Stock Exchange: Are You Paying Attention To Market Conditions?

The Stock Exchange is all about trading. Each week, we do the following:

• Discuss an important issue for traders,
• highlight several technical trading methods, including current ideas,
• feature advice from top traders and writers, and
• provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review: Beginning Or End Of The Sell Off?

Our previous Stock Exchange asked if the current market decline was the beginning or end of the sell off? We noted that news headlines continue to be dominated by the fed’s monetary policy decisions and the US-China “trade war.” But a big question remains as to whether it is the beginning or end of the sell off? We considered whether it was a “buy the dip” opportunity or a “step aside and look out below” opportunity?

This Week: Pay Attention to Market Conditions

On one hand, tuning out market noise is one of the best things investors and traders can do. For example, don’t get sidetracked by the media’s constant stories of gloom and doom, and don’t get caught up in euphoric zeitgeist either.

But that doesn’t mean tuning out everything. Market conditions obviously do change, and ignoring those changes can be a mistake. For example, US treasuries yielded over 15% in the early 1980’s, but you may be waiting a very long time before you ever see those types of yields again. Hopefully you’re not making your market decision today based on conditions that existed 35 years ago.

Similarly, the market cycle changes, and so do does the length of each market cycle. For example, we are currently in one of the longest running bull markets in the history of the US stock market. Are you adjusting your trades accordingly?

On a smaller sub level, the market has also been toggling through periods of momentum much quicker than previously. We’ll hear more about this change from our Felix trading model later in this report.

Importantly, as a trader, are you monitoring market conditions and adjusting your trades at all? Being oblivious to market noise is one thing, but ignoring changing market conditions is something different altogether.

James “Rev Shark” DePorre shared “5 Important Tips for Dealing With Changing Market Conditions” in this article, and a couple of them are relevant and worth repeating, including:

• Don’t reinvent the wheel but adapt your style.
• Shift your time frames

These two are particularly timely now as market conditions continue to change. And as we discuss later in this report, we are shifting our style and our timeframe for a couple models (one in particular) based on changing market conditions.

They say hindsight is always 20/20, as if to suggest things only become obvious looking backward. But market condition are dynamic and providing plenty of clues as to what comes next.

Model Performance

We are sharing the performance of our proprietary trading models as our readers have requested.You’ll notice this week we extended the table to include a 2-year performance number for each model. You may have also noticed Felix is missing from the table this week. We’ll have more to say about that later in this report.

Expert Picks From The Models

Note: This week’s Stock Exchange report is being moderated by Blue Harbinger, a source for independent investment ideas.

Road Runner: I bought shares of Old Dominion Freight Lines (ODFL) on Friday (8/16). As you know, I like to buy stocks in the lower end of a rising channel, as you can see on the following chart.

BH: That’s a freight truck company. They’ve grown from 1 truck back in the 1930’s to a greatly expanded national truck company now. And I can see the “lower end of a rising channel” thing you are talking about in the chart above. Is it just that simple? Look at the charts then buy?

RR: No. It’s a little more complicated than that. For starters, I trade individual stocks, not entire market indexes. And generally speaking, I like to buy in the lower end of a rising channel. But more specifically, I look for a certain type of situation (some call it a pattern, others may call it a setup, etc.) where the probability of a particular action is not a matter of chance (50/50) but has been historically noted to result in a greater tendency toward a particular outcome. “Trending in a channel” is one such situation. An equity will often “cycle” between the upper and lower bounds of that channel for substantial periods of time.

My model design attempts to take advantage of this property by identifying stocks trending in an upward channel and waiting until the stock price drifts to the lower bound, making it a candidate for purchase. These types of situations have a relatively high probability of positive outcome with a reasonable profit potential. Old Dominion can be seen to be in this type of a situation. This is a short-term trade that has traditionally shown profitability when the right conditions have been met. One way or another, I’ll be out of it shortly–usually after about four weeks.

BH: Well that’s all interesting, and I appreciate the explanation. But do you even look at fundamentals, or are your trades based on entirely technical pricing information? Here is a look at some fundamental data in the F.A.S.T. Graph.

RR: I am aware of the fundamentals, but the trade is almost entirely based on technical pricing data.

BH: And do do you pay any attention to overall market conditions, or is it all stock specific?

Felix: Stop harassing, Road Runner. He pays attention to market conditions and so do I. And market conditions are not currently conducive to my trading style, so I may not actually be placing any trades for a while. Specifically, I like to trade momentum cycles to capture long-term gains, but the momentum cycles have been getting shorter and shorter, to the point where it’s difficult to find opportunities that are not short-term gains. And for this reason, I will probably not be placing any trades for a while.

BH: You mean you are not oblivious to changing market conditions? That sounds like a good thing, Felix.

Felix: Exactly. I am very aware of changing market conditions. In fact, we’ll soon be welcoming another anthropomorphic trading model to the crew called Emerald Bay.

BH: Emerald Bay? I am looking forward to learning more about this.

Athena:  While you all are staying tuned for next week’s new model, I placed a new trade this past week on Friday (8/16). I bought shares of Heico Corp (HEI). What do you think about that?

BH: They provide aerospace, defense, and electronic related products and services. Why’d you buy?

Athena:  I look for stocks having strong positive trends and then select only those with the very strongest trends (“king of the hill”), constantly replacing the ones with weaker trends. It should not surprise anyone that I bought Heico. A quick look at the chart should make the strength of the trend fairly obvious. And I generally continue to hold my positions until either the strength of the trend abates or a stock with an even higher trend strength comes along. I don’t have a set “holding period” for a position. I will exit only when either a stronger stock comes along or if market conditions dictate a strong potential for loss – capital preservation remains the key driver in all situations 

BH: Defense spending may be less correlated with the overall market, so perhaps this trade is less dependent on current market conditions. The share price has certainly been doing well. And Wall Street seems like the shares based on the number of “Buy Recommendations” and price target.

Holmes: This week I bought shares of Viacom (VIAB).

BH: That’s right, Holmes–you are quite the dip buyer. The market seems less than thrilled with the announced CBS Viacom merger and that contributed to the big dip in price. You know Viacom offers 314 locally programmed and operated television channels, including Nickelodeon, MTV, BET, Comedy Central, Paramount Network, Nick Jr., VH1, TV Land, CMT, Logo, Channel 5, Milkshake!, Telefe, Colors, Paramount Channel, TeenNick, Nicktoons, Nick Music, MTV2, MTV Classic, MTV Live, BET Her, BET Gospel, and BET Hip Hop.

Holmes: Yes. I am a dip buyer, and yes I am aware of what the company does. And the business is more than about just television stations. It also offers Filmed Entertainment too. I typically hold for around 6-weeks, and this latest price dip is particularly attractive.

Conclusion

Market conditions and cycles are constantly changing. And in a world of non-stop media information, it’s important to be able to drown out the noise and to instead focus on important information such as real market cycle changes. For example, Felix recognizes the shortened timeframe of the momentum cycle, and has decided to step away from trading for a while because the cycle is becoming too short to adequately identify the long-term capital gains he was designed for. Are you monitoring changing market conditions? What have you done to modify your approach?

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome. You can also access background information on the “Stock Exchange” here.

Trade alongside Jeff Miller: Learn more.