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 

subscription.ust@gmail.com or penta.strategies@gmail.com . 

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

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. 

 

Next IPM Model Turn Window

After briefly topping at the last turn date of Feb 28, 2017 (link), market rallied yesterday on Federal Reserve's announcement. 

Market Condition

• During the correction since Feb 28, market did not generate any sell signals. In fact, it generated several buy readings from oversold perspective. 
• At the same time, Sentiment as subsided in the past few weeks, which will provide fuel for this rally to continue. 
• From a government perspective, they are busy with controversies and will not be able to influence the market. 
• Furthermore, Dutch election results were positive for the overall geo-political situation

Hence there are no significant headwinds in front of the stocks right now.

We remain long the stock market because Market Classification Model remains bullish, which turned bullish on stocks in July 2016 and has remained bullish ever since (2017 Investment Performance). However, it is critical to understand potential future turn dates.

According to latest Inflection Point Model re-run, stocks will likely experience turbulence in the first week of April. Following chart shows the IPM model output.

IPM Model turn date is scheduled for April 5 (+/- 4 days). Most likely, this will turn out to be another intermediate top, which will last till majority of companies start reporting their earnings in mid April. However, it will be sufficient enough to make bears out of many longs. 

We will continue to evaluate the market conditions for any sell signals, as we approach this turn date. In the mean time, it seems like this rally could continue for another ~2 weeks.

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Market Behavior and Impact on Gold

Market Overview

Markets have rallied very significantly. First burst of the rally was after election till mid-December and the second burst has been from end of January till today. Impressively, our proprietary Market Classification Model remained long stocks during this entire period. Model turned bullish soon after Brexit and has remained bullish since July’16.

Although in the hindsight one can easily say that the market rallied and it was prudent to remain long throughout this time, most of the market participants did not stay long. In fact, there have been significant bursts of pessimism during this rally. For example:

• Brexit induced anxiety
• Election related stress
• Post-election disbelief
• Post Executive orders convolution

However, these kind of market panics are the very reason why this market has been able to rally this far – Market likes to climb a wall of worry.

Now that stocks have rallied sharply over the last two weeks, we are approaching a period of consolidation. Consolidation doesn’t mean a sharp decline rather a period of sideways action like we saw in January, to digest recent gains. A potential scenario is market topping towards the end of February, according to Inflection Point Model and then consolidating till next earnings reports to justify high prices.

Once this consolidation phase arrives, other assets like Gold are likely to outperform.

Gold

Gold has been consolidating for some time. And this consolidation is supported by a series of higher highs and higher lows, which means that the next stage rally could be very significant. Gold also remains in a Bull market and would be an ideal candidate for a continued rally.

Following chart shows Gold performance over the past 2 months, where a steady uptrend is clearly visible.

 

Gold stocks are also tracing out higher highs and higher lows. In fact, following chart shows a potential head and shoulders pattern being crafted out by the Gold stocks. Once this pattern is completed, Gold miners can easily make a run for the summer 2016 highs.

 Latest MCM report included details about Gold’s uptrend and where the trend is with respect to the overall bull market.

Upside potential is further amplified by the fact that Gold performs very well in an inflationary environment and with rising interest rates, we are likely entering an inflationary environment.

If your interested in free e-mail list or in Market Classification Model, please fill-out the form below.

 

 

2017 Investment Themes

There are many prominent investment themes for 2017. Investment themes help investors understand the broader investment landscape based on historical performance of different asset classes and their current catalysts. This analysis helps in properly positioning one's portfolio to take advantage of the winds of change.

US Stock Market

SP500 and DJIA have experienced an amazing 1 year rally. Since Feb 2016, markets are up ~30%. With such a sharp rally, it won't be wrong to expect a sideways/downward market correction. Since corrections can come in different forms, sideways correction with time will help in digesting last year's gains just like a sharp fall in prices.

Lofty price levels can be supported by equally good earning numbers, which can provide further fuel for the rally. However, with the uncertain political dynamics in the U.S. we should be prepared for any sudden decline in the US stock prices like 1987 market crash - not a certainty but a word of caution.

Note: Next earnings will be reported in mid-April 2017


Emerging Markets

On the other hand, emerging markets finished a 5 year long correction in 2016. As US markets rallied, emerging markets corrected from 2011 to 2015. Since bottoming in 2016, emerging markets have rallied and looks like they have formed an inverted head and shoulders pattern. Once they breakout, emerging markets could go up to there 2011 highs. Therefore, this is an area to keep in mind.

Precious Metals

Gold had been declining since 2013. It bottomed in early 2016 and then rallied sharply. However, since mid-2016, Gold has again experienced a major pullback. However, we think that this pullback is a buying opportunity and would result in higher prices. 

Following chart shows a potential inverted head and shoulders pattern being formed by gold. Once this pattern is complete, gold can make an advance towards all-time highs around 1900. However, the first target would be to reach July 2016 highs. Therefore, gold is an area which one should keep on his/her radar for investment opportunities.

Precious metals are also influenced by the US dollar. US dollar has rallied very significantly over the last two years or so. Therefore, as the US Dollar corrects, it will provide fuel for a rally in the precious metals complex.

Bonds

Bond have been in a long-term bull market. In fact, its one of the biggest bull markets in history of bond prices. However, the bond price cycles are turning and so are the prices. Now the question is whether the Bond Bull has ended or it still has some life left.

Bond prices started declining in mid 2016 and have reached a critical area. Prices should reverse to the upside soon or they will mark the end of the Bond bull, which can be disastrous for the debt-laden global economy. We will keep a tab on the Bond market to understand clues for the future of the US economy.

Investment Options

We are working very hard to make these strategies available for investors. If you are interested in investing, you can register below and we will send you 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

January 2017 - Performance Review

January was an interesting month for the markets. In the beginning of the month, markets continued to go sideways, which they had been doing for past couple of weeks - since mid December 2016. Then came the earnings and market zoomed higher. Although this rally was not as significant as post election rally in 2016, it did bring back a lot of enthusiasm. The rally continued with President's oath taking. However, it experienced some difficulty towards the end, with the immigration executive order confusion and protests across the United States.

Following chart shows how SP500 performed in the first month of 2017:

To summarize January action, it was a volatile month. Volatility does not only impact our portfolio, it hampers our investment decisions, self-confidence and risk-taking abilities. In order to reduce the impact of volatility and realize long-term consistent results, UST team develop proprietary strategies based on our 8+ years of investing experience, as documented in this blog and other sources.

These strategies went live with real money at the start of 2016. Their 2016 performance has been documented here (link). Our team is currently working on more than 5 strategies. Two of these strategies have moved to production, two are in beta phase and others are in final development phases.  

Investment Strategies

Two strategies (one conservative and other aggressive) will be used for clients' investment needs. These strategies are customized to meet the performance and risk profile needs of investors. These strategies utilized strategic and tactical portfolio allocation techniques, along with proprietary market timing methods to generate Alpha with extremely low correlation with the benchmark SP500. Hence, have very high Sharpe Ratios.

Following chart shows January 2017 performance of Conservative and Aggressive strategies, directly taken from the brokerage account.

Conservative strategy performed 4.53% and Aggressive strategy gained 11.36%, while SP500 was up 1.90% in January.

Performance of these strategies is also tracked on OpenFolio to see daily changes. Following chart shows daily YTD performance for the Conservative Strategy:

Interested ? 

There are two ways to follow and invest in the strategy:

1. Utilize some of the offerings that UST offers (link). We will officially start sending our Market Classification Model updates in February 2017. And plan to add additional services in the next few months.

Overall, we will actively be working on this blog to ensure that all the services are streamlined. If you have any questions please feel free to comment or interact with the team via Twitter @survive_thrive. Please use the below sign-up button to register for free newsletter or other services:

US Stocks at Tipping Point

For readers who want to quickly read about the action plan in this environment, scroll down to the Next Steps section. For detailed understanding of current situation, please read through:

Background

Latest rally phase started in November 2016, around election time. Initially, it was regarded as a relief rally for Hillary could become president as FBI investigation had yielded no results. However, it quickly turned into Trump rally because of promises for stimulus and other pro-business policies.

The popular belief was that the new president will only implement pro-business policies like stimulus and tax cuts, while several other more aggressive policies will not be enacted. Fast forward to today, and the pro-business policies remain elusive while the aggressive policies are causing confusion and in return global equity markets are suffering.

Correction that was due

Blaming the market's decline on policies or some external factors is what TV commentators do. But there is another perspective to looking at this decline. And that is related to the fact that the markets have not experienced any substantial decline since last February (2016).

Following charts shows a nicely persistent rally that had endured over the last year in the face of all the uncertainty of 2016. Both SP500 and Nasdaq show a clear 5-wave rally pattern.

It is surreal to look back at the extremely dismal start of 2016, when people were talking about Oil crash and so many other variables. Even then the market managed to end up ~12% in 2016.

In such a volatile year, our proprietary strategy beat the market and the gained 12.2%. Most of the gains were long-term gains, thus minimizing tax impact (Detailed 2016 performance evaluation).

Therefore, one cannot judge the performance of the market just by looking at couple of months. But one thing is for sure, volatility will be high as overdue correction finally arrives.

No Buy signal, means continued decline

There are several other reasons to believe that recent decline is the start of something bigger:

1. No buy signal after 2 day decline
2. Extremely high valuations
3. Political uncertainty without any focus on economic stimulus programs
4. Hawkish Fed 
5. Fairly optimistic sentiment

In order for these stock market rally impediments to go away, market needs to consolidate recent gains. Right now there is no indication that this decline will be the start of a new bear market. However, if the government does not deliver on its pro-business policies, it could quickly turn into one.

Next Steps and Investing Strategies

1. Keep an eye on the Market Classification Model to understand if and when the stock market enters a Bear Market (MCM Details).
2. US markets are still in Bull phase and this could be a good buying opportunity, at lower levels
3. Gold and Bonds can be good alternatives, with careful review of the MCM
4. Develop an investment plan with your goals in mind and invest accordingly. For example, if you want good returns and have some extra cash, one can buy BitCoins

We will continue to explore 2017 strategic investing ideas on this blog. Forward looking investing helps you in keeping a level head while investing. For example, we mentioned that the market had not entered a bear market in Oct-Nov 2016 and added longs, and ended up benefitting from the latest rally. Analysis during election time:

• Post Election Investment World
• Reasons to be Bullish - From Twitter
• Elections and the Stock Market

Therefore, if your interested in free e-mail list or in paid services like Market Classification Model, please fill-out the form below.

Amazing 2016 for UST Proprietary Strategy!!

Happy New Year to all the readers. 2016 was an amazing year with our conservative strategy up 12.2% versus 11.96% of SP500 (with dividend). Snapshot below is taken from the brokerage account.

Introduction

We will start 2017 by reviewing 2016 performance. This review will cover every aspect of the performance, along with how the strategy performed in times of uncertainty and volatility. Each blog post will cover a different aspect of the performance review.

UST team has been developing repeatable, scalable and easily explainable proprietary investment strategies, along with built-in risk-management measures. In 2015, the strategy was developed and back tested. Last year, strategy was moved to production with real money. At the same time, we also developed 3 additional strategies, which will be discussed in future posts.

2016 - The Year of Volatility:

2016 was a very volatile year. It started with one of the worst starts of the year for the US stocks. Although market started a rally phase from Feb/March time frame, it remained on the edge due to following three major reasons:

1. US presidential election primaries
2. Fed's rate decision
3. Brexit 

Brexit was one of the biggest surprises of 2016. The night of Brexit vote, market dropped over 1000 points before starting another rally phase, which most of the market participants didn't see. This was followed by an unprecedented US presidential election, which took almost everyone by surprise. If some people got the election results right, their market positioning was wrong. In the end market ended with a ~12% gain from a ~5% loss at the start of the year.

Conservative Strategy Performance - 2016

Interesting aspect of this strategy is that the returns are uncorrelated with the market. 2016 Beta was -0.57, while 9 year back-testing showed a Beta of -0.08. Since the returns are totally independent of the market performance, we can say that these returns were Alpha.

Throughout this volatile year, our proprietary model kept us on the right side of the trade and kept on adjusting the holdings to dampen impact of volatility, while amplifying potential gains. Following is a snapshot from the brokerage account showing the monthly performance:

Following chart is from Openfolio, showing daily change of the same portfolio in 2016:

Overall gains were impacted by pre-election jitters and post-election bond rout. However, it gave the strategy an excellent buying opportunity, whose benefits we could reap in 2017. We also learned several very important lessons for the strategy, which has enabled us to improve the nimbleness of the model. Benefits of these additions are clearly visible in 2017's performance, which we will discuss in one of the next blog posts. 

Investment Options

We are working very hard to make these strategies available for investors. If you are interested in investing, you can register below and we will send you 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

November Review and December Forecast

Over the last 2 weeks we have discussed Gold market and the Bond market, in terms of their structure and sentiment, to understand the next rally phase. Detailed analysis can be reviewed here:

• Bond Market Analysis
• Gold Analysis (Part 1 - Structure, Part 2 - Sentiment)

As we enter a new month, its critical to quickly review last month and then try to understand where things could go in the last month of 2016.

November 2016

Elections 

At the beginning of November, market experienced a sustained consecutive negative days. This negative behavior, not only tilted the sentiment to bearish and technical indicators to oversold, it also completed the correction pattern. This completion gave way to an amazing rally. We discussed the upcoming rally several times in following posts:

• Reasons to be Bullish - From Twitter

• Elections and the Stock Market

even though few people will remember this fact but the market started rallying even before the election on the news that FBI had dropped the investigation involving Hillary Clinton's e-mail. At that point, people attributed the rally to Mrs. Clinton's impending victory. However, as Mr. Trump won and the market continued its rally, it took many by surprise. 

This tells us that news/economic/political events don't matter. It's the reaction to these events that matter. And one of the best ways to gauge the reaction objectively is by looking at the price structure and sentiment indicators, along with forecasting strategies. 

Correlation with the US Dollar

Even more interesting is the fact that this rally has come in sync with rallying US Dollar. Typically, when US Dollar rallies, all asset classes are impacted. And if not directly impacted, they find it difficult to rally. But following chart shows the amazing correlation between US Dollar and the stock market:

Divergence with Advance Decline line

While this rally has made a lot of market commentators excited about the prospects of a major rally and 2017 with prospects of a major stimulus, this rally wasn't substantial enough to eliminate NYAD divergence.

Divergence in Advance Decline issues is critical for a sustained rally. This doesn't mean that this current rally cannot move much higher, it just means that the near-term rally could face challenges to continue in face of this divergence.

What's Next in December?

In summary, we have credible reasons to believe that the recent stock market rally is extended and we could see a market correction over the next 1-2 weeks (probably till next IPM turn window). While Stocks market corrects, asset reallocation can take place with money flowing into oversold sectors like Gold and Bonds.

Since US Dollar is also extended, a correction in the Dollar index will also support Gold rally. On the other hand, Fed FOMC meeting and an announcement to increase the short-term rates can also reduce some of the uncertainty from the Bond market, which could result in reprieve rally for Bonds.

Market might resume its uptrend in the 2nd half of December. However, the velocity of the ascent might not be as significant, as it has been in November.

Lastly, for Gold it is a do-or-die point. It needs to rally above 1205 in the next few weeks or it will likely enter another bear market.

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Post Election Investment World

We have been discussing stock market uptrend and upcoming bottom for the past few weeks (post 1, post 2, post 3). And as of today, DJIA futures are above all time highs (shown below).

Such a market action in the face of presidential uncertainty is amazing. Although it bodes very well for the overall economy, we will talk about potential Trump impact in the upcoming post.

From an investment perspective there are different scenarios that one needs to be aware of.

Stock Market:
As stocks break out into uncharted territory and Nasdaq approaches the vacuum zone, it means that we are on the cusp of a major rally.

Like many rallies before it, this rally will also be debated by market participants as to why would market rally while president's economic plan would mean job losses. However, the pattern suggests that the stock market remains in a bull trend.

In essence, the underlying economy is very strong and would result in strong growth without any external influence. We will discuss internal structure of the market in future posts.

Bond Market:
Bond market's sharp sell-off probably suggests that the long-term bond bull market has ended. We are probably on the cusp of a significant inflation cycle. Near zero bonds are a thing of the past. Even though we might see some respite from the Federal Reserves, which might hold-off on the decision to increase the interest rates, we are surely in for higher rates.

Following chart shows a very long-term bond yields. Post-election rally has broken a long-term down trend line - another confirmation of the trend change. We have been keeping track of this wave count for years now and have discussed potential bond yield bottom with clients.

Many of our clients bought houses, properties etc in the last 2 years!

This market behavior has significant consequences for investors and we will discuss these consequences in detail. However, one should keep in mind that this kind of behavior will not result in bonds going to stratosphere in the near future. In fact, after couple more months of rising yields, yields might see a very sharp correction.

Metals
Copper has rallied very sharply over the past few days. Precious metals rallied on the news of potential Trump win - fear trade, but since then have declined. This decline was a significant intra-day reversal. But the overall trend in metals remains up.

Gold could continue to rally in anticipation of a higher inflationary environment. So will the gold stocks. Gold and Silver are tracing out very interesting patterns and could have significant upside potential if the can break above 1320 in Gold. We will also discuss the gold pattern in the near future. Past analysis on gold accurately predicted the bottom in October.

Portfolio Allocation:
Our proprietary model has performed extremely well in 2016. It not only kept us in the market during relevant bull phases, it also enabled us to maintain our calm whether during Brexit shock or Trump shocker. Any portfolio that can:

1. Yield returns which are uncorrelated to the market
2. Save a lot of heart-burn when the market goes against you by 1000s of points whether in futures or cash
3. Provide you consistent returns AND
4. Mitigate volatility and provides very high Sharp ratio

by the grace of Almighty, is an amazing performance. We will write a white paper on the performance of the model portfolio in 2016 - a year of surprises and nerve wrecking market action!

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Reasons to be Bullish - From Twitter

Market completed longer term corrective pattern - Higher prices ahead? https://t.co/lyQxShgxmX $SPY $DJIA $QQQ pic.twitter.com/SeQjjd6D9P

— U_S_Thrive (@survive_thrive) November 8, 2016

A rerun chart from last week. VIX now now longer above all its futures contracts. Looks therefore like it was a scary dip, not a downtrend. pic.twitter.com/xyklR0F14r

— Tom McClellan (@McClellanOsc) November 7, 2016

$VIX term structure suggests that we are approaching an inflection point but note that it has spiked much higher in a few cases#volatility pic.twitter.com/s36s0ZnGun

— Babak (@TN) November 3, 2016

Options Traders Ramp Up Put Buying As Fear Spikes - https://t.co/bq51yqoc8t blog by @JLyonsFundMgmt $SPY pic.twitter.com/UGvsSzqECd

— See It Market (@seeitmarket) November 7, 2016

Chart Of The Week (by views): Investors (Over?-)Prepared For Election Volatility (11/1) $VXST
Post: https://t.co/p7piJzdNeI pic.twitter.com/lOpF6pMibP

— Dana Lyons (@JLyonsFundMgmt) November 5, 2016

we have yet to see any panic from the CBOE equity put/call ratio (normalized by dividing 10d/150d MA) $OEX P/C ratio still negative for mkt pic.twitter.com/z2wvkaDdmv

— Babak (@TN) November 4, 2016

Elections and the Stock Market

Market rallied very powerfully today and after a long time it sustained the morning gains. Not only did it sustain the morning gains, market was able to build on it.

We have maintained that the stock market remains in an uptrend and no matter how the election results come out, market would continue its uptrend till the time it enters a bear market. Right now there are no indications that the trend has reversed.

In fact, right now, market seems to have completed its ~4 month long sideways action and is on the verge of breaking out of current 2 year old range.

We discussed the market structure in this post few days ago. Following charts shows what was highlighted and what we saw today:

Long-term consolidation along with this pattern and sentiment decline suggests that there is a very good chance we could see a sharp rally from here. This rally could last for few months. Following chart shows the longer-term range bound market:

Portfolio Alignment

Our strategies are aligned with this potential market moving scenario is ready to take advantage of market move. At the same time, it is possible that we might see a surprise in the election and could witness some near-term turbulence in the markets. Keeping this scenario in mind, we are positioned to mitigate any volatility impact. 

Our portfolios take advantage of market moving events by positioning ahead of them and hedging against potential risks. So far in 2016, we are up ~20% YTD with a Beta of 0.36 i.e. these returns are totally uncorrelated with stock market performance.

As for other areas for investment, we will discuss metal and bonds in the next few posts. Bonds might see further sell-off after the election and before Federal Reserves rate announcement in December. 

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Market Approaches Key Levels

Market's decline is now almost 3 months old and sideways action is ~4 months long. In the beginning this action was purely sideways but recently, it has taken a sharper turn to the downside. With this decline comes an opportunity that the sentiment is getting worse by the day, while proprietary indicator remains in a bull state.

This worsening sentiment is essentially fuel for the market. Sentiment is one fuel which really kindles market rallies. Right now sentiment is at level normally seen at significant market bottoms, and the market structure is now supporting a potentially sharp rally.

Market Structure
Recent investigation of the market structure suggests that the SP500 along with other indices is tracing out a potentially corrective structure of 3 wave decline.

Following chart shows this structure. Wave C (3rd leg) seems like an ending diagonal. Ending diagonals take place towards the end of a market move and give way to a sharp rally. So once the market rallying, it could take-out many of the recent highs.

Similar pattern is visible in almost all major indices. Following chart highlights this structure in Dow Jones Industrial Average

Along side this market structure, stock market indices have also traced more than 50% of their rally since Brexit vote. This shows that recent correct is now very substantial and should be treated as a minor wave 2. If this is wave 2, it will give wave to a very sharp wave-3 rally.

Sentiment

Following charts show sentiment as measured through Fear/Greed indicators and AAII. Both of these measures suggest that the sentiment is in areas where we see significant bottoms.

However, the key is to be detached with the market. Know when there is potential for market moving events but stock to your plan. So far in 2016, our strategic investment portfolio has beaten the stock market by ~12%.

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