Stock Exchange: Did The Market Just Bottom?

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: Is Twitter The Blueprint For Success?

Our previous Stock Exchanged asked Is Twitter the Blueprint for Success? We noted the company’s differentiated strategy as well as its lower correlation with the market. We noted also that lower correlated differentiated strategies can be the key to success in challenging markets.

This Week: Did the Market Just Bottom?

The market has been declining since early October, but experienced a big gain on Wednesday, as the Dow gained 600 points–its biggest surge in 8 months.

A large catalyst for the market gains was the Fed. Specifically, Fed Chair Jerome Powell said Wednesday that rates are “just below the broad range of estimates of the level that would be neutral for the economy.” However, near the start of October, he said rates are a “long way from neutral” which was widely considered a driver of the market selloff, particular in risk assets.

In another potential positive for the markets, the NY Times noted that “President Trump will meet President Xi Jinping of China at the G-20 summit meeting this weekend in Buenos Aires,” and he could seek a China trade truce, despite his “tough talk.”

(image: NY Times)

Another potential positive for the market is increasing concerns from OPEC to stabilize oil prices.

According to the Wall Street Journal, with oil prices down 30% in the last eight weeks, OPEC officials may increasingly believe that coordinated action to stabilize the market is needed. And we certainly have our own thoughts on oil, as we wrote about in this week’s WTWA: Do Plummeting Oil Prices Signal a Weak Economy?

However, despite any positive ideas you can put forward to suggest the market may be bottoming, there will always be naysayers. For example, here is a list of negative interpretations from The Official Bears Playbook:

Event What to Say
Stocks moving higher This is an extended bubble. It has no basis in fundamentals. This is a sugar high from the Fed and high debt levels.
US stocks outpacing the world The US is part of the world economy. It cannot succeed by itself.
Dollar weaker This portends stagflation! Growth is weakening and foreign goods cost more.
Dollar stronger This threatens the corporate earnings of the many US companies with major overseas business.
An economic indicator misses expectations This is just the start of a pattern of economic weakness.
Economic indicators show strength The Fed will react by taking away the punch bowl even more quickly
An economic indicator pulls back slightly from a series of great results It is rolling over! Produce a chart with a red arc over the most recent data point. It is easy to spot old peaks and put the arc over those as well.
Oil prices move higher This signals inflation, faster Fed action, and the end of economic growth.
Oil prices move lower Declining commodity prices are an early warning of a weaker economy. Prices have always declined before a recession.
Bitcoin spikes higher Demonstrates the overly optimistic, bubble-everywhere mentality of investors
Bitcoin plunges Even more evidence of reduced appetite for risk.
Small cap stocks lag in an overall rally Shows lack of breadth – no confirmation of the broad market.
Small caps surge Classic sign of a frothy market.
New highs in stocks or the economy It doesn’t get any better than this. Look out below.
FAANG stocks surge Market lacks breadth. Most gains from a few stocks.
FAANG stocks decline Market cannot rise without leadership from FAANGs.

Of course no one knows for sure if the market goes higher from here. However, it’s possible to profit through trading, even in a downward market, as some individual securities inevitably buck the market wide trends and move higher based solely on their own stock-specific merits. We’ll review a few specific ideas later in this report.

Model Performance:

We are sharing the performance of our proprietary trading models, as our readers have requested, as shown in the following table:

Worth noting, the model results look weak in various time frames, but it is actually a reflection of only the last month or so. Our system of exits is more complex (and more effective) than most simple, price-based methods. Without going into the details, it is a bit more “patient” than most. For perspective, the models do well in up markets and flat markets. In large declines they outperform the general market via a complete exit. For more than a month we have been operating on the edge of the effective range – something that we report in the indicator snapshot each week on WTWA. The recent market action illustrates the effectiveness of our approach, which will start to show up in next week’s table. Unlike our models, systems that use aggressive stops have difficulty in re-entry. Our models are less likely to miss the subsequent rebound after the market sells off.

For more information about our trading models (and their specific trading processes), click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

Expert Picks From The Models:

Note: This week’s Stock Exchange is edited by guest contributor Blue Harbinger, a source for independent investment ideas.

Holmes: This week I purchased Banco Bradesco (BBD).

Blue Harbinger: That’s a Brazilian bank, Holmes. They do banking and insurance. Any particular reason you like it?

Holmes: In the simplest terms, because I am a dip-buyer. And as you can see in the following chart, BBD has recently dipped in price, and has upside ahead.

Also, considering I am a dip-buy, it would help my trade if the Fed’s less hawkish tone this week truly does market a bottom in the market. More overall market upside could help this specific trade achieve higher gains too.

BH: Honestly Holmes, I don’t know much about Brazilian banks. I believe the entire Brazilian market did well in the run up to the election of capitalist-friendly Bolsonaro in October. He is a look at some of the fundamental data in the Fast Graph.

Road Runner: This week I bought Verisk Analytics (VRSK). This company does data analytics for customers in insurance, energy and specialized markets, and financial services. I like to buy things in the lower end of a rising channel, as you can see in the following chart.

BH: Interesting Road Runner. I can see the channel you’re talking about, but I think it’s more visible in the longer term chart below.

RR: Thanks for the longer-term chart, but my typical holding period is only 4 weeks.

BH: Without knowing much about this company, I can see in the following Fast Graph that EPS is rising, but the PE is somewhat high, and the credit rating is a little low.

Road Runner: Thanks for the data points, but I am a shorter-term trader, and those fundamental metrics are less important to my thesis. I typically get in, and then get out, long before the long-term story plays out.

Athena: This week I bought Flex (FLEX). This company provides design, engineering, manufacturing, real-time supply chain insight and logistics services to companies of all sizes in various industries and end-markets.

BH: I am surprised you know that much about the business considering you are a technical model (not a human), and you typically only hold your positions for about 17 weeks. Here’s some additional fundamental data if you are interested, Athena.

Athena: I am very aware of the data. I run a “king of the mountain” type strategy, and it takes a lot to get into my “best ideas” portfolio. I am also big on momentum too.

Felix: I am also a momentum trader, and I usually hold for much longer than the other traders in this report, 66 weeks on average. I also monitor macro conditions for risk control purposes. This week I ran the Russell 2000 (US Small Caps) through my model, and the top 20 rankings are included in the following list.

BH: Smalls caps have gotten hit particularly hard during the most recent sell off, so I appreciate you sharing some ideas in this space. If we truly are moving back towards a “risk on” market (considering the Fed’s recent decreased hawkishness) that could be a good sign for small caps.

Oscar: I also use a momentum strategy, but I implement it through sector rotation. This week I ranked our “High Liquidity ETFs with Price*volume over 100 million) through my model, and the top 20 are listed below.

BH: I see the Brazilian ETF (EWZ) ranked at the top of your list, I am sure Holmes would appreciate this considering he just bought a Brazilian stock. That market seems to have some good momentum behind it following the recent election.

Conclusion:

No one knows if the market has bottomed. And if someone tries to guarantee you that this is (or is not) the bottom, that person should not be trusted. Even though there is evidence that the market could resume its upward trend (based on the Fed’s tone, the upcoming G20, or the potential for OPEC intervention) no one know for certain. The best you can do as a trader or investor, is pick a strategy that meets your needs, and then stick to your plan. Keep your goals in mind, and don’t let the perma-bears or perma-bulls, throw you off from meeting your needs and achieving your goals.

Stock Exchange Character Guide:

Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum 17 weeks Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value Long term Risk signals Recession risk, financial stress, Macro

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. Your can also access background information on the “Stock Exchange” here.

Trade alongside Jeff Miller: Learn more.

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