Month: March 2020

With no read-through to the economic impact the virus is having (or will continue to have) on businesses, many economists have turned to becoming armchair epidemiologists. They are spending their time on the molecularity biology of the virus, on the infection curve, and comparing weather patterns of hard-hit areas. These are all import topics and it’s a serious time in both our country and the globe. However, drawing a line from the virus to the financial system is one fraught with risk and a steep hill to climb with many hidden traps.

See, we are not a civilization that’s overly fond of rationality. Hundreds (I’m guessing, I know of at least several great ones) of books have been written on this topic. Nobel Prizes have been awarded on this topic. Yet, ironically we continue to believe the actors involved in the markets and our consumer-based economy will act rationally. In 1978 Michael Jensen wrote that nothing had more evidence support than the efficient market hypothesis (EMH). The market has spent the last 42 years repeatedly saying “hold my beer” – finding unique and creative ways to prove EMH wrong. First, we had Black Monday, the dot-com bubble, the housing bubble, the 2010 Flash Crash, and a global pandemic is the latest trick up Mr. Markets sleeve to show those over-confident practitioners just how rational the public and the market is.

John Maynard Kenynes, regardless of your personal feelings of his politics or suggested policies, is considered one of the “greats” when it comes to economics. In 1936, Keynes wrote of an analogy comparing the stock market to a beauty contest conducted in a newspaper. To win you needed to not correctly guess the most beautiful woman in the contest but to guess who the other participants would think is the most beautiful.

Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole: so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgement, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.

The General Theory of Employment, Interest and Money

Richard Thaler said, “Keynes’s beauty-contest analogy remains an apt description of how financial markets work.” The winner would not be an expert in facial symmetry but in understanding the actions and irrationality of crowds.

Today’s beauty contest is less attractive and has taken the form of a contagious virus. Its market implications are less known but the market’s actors involved have been, are, and will forever be irrational in the actions they take in response to the virus – whether overblown or under-reacted. In my opinion, it’s not important whether we are over-reacted or not, what’s important is the reaction and the continued reaction each passing day. Focusing solely on the virus is like looking at beauty contestant’s cheek bones while everyone else is making their bets on the color of their eyes, you may be right, but it won’t matter in the end.

The most recent example of this? Yesterday jobless claims rose to a multi-decade high of 3.28 million on the back of a practical nationwide quarantine of workers. What did the market do? Rip 6% higher! The stock market is not the economy and trying to connect them on the short-term in my opinion is a fool’s errand.

It’s our job as investors and financial professionals to not make judgement about the infection chart – not to guess the most beautiful woman in Keynes contest – but to evaluate how the market is responding, through supply & demand of stocks, bonds, currencies, and commodities.

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.

I’ll keep this brief.

The U.S. equity market has been seeing large countertrends higher within the construct of the -now- bear market, each failing to do more than simply fill prior gap-down from prior days. Each rally that’s attempted to get started begins to fade when any tiny sign of supply via prior short-term price ‘memory’ is reached. This has been the theme for the last month as you can see from the chart below.

Some investors may get excited by the single day performance, the record-setting Dow moves, and the double-digit advances in stocks that are still bleeding from being cut in half in just a handful of trading days. Unfortunately, these moves are not indicative of trend changes and can be found in history during the ‘meat’ of a bear market, not at the tail-end of down trend. I tweeted on Tuesday that since 1950 when the S&P 500 has rallied 8+% were during 2008, ’87, and earlier this month – none of which were just before or right after a final low in stocks. Going back to 1900 for the Dow and looking at 10+% advances (similar to yesterday’s advance) and again we see they occurred in brief counter-trend bear market rallies.

I’ve written in my Thrasher Analytics letter the specific developments I’d like to see to gain confidence in a final low is in place or nearby. My focus is squarely on the breadth of the market and volatility. I’m not concerned with momentum at this point, momentum can be a sneaky devil during substantial down turns, the math behind the indicators can give a false confidence when used incorrectly. From a price perspective, this trend in the chart below needs to break. We need to see rallies not fail and price to show strength when approaching potential resistance, not retreat.

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.

I have the great honor to serve as a Portfolio Manager for an RIA, the Financial Enhancement Group, in central Indiana. We serve families across the state as well as the country, helping them plan for and invest for the retirement and future financial goals. In this role, it is my responsibility to work with our firm’s CIO, Adam Harter, CFA in managing and trading the investment models used for client assets. While our primary focus is on long-term investing as many of our clients have 10+ year time horizons for their investments, we do not ignore the short-term implications of the market and have specific model portfolios we use to navigate these investment waters. With the historic sell-off that’s taken hold of international financial markets, I thought it may be helpful to share how a professional Portfolio Manager approaches this type of volatility within their process. My role can be broadly classified into three groups: research, communication, and trading.

Research and Analysis: I spend a very large chunk of my time watching the markets, not on a tick-by-tick basis but going through primarily daily and weekly charts of both individual stocks, indices, and various other types of data and indicators I have at my disposal. During ‘normal’ market trends I typically do my charting in the morning and then again at home after the market’s closed. During periods of chaotic price action, I shift my analysis to be entirely outside of market hours.

When the market is open is when I go through outside research our firm subscribes to or the list of curated writers and bloggers I follow. By using this time to see what other’s I highly respect are saying I can better grasp serval viewpoints of the market and potentially uncover something I may have missed in my own research. One (maybe) unique practice I have with this regard is I don’t read everyone and everything. I don’t click every link or peruse every ‘hot take’ on the market. By sticking to my crafted list of trusted writers I build a history with them. I see how they their analysis and thought process changes with the market. I have a different expectation from a writer whose an economist than another whose watching option flows or intermarket relationships. I stay in constant contact with Adam as we share things we are both seeing in our research and reading as his viewpoint is more fundamentally-focused and mine being on the technicals of the market we are able to tackle the market from multiple angles.

By shifting my analysis to when the market is closed there’s less of an emotional response to what’s taking place intraday and allowing it to infect my process. I review everything either before we open and/or after the close and create my game plan for the next day during those times – no “on the field” play calling so to speak. During this time, I craft the stocks, whether they are current investments or on our watch list, that I want to closely monitor the next day with specific levels in mind and not every day is one that requires an action to be taken, thankfully most don’t! This preparation is not abnormal from my regular process but it’s critically important during times of heightened volatility.

During market hours if I see something that catches my eye then I make note of it and reference back to it after the close. Again, this prevents tick-by-tick emotion caused by 1,000+ point swings to take control.

Communication: Communicating with the families we take care of is critically important. While I personally do not meet with very many clients (allowing my focus to be on asset management), our firm’s advisors are all-hands-on-deck during market environments like this. They are proactively making calls to clients they know are more prone to worry over short-term volatility, prefer to be contacted when markets have an unexpected move, or those that may be newer and less familiar with our process during market downturns. Our CIO, Adam, and I meet weekly with the advisors and associate advisors to update them on changes we’ve been making to the portfolios as well as what we believe is important news stories and developments in the market. We also provide possible answers to questions they may get about what’s taking place so they can be better prepared to address client’s concerns. I also meet one-on-one with many of our team to answer their personal questions and help them better understand the market dynamics at play.

Trading: Because we manage money for over 1,000 families, trading is a big piece of my role. Whether that’s freeing up cash for a requested distribution or RMD, putting new accounts into our models or making buy and sell changes within our investment portfolios. Thanks to our excellent technology partners like Orion and our primary custodian, TD Ameritrade, trading has become extremely efficient. In ‘normal’ markets, we can process trades through standard rebalancing – selling what’s grown too large, etc. During volatile periods in the market we begin to take a more surgical approach, especially in non-qualified (tax sensitive) accounts. I work with our CIO in crafting a plan for what we want to focus on for potential sell candidates for cash distributions, at times it may be fixed income holdings due to their rise in price, causing it to be a larger weighting in the investment account than we would desire, and other times it’s a stock or ETF we no longer hold in favor.

While this is a small glimpse into a day of a Portfolio Manager for an RIA, I hope it may help provide a look at the changes I make and what I focus on when markets get crazy. The main priority is emotion management in order to properly attempt to navigate the ship through rough waters.

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.

Due to the historic market volatility taking place in the financial markets, I’ve decided to make this week’s Thrasher Analytics letter open to the public. I share a letter to subscribers every week with my analysis and charts. This week’s letter is slightly shorter than normal as I tried to stay focused on just the drop in equities over the last couple of weeks.

The purpose of the letter is not to provide ‘trade alerts’ but to give a broad view of the market, the risks and potential opportunities based on technical analysis and custom built indicators and tools.

I hope you find this useful during these stressful times. If so and you’d like to learn more and subscribe to future Thrasher Analytics letters please visit: www.thrasheranalytics.com

To Download This Week’s Letter: Please Click Here

Note: There is no relationship between Thrasher Analytics LLC and Financial Enhancement Group LLC, for which I am an employee and Portfolio Manager. Thrasher Analytics is a publishing company not an investment advisor and does not make buy or sell recommendations nor does it offer investment recommendations or advice.

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.