July 2016 – Andrew Thrasher

A Bear Market Has Yet to Begin With A Terrorist Attack

Posted on July 18, 2016 by Andrew Thrasher, CMT

With the increase in horrific violence taking place across the globe, I thought it was pertinent to share this study completed by Ned Davis Research. While it’s disheartening to see what’s taken place in Dallas, Turkey, Baton Rouge, and sadly many other locations – the impact on the market has been not been as significant during past terror attacks. According to NDR in this Time article, the market has been resilient during previous times of violence.

Ned Davis Research studied the market’s reaction to 23 large-scale acts of global terrorism since the late 1970s, from the 1983 attack on Marine barracks in Beirut to the 2005 London train bombings. Three-quarters of the time, the Dow Jones industrial average was up within a month of the event.

In all but one case in which equities didn’t snap back quickly — a bombing in India during the global financial panic — stocks had recovered and were back in positive territory within six months.

Jack Ablin, chief investment officer at BMO Private Bank also notes that in the last 35 years there has not been a bear market that’s started with the occurrence of a terrorist attack. So while there is of course a first for everything and just because a 20+% drop in stocks has not previously followed prior terror-related activity, I think it’s important to look at what’s happened in history and to stay grounded to historical facts during times of heightened emotion that often are accompanied such tragedies.

Source: Can Terrorism and Violence Shake the Market? (Time)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Sector Breadth Confirms Broad Equity Strength

Posted on July 13, 2016 by Andrew Thrasher, CMT

Want to find something bearish on the market? It’s not hard to throw a rock and find a piece of pessimistic data or commentary that will feed an equity bears appetite. I know my personal bias is to lean more cautious when evaluating the markets, but when the data that I rely on is telling me something different I must respect what its showing. That brings me the market’s breadth, specifically the Advance-Decline Line, which has confirmed the recent strength in U.S. equities (here and here).

We can take this breadth analysis a step further by looking at the individual sectors, and seeing if the strength in the broad market’s breadth is relying heavily on just a few sectors or if strength is stretched across the entire market. Below I have listed the nine S&P sectors using price only data (not adjusting for dividends) and their respective Advance-Decline Lines. The Advance-Decline Line simply adds and subtracts the number of stocks going up and down in a cumulative total. If more stocks are rising, the line will rise and vice versa when more stocks are declining. I use this type of indicator to understand if there’s support for an underlying price movement. If a market or ETF breaks out, I prefer to see broad participation by the underlying stocks.

Materials
While the sector itself is still nearly 8% off its high, its respective Advance-Decline (A-D) Line is already nearly back to its prior high.

Energy
While the Energy sector ($XLE) is still in a down trend of lower highs and lower lows, it’s breadth has improved somewhat as it advances with price to challenge its prior high.

Financials
Financials ($XLF) have been one of the worst performing sectors YTD, largely attributed to the declining yield curve. However, when looking at the performance of the individual financial names, the $XLF A-D Line is already at a new high.

Industrials
When taking into account dividends, $XLI is already at a new high but when looking at just price it still sits a few cents under its 2015 peak. But once again, the sector’s breadth measurement has already set a new high.

Technology
Tech ($XLK) is right at its 2016 high and is just itching to breakout and so far it has the full support of its A-D Line as it broke its April ’16 high back in June.
Consumer Staples
$XLP has been in a clear up trend as it makes new highs in price for the bulk of the last year. What about its Advance-Decline Line? Yep, right there with it as it marches higher.

Utilities
Utilities ($XLU) has been one of the stronger performing sectors YTD, clearing its 2015 high back in May. It’s A-D Line has created almost a straight line higher as individual utility names retain their up trends.

Health Care
The Health Care ($XLV) sector still sits below its high but has recently broken above a level of resistance around $73. The A-D Line for the sector has been leading price higher, having already made a new high.
Consumer Discretionary
The Consumer Disc. ($XLY) sector is just under its prior high but its breadth has already broken out.

As you can see, from a breadth perspective using the sector’s individual Advance-Decline Lines, the market appears to be much healthier than what the macro economists would lead you to believe. I understand profit margins are contracting, margin debt is high, Europe is falling apart but there is a difference between economies and markets, and we’re seeing a clear separation when looking at the major nine S&P sectors and their respective breadth indicators.

While it’s possible we see the market digest these gains and see some type of back-filling, it’s hard to argue that the current up trend is anything but strong based on the underlying breadth strength in the S&P sectors.

The Trades I Didn’t Take And the Lesson I Learned

Posted on July 12, 2016 by Andrew Thrasher, CMT

This post is not an endorsement for my firm’s asset management services nor is it a recommendation to buy or sell securities mentioned. Everything written here (like all my posts) is for education purposes only.

One of the processes I go through as a professional trader and Portfolio Manager for an asset management firm is running a systematic signal that generates buys and sells based on a set of criteria I’ve created. These signals are used for one of our more aggressive portfolios and fills a piece of the portfolio pie to create the equity allocation. I have a preference for system-based trading because it helps eliminate the emotion of trading and also acts as a more efficient way of finding trade opportunities.

Like all traders, I make mistakes. And one of those mistakes is the subject of this post. As I mentioned before, one of the benefits to system-based trading is the removal of emotion. This is true if you follow the instructions of what the system is telling you to do (i.e. buy or sell a security). However, by getting involved in the decision making can happen and have either positive or negative implications. The thing is, you’ll rarely know if your involvement is for better or worse until after the fact.

Recently my system told me to buy two airline stocks on two separate days – American Airlines and Delta Airlines.
Due to the risky nature of the airline industry and their tendency to have boom-bust cycles, I ignored both of these buy signals. American Airlines chart has looked like trash lately and the industry as a whole as gotten quite a bit of bad press lately which filtered like a virus into my thinking. Today American Airlines rose over 11%, which is approx. 20% above the signal’s entry. Delta also had a strong move today, up 5%.

My preconceived bias towards airlines made me miss these trades, and thus the opportunity for potential gains. This acted as an excellent reminder of why I have the process and the systems I’ve created and an example of one result of not following it to a T.

Many times on social media traders just share their winners. They show the best parts of their highlight reel. I view things a little differently, I think the bad traders or the missed trades are part of my highlight reel. They are what help make me a better trader and teach me the lessons required to improve as an asset manager. I am constantly seeking improvement and reviewing previous traders or trades I didn’t take is part of how I grow and evolve as a trader.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

The Nine Rules of Research According to Ned Davis

Posted on July 7, 2016 by Andrew Thrasher, CMT

There’s always a news story blowing in the wind that can catch your attention and in turn shift your bias and focus. However, the first half of 2016 seems to have contained an abundance of such stories ranging from profit margin contraction, Fed policy, country’s leaving unions, police shoots, and whether certain political candidates are either racists or criminals.

As traders our job is to focus on what the market is telling us – for many of us that involves a form of analysis based on price movement and for others it incorporates corporate reporting and macro economics. No matter your market paradigm, staying focused on what matters is crucial.

This is why I thought it’d be a good idea to share the nine rules of research as created by Ned Davis, founder of the well-respected market research firm, Ned Davis Research…

Don’t Fight the Tape – the trend is your friend, go with Mo (Momentum that is)
Don’t Fight the Fed – Fed policy influences interest rates and liquidity – money moves markets.
Beware of the Crowd at Extremes – psychology and liquidity are linked, relative relationships revert, valuation = long-term extremes in psychology, general crowd psychology impacts the markets
Rely on Objective Indicators – indicators are not perfect but objectively give you consistency, use observable evidence not theoretical
Be Disciplined – anchor exposure to facts not gut reaction
Practice Risk Management – being right is very difficult…thus, making money needs risk management
Remain Flexible – adapt to changes in data, the environment, and the markets
Money Management Rules – be humble and flexible – be able to turn emotions upside down, let profits run and cut losses short, think in terms of risk including opportunity risk of missing a bull market, buy the rumor and sell the news
Those Who Do Not Study History Are Condemned to Repeat Its Mistakes

You’ll notice that nothing is profound among the nine. You likely have heard some version of each of them before. But when the voices get loud and volatility picks up, it’s nice to have a reminder in what’s important and why we do what we do.

Source: Ned Davis’ 9 Rules of Research (LinkedIn)