Join David Stendahl, portfolio manager at Capitalogix, at the Traders Expo in Dallas Texas June 6 – 8.
David will be talking about effective way to build diversified futures portfolios. Click here for more information.
I'll be there too. Let me know if you're going ... looking forward to seeing you at the Expo.
One of the ways to measure the mood of the stock market is to see what sector rotations are taking place beneath the surface.
This chart shows that sector rotations over the past month reflect a market mood that is turning more defensive.
John Murphy explains:
The four sector lines are plotted "relative" to the S&P 500 which is the flat black line. In other words, the four sector lines are relative strength ratios that measure their performance "relative" to the S&P 500.
The blue line shows the Technology SPDR (XLK) leading the market higher since the beginning of the year. Technology leadership is a good thing for the market. The XLK:SPX ratio has started to drop during April, however, which shows short-term loss of that leadership. In fact, technology was this week's weakest sector.
The other three lines show the relative performance of the three defensive sectors which are consumer staples (pink line), healthcare (green line), and utilities (red line).
Those three sectors underperformed the S&P 500 since December as the market rallied. Notice, however, that those three relative strength ratios have turned up over the last month. In fact, utilities, healthcare, and staples were this week's three strongest sectors.
That's normally a sign that investors are turning more defensive and are protecting themselves from a possible market correction.
Meanwhile, Q1 Earnings Season got off to a good start as companies continue to surprise with strong revenue and earnings.
via Bespoke.
The S&P 500 Index is entering a seasonally bullish period. The chart below shows the predicted turning points based on the past five years of historical data.
Something potentially different this year is that the S&P 500 Index has performed pretty well year-to-date. In fact, it is up 12.17% so far ... and things look pretty strong until May.
However,the chart below should serve as a reminder that there a lot other markets worth trading too. For starters, the DAX is up 21.18% so far this year.
The chart shows the top-ten performing markets for the past few years. Click the chart to see an expanded version of this data.
Note how much diversification there has been in the top-ten throughout the years.
That is the funny thing about markets ... something is always working. The trick is finding it while it's working.
Does a market rally in January imply anything for the rest of the trading year? "As goes January, so goes the year." This particular phenomenon is what is referred to as the January Barometer.
Many reputable services report the January Barometer's recent-history success rate at around 75%; so it is at least worth noting.
I was going through some past research and found this chart from Chart of the Day from 2009. It illustrates that the S&P 500 has performed much better (on average) during the months following a January gain. The chart is a few years old, but recent years have followed this trend as well.
John Murphy has a slightly different perspective; he says that what the market does during the first week of the new year often gives a clue about direction for the remainder of the year.
Murphy cites the Stock Trader's Almanac, "S&P gains during January's first five trading days preceded full-year gains 86% of the time". The predictive ability of the month of January is nearly as impressive. "The January Barometer predicts the year's course with a .741 batting average. 12 of the last 14 post-election years followed January's direction" (Almanac).
While the January barometer has a good record of prediction, Carl Swenlin still puts it in the "for what it's worth" column because, while it is interesting to note, it might simply be coincidental. Likewise, Business Insider questioned the significance of this indicator in a note called "Don't Be Fooled By All Of The So-Called Market Wisdom".
Nevertheless, we had a good start to that first week of January here in 2012 - and it has continued. Let's hope it keeps up.
S&P Downgraded France and several other Euro-Zone countries this weekend. Now what?
Here are some of the posts that caught my eye. Hope you find something interesting.
David Stendahl sent me some stats that point to some diversification opportunities.
Does the following chart look like a bunch of scribbles? Good; it shows the diversified returns of the S&P 500 Index, Gold, Euro, 10-Year Note, Corn and Crude.
Keep these markets in mind as trading options that often offer performance not highly correlated with the S&P 500 Index.
What follows are a similar set of comments for various markets.
Gold
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Over the past 14 yrs, the top 20 winning mos. in Gold produced an avg return of 8.3% … |
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Since 1997 Gold generated a total return of 165.3% based on its top 20 grossing mos. … |
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Gold generated an avg return of 8.3%/mo based on its top 20 grossing mos. since 1997 … |
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FYI: Gold generated an avg return of 0.6%/mo based on its top 20 grossing mos. since 1997 … |
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14 year perspective … top 3 monthly returns for Gold 13.4%, 13.2% & 12.3% vs. those for the S&P 500 index 11%, 10.1% & 9.3%. |
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The short advantage ... top 3 negative monthly returns for Gold -17.9%, -11.4% & -9.2% vs. those for the S&P 500 index -18.1%, -12.2% & -11.5%. |
Crude Oil
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Over the past 14 yrs, the top 20 winning mos. in Crude Oil produced an avg return of 9% … |
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Since 1997 Crude Oil generated a total return of 179.2% based on its top 20 grossing mos. … |
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Crude Oil generated an avg return of 9%/mo based on its top 20 grossing mos. since 1997 … |
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FYI: Crude Oil generated an avg return of 1.8%/mo based on its top 20 grossing mos. since 1997 … |
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14 year perspective … top 3 monthly returns for Crude Oil 19.2%, 17.3% & 11.6% vs. those for the S&P 500 index 11%, 10.1% & 9.3%. |
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The short advantage ... top 3 negative monthly returns for Crude Oil -23.3%, -15.1% & -13.6% vs. those for the S&P 500 index -18.1%, -12.2% & -11.5%. |
Corn
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Over the past 14 yrs, the top 20 winning mos. in Corn produced an avg return of 10.7% … the same mos for the S&P 500 returned 1.9%. |
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Since 1997 Corn generated a total return of 214.7% based on its top 20 grossing mos. … the S&P 500 index returned 37.7% for the same mos. |
Euro
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Over the past 14 yrs, the top 20 winning mos. in Euro produced an avg return of 5.5% … |
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Since 1997 Euro generated a total return of 109.2% based on its top 20 grossing mos. … |
Ten Year
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Over the past 14 yrs, the top 20 winning mos. in 10 Yr. T-Note produced an avg return of 2.1% … |
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Since 1997 10 Yr. T-Note generated a total return of 42.3% based on its top 20 grossing mos. … |
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10 Yr. T-Note generated an avg return of 2.1%/mo based on its top 20 grossing mos. since 1997 … |
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FYI: 10 Yr. T-Note generated an avg return of -1.5%/mo based on its top 20 grossing mos. |
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14 year perspective … top 3 monthly returns for 10 Yr. T-Note 5%, 2.7% & 2.4% vs. those for the S&P 500 index 11%, 10.1% & 9.3%. |
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The short advantage ... top 3 negative monthly returns for 10 Yr. T-Note -3.7%, -2.6% & -2.5% vs. those for the S&P 500 index -18.1%, -12.2% & -11.5%. |
There is a slight, but potentially growing, disconnect between the S&P 500 Index and the Asian stock markets (specifically the Hang Seng).
On Friday the Hang Seng lost 1%. Moreover, looking at the recent price performance action … on a 20 day basis, the Hang Seng acting very different than other world markets.
Signal Financial Group just updated their seasonal chart series for the Hang Seng Index. It indicates that we could be at a turning point, with little upside expected based on historical patterns.
A Little Risk/Reward Exercise in Portfolio Diversification.
If the S&P continues to the upside … the Hang Seng may not follow. Thus, over the next few weeks, some traders may look at a potential Long S&P and Short Hang Seng play.
Just as an example, here is a quick look at a portfolio study covering 6 weeks, comparing the performance of a portfolio based solely on the S&P 500 Index versus a portfolio that is long the S&P (using 90% of capital) and short the Hang Seng (with 10% of capital).
Portfolio Allocation:
| Equity Portfolio: | 100% Long S&P 500 Index | |
| Mixed Portfolio: | 90% Long S&P 500 Index and 10% Short Hang Seng |
The chart below provides a basic analysis, identifying the differences between the two portfolios. The chart is divided into three sections: return comparison, risk comparison and portfolio change. The first section shows the percent return figures for the portfolios over a recent six week period. The second section focuses on risk, which is defined as standard deviation of return, over the same six week time period. The final section shows the net percentage change to the portfolio's performance based on the small 10% allocation to Hang Seng.
The diversification helps the risk/reward ratio in the study. That looks like something to watch for in the coming weeks. Hope it helps.
Booting up SkyNet.
Kevin Slavin argues that we're living in a world designed for -- and increasingly controlled by -- algorithms.
In this thought-provoking talk from TEDGlobal, he shows how these complex computer programs determine: stock prices, espionage tactics, movie scripts, and architecture. And he warns that we are writing code we can't understand, with implications we can't control.
Here is a TedTalk by Kevin Slavin.
Michael Covel's Trend Commandments
Michael Covel was the keynote speaker at this year's Market Technicians Association Annual Symposium.
Covel has made a name for himself as a chronicler of the Turtle Trading experiment and an outspoken proponent of trend following. Here is a photo of him and me at the Symposium.
Truth be told, I often sit through presentations at a trading conference feeling skeptical, and looking for an idea that rings true or at least seems worth investigating further.
This was much better than that.
Covel claims that market profit is about the right mentoring and practice, not genetic gifts, inborn talents, or Asperger's memory brilliance. You simply need a winning philosophy and strategy, backed by proven positive results that you can execute.
Unlike some industry experts who hint at elusive secrets, Covel's unabashedly open about what he believes works and the things that he's learned from winning traders. He also sprinkles in wisdom from the ages, like this quote from the ancient Greek trend follower, Epictetus.
The audience at an MTA event is filled with an impressive group of people ... you'll meet portfolio managers, strategists, analysts, quants, and traders who rely on technical analysis. Talk of oscillators, histograms and regression testing fills the air. So, it was refreshing to hear Covel challenge the room. Covel loves to poke technicians who talk about quant trading; he claims that systematic trend following is the only quant strategy that actually works.
He said that what he does is real technical analysis because despite what anyone else thinks, he's skeptical that any of the complex strategies being discussed consistently beats the technique he's talking about. The proof, he says, is in the evidence. In this case, it's the detailed trading records of dozens of systematic trend traders who have produced consistent results that dramatically outperform the markets, year-in-and-year-out for decades.
Simple Is Often Better.
If you asked someone who builds trading systems to describe a trading system, they'd probably focus on inputs and technique (e.g., what indicators does it use; is it a momentum strategy; does it seek to profit from artbitrage, reversion to the mean; does it use a simple crossover technique?). In contrast, Covel starts with a proverb:
Going a little deeper, Covel says a system should confidently deal with these questions.
However, he cautions that trend following starts with knowing when to do nothing. If the market is screaming like a spoiled brat ... Step to the side. That’s your first play. Cash is a legitimate position.
Learning More.
Covel is an engaging speaker and writer. In addition to the keynote, I had an opportunity to sit down with him and have a real conversation. I'm happy to say that he has a terrific grasp on trading, traders, and an interesting perspective on what works.
As a result of our conversation, I bought a copy. Since I had already read several of his other books, including Trend Following and The Complete Turtle Trader, I didn't expect much new information. However, just as he promised, this book has a different tone and is chock-full of insights and tradable ideas.
If your're curious, here's my post on his earlier books.
Covel offers an interesting collection of Podcasts. Click here to check them out.
Sounds good.
Posted by Howard Getson at 01:19 PM in Books, Ideas, Market Commentary, Trading, Trading Tools | Permalink | Comments (0) | TrackBack (0)
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