Stock Exchange: It’s difficult to argue with a market at new highs

Jeff: Joining me on the Stock Exchange is my colleague Todd Hurlbut, Chief Investment Officer at Incline Investment Advisors, LLC. Todd is the creator of the Emerald Bay model featured in this column. He is known as “Trendy Todd.” And yes, that is a hint about his trading style. Todd, please tell us a little more about yourself.

TT: I started my career in the late 90s in New York City and immediately gravitated toward a systematic approach to investing. Specifically, an approach that removes the emotional pitfalls that can trip up investors. Systems can be empirically tested and improved upon over time. I look for the strongest stocks in a select universe, those exhibiting strong momentum with minimal volatility. The objective is to continuously expose the portfolio to leading stocks to achieve attractive returns for a given level of risk.

Summary

There’s much conflicting data today demonstrating economies across the globe are slowing, however, it typically pays to follow the market’s reaction to the news as opposed to the data itself.

Our regular participants share trading ideas, reflecting their contrasting styles and time horizons.

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 advise 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: ETFs Kill Fundamentals, Technicals Matter

    Our previous Stock Exchange teased the idea that ETFs Kill Fundamentals, and Technicals Matter. We noted that a growing percentage of investment assets are managed according to passive ETF strategies, and suggested this dynamic emphasizes the importance of technical analysis. We asked readers for their views on this dynamic and received varying responses in terms of the evolution of their individual trading strategies.

    This Week:

    Investors are subject to behavioral biases that color how we see the world. One of these biases relates to trading and investing and how we tend to seek out data that confirms our beliefs and biases while conveniently ignoring the rest.

    It’s easy today to focus on the economic doom and gloom and miss the big picture which is that one of the broadest measures of stocks in the US, the S&P 500, is at an all-time high.

     


     

    Despite the negative news coming out related to the global economy and impeachment, many stocks are making new highs on a daily basis. After all, the broader market is made up of individual stocks each reflecting the health, expectations and future opportunity of their respective companies.

     

    Thomas Franck (CNBC) collected the viewpoints of a number of technical analysts. He concludes:

     

    The stock market’s surge to new highs on Monday shows the historic bull market that began in 2009 is resuming its climb and should be viewed as a green light for investors over the next few months, according to Wall Street’s chart analysts.

     

    Our own experience tells us that it pays to follow a stock’s reaction to the news as opposed to the news itself. This is reflected in our current holdings and the choices discussed below.

    What do you think? We welcome comments and discussion from other traders.

     

    Expert Picks from The Models

    Holmes: I bought shares of Proofpoint Inc. (PFPT) on October 25th. How do you feel about that trade?


    TT: It’s an enterprise software solution of data protection and compliance, Holmes. It’s been growing revenues north of 30% for the past 4 years. Why’d you buy it?

    Holmes: I purchased for technical reasons. Specifically, I am a dip buyer, and I like to buy attractive pullbacks, as you can see in the chart above.

    TT: I see the pullback you’re talking about, and it looks attractive so long as you believe the fundamentals are sound and attractive growth rates can continue.


    Holmes: As a technical trader, with a holding period typically around 6 weeks, I don’t care too much about long-term fundamentals. I’ll be out of this trade long before the long term. Why?

    TT: I principally care about an attractive price chart and a stock trading off from recent highs. I guess I am a bit of a dip buyer too. Anyway, thanks for sharing this trade, Holmes.

    Emerald Bay: I bought shares of KLA Corp (KLAC) on October 23rd. And it’s not out of style at all. It’s a semiconductor equipment manufacturer.


    TT: Wow, that’s quite a trendline. It looks like these shares have been rising steadily in a very tight channel for months before you purchased.

    EB: I seek exposure to the highest momentum names in our large cap equity universe, adjusted for volatility. Specifically, I like to base my position sizes on volatility with more capital invested in the less-volatile stocks.

    TT: You’ve been doing quite well with this position. And that sounds like quite an interesting and attractive strategy. Thank you for sharing.

    Jeff: Not so fast! I can see that you chart lovers will need some supervision. Let’s take a look at the fundamentals with the basic chart from FASTgraphs.


    Jeff: It actually looks pretty good. Earnings growth has supported the price increase. As a fundamental analyst, that is what I watch.

    Conclusion

    Economic data is often conflicting and at times murky. At the same time, daily news headlines can cause investors to lose sight of the big picture in waiting for a negative event to occur that never materializes. By focusing instead on how stocks react to market news as opposed to the news itself, one can gain more confidence in their portfolio and the ability to weather the occasional negativity in the news cycle.

     

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