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Friday, July 21, 2017

Gold Could Experience Significant Gains

Summary:
  • 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

Introduction
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. 


Positioning
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 

Contact
  • 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.

Structure
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.

Divergences
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.

Timing
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.

Sentiment
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)

Positioning
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: subscription.ust@gmail.com 
  • 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!

Conclusion
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 subscription.ust@gmail.com 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: 

Monday, June 26, 2017

Market Update - June 26, 2017

Markets have been gyrating sideways with an upward-tilt over the past few weeks. Since the start of January, we have seen a rotation from Tech stocks to Industrials and as a result DJIA has reached all-time highs, while NASDAQ remains below its May highs. 

Stock Market Turn
We have discussed the possibility of a July top in the equity markets on multiple occasions on Twitter: @survive_thrive, and the July turn window being in close proximity to Q2 earnings season, supports that observation.


However, we don’t think that it will be the start of a major new down trend. Rather market could go sideways to down for few months, but will likely see a resurgence towards the end of the year because of following two reasons:
  1. Bond Yield Dynamics
  2. US Dollar Dynamics
Yield Curve:
So far we have not seen an inverted yield curve i.e. near-term rates being higher than the longer-term rates. In a normal world, longer-term rates are higher because long-term (30 years) lenders expect more interest than short-term (2 year) lenders, as they take more risk.


However, when yield curve flips it suggests that there is something fundamentally different in the overall interest rate structure. And when this happens, we typically see a recession. In fact, all of the recessions since 1950s have been accompanied by the inverted yield curve phenomenon. Therefore, we should keep an eye out for it.

At this point, the yield curve is flattening but is not inverted. Following two charts show this change. 

Yield curve in April 2013 was very steep (above), while now its getting flat (bottom).


It might take another 2-3 Federal Reserves’ rate hikes to trigger the flip. This goes along nicely with the concept of continuation of stock market rally for the time being.

US Dollar
There are interesting developments happening in the US Dollar index and commodities markets especially Gold. Although Gold prices have been in a holding pattern for last 2 years, China and Russia have started dealing in Gold-Yuan for oil trade, rather than US Dollars. At the same time, cryptocurrencies like Bitcoin and Ethereum are becoming popular. All of these developments suggest that US Dollar has some really strong head winds.

When you combine this with US Dollar's price structure, we see that Dollar will be under significant pressure over next several years. We will discuss the US Dollar's price structure in another post. 

Most recent rally in US Dollar lasted for ~10 years (since 2007), and could lead to significant devaluation. If the US Dollar declines due to underlying changes in global economic structure, it would send Gold significantly higher. And many other opportunities will arise due to this development

Investment Decision
These two are big themes that we see in today’s market. While we are currently positioned to take advantage of these big moves, we will keep an eye out for any emerging opportunities. 

Everyone should evaluate their investment process on two fundamental investing questions:
  1. Will they be ready when the current trend changes in the stock market? 
  2. If yes, will they have the mental stamina to go against the herd and make a buy/sell decision before it's too late? 
  3. Am I positioned to take advantage of what market is offering today and could offer in the near future?

We can help you answer above questions and recommend a strategy that can work over time and in different markets. Feel free to contact us with any investment questions on twitter or via e-mail.

Our proprietary strategies are based around above two fundamental questions with the goal of providing absolute returns in any market condition. As a result, we are positioned to take advantage of big market themes while managing risk to limit potential losses. These strategies are open for investment. Please feel free to contact via 

You can also sign-up for free email updates below: 

Wednesday, April 26, 2017

Q1 2017 Performance Review

Recap
First Quarter of 2017 was very eventful. It started with an overbought market, which continued to gyrate with new president coming into the office and confusing Executive Orders. While all of this happened in January, earnings started coming in better than expected and propelled the market to new highs in February.


After topping on March 1, within IPM turn window, market declined for rest of March. Many reasons were given for this decline including overbought market, high valuations, sentiment, potential for unfulfilled presidential promises and geo-political turmoil. Sadly, this wasn't something new. These kind of events happen all the time, making investing an arduous task.


Now the question is how can someone properly and profitably navigate through such tumultuous markets, while maintaining one's composure. That's why we created strategies that don't depend on market news, rather take into account underlying market currents to make investment decisions. This reduces transaction cost, dampens volatility and increases consistent results.


We are currently running two strategies. Goal of both portfolio is to generate absolute, uncorrelated returns for long-term growth. These are:
  • Conservative: Suitable for retirement accounts and risk-averse investors
  • Aggressive: Suitable for risk taking investors, with longer-term invest goals
Although both strategies performed amazingly well in Q1'2017, we will review their performance individually.


Conservative - Enhanced PSB (Green )
Conservative strategy went live in 2016. It returned 6.8% (excluding fees) against 6.1% return of SP500 total returns including dividends.

Following chart shows the cumulative performance of Conservative portfolio since inception. Strategy returned 19.8% (excluding fees) vs SP500 total return of 19.8%. In 2016, conservative strategy outperformed SP500 12.2% vs 12%.




Aggressive Strategy - Aggressive Enhanced PSB (Orange)
Aggressive strategy went live in 2017. It returned 15.6% (excluding fees)  against 6.1% return of SP500 total returns including dividends.

Since this strategy went live in 2017, Q1'2017 performance of 15.6% also shows the since inception performance of the Aggressive Strategy.


Although past performance doesn't guarantee future results, Q2'2017 performance remains very robust for both strategies.


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 on investments while looking at news all the day 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 subscription.ust@gmail.com for details. These strategies can be implemented via managed account setup through a Registered Investment Advisor. Please contact us for details. You can also sign-up for free email updates below: 
 

Tuesday, April 4, 2017

Gold Rally Can Pause!

We started investing in Gold in 2016 April, after 4 years of being out of the Gold market. We again increased Gold exposure at the start of 2017, in our proprietary strategies (Jan / Feb
2017 Investment Strategies' Performance)Overall, Gold remains in an uptrend but recent development has made us wary of immediate upside of Gold. 

In this post, we have analyzed Gold's short-term prospects using multiple analysis techniques to showcase the rationale behind our caution:

Technical
After experiences a sharp decline in early March, Gold has rebounded nicely. It is now testing significant trend-lines (show below). These trend lines could act as resistance in the near-term and force Gold to consolidate.


Sentiment
While Gold could experience a pause, it will be a very constructive development. But what is not constructive is the fact that news media has recently turned bullish on the yellow metal. Following are some of the recent bullish Gold headlines:



Furthermore, other sentiment indicators also suggest that Gold and Silver are in for some turbulence. Following chart shows Silver positioning among large and small traders. Current positioning is at levels that have resulted in Silver going down or sideways.

One cannot believe the financial news media because they get behind a trend, once everyone is on board. A detailed analysis of 2016 news and market action is presented here. Therefore, investors need to remain objective in terms of their direction and action plan.
Short-term structure:

With sentiment picture on the optimistic side, its likely that the trend will experience some pause before really asserting itself in the next few days. Above chart shows a potential inverted head and shoulders pattern being formed in Gold. However, the right shoulders doesn't look complete. Some back and forth action will be ideal to complete this structure.  

Gold Influence
Gold is significantly influenced by USD and Euro. Strong dollar pressures the commodities complex. It looks like Dollar has completed a long-term correction since the start of 2017, and could rally for few weeks. Start of 2017 is the same time when Gold start rallying. Once US Dollar rallies, it would be negative for Gold and Silver markets.
Furthermore, Euro long positions are also very extreme, which means that Euro will soon experience correction. Euro decline will also fuel Dollar rise; another reason that could dampen Gold’s ascent.

Conclusion
Gold could experience some resistance around these levels because of technical, sentiment and influence from other areas. However, that doesn’t mean that Gold will not spring back or it has entered a down trend. In financial analysis, one needs to remain objective.

How are we positioning?
We have reduced our long exposure but maintain long positions because Gold remains in an uptrend, as per proprietary Market Classification Model. Details will be shared with subscribers by April 9th. Our conservative proprietary strategy has out-performed the market in 2016 and in Q1-2017 through objective risk-management and a combination of strategic & tactical allocation. Detailed performance analysis will be shared in next 2 weeks.

Want to Invest
You can invest in these strategies through “Managed Account” offering or by subscribing to some of the services like Market classification Model (subscription page). MCM serves as the backbone for our model and can help you develop an understanding of the markets.  If interested in investing, you can register below and we will send an update. 
 

Tuesday, March 28, 2017

Financial Media and Stock Market

Over the last week, Financial News media is talking about how Trump will not be able to keep his promises given current political situation. Hence, continuation of the "Trump Rally," as it has come to be known, is in jeopardy. However, this is not correct and this is my problem with the media. News media needs a story and reports on everything after the fact because that is what majority of their readers can relate to.

They have done the same thing over and over again. Three big examples from 2016 include Brexit, US Elections and Oil crash of early 2016. In case of Brexit and US Elections, media did not have clue of what will happen in the actual vote. Everyone was complacent about status-quo remaining intact and no changes taking place. For example, UK staying in EU, while Hilary winning the White House.


Once both of these predictions turned out to be wrong, they focused on how negative will this development be for the overall stock market because of nationalistic policies, lack of growth and other issues. However, the market proved them wrong every time. And then they cam up with rational behind Trump rally or Post-Brexit stock market rally. These reasons range from additional liquidity by central bankers or business friendly presidency.

Brexit
US Elections
However, if you think about it for a minute, what would have happened had we seen the opposite results in Brexit Vote or US elections?
  • Brexit Vote: A vote to stay as part of EU would have also triggered a stock market rally but the rationale would be - it's a relief rally!
  • US Elections: A vote for Hilary Clinton would have also triggered a market rally with a rational of policy continuation and lack of uncertainty  
In either case we would have experienced higher prices but different rational. Therefore, financial news media had no idea regarding the cause of the rally and didn't know that the market would rally. They just react to market performance and come-up with justifications. If one had been following the financial media and acting accordingly, they would have lost a lot of money or at least had not participated in the market rally.

And right now, media is so focused on negative aspects of Trump administration that it is missing several opportunities. We discussed some of these opportunities, as part of our 2017 investment themes in February (link).

In order to mitigate this news driven emotional roller-coaster, we developed proprietary portfolios, where investors can invest for longer-term consistent gains without involving emotions due to financial news media. For example, we exited the stock market in Sept 2015 and then entered the market again in July 2016, and have maintained long positions since then.

Following is an overview of the performance. Detailed performance will be shared after end of Q1:
  • Conservative: ~7.5%
  • Aggressive: ~18.5%

Want to Invest?

At Understand, Survive and Thrive, our goal is to produce consistent, uncorrelated returns using unique analysis techniques, that will enable your portfolio to beat the market over any economic cycle and provide peace of mind. We don't believe in beating SP500 every single month. And therefore, if someone wants to try our strategies just for the short-term, we will suggest that they will be disappointed at some point.

If you are interested in investing, you can register below and we will send an update. Some of the key outputs from the data models used in this strategy are also available through subscription.

Sunday, March 19, 2017

Bitcoin Analysis and Future Roadmap


Image result for BitcoinBitcoin is a digital currency - one of many. However, it is the first digital currency of its kind with a market cap of ~$18 B, with a finite supply. This means that there will be a time when no new bitcoins will be created, which is very important for any thing of value. Bitcoin does not have any central bank or country controlling it. Hence, it is the true currency for a society without borders. Bitcoin price has sky rocketed since its launch in 2009. For details on Bitcoin basics, please go here

Bitcoin today serves multitude of functions ranging from a store of value to medium of purchasing goods. Its underlying technology, known as "Blockchain," has found many uses other than pure currency usage. In fact, many financial and other institutions are exploring the use of Blockchain in their industries. This technology promises instantaneous registration of financial transactions e.g. purchases or trade settlements. Some of the prominent Bitcoin accepting merchants include:


Recent Developments

Recently, Bitcoin has come under significant selling pressure - declining from ~1300 to ~950 in few days. This selling is coming primarily from speculators who bought the currency in the hopes of SEC approval of a Bitcoin ETF (link), which did not happen, and discussion of a new parallel currency - Bitcoin Unlimited. We have seen similar periods of Bitcoin despair in the past, especially towards at the beginning of 2016 when many Bitcoin enthusiasts proclaimed that the currency is dead and was a good experiment (link). At that time, Bitcoin price was $400 and today it is $1000.

Another apprehension is slower processing of Bitcoin transactions. However, its something that can be resolved and should be resolved. Now the interesting thing from this recent Bitcoin pessimism is that this might be setting-up a great buying opportunity for long-term investors, who want to diversify their portfolio.

Future projections

Bitcoin trend remains up. We started buying Bitcoin after our proprietary Market Classification Model (link) showed a trend change in late 2015. The trend remains up and recent surge in pessimism along with decline in Bitcoin price could provide the fuel needed to start the next rally phase.

From an Elliott Wave perspective, Bitcoin potentially completed a longer-term 1st and 2nd waves in 2015. Since then it went up in a minor degree first wave. Either recent decline is 2nd wave of minor degree or we are experiencing a sequence of 1s and 2s. In either case, once recent correction is complete, we should see a continuation of the uptrend and with substantial force.

Following chart shows the discussed wave structure:


From a sentiment perspective, recent declines in enthusiasm and rejection from SEC supports this interpretation of the wave structure. An approval of the Bitcoin ETF from SEC would have suggested a major top in Bitcoin because of mainstream approval.

Other Developments

Along with technical reasons, there are a multiple geo-political and policy reasons that could really support Bitcoin prices, including:

  1. Elections in Europe, especially France
  2. Impact of US policies on the world e.g. protectionism 
  3. Potential inflation scare
  4. Downturn in U.S. economy. U.S. economy has been rising for the past 8 years. A bear market/recession is overdue.

Where can it go? 

If Bitcoin starts rallying, it could touch $3K, followed by $5K in 1-2 years. Longer-term, there are projection for $13K. But we will see the market action one day at a time. We will continue to evaluate our indicators to decide when to add and keep an eye on the Market Classification Model to identify exit point, if Bitcoin enters a bear market.

In today's investment environment where Bonds and Stocks are very expensive, Bitcoins provide an alternative for investors to not only diversify their portfolio but also potentially grow it at a fast pace. Its like an options strategy, in case you need to protect yourself with diversification but with one big advantage - there is no expiry date!

Our services

At Understand, Survive and Thrive, our goal is to produce consistent, uncorrelated returns using unique analysis techniques, that will enable your portfolio to beat the market over any economic cycle and provide you the peace of mind to stay with the strategy. We don't believe in beating SP500 every single month. And therefore, if someone wants to try our strategies just for the short-term, we will suggest that they will be disappointed at some point. Like one can use Bitcoin for investment and for diversification, one can diversify their investments without Bitcoin and that's our goal.

If you are interested in investing, you can register below and we will send an update when the strategy is available for investments. Some of the key outputs from the data models used in this strategy are also available through subscription.