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: 

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.

Bitcoin Analysis and Future Roadmap

Bitcoin 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.

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.

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

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.

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.

If interested in free e-mail list or in paid services, please fill-out the form below.

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!

If interested in free e-mail list or in paid services, please fill-out the form below.

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. 

If interested in free e-mail list or in paid services, please fill-out the form below.

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%.

 If interested in free e-mail list or in paid services, please fill-out the form below.