Tuesday, April 28, 2015

Fed and GDP report coming up

Market declined in the morning on a news that geo-political event has occurred in the middle east. However, as the news came out that the event wasn't significant, markets rallied. At the same time, the turmoil in Baltimore kept traders on the edge.

Although today's rally wasn't broad based, it showed that the broad gains that some stocks saw few days ago were being digested by sideways action.

Tomorrow we have a lot of news coming. 1st Quarter GDP's initial numbers will be released tomorrow morning, followed by Fed FOMC meeting minutes. Therefore, its going to be a busy day for the stocks and one can expect sharp moves.

Updated model performance is given below:


Monday, April 27, 2015

Model Update - April 27, 2015

Market action today was more of sideways gyration. Dow Jones industrial average is completing its inverted head and shoulders pattern. Hence, we are seeing the back and forth. However, one must remember that market is about to enter traditionally weak time of the year, with sell in May phrase about to start making round in the financial news channels.
Under such circumstances, its possible for market to decline a little. This will be a good time to test the model and see how it behaves in a historically weaker period for stocks.
Today, model lost 0.75% vs 0.23% in DJIA.

Saturday, April 25, 2015

Lessons from Nasdaq and Beating the Market

Last week was a positive week for the overall market. Blue chips gained some but Nasdaq gained a lot. Nasdaq is now within few points of all time high, which was set in 2000.

Although Nasdaq (the darling of 90s) is now approaching all-time highs after 15 years, many of the companies that were making higher highs in early 2000 are no where to be found in today's market. If one had invested in selected few companies, he would still be at a much lower level.

The story of Nasdaq taking 15 years to reach its all-time highs, teaches us two important lessons:
  1. Market can remain below a certain level for eons. Therefore, buy and hold might not be the best strategy
  2. Individual stocks are extremely hard to manage because of their individual unique profiles, company cultures and other aspects
Being said that, now the question arises how can one then beat the market and should one hire a money managers, with ton of market experience, to beat the market. Lets tackle both of these questions one by one:

Firstly, over the long-term (~20 years) only 1-2% of the money managers beat the market. This means that the probability of selecting a winning manager is .02. In other words, if you have the choice of investing money with 100 money managers, only 2 will be able to beat the market over the long-run. Furthermore, all of them will take money management fees. So should one invest with money managers with such low odds of success?

This observation gives credence to Warren Buffet's concept that its better to invest in low cost ETFs that follow the market and at least perform better than majority of the money managers because you will be closely following market's performance. But this method does not answer the question of how to beat the market. Although it is a difficult question to answer, it is a very good question to ask!!

In order to beat the markets, one should buy good companies and ride them as long as they perform well. If they enter a bear market, one should start riding another well-performing company. Although this concept seems very simple, it is very difficult to implement. In order to effectively implement this concept one needs following 5 pieces of information:
  1. Which companies to invest in?
  2. Whether selected stock is in a bull or bear market?
  3. How much to invest in each position? 
  4. When to exit a certain position?
  5. How to protect gains? 
As you know Understand, Survive and Thrive has been performing market analysis over the past several years with the goal to optimize portfolio returns using objective techniques and algorithms to take out emotions from trading. We have recently tried to incorporate above mentioned 5 pieces into our model for long-term investing.


Sunday, April 19, 2015

Weekend Market Review - Week of April 20, 2015

Last week market declined with Dow losing more than 1% in a week, with Friday being the worst day of the week. Although the decline was pretty severe on Friday, one can regard the overall market action has sideways gyration. Over the past few weeks, there hasn't been any clear direction for the market and therefore, its like that the market is setting up a base before the next breakout. However, there is a lot of news on the deck that could keep this market gyrating back and forth, before it sets the direction.

Next week will bring another deluge of earnings, which would keep the market participants on their toes, itching to press the trigger. Very basic instinct of any trader is to buy on good news as the stock rallies and sell when it is confirmed that things are going south. However, by the time it is confirmed with financial results that stock/company is doing poorly, a forward looking company management already implements policies to bring the company back on course. As a result, many stocks turn around and maintain their bull trend, as soon as bad results are announced.

This behavior gives birth to the concept of portfolio re-balancing and riding the trend. It means that as long as an individual stock is in a bull market, it will continue to rise and give way to more growth. In this regard, if one can identify the following traits, they can be very successful:

  1. Which stocks to invest in
  2. Whether selected stock is in a bull or bear market
  3. How much to invest in each position 
These three characteristics, along with few other key contributors can allow an individual to beat the market without even paying daily attention on their portfolio. This concept is the result of 5 months of exhaustive research and will discuss it in more detail in future.

For now, market is in a long-term bull market. There was a scare but it has been dealt with. Technically speaking, market is carving out an invested Head and Shoulder pattern which, when complete, could provide a foundation for another rally. We will re-evaluate the situation on a decline below 2500 (Global Dow).

Saturday, April 11, 2015

Market Update - April 11, 2015

The stock market grinded higher most of last week as SP500 closed higher four out of five days. The lack of any sharply higher days has kept the bullish enthusiasm at relatively low levels.

The earnings season hits full stride next week with 15 companies reporting next Tuesday and 46 on Wednesday. The season peaks on April 30 when 392 companies report. The continued lowering of earnings expectations may end up being a positive as very weak numbers may already be factored into some of the beaten down stocks.

As of now market seems healthy. Bears had there chances in March, but now its time to see how bulls fight back.

As mentioned few months ago, UST team was working on a unique asset allocation model to capitalize on stocks in a bull market, staying with the trend and minimizing the trades for effective portfolio management. Although we will discuss the model is greater detail in future, the model has been in use since November and results seem promising.