Treasuries) versus T-Bills.

In each case, the backtest period was about 42 years (1997-2018 YTD).

In the best 2 of 5, the result could be 2 risk assets, 1 risk asset and T-Bills, or all T-Bills.

Single Risk Asset vs T-Bills

The timing model produced a 19.67% return over the period 1997-August 2018 versus 8.42% for the equal weight portfolio, which in this case is 100% S&P 500. Note that these results are based on investable assets, not indexes.

While results such as this could have been available to you if you did this on your own, they would not have been effective for a “hedge” fund type investment with their 2% management fees and 20% of gains above a preferred return, because the return difference of 2.22% would have been wiped out by their fees.

The volatility (standard deviation) of the method was lower than buy-and-hold. The best year was better, and the worst year was dramatically better (negative 7.67% versus negative 37.02%). The superior maximum drawdown was critical (down 16.31% versus down 50.97% for buy-and-hold).

The average trade lasted 29.9 months, which tended to create capital gains as opposed to ordinary income when trades were executed.

The Sharpe Ratio (return in excess of T-Bill return, divided by the standard deviation of return – how “bumpy” the ride was) was better for the method (0.79 versus 0.48), as was the Sortino Ratio (like the Sharpe Ratio but only divided by the size of downside volatility) at 1.29 versus 0.70.

Last, as a small form of diversification, the correlation to total US stocks was only 0.74 versus 0.99 for buy-and- hold

The complete trade history from 1997 is in this table:

However, not all backtests are inspiring. The specific time period you test and whether or not a Bear intervened are critical to how attractive the method appears.

It can be years of effort with little if any outperformance to show (and taxes in regular accounts) if a Bear is not in the period.

It takes a Bear to make relative momentum versus T-Bills look good.

Best 2 of 5 Risk Assets vs T-Bills

As with the single risk asset (S&P 500) versus T-Bills, the best 2 of 5 risk assets was superior (excluding any tax considerations) to the equal weight, buy-and-hold approach.

Compound return was better by 4.73%. Standard deviation was almost the same. The best year was better by 16.73%. The worst year was better by 13.68%. The maximum drawdown was better (less severe) by 26.15%. The Sharpe Ratio was higher by 0.37. The Sortino Ratio was better by 0.79. The correlation to total US stocks was lower by 0.30, and the Beta to total US stocks was lower by 0.22. All good.

There were many trades for an average trade holding time of 2.37 months. That created a lot of ordinary income for someone doing this in a regular taxable account. The trades over the past year are in this table.

Selecting the best 2 of 5 risk assets might be expected to be more effective during periods without a Bear market, but the evidence in our test suggests that is not the case. Looking at the period 2010 through August 2018 (a period without a Bear), we were able to find an evaluation period that produced a 2+% higher return (before any tax costs), but it produced a 1+% more severe maximum drawdown — it did not provide the downside protection the method is intended to provide.

The most useful evaluation period we found for the best 2 of 5 model was 12 months. It produced a 9.56% return versus 7.49% for the equal weighted benchmark, but experienced a 16.69% maximum drawdown versus 15.50% for the benchmark.

The following charts show the results for evaluation periods of 1, 11 and 12 months.

1 Month Evaluation Period (2010 –Aug. 2018)


11 Months Evaluation Period (2010 – Aug. 2018)


12 Months Evaluation Period (2010 – Aug 2018)


Because we consider maximum drawdown protection key to the utility of relative momentum versus T-Bills, our conclusion is that the method needs a Bear market to be attractive.

Relative momentum allocation between a risk asset and T-Bills can produce meaningfully higher return and substantially less severe maximum drawdowns, but the fact is that the avoidance of large drawdowns (Bear markets) is the most important contributor to the potential of the method to outperform.

If there is no Bear market during the time the method is used, the potential for outperformance is limited.

Tax costs are a problem in taxable accounts (more when selecting among multiple risk assets, because position holding time is shorter with more ordinary income tax cost).

No universal evaluation period is effective for all risk assets, and the evaluation periods that work best drift over time, making continuous curve fitting part of the challenge and work load.

Not all assets have good potential with the method (basically only those that have occasional major drawdowns appear to work well).

Because of the role of Bear markets in creating advantage for the method, it is important when reviewing reports about the method to distinguish between long-term studies incorporating one or more Bears, and short-term studies of Bull markets.

Winning by not losing is the most important benefit of the method. The benefit derived is greatest when the loss experienced by buy-and-hold is greatest.

As must always be said, past performance is no guarantee of future performance.

I hope that for those of you who have been asking about the popular idea of risk reduction with relative momentum versus T-Bills, that this is helpful.

 

 

July ChartBook – Trend Indicators, Relative Performance & Top Momentum ETFs And Stocks

Monday, July 30th, 2018

Some of the information in this post:

  • Intermediate trend indication for 45 key asset categories.
  • S&P 1500 Net Buying Pressure.
  • Compare relative performance (momentum) of sectors, regions, countries, mkt-cap, styles, factors.
  • Identify leading relative performance stocks and ETFs.

This week I’m sharing with you a chart book that I put together for myself periodically to attempt a wide-angle view of markets. You may find bits of it here and there interesting, or the basis of questions you would like to discuss. The chart book contains chart and table data only and is color-coded in most places to be data visualization friendly as you scroll through the pages.

You can download the chart book here.

Important Note: This ChartBook focuses on relative performance and chart patterns, and does not consider thematic issues, forward earnings or revenue forecasts, valuation or company fundamentals or credit rating. Those are important factors that should be evaluated before any of the securities identified in this ChartBook are purchased. Relative performance is not a substitution for strategic allocation, and may not be a suitable subject matter for many investors. It may be useful to those with tactical ranges within their strategic allocation, or those seeking to make security substitutions within their allocation based on relative performance, or those operating a short-term tactical sleeve within their portfolio. Do additional research on any security listed here before purchase. These are not recommendations. They are filtered observations of performance over the past 12, 6, 3 and 1 months. This is an investment decision aid, not an investment decision solution.

Based on relative price performance to the S&P 500, this ChartBook identifies small-cap and large-cap growth as leading performance categories among mkt-cap, style, factors, and dividend approaches, as represented by these ETFs:

IJR, RPG

Based on relative price performance to the S&P 500, this ChartBook identifies the outperforming US sectors, as represented by these ETFs:

XLY, XLK, VCR, VGT

Based on relative price performance to the US Aggregate Bond index, this ChartBook identifies no favorable ETF categories. Note that ultra-short-term, investment grade, floating rate debts, tend to have minimal price fluctuation, but competitive total returns in a rising rate environment. That means that securities such as these might be considered as outperformers:

BIL, FLRN and FLOT

Based on relative price performance to the S&P 500, this ChartBook identifies none of the top 10 developed markets countries and none of the top 10 emerging market countries, nor the world, total international, Europe, emerging markets or frontier markets as outperforming.

Based on relative price performance, a minimum cumulative total return and visual chart pattern inspection, this ChartBook identifies these 12 ETFs as outperforming:

FDN, FINX, IBUY, IGM, IGV, IHI, IJT, PSCH, SKYY, SLYG, VGT, XHE

Based on relative price performance, a higher minimum total return than for ETFs, and visual chart pattern inspection, this ChartBook identifies these 11 members of the S&P 100 as outperforming:

AAPL, AMZN, BA, COP, COST, GOOG, GOOGL, MA, MSFT, UNH, V

Based on relative price performance, a higher minimum total return than for members of the S&P 100, possession of both quality and value attributes (as defined by Vanguard in their VFMF multifactor ETF) and visual chart pattern inspection, this ChartBook identifies these 12 stocks as outperforming:

ADBE, ALGN, CECO,CPRT, CWST, INGN, MED, NSP, TTGT, VRNS, WCG, WWE

Based on relative price performance, a lower minimum total return than for S&P 100 stocks, and visual chart pattern inspection, this ChartBook identifies these 12 quality dividend stocks (as defined by Northern Trust in their QDF quality dividend ETF) as outperforming:

AAPL, BA, BR, CDW, FIS, MSFT, NTAP, SSNC, TSS, UNH, UNP, V

 

A panoramic data document like this ChartBook is intended to not only give a wide perspective on the markets, but also to help unusual or abnormal data to stand out. Scroll through the pages to see what may be of interest to you.

To give you a starting point of reference on many of the pages here are some comments by page number. The comments are not complete, They may help you get into the data on each page .

  • Page 2 – Yield Curve: the yield spread between short-term rates and intermediate-term rates is compressing rapidly but still positive; and in the past when shorter-term rates become larger than longer-term rates it has signaled a coming recession and the decline in stock prices. We aren’t there yet, but this is a risk factor to be closely watched.
  • Page 3 – Forward Earnings Estimates: the 20% earnings growth rate expected for 2018 contrasts with the 10% earnings growth rate projected for 2019. The growth rate for 2018 is exceptional, and is partly due to a quantum, one-time increase in corporate profits due to recent tax legislation. Slower growth in 2019 may cause some compression of price-earnings multiples
  • Page 4 – PEG ratios (price earnings ratio divided by five year forecasted earnings growth rate) appear to be most attractive for Consumer Cyclicals among large-cap, mid-cap and small-cap US stocks; and you will see on page 19 that they show favorable momentum as well; but on page 5 they look a bit expensive versus historical valuations.
  • Page 5 – telecommunications services looks inexpensive, but in September that sector will be redefined as Communication Services and will include some stocks from Consumer Discretionary and from Information Technology, so those numbers really aren’t useful now. If we’re lucky analysts will restate history based upon the reconfigured sectors sometime later this year.
  • Page 6 -US stocks are in good trend condition as are international stocks overall, but Europe is wavering and emerging markets are down (as are real estate and gold). Even though the China ETF MCHI is still in an intermediate uptrend, you will see later on page 14 that the overall China market is doing poorly, and the larger-cap stocks represented by the ETF have broken down on a daily chart basis.
  • Page 7 -shows fundamental data for key equity categories revealing more attractive price to cash flow multiples for foreign stocks versus domestic stocks as well as higher yields: and it shows better Sharpe Ratios (basically return divided by volatility) for minimum volatility and momentum factor funds, and attractive ROE levels for quality minimum volatility and momentum factor funds.
  • Page 8 – taxable bonds are all in downtrends and some municipal bonds are not trending upward or are wavering.
  • Page 9 – Some bond categories show extraordinary interest rate risk as evidenced by the duration being substantially larger than the yield. As a rule of thumb, if the interest rate on the fund rises by 1% over a short period of time, the price will decline by the duration times the change in interest rate. Long-term government bonds are less than 3% and have more than 17 years of duration – dangerous. Long-term corporate’s pay less than 5% and have almost 14 years of duration – also dangerous in this time of rising Federal Reserve rates, rising GDP, and rising inflation.
  • Page 10 – S&P 1500 Buying and Selling pressure: net buying pressure began to decrease in the beginning of 2017 and has become flat to negative this year. It is a divergence from the rise in stock prices during that time. This is a cautionary sign. The indicator measures the total amount of money flowing through rising stocks divided by the total amount of money flowing through all stocks.
  • Page 11 – the percentage of stocks in Correction, Bear or Severe Bear have been in rough synchrony with price movements of the Standard & Poor’s 1500 stocks since 2017, and no particular signal is generated there.
  • Page 12 – the percentage of stocks within 2% of their high is in a normal range and is acting in synchrony with stock prices. There is no signal there.
  • Page 13 – the percentage of stocks above their 200-day moving average is at a healthy level, continuing to support rising stock prices.
  • Page 14 – breath is best in the USA, second-best at okay levels in Europe. Japan is in a week third place. Larger China market is doing badly with the median stock off more than 30% from its high, and 90% in a Correction and 75% in a Bear or worse. The chart below the table, however, shows the effect of what is called “sequence risk”. Someone who invested in China a year ago is doing okay, but someone who invested at the beginning of this year is doing very badly. The intermediate trend for China shown on page 6 is still positive, but a detailed review of the chart shows that it is near a turning point, and this daily chart on page 14 reveals that breakdown more clearly.
  •  Page 15 – looking at stocks in terms of regions, market-cap, style, factors, dividends and real assets; only small-cap and large-cap growth show good price momentum, as indicated by the light green shading on the symbol and name
  • Page 17 – looking at bonds only T-Bills and ultra-short-term investment grade floating rate bonds show price behavior that is positive. Note these are price returns , not total returns. The total return on US investment grade ultra-short-term floating rate bonds is higher than for T-bills. We have effectively shifted virtually all of our bond allocation to ultra-short-term investment grade floating rate bonds some time ago, and expect to remain there through the Fed rate hike cycle. You can see the steady positive return of ultra-short-term investment grade floating rate bonds relative to the aggregate bond index in the middle chart in the top line of page 18.
  • Page 19 – among US sectors Technology has the strongest price momentum, even though the last week was tough for some. Consumer Discretionary sectors also have good momentum.
  • Page 21 – none of the top 10 Developed market countries or top 10 Emerging market countries have favorable price momentum.
  • Page 23 – there are some ETF’s with favorable price momentum. They are primarily found in the Technology and Healthcare sectors.
  • Page 25 – less than 15% of the Standard & Poor’s 100 stocks have good price momentum, and they come from various sectors
  • Page 27 – within the Russell 3000 (essentially the entire US market of stocks of consequence) there are 100 or so stocks with good momentum that also have good Quality and Value characteristics. This page shows those with the largest 12 month price gains, and the following page 28 shows those that gained at least 200% over three years and have the best shape curves among those with favorable momentum.
  • Page 29 – looking at the 150+ stocks selected by Northern trust as “quality” dividend stocks, a limited number have favorable price momentum, and page 30 shows those 12 with the best shaped three-year curves among them.

 

Trend Indications for Key Asset Categories

Sunday, May 27th, 2018

Some observations:

  • Most key stock categories are in positive intermediate-term trends.
  • Only mid-cap, small-cap and micro-cap stocks are in positive short-term relative momentum trends.
  • Most key bond categories are in negative intermediate-term trends and negative short-term relative momentum trends, except for some municipal bond categories.
  • Equity REITs are in negative intermediate-term trends and short-term relative momentum trends, while gold and commodities are in positive intermediate-term trends, but gold is in a negative short-term relative momentum trend.

This letter presents these data for each of 42 key asset categories:

  • QVM Intermediate-Term Trend Indicator (and its elements)
  • QVM Short-Term Trend and Relative Momentum Indicator
  • Price Distance from moving average trend Lines over multiple periods
  • 3-year monthly charts containing the elements of the QVM Intermediate-Term Trend Indicator
  • Annualized total return spread versus total return of S&P 500 and US Aggregate Bond index
  • Short-term traditional technical ratings from BarChart.com
  • Fundamental stock and bond valuation metrics.

We produce this data regularly. It is currently available without subscription by email.  If you would like to be included in future email of this content, let us know at Info@QVMgroup.com, use subject TREND INDICATORS.

QVM Monthly Intermediate Trend Indicator is positive on stocks, gold, diversified commodities and some municipal bond categories, but negative on most bonds and equity REITs. Money market funds or ultra-short-term, investment-grade debt funds are a good placeholder for the bond allocation.

(click images to enlarge)

QVM Short-Term Trend and Relative Momentum:

Rules: All securities must have a 200-day trend line higher than 1 month ago, and their price must be above the trend line; and they must have price return higher than 3-month T-Bill total return over 1 month, 3 months and 6 months.

Stocks, REITs, gold and commodities must also have higher price return than price return of SPY (the S&P 500 proxy) over 1-month, 3 months and 6 months.

Bonds must also have higher price return than price return of BND (proxy for US Aggregate Bonds) over 1-month, 3 months, and 6 months.

Table Indications Summary:

  • Mid-cap, small-cap and micro-cap stocks pass, while large-cap and mega-cap stocks do not.
  • Long-term and high yield municipal bonds pass, while other bonds do not.
  • Diversified commodities pass, while equity REITs and gold do not.

Price Distance from Moving Average Trend Lines:

The QVM Relative Momentum rules judge whether the price is above or below the 200-day trend line. This table quantifies the magnitude of the price deviation from the trend line; and the deviation from other common moving average trend lines.

Pink means the price is below the trend line. Green means it is above.

Asset Category QVM Intermediate-Term Trend Charts

These charts plot the 3-year cumulative percentage performance of each key asset category for comparability. The four elements of the QVM Intermediate-Term indicator are on each chart.

In the main panel: (1) the trend line in dashed gold, (2) the price in black, (3) the parabolic pace curve in dotted red. In the lower panel: (4) the money flow index within a 0 to 100 scale. The cumulative total return for the security is shown in the upper left corner of the main panel.

A desirable chart has (1) the leading edge of the trend line moving up; (2) the price above the trendline; (3) the price above the parabolic pace setting; and (4) the money flow index above 50. The trendline tip must be up for a security to have a 100 rating, and at least 2 of the other 3 elements must be positive. For mutual funds which do not have volume, we use RSI as a second-best alternative to money flow.

The QVM Intermediate-Term Trend indicator does not distinguish between a weakening and strengthening trend. Visual chart inspection and other indicators, such as the QVM Short-Term Trend and Relative Momentum indicator do that.

A 19-minute video explaining the indicator in more detail and providing performance of the indicator with the S&P 500 since 1901 may be accessed here.

Annualized Total Return Spread to Stock and Bond Benchmarks

This table shows the annualized total return of each security minus the annualized total return of SPY (representing the S&P 500) and BND (representing the US Aggregate Bond index) over 4 weeks, 13 weeks, 26 weeks, 1 year and 3 years.

The cells are color coded to quickly visually distinguish between better and worse performing securities.

Note the performance in the charts in the previous section is cumulative for the security. The performance in this table is the annualized performance in excess of the performance of a benchmark.

Short-Term Technical Indicators from BarChart.com

Traditional short-term technical indicators from BarChart.com see domestic stocks mildly positive, but international stocks as negative. They give a mixed mostly positive view of Treasuries, and negative on corporate bonds except for investment-grade short-term corporate bonds. The indicators have a mixed view on municipal bonds, a negative view of gold, and a positive view of equity REITs and diversified commodities.

 

Fundamental Data

These data are accessed via Morningstar and are not independently verified.

Fundamental data is not useful for understanding short-term historical or future price action but are important in the long-term.

It is a good idea to be aware of the valuation attributes of key asset categories.

 
Symbols Examined In This Post:
XLG, OEF, SPY, MDY, IJR, IWC, VLUE, QUAL, USMV MTUM, VIG, VYM, DVYE, VT, VXUS, VEA, VGK, EWJ, VWO, MCHI, FM, VGSH, VGIT, VGLT, VTIP, TIP, VCSH, VCIT, VCLT, HYG, FPE, BND, BNDX, VWOB, VWSTX, VMLTX, VWITX, VWLTX, VWAHX, VNQ, GLD, DBC

Stocks and ETFs in Strong Uptrends Now in a Weak Market

Monday, March 5th, 2018
  • Small number of strongly up trending stocks shows weak overall market.
  • Less than 1% of ETFs are in strong up trends.
  • Less than 2% of S&P 1500 stocks are in strong up trends.
  • Few of the strongly up trending stocks and ETFs carry attractive analyst 12-month price estimates.
  • Most of the strongly up trending stocks have high valuation levels.

For our DIY investor readers, here is some preliminary screening research to give you something to chew on — maybe even find something you like.  This will save you some time if you are interested in strongly trending securities.

No recommendations here, just filter data that may or may not reveal an opportunity. That’s for you to decide.

We specifically used only tools available to the public to develop this list and supporting data, so you could find and use those information sources in the future.

We also provide the trend screening syntax we used, which could save you a bundle of time, if you decide to use it.

From the screening today, only 24 securities in either the S&P 1500 or non-leveraged, long-only ETFs survived a rigorous trend screening ( 1 ETF and 23 stocks).

The inverse of these results is that 1477 S&P 1500 stocks did not have up trends and liquidity as strong as our filter criteria specified; and over 2000 ETFs also did not pass the test.  Less than 2% of the S&P 1500 passed the filter, and less than 5% of 1% of ETFs passd the filter.  Overall, that suggests a very weak market.

This post provides:

  • The list of survivors
  • The screening criteria
  • Price performance charts for each security
  • Tabular return and valuation for each security
  • Short-term technical ratings for each security
  • Street consensus 12-mo price estimates for each security.

The Survivors:

AAXN Axon Enterprise, Inc.
ABMD ABIOMED, Inc.
ATVI Activision Blizzard Inc.
BF/B Brown-Forman Corp. – Class B
CRM Salesforce.com, Inc.
DDS Dillards Inc
DIN Dine Brands Global, Inc.
HPE Hewlett Packard Enterprise Co.
IGV iShares North American Tech-Software ETF
ILG ILG, Inc.
KEYS Keysight Technologies Inc.
MKC McCormick & Co., Inc.
MKSI MKS Instruments, Inc.
MSCC Microsemi Corp.
NATI National Instruments Corp.
NFLX Netflix, Inc.
NKTR Nektar Therapeutics
OLLI Ollie’s Bargain Outlet Holdings Inc.
PTC PTC, Inc.
RHT Red Hat, Inc.
SNI Scripps Networks Interactive Inc.
ULTI The Ultimate Software Group, Inc.
WWE World Wrestling Entertainment, Inc.
X USX-US Steel Group, Inc.

 

(click images to enlarge)

The Screening Criteria:

(using StockCharts.com advanced screening tool)

1-Year Daily Charts:

(from StockCharts.com)

 

Returns and Valuation:

(from Morningstar)

Short-Term Technical Rating:

(from BarCharts.com)

Note: Barchart technical ratings are for traders, and what they call long-term is still quite short-term for most investors.  They denominate in days, not months or years.

 

Street Consensus 12-Mo Price Estimates:

(from 4-Traders.com)

 

Good hunting!

Breadth Character of the US Stock Market

Monday, March 27th, 2017
  • Major stocks indexes still in intermediate-term up trends
  • Breadth indicators suggest problems underneath with prospect of near-term corrective move
  • Maintain current reserves in anticipation of better entry point for broad index positions

WHAT ARE BREADTH INDICATORS?:

Stock market breath indicators  measure the degree to which the price of a market-cap weighted index, such as the S&P 500 index, and the broad equal weighted market are changing in harmony — looking for “confirmation” or “divergence”. With confirmation, expect more of the same. With divergence be prepared for the path of the index to bend toward the direction of the path of the breadth indicator.

It works in a way similar  to the physical world as described in Newton’s First Law of Motion, which says that an object in motion continues in motion with the same speed and direction unless acted upon by outside force. The object is the stock index price. The force is the breath indicator.

There are multiple forces acting upon the object (the stock index), and it is the sum of those forces  that determine the speed and direction of the  index. Breadth indicators are among the more  powerful forces, because they reflect the effect of other forces (such as earnings and growth prospects and microeconomic news) on each of the index constituents separately.

Breadth indicators tend to be more effective at signaling impending market tops than market bottoms.

As more and more of the broad market issues move in the opposite the direction of the market-cap weighted stock index, the greater is the probability of reversal in the direction of the stock index.  The breath indicator represents the equal weighted broad market, which normally peaks before the market-cap weighted indexes peak..

Additionally, when breath indicators reach extreme values in the same direction as a market-cap index,  the market-cap  index is thought to be overbought or oversold, and subject to moderation back toward the moving average.

Let’s look at a few breadth indicators that we follow weekly to see what they might be suggesting at this time about the Standard & Poor’s 500.

CURRENT S&P 500 INTERMEDIATE-TERM TREND CONDITION:

First, let us stipulate that the S&P 500 is in an uptrend. Actually most major indexes around the world are currently in up trends (see a recent post documenting trends around the world).

Figure 1 shows our 4-factor  monthly intermediate-term trend indicator in the top panel in black (100 = up trend, 0 = down trend, 50 = weak or transitioning trend).  (see video explaining methodology, uses, and performance in a tactical portfolio since 1901).

FIGURE 1:

(click images to enlarge)

2017-03-27_SPY trend

 

BREADTH INDICATORS CONDITION:

Percentage of S&P 1500 In Correction, Bear or Severe Bear

We  look for divergences between the direction of the combined constituents of the S&P 1500 broad market index with the direction of the S&P 500 index.

In Figure 2, we plot the percentages of constituents  in a 10%  Correction or worse;  in a 20% Bear or worse;  and in a 30% Severe Bear or worse versus the price of the S&P 500.

This measure’s how much bad stuff is happening in the broad market.  The weekly data is a bit noisy, so we also plot the 13 week ( 3 month) average shown as a dashed line over the weekly data.

Leading up to the 2015 correction, these indicators (particularly the 10% Correction or worse indicator) gave an early warning of developing risk of a market reversal.

After the 2015 correction, those indicators continued to deteriorate, event though the &P 500 recovered; once again giving a signal that not all was well, which led to the 2016 correction.

After the 2016 correction,  those indicators improved rapidly  until the period before the 2016 election where concerns were rising. After the election, the indicators once again improved very rapidly, but now those issues in Correction, Bear  or Severe Bear  are rising again, suggesting caution about the possibility of another market reversal.

(click images to enlarge)

FIGURE 2:

2017-03-26_CBSB

Percentage of S&P 1500 Stocks Within 2% of 12-Month High:

In Figure 3, we plot the percentage of S&P 1500  constituents within 2% of their 12 month high, versus the price of the S&P 500.   This measures how much good stuff is happening in the broad market.

That breadth indicator  began to decline months before the 2015 correction and continued to decline even as the market recovered from that correction, portending the early 2016 correction.

The 13 week average turned down before the larger part of the corrective move preceding the 2016 election and rose after the election, but now it is  rising again, suggesting the possibility for a corrective move in the near term.

FIGURE 3:2017-03-26_2pct

S&P 1500 Net Buying Pressure:

Figure 4 presents another breath indicator, which recall “Net Buying Pressure”.

It measures the flow of money into rising and falling prices of the constituents of the S&P 1500 for comparison with the  direction of movement of the S&P 500  index.

The chart below plots  the Net Buying Pressure for 3 months, 6 months, and 12 months.

We multiply the price change in Dollars of each of the 1500  constituents each day, and multiply that change by the volume of shares traded each day. We sum  the negative products, and sum the positive products.     We then divide the sum of the positive products by the sum of the positive and negative products combined. If the ratio is more 50%,  that means there is more positive product than negative product, which we called Net Buying Pressure.   If the ratio is less than 50%,  that means there is less positive product than negative product, which we call Net Selling Pressure.

You can see in the chart that Net Buying Pressure began to decline in advance of correction in 2015 and continued to decline even as the index recovered before going into a second correction 2016. Since then net buying pressure has risen until just recently, when it has begun to decline again. That suggests to us trend in the S& 500  is not well supported by the broad market, and may be ready for a corrective move.

FIGURE 4:

2017-03-26_NetPressure

 

Bottom line for us is the view that the broad market foundation of US stocks is materially weakening, making the major market-cap indexes (dominated by the largest stocks) increasingly, visibly vulnerable to a material corrective price move; which suggests a better time later to commit new capital than now.

 

 

All Key Regional Stock Markets Are Now In Intermediate Up Trends

Wednesday, March 22nd, 2017

With Europe and China joining the other key regional markets, they are all now in intermediate up trends, as measured by our 4-Factor Monthly Trend Indicator.  This is not a prediction of the future, merely an observation of the current trend condition of the markets.

(see video description of the indicator methodology and uses; and performance of the US large-caps in tactical allocation since 1901; here).

Each market is plotted below using a proxy ETF, showing the trend indication month-by-month for the last 10 years (4+ years for China ETF).

The trend indicator is plotted in black in the top panel, showing 100, 50 or 0.  A 100 means up trend.  A 0 means down trend.  A 50 means a weak trend or transition between trends.

The 4 factors shown in the main panel are:

  • whether the leading edge of the 10-month moving average is pointing up or down (gold line)
  • whether position of the price is above or below the 10-month average (black vertical bars)
  • whether buying pressure is net positive or net negative (dashed green line, left scale)
  • whether the rate of price change in the direction of the trend is keeping up with a geometric pace  (red dots).

US STOCKS INTERMEDIATE-TERM TRENDS:

(click images to enlarge)

S&P 500 Large-Cap (SPY)

2017-03-21_SPY trend

S&P 100 Mega-Cap (OEF)

2017-03-22_OEF trend

S&P 400 Mid-Cap (MDY)

2017-03-22_MDY midcap

Russell 2000 Small-Cap (IWM)

2017-03-22_IWM Smallcap

Russell Micro-Cap

2017-03-22_IWC microcap

Russell 3000 “total market” (IWV)

2017-03-22_IWV R3000

 

INTERNATIONAL STOCKS INTERMEDIATE-TERM TRENDS:

Europe (VGK):

2017-03-22_VGKtrend

Japan (EWJ):

2017-03-22_EWJ trend

China (MCHI):

2017-03-22_MCHI trewnd

Global Emerging Markets (VWO):

2017-03-22_VWO Trend

Frontier Markets (FM):

2017-03-22_FM trend