Monday, August 24, 2015

Stock Market - Black Monday (Aug 21, 2015)

Today's market action was very scary. Since last week to today's lows, markets decline over 10%. This decline wiped out more than ~$1.5 Trillion in wealth from the stock market.

If you had looked at the news today, it was horrific. There was live coverage on the decline even on channels like CNN. I have received several calls from investors trying to figure out if they should enter the market or not. And how are the proprietary models of Understand, Survive and Thrive, reading into this market.

I would like to start by saying that panicking will not help!!!

DJIA completed a head and shoulders pattern at the top, which was not noted in the financial media. This kind of development suggested that we should expect this head and shoulders pattern to play out. However, I did not expect a crash like scenario.

Now that we have seen the flash crash type of event, the big question is how should one proceed. Should we buy the dip or use the rally to sell-out of equities. In order to objectively analyze these two options, lets look at three Bull/Bear market indicators that we have used to great success.

  1. Yield curve inversion: Historically, over the last 50 years no bear market has ensued without yield curve inversion (link). If that is the case, yield curve is not inverted yet and therefore, we should give benefit of doubt to the market
  2. Proprietary Bull/Bear indicator, using optimum Bull/Bear criteria, is calculated on a monthly basis. As of last calculation at the end of July, it was registering 70%, which is above the threshold of 65%. Although the indicator will be recalculated on Aug 31, persistent market decline can result in us entering a bear market. This would mean that we have several months of lower prices ahead. The true result will come out on September 1st and therefore, no decision of exiting longs will be made till that time
  3.  Another very important Bull market indicator is still bullish which uses Global Dow as the proxy of global stock markets. It would need September data to declare whether we have entered a bear market or not.
Therefore, next few days will be very crucial for the market. Since the yield curve has not inverted yet, the chances of entering a prolonged bear market are very slim. As a result, this should be a buying opportunity. If the market is to avoid entering a bear market based on proprietary indicators, it should rally hard over the next few days. From a geo-political standpoint, it would make sense for the market to stay up for till next year's election because there is no change in policy and Congress gridlock continues.

In conclusion, we should expect a sharp rally over the next few days. Otherwise, markets will enter a prolonged bear market, which yield curves inverting over the next few months.


Monday, August 3, 2015

IOM Performance Evaluation - July 2015

In an environment when Greek deal was so uncertain that Greek was almost booted out of the European Union, at a time when corporate earnings had started to disappoint and in face of Federal Reserve's anxiety around interest rate hike, IOM portfolio once again outperformed the market. Since March 2015, IOM has lead the market by 5.7% (model is up 3.7%, while total return DJIA is down 1.7%).

In other words, model has generated Alpha without taking on very much risk. In built, risk management mechanisms have ensure removal of underperforming stocks and heavier allocation to stocks with great fundamental and technical pictures.  

This outperformance is especially significant because it came at a time when the global markets were very uncertain. Following chart shows the market performance since March 2015.

The investment optimization model (IOM) has been developed to manage risk and amplify gains. In order to do so, the model is deigned to out-perform its benchmark in following three distinct environments: :

1- A market which is trending up
2- A market which goes sideways and down
3- A Bear market

In an up-trending market, the model's components will outperform its benchmark because the stock selection is based on a systematic method of identifying stocks exhibiting certain features and higher gain potential.

At the same time, strict risk management process ensures that if a single entity is doing bad, asset allocation is reduced. For example, last month LinkedIn was removed and this month Chipotle has been added back into the portfolio.

 In a sideways market, like right now, the model is designed to outperform and preserve capital.

Finally, in a bear market, model will not only preserve capital using proprietary risk-management strategies, it will also short the market and diversify in other asset classes.

Therefore, the model is very holistic and so far in 2015, it has proved to be very valuable. Moving forward, we are working on enhancing the model with additional business rules to not only amplify portfolio's return potential but also to forewarn about an impending bear market. We will keep the blog updated with latest performance and enhancements.