Friday, August 25, 2017

Market at Crossroad & Potential Catalysts

Over the past few weeks, we are seeing several consolidation patterns popping-up in different markets. Consolidation usually signals in-decision or brief pause before resumption of the underlying trend. However, markets also consolidate in a sequence of 1s and 2s before a significant move in a new direction.

It appears like we are experiencing both the cases in different areas, where market is tracing out a sequence of 1s and 2s, and is waiting for a catalyst to break out of this consolidation. Following charts show this pattern:

Bonds: Since July Bond prices have been increasing but in an overlapping manner. This suggests that either this is a corrective move and we will see a move down soon, or we will soon see above June highs.

Gold: Over the past 4 days, Gold has placed in 4 inside days above the downtrend line and near the resistance. Inside days show indecision - a point where buyers and sellers are not comfortable making the move. Although most of sideways consolidations result in a move in the direction of the trends, next few days will be telling in terms of the move.

Stocks: SP500 is stair stepping down. Like other instruments, this stair-step pattern would either give way to a substantial decline in the near future or would turn out to be a correction in the broader up trend.

Even though stock market sentiment has come down recently, it remains elevated. On the other hand sentiment for Bonds and Gold is rising but not very optimistic yet. Proprietary timing indicators suggest that next turn date is few weeks away in the stock market. Therefore, if the market declines, other assets could rally but they need a catalyst to move away from current sideways indecision.

Need for Catalyst
Today's Jackson Hole speeches by Janet Yellen (Fed Chair) and Mario Draghi (Chair ECB) could be the catalyst that the market is waiting for.

If it is the trigger and if the markets start moving in 3rd wave out of this consolidation, logical move would be a rally in Gold and Bonds, while decline in Stock Market. Stock market is over-valued and has been rising for over a year, so this move is very possible. A decline in the stocks will be attributed to debt-ceiling debate and numerous other distractions from Washington by fundamental analysis but essentially it will be a natural part of the market rhythm.

We have underscored this observation multiple times that financial news media distracts investors. It can lead to early exit and pre-mature entry into investment positions. As a result, one of the lessons that we learned through 2016 is (Investing Lessons)

Lesson 1: There are no guarantees but being persistent is the key to long-term success

Long-term investing is regarded as the secret ingredient for many successful investors. Time is a very powerful commodity. If you give time to a successful business model or investing strategy, and combine it with dedicated and passionate management team, it will give you amazing long-term results.

Another reason why long-term returns are much more important than short-term returns is because when a portfolio achieve critical mass, one’s personal savings will not have that big an impact on the growth of portfolio. For example: $100K invested today will grow to 1M @ 20% return in ~13 years. At that point 100K will not have as much value because @20% / year an investor will experience a $200K increase without adding any more funds.

Thirdly, investing is a game of nerves and patience, whether in the stock market or any other endeavor like small business, start-ups through Angel/Venture investing, or Private Equity. The only difference with stock market based investing is that you have the opportunity to exit early because the market provides excessive liquidity, which provides peace of mind for many investors.

Long-term investment positioning and persistence provides investor with the focus needed to successfully withstand periods of draw-down because major moves take place after big draw-down periods. We will discuss additional lessons in the next post.

How to Position? 
Most of the readers would agree that the markets are at a critical juncture. However, knowing this is one thing and acting on this information is totally different. So far in 2017, we have mentioned several big moves on this blog and on twitter but doubt if effective trading was performed around this analysis by the readers.

Effective, long-term and consistent trading requires discipline and an edge in the market to adjust findings as market situations change. At this critical time, we are using proprietary models to expose clients to positions that have the highest success probability.  Performance - H1 2017 

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