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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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Friday, August 18, 2017

Current Market Volatility and Lessons from 2016

Summary
  • Overview of July / August market action
  • Performance milestone of Investment Strategies
  • Lessons learned from 2016 draw-down and positioning for effective investing

Recent Market Action
Yesterday we saw a significant downdraft in the markets with SP500 down over 1.5%, while Nasdaq was down ~2%. Although this kind of behavior is nothing new for market watchers who remember 2008, it was a surprise for many who had forgotten that volatility can even rise. And not only rise, but bite very hard.

Although 2% decline in one session is good for some investors - those who are looking for cheaper stocks or are short the market, it is very scary for other market participants who are long stocks. These are the type of market conditions (volatile and uncertain), where a "Market Neutral, Absolute Return" strategy shines out among many other options.

Such strategy when combined with algorithmic rigor and proprietary indicators can not only give you peace of mind during down turns, it positions your portfolio for significant rallies. Following chart shows SP500 since the beginning of July 2017. It is evident that SP500 went sideways for over 1.5 months (+0.3%), while our portfolio strategies performed very well (Up 3.8% and 9.1% excluding fees).

Disclaimer: Performance numbers do not include fees and past performance doesn't guarantee future results
Historical Perspective
Overall, it has been a very interesting year with a rising global stock markets. However, riding the rising market has not been easy because of constant uncertainty. On one hand, financial media pundits highlighted that the equity markets are over-extended and one should prepare for a potential decline, while on the other side, they kept recommending staying long and buying in the market because of multitude of reasons. As a result, it became very difficult for a regular investor to invest in the market - let alone the volatility that we are experiencing right now. 

Although this makes things difficult, the good news is that this is nothing new and hence can prepare us for the future. Markets, financial pundits and media always behave like this. I have seen this over past 9 years of writing about the markets, and through the history of the financial markets whether in 1929, 1960s, 1980s, 1990s or 2000s.

In order to counter this continuous propagation of news that negatively impacts one’s portfolio, we developed our proprietary “Market Neutral – Absolute Returns” strategies. In 2016, we only had a conservative strategy, which performed very well. In 2017, we launched an aggressive strategy along with the conservative strategy. These strategies have performed extremely well in 2017.

Last week, we hit a major milestone – New all-time highs in the Conservative strategy, as sown below. If someone is interested in numbers, please contact us using the link below or e-mail at: subscription.ust@gmail.com
Disclaimer: Performance numbers do not include fees and past performance doesn't guarantee future results
Last time, this strategy had reached these level was back in Aug 2016. Last 12 months have taught us very important lessons that have helped us improve our performance parameters and discuss investment approach in a very holistic form with our clients, rather than providing pointed near-term solutions. 

Lessons Learned: 
  1. There are no guarantees but being persistent is the key to long-term success
  2. Understanding that a portfolio can and will decline
  3. Reduce exposure on sharp gains even if it means to leave a loved position
  4. Probability plays an active role in the markets
  5. Fundamental reasons typically come out after the price action has already taken place or started
  6. At times a trade might seem counter intuitive because of perception
  7. Keep Learning: Improvements & Realization

We will analyze all of these learning in greater detail in next few blog posts. If you have any questions, please feel free to contact us on Twitter (@Survive_Thrive) or via e-mail.

What are we doing?
We have incorporated all of the lessons learned into our strategy algorithms' business rules. We hope that the implementation of these business rules and algorithmic real-time allocation will significantly improve portfolio results over the long-term. 

We will be testing the results over the next few months and could result in a new strategy for clients. Existing customers will get access to new strategies at a discount.

Positioning
Markets are at a critical juncture. However, knowing this is one thing and acting on this information is totally different in our experience. 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.

At this critical time, we are using proprietary models to expose clients to positions that have the highest success probability.  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 the last Investment Option and a Registered Investment Advisor will reach out to you.