Stock Exchange: Do You Trade Extreme Market Moves?
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: Hindenburg Omen Flashing Red, Is It Reliable?
Our previous Stock Exchange noted The Hindenburg Omen is Flashing Red, and asked the question: Is it reliable? We noted there had been an increasing number of “Hindenburg Warnings” in recent trading sessions–an indication that some traders believe is pointing to an increased likelihood of a market crash. However, we went on to explain there are right ways and wrong ways to build your trading programs and indicators.
This Week: Do You Trade Extreme Market Moves?
This article is NOT about “pot stocks” (for example Tilray (TLRY)) or Bitcoin (GBTC), but we use them as examples of extreme market moves, as shown in the following charts:
The big question for some market participants is: Are there any trading opportunities here?
For one perspective, The very highly regarded, Avi Gilburt, suggests that:
However, if you are interested in these types of extreme market moves, you had better know what you are doing (like Avi) because while the potential rewards are very great, so too are the risks.
The always insightful, Adam Grimes, offers some advice in this article:
As usual, Adam’s wisdom is sage, and he offers a few practical guidelines if you’re going to trade extreme market moves:
- Stay small. If you want to play in a stock like this, you don’t have to put all your chips on the table.
- Stay focused. Assume that anyone telling you anything about a market like this does not know what they are talking about. Listen only to yourself and follow only your trading plan.
- Take partial profits along the way. Don’t try to sell the exact high all at once. If you have solid profits and you find yourself getting emotional, sell some. Sell down to the point where your emotions settle down.
- If you want to short something like this, chances are you are not wrong. But if you are wrong on the timing, you could be out of business…
Adam’s complete article includes additional helpful guidelines (see link above).
Taking another perspective, Twitter Zen Master, and insightful investor, Ben Carlson had this to say:
As for our own trading models, we generally stick to the 750 most liquid stocks. However, some individual traders might be able to do better if they can handle the volatility. And why don’t we trade these extreme market movers? For starters, because we’ve had a lot of success without them. And if you are going to play short-term moves you need to develop models on tick data and prepare for day trading. It can be done, but we have not done it with our own models, at this time. Here is a look at our mostly recently updated trading model performance.
Model Performance:
We are sharing the performance of our proprietary trading models, as our readers have requested, as shown in the following table:
We find that blending a trend-following / momentum model (Athena) with a mean-reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.
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.
This week’s Stock Exchange is being edited by guest contributor, Blue Harbinger. (Blue Harbinger is a source for independent investment ideas).
Expert Picks From The Models:
Holmes: This week, I bought Workday (WDAY). This company develops enterprise cloud applications for finance and human resources uses. What do you think of this trade?
Blue Harbinger: This “enterprise cloud” space is very interesting to me, but I think you have the wrong company, Holmes. I think there is way more long-term growth in names like Paylocity (PCTY) and Paycom (PAYC).
Holmes: We go through this every week, Blue Harbinger. I am not a long-term investor; I am a trader, and my typical holding period is only about 6 weeks. I like to “buy the dip,” and as you can see in the above chart, there is a nice trading setup on Workday. Besides, Workday and the names you mentioned have some similarities, but they’re not exactly apples-to-apples comparisons.
Blue Harbinger: You can say that again, they’re not apples-to-apples. The names I mentioned have much more long-term growth potential. Anyway, here is a look at the Fast Graph for Workday.
Holmes: Gee thanks for the longer-term fundamental data. Anyway, how about you Road Runner–any trades this week?
Road Runner: You bet. I bought Axon (AAXN) on 9-18 for around $69.36. As you might have guessed from my name, I am a momentum trader. Specifically, I like to buy in the lower end of a rising channel, and I let my trades typically run for 4-weeks.
BH: I like Axon. This is a name I can get behind. As you know, this is the old “Taser.” They changed their name to Axon when they got into “body cameras” for police and law enforcement. They have a whole software platform to upload data, and it is a pretty nifty solution. Plus, there is a big social demand for police to wear body cameras, given the history of shootings, as we often here in the media. I think there is a fairly large total addressable market here, and there really is no real competition. And Axon strengthens its competitive advantage every time a new police force starts using their body cameras because there are switching costs that deter switching. Here is a look at the Fast Graph.
RR: Thanks, for that perspective. And how about you, Athena–any trades to share this week?
Athena: I bought Five Below (FIVE) on 9/14 for around $130.75. And before you start complaining that you want to know about my trades sooner, I’ll just remind you that Felix and I trade weekly on Friday mornings, and it’s possible that I’ll hold for only 1-week, but I typically hold for about 16 weeks.
BH: Okay, thanks for that info. Did you buy because you don’t like to pay more than $5 for each of your wardrobe accessories? Here is a look at the Fast Graph, by the way.
Athena: I am a technical model, not a human. I bought because my strategy is momentum-based, and the setup on Five Below is attractive.
BH: I see the price momentum on this one. Are you ever concerned the price has gone up too fast?
Athena: This isn’t Tilray!
Felix: I too am a momentum trader, however unlike the other traders, my typical holding period is longer–typically 66 weeks. This week I ran the Russell 1000 stocks through my model, and my top 20 rankings are listed below:
BH: I recognize many of the momentum names on your list, but why didn’t Tilray make the cut?
Felix: This is the Russell 1000, basically the 1000 largest US stocks by market capitalization. Even though Tilray’s market cap has recently skyrocketed to nearly $20 billion, is was basically non-existent last time the Russell 1000 was reconstituted.
Conclusion:
Trading can be dangerous, but as we’ve written in the past: you can make it as a trader, if you do it right! One of the things we have learned is that we can have plenty of trading success without getting involved in the most extreme market movers, such as “pot stocks” and Bitcoin. It’s important to find a trading style that works for you, and then to apply discipline in sticking to your strategy, whatever it may be.
Background On The Stock Exchange:
Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.
The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.
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.
Trade Alongside Jeff Miller: Learn More.
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