Inflection Point Model - August Turn Date

Market's decline over the past few days probably culminated at today's Fed meetings minutes. Although there was nothing significant in the minutes, underlying uptrend of the stock market is taking the lead. 

There are several ways, technical and non-technical, in which one can justify either direction of the market i.e. up or down. But in any case, according to our proprietary market timing model, the next turn window is scheduled for Aug 30, 2016 (+/- 4 days).

Although the turn date signifies a major market inflection point with the direction, different market indicators suggest that current rally will continue till the end of August. End of August turn window will most likely be a short-term market top. 

This also means that next week's Federal Reserves Jackson Hole meeting would also propel the stock market. We will will discuss other indicators in the next posts. But the key thing to keep in mind is that no matter what anybody says about the market, the path of least resistance is always with the trend.

Currently, according to proprietary Market Classification Model, the stock market is in an uptrend. This model took us out of the stock market in September 2015 and kept us out of the stocks till June 2016. As a result, we avoided the sharp market gyrations, while investing in better performing areas. 

Market Update and Portfolio Performance

As markets wrap-up another quite week, there is a lot of discussion regarding the next steps of the market. Over the weekend, I have read several articles on the next steps of the market. There is an apparent disconnect between market observers. Some are calling for market to continue its rally, while others regard this market as being extremely over-valued. Few good articles in this regard have been pointed out by the following article (link): 

Main theme are related:

1. Bollinger Bands tightening
2. Financial sector break-out
3. Strength of the overall rally.

According to our proprietary model, stock market entered a new bull phase in July 2016. That was a time when the world was focused on the impact of Brexit. Brexit was supposed to bring the world economy to a halt, and would have shaved several percentage points from the global economy. Many people not only abstained from the market, they even totally exited the markets. Fast forward to today, and the markets are doing very well. SP500 total return index is up 4.32% since June 30th 2016. 

Prior to this correct call, our proprietary Market Classification Model rightly identified change in trend in September 2016. It kept us away from the treacherous markets of H1 2016, which allowed us to invest in other more prolific asset classes.

So far in 2016 (by the grace of God), our proprietary portfolio is performed extremely well with half the volatility risk and amazing Sharp Ratio. Furthermore, this portfolio is constructed in such a way that it minimize the Beta correlation with SP500. Current weighted asset Beta value is 0.35, which means that our model portfolio is nearly completely uncorrelated with the market. Therefore, one should not worry about market/economy risks.

Above chart shows the real-time performance of the model portfolio with real $. This performance is tracked at OpenFolio. The YTD performance values from the brokerage account is +27.6%

As we have mentioned before that we have also been testing an aggressive version of the investment model. We are humbled to share the YTD (7.5 months) results of this model - +57%.

Both of these results, by the grace of Almighty, are amazing and are achieved with minimal risk. In next couple of months, we will share original monthly statements from the brokerage account to share these results. Above all, we continue to enhance our strategies - Our motto is:

"Never Ending Search For Even Better Returns"

Although at this time we are not expecting any investments for these models (we are trying to make that a possibility at some time in future), if your interested, you can subscribe for "Market Classification Model" for now.

MARKET CLASSIFICATION MODEL
A proprietary algorithm that classifies market conditions i.e. Bull market or Bear market. Currently, this model is suggesting a longer-term up-trend for the US Stock Market.

Upcoming Market Opportunities

There are many areas where long-term investors can invest their savings in for long-term growth. However, not all of these areas generate substantial returns. 

For example, an investor who would have invested in Stocks in early 1990s and stayed in the market till 2000, would have gained a lot. On the other hand, if another investor would have invested in 2000, it would have taken him almost 12 years to break-even after the dot-com crash. 

Over the years, one of the most valuable lessons that I have learned in the markets is that don't lose money. It's a lesson touted by Warren Buffet and means a lot in investing. (10 best tips from Warren Buffet) 

"1. Never lose money
Warren Buffett's No. 1 piece of advice for 2016 is one he follows as closely as he can: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1." This rule applies readily to investing -- if you're working from a loss, it's that much harder to get back to where you started, let alone earn gains."

STOCK MARKET
Now that we know that preserving capital is very important, growing it is the second most important thing. However, in order to grow capital risk would have to be taken. But risk has to be calculated. As for the risk in the market right now, Stocks are in a very good shape. In fact, they are poised for a substantial rally.
Now, markets don't go up in a straight line and there has been some froth built into the sentiment, which needs to be cleared-up before launching a new rally phase. But in any case, the longer-term (1-2 year) trajectory remains up.

Following chart shows the market's hypothetical map for 
the month of August.

Recent rally, which started last week, could continue for another 1-2 days. It will be followed by sideways market action, which could fill-in the head and shoulders pattern, followed by a September break-out to new highs.

                                                                                                                                              

MARKET CLASSIFICATION MODEL
A proprietary algorithm that classifies market conditions i.e. Bull market or Bear market. Currently, this model is suggesting a longer-term up-trend for the US Stock Market. In fact, this model is close to triggering another new Bull trigger. So far in 2016 (Jan-July), our two proprietary portfolios are up 27% (conservative) and 55% (aggressive) [performance]. One can subscribe to MCM using link above.

Performance - August 2, 2016

Performance Evaluation - July 20, 2016

As expected, Bond and Gold markets are taking a breather and so is the portfolio. As you know nothing goes up in a straight line. Although one can time the market on a shorter term time frame, it results in heavy tax implications. And therefore, the balance between long-term investing and market timing/tactical allocation, is a delicate line.

Furthermore, markets are supposed to be treated as a place where one can grow their wealth by investing in other people's ideas and innovation, so that the global wealth grows, lives improve and you reap the benefits. It is not supposed to be a stressful environment. Therefore, long-term investing demands patient, persistence and following longer-term stories to ride the waves.

Over the past 2 weeks, the waves of Gold and Bonds are declining, while wave of the stock market is gaining momentum. In fact, our proprietary model just triggered a buy signal in the stock market, which has prompted a shift in asset allocation.

We believe that over time, portfolio will come back in a very sharp manner. At the moment, portfolio is up ~22% YTD, while SP is up ~7.5% YTD with a Beta of 0.04. This suggests that the portfolio is generating totally uncorrelated gains and is not dependent on whether the stocks rise or fall.

At this time, there is a lot of confusion in the markets. Many pundits are ignoring the rally, while others are stating this as a bull-trap. There is a huge cash pile on the sidelines because fund managers have believed that a major recession is about to hit the US. Therefore, under these confusing times, it is best to stay with a time-tested model and prepare for the next leg-up in the assets held in the model portfolio by the grace of Almighty.

Performance Evaluation - July 8, 2016

Portfolio keeps out-performing the market by the grace of Almighty. YTD the model is up ~26%, while SP500 is up ~5.4%.

This performance is amplified in the aggressive portfolio, which is now up ~61% since January 1, 2016.

The basic tenants of out performance are:

1- Staying away from Stocks since September 2015
2- Having a well diversified portfolio in bull markets assets

These classifications of whether an asset class is in a Bull/Bear market is determined by proprietary models. Once you are on the right side of the market, gains will accumulate over time.

Performance Evaluation - July 1 , 2016

As we approach the mid-year mark, its a good time to reflect on the performance of our proprietary model based portfolio and the markets.

Last six months were one of the most eventful months that I remember in the markets. The year started with a bang, with the world markets anxious about free fall in oil prices and the associated bond market issues. Some were equating market behavior to Lehman brothers. But then the market came roaring back and many market participants were caught off-guard.

All of this happened at a time when a unique U.S. presidential race was going-on in full-steam. As the race for nomination winded down with some clarity, markets started getting anxious about potential Fed rate hike. Such eventful 5 months cam to a climax with the surprise Brexit vote. A vote which resulted in a precipitous market decline for 2 days, followed by sharp reversal last week.

After all was said and done, the SP500 (including dividends) gained 4%. Although this is an impressive performance under uncertain circumstances, it required investors to endure a lot of massive market gyrations. Investors also had to believe in the ability of the market to rally, in front of daunting economic and geo-political odds.

On the other hand, our proprietary model was up ~23% in the past 6 months. These returns were amassed through strategic positioning, pro-active risk management and statistical analysis based portfolio allocation.

 
Portfolio allocation might change over the next few weeks, as new market data comes out. But overall, the model portfolio has handsomely beaten the market in 2016. A aggressive version of this portfolio, utilizing leverage and exotic asset classes, is up ~50%. We will share results of the leverage portfolio after more data points are gathered.

The portfolio utilizes an algorithm that fuses together multiple market analysis strategies to define optimum portfolio allocation by assets. One of the key proprietary model is "Market Classification Algorithm." We will share the importance of Market Classification Algorithm in the next blog post.