Friday, July 21, 2017

Gold Could Experience Significant Gains

  • Gold market Overview at the top of the post
  • Positioning / Investment options at the bottom of the post
  • Analysis: Short, Medium and Long-term analysis with rationale in the middle

On April 4, 2017 we mentioned that the Gold rally could pause over here. At that point Gold was at 1263 and today its at 1245. Following chart shows the ~4 month sideways consolidation in Gold:

What happened to Gold was that it succumbed to excessive optimism among market participants and as a result wasn't able to muster enough strength or the wall of worry wasn't strong enough to allow Gold to climb beyond immediate resistance levels.

At the same time, stock markets around the world did pretty well, which dampened Gold's demand. As a result, sentiment turned extremely sour towards precious metals. for example:
  • Daily sentiment Index reached: 10 out of 100
  • Long Positions of major hedge funds reached lows not seen since late 2015
  • Articles started coming out proclaiming much lower Gold prices and Bitcoin being the new Gold
Both of these development highlighted the fact that in July (after 3 months), wall of worry had again gotten stronger. And now we are at a different phase in Gold. We will evaluate Gold from near-term perspective to long-term to understand what is coming-up next.

Near -term:  Since July 11th  Gold has been stair-stepping higher without any major move, which is good because its moving under the radar. Secondly, it is tracing out a sequence of 1s and 2s, which can lead to a sharp move higher in wave 3 of 3. 

Medium Term: While Gold and Gold stocks prepare for acceleration on the short-term time frame, they are also positioned very well for a rally in medium term. Because at this time frame, Gold also completed a sequences of 1s and 2s. Even though following chart shows Gold stocks, bullish case for Gold is similar if not better.

Longer-term: Gold is tracing out an inverted Head and Shoulders pattern. This pattern, once broken can lead to 1400 price. Important thing to note is that this price target might will not be achieved in one day but will reach there over time.

Rationale: There are many reasons that can propel Gold to higher levels some of these include:

  1. Potential correction in Stocks and Gold acting as the safety trade
  2. Potential increase in geo-political tensions
  3. Continuous weakness in US Dollar Index, which was one of the big trades at the start of the year but we mentioned in February on twitter (@survive_thrive) that this US Dollar rally might be over, so one should look for alternatives. We will discuss US Dollar index in greater detail in another post. 

Markets are at a critical juncture. However, knowing that is one thing and acting on this information is totally different in our experience. We mentioned following big moves on this blog/twitter in 2017 but doubt if effective trading was performed around this analysis:

  • March Top
  • April Top in Gold
  • April Bottom in Stocks
  • Emerging Market buy in February
  • Early July bottom in Nasdaq
  • ...

At this critical time, we are using proprietary models to expose clients to positions that have the highest success probability.  Our strategies have generated consistent returns, while taking advantage of new market opportunities and minimizing existing risk. We provide Absolute Return Hedge Fund like strategies through Managed Accounts. Performance - H1 2017 

  • Any investment / trading questions: Twitter (@survive_thrive)
  • Free e-mail subscription: Click on the button below and select "Free E-mail"
  • Invest with us: Click on the button below and select last Investment Option and a Registered Investment Advisor will get in touch with you.

Thursday, July 13, 2017

Stocks Approaching Dangerous Levels

Yesterday's rally in all of the major indices $DJIA, $SPX, $EEM, was very well received and triggered many tweets regarding Dow being at all time highs. Even President tweeted that stock markets are doing Great! I would recommend against such tweets because:
  1. What happens when the market goes down? If one owns a rising market, they would have to own the declining market as well, which could be much more negative.
  2. Market risks are increasing and we are close to a turn in the markets, which will correct post-election rally. Hence, a deeper correction can be expected. 
Following analysis supports the correction hypothesis (not a Bear market for now). Please note that below analysis is predictive and unlike mainstream finance, which is reactive, this analysis helps in understanding potential market move before time. This analysis also plays a pivotal role in our client portfolios (H1 2017 Performance has been shared). There are four key components:
  1. Structure
  2. Technical/Divergence
  3. Market Timing
  4. Sentiment
This correction could last for few weeks/months before resumption of the trend because we don't see a Bear market right away. But do you want to be part of a market when its going down and the headlines are negative? Some investment suggestions are included at the end.

Firstly, the Elliott Wave structure is nearing completion. Once this 5-wave rally completes, we will see a decline. Next decline could bring DJIA back to ~20,500. As for the upside, if current structure (As shown below) holds, Dow Jones Industrial Average cannot exceed 22,000, which is less than 500 points from yesterday's close.

One of the lesson that we have learned over past several years of market analysis is that one cannot and should not blindly believe on Elliott Wave structure without considering the market backdrop.

Inter-market divergences highlight discrepancies between markets. These discrepancies typically take place in 5th wave where markets start diverging. We can currently seeing a divergence between SP500, DJIA and Nasdaq (shown below).


Please note that these divergences don't mean that long-term trend has reversed. On the contrary, there are no signals (structural or momentum) that this decline could lead to a new bear market.

Our proprietary market timing model has a key market turn date scheduled for July 14 (+/- 4 business days). Therefore, we can expect a top by next week.
This model has worked very well in the past and also serves as a key component of our proprietary strategies. We are working on developing a unique trading system around IPM, with potential go-live in 2018.

Following charts show that sentiment is very elevated. 

Long positions in DJIA are at all time highs, which does not bode well for a sustained rally.

Investor Intelligence survey respondents are mired in the bullish region for quite some time, and same is the case with Naaim survey results (charts courtesy of Babak).


Lastly, these two are very interesting.

TD Ameritrade users are very Bullish and are showing it with their trades. Since these are real retail investors, them being so bullish doesn't bode well for the markets.
More than half of E-trade users are also optimistic regarding the prospects of the market, which is another warning signal (Courtesy Noon Six Cap)

Markets are at a critical juncture. Preparing for such a decline will depend on personal risk tolerance and tax considerations. Everyone should evaluate their investments through following key investing questions:
  1. Am I ready for a stock market trend change?  
  2. Will I have the mental strength to go against the herd?  
  3. Can I take advantage of new opportunities?
If you think you have too much exposure to stocks, you can reduce some exposure to be able to buy again. If your comfortable taking a hit to the portfolio knowing that you might not be able to enter back in time, it's better to ignore the news and remain invested. Worst thing a person can do is not reduce exposure at top and then get stressed with market/news, ad get out at the bottom, only to see a resumption of the rally.

Alternative Solution: We are helping clients answer above questions every day. And have developed our proprietary strategies to generate consistent returns, while taking advantage of new market opportunities and minimizing existing risk. We aim to provide Absolute Return Hedge Fund like strategies for individual investors through Managed Account model.

Feel free to contact us with any investment questions or if you would like to invest with us (Performance - H1 2017):

  • Twitter: @survive_thrive
  • E-mail: 
  • Comment below
  • You can also sign-up for free email updates below: 

Thursday, July 6, 2017

H1' 2017 Market & Strategy Performance Review

First half of 2017 was very eventful where SP500 continued to rally in face of many uncertainties. Hence, it was a difficult period of investors as they had to absorb a lot of headline risk and be brave in their investments. Both of our proprietary strategies have beaten SP500 in 2017 with good margins and with uncorrelated returns. Therefore, not being influenced by news headlines.

Let's first review the markets in H1'2017 to gain a perspective for circumstances in which market beating uncorrelated performance was given. 

Market Recap
First half of 2017 was very eventful. It started with an overbought market, which continued to gyrate with new president coming into the office. However, earnings propelled the market to new highs in February. Market topped on March 1 (within IPM turn window) for 1.5 month decline. 

At the time, many reasons were given for this decline including overbought market, high valuations, sentiment, potential for unfulfilled presidential promises and geo-political turmoil. However, market resumed its rally with Q2 earnings in April (again within IPM turn window). But in the process, many investors had to exit the market due to confusion regarding future direction. This is why investing is a difficult task.

Market rally continued in May through early June. as market was approaching a key IPM turn window on June 8th (posted on twitter), we saw excessive optimism from famous investors calling tech stocks extremely cheap. While on one hand this proclamation was very dangerous because tech stocks had already rallied substantially and they were rallying without any real profits, these headlines make investing very difficult for long-term investors because of emotional attachment. 

Fast forward 1 month from June 8 and Nasdaq is down ~5% from the top. And many of the reasons for market correction that were being discussed in March are still here but are not being discussed because markets are near the highs. And lastly, stocks have rallied for consecutive ~8 months. Everyone should ask themselves if their portfolio is positioned to absorb increased volatility because it will come, and to potentially take advantage of rotation.

In order to properly and profitably navigate through markets where extreme gyrations and news driven moves are the norm, one needs to maintain their composure. Hence, we created strategies that don't depend on market news, rather take into account underlying market tones to make investment decisions. This reduces transaction cost, dampens volatility, moves taxes to long-term bucket and generate consistent results.

Portfolio Strategies
Two strategies are currently live. Goal for both is to generate absolute, uncorrelated returns for long-term growth:
  • Conservative: Suitable for retirement accounts and risk-averse investors
  • Aggressive: Suitable for risk taking investors, with longer-term invest goals

Note: Following strategy performance numbers exclude fees.

Conservative Strategy: 9.59% vs 9.34% for SP500 (w/ dividends)

In 2017, Conservative strategy has beaten SP500. Keep in mind that SP500 has had a very good start of the year since 1950. 
H1 2017 Performance 

Aggressive Strategy: 23.75% vs 9.34% for SP500 (with dividends)

Aggressive strategy has performed very well in 2017. 

H1 2017 Performance 

Although past performance doesn't guarantee future results, H1'2017 performance was very good for both strategies. June was the first negative month after 6 positive months, providing a much needed correction to avoid over-heating!

The best aspect of these strategies is that they enables the investor to concentrate on the work that is more important in life than losing sleep over investments through daily news because we do the research and invest using proprietary algorithms and valuation models.

These strategies are open for investment. Please feel free to contact via for details. These strategies are being implemented via managed account setup through a Registered Investment Adviser. As a result, you keep control over your assets. 

Please contact us for details. You can also sign-up for free email updates below: