Category Archives: Week in Review

So Friday was fun. The Dow dropped 665 points with the major U.S. equity indices dropping 2%, erasing a chunk of the abnormally large gains captured in January. A great deal of attention was given to the lofty level reached in the 14-day Relative Strength Index, as it got to near 90. Well that’s now been corrected, with momentum indicator falling under 70. It’s often said that the market rarely bottoms on a Friday as traders become nervous holding long exposure into the weekend. With that, I’d be surprised if we didn’t see a little bit more selling pressure, especially after sentiment readings got as high as they did in January. However, the earnings data appears to be coming in strong for Q4, so the dip buyers will likely still have a bit of confidence left before completely abandoning ship. It’s important to remember that this type of price action, you know, prices actually moving in more than one direction, is normal. It’s amazing the number of calls I’ve seen published this weekend calling an end to the bull market simply because the S&P is off at high by a couple of basis points – truly amazing.  Alright, let’s get into some of the charts that highlight the developments from last week’s sell-off.

Index Returns 
The Dow started the year as the strongest index between the Nasdaq, NYSE, R2K, and the S&P. After last week’s decline the Russell 2000 has moved into the red year-to-date.

Sector Return
Year-to-Date sector returns show four of the major S&P sectors now under-performing the major index and down on the year. Utilities have taken a hit with the rise in interest rates, followed by Energy, Materials, and Consumer Staples. Meanwhile, Consumer Discretionary (cyclical), Financials, and Health Care are currently the best performing sectors for the start of the year.

Equal Weight vs. Cap Weight S&P 500
As I mentioned with the first chart as small caps are now negative YTD, the down trend of equal weight vs. cap weight S&P 500 has now declined to 2012 levels. Having been a theme for most of 2017, the largest components of SPX have led the drive higher, erasing the relative strength RSP put in during 2016.

Equity Put/Call Ratios
With Friday’s large move lower, an interested development took place in the three put/call ratios. We saw a large pick up in put buying relative to call buying in equities while investors actually seemed to be buying the dip in index options, shifting the index put/call ratio to one of the lowest levels seen int he last few years.

Gold
I last showed this chart in a post in August, questioning the advance in gold that wasn’t being confirmed by the yen. The shiny metal went up for a few more days before sinking back to $1,240/oz. We then had a bullish divergence in the yen, as it put in higher lows as gold was making a lower low – once again gold flipped direction and headed higher as it confirmed what the yen was telling us. Now we have a replay of what we saw in August as the yen has yet to get back the upper-end of its 12-month range while gold has created a false breakout from its August high. The break of $1,350 without the yen was tough for gold to sustain, so the move lower isn’t too much of a surprise. The yen has now begun to roll over, putting additional pressure on gold prices.

Volatility
One of the big stories from Friday was the large move in the $VIX, which spiked 28% on Friday and over 50% for the week, shown by this CBOE table. The largest move in volatility was in the 9-day VIX ($VXST) with volatility across most of the measured instruments rising double-digits last week. However, volatility for IBM, Apple, Amazon, and Google were actually flat or lower on the week after the large tech companies reported earnings, taking some of the air out of the volatility ramp-up into their reports.

Volatility Rises 50%
Yes, discussing the VIX in percentage terms isn’t technically correct since it’s a percentage itself, but stick with me for a second. Steve Deppe shared this interesting chart, looking at previous times the Volatility Index has risen 50+% in a single week. Like last week, many of the previous instances also had the VIX finish above its upper Bollinger Band. While the sample size is admittedly small, the following moves in volatility have historically been largely lower, averaging a 1-week decline of 11% in 80% of the periods. In fact, two weeks later the VIX was only higher 10% of the time. Josh Brown also shared on his All Access Twitter account a stat from Ari Word, CMT that the S&P 500, when it’s still above its long-term moving average, 13-weeks after the VIX has moved 50% higher is up on average 4.5% vs. just 2.1% in all periods since 1990. So while the historical expectation in the intermediate term is for volatility to come back down, previously this time of spike in the VIX has acted as a nice propulsion high for stocks as well.

Spot VIX Rises Above All VIX Futures
Tom McClellan shared this interesting point over the week, highlighting that spot VIX moved above all VIX futures contracts during trading on Friday, something its typically only done int he resent past during periods of economic or geo-political events. The prior two occurrences being Brexit and the U.S. election. While this condition can persistence or repeat itself before equities ultimately find a low, like we saw several times in 2015, it is a development that’s often led a move higher in stocks.

Volatility Podcast Interview
I recently spoke with Andrew Swanscott on his podcast, Better Systems Trader about my Charles Dow Award paper on volatility spikes, if you’d like to give it a listen here’s the link: Forecasting a Volatility Tsunami with Andrew Thrasher.

Super Bowl Winner
Naturally there will be lots of commentary and tweets on Monday morning about who won the Super Bowl and the market’s resulting rise or decline. The two aren’t correlated, don’t waste your time reading about it….

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 S&P 500 finished last week up 1.57%, the Dow and the Russell 200 both  rose 2% and International markets (EAFA) finished the week up by 1.59%. This has been a very strong start to the a new year, the strength from 2017 has clearly flowed into ’18 and with that, here are the charts I find worthwhile to start the week…

Distance From Major Moving Averages
First let’s take a look at just how strong and fast this move in stocks has been. We are currently in thin air in respect to the distance for the S&P 500 from its 50-day (4.8% above), 200-day (10.88% above), and 1-year Moving Averages (12.53% above). In the last 10 years we’ve only seen the index this far above all three at the same time three times: April 2010, February 2011, and May 2013. We saw a pullback in each of those occurrences but to a varying degree as 2013 was much less of a drawdown compared to ’10 and ’11. Last year we saw the market set quite a few records and that theme doesn’t appear to be over as we make our way into 2018.

Equity Trend Strength
Another way we can measure the magnitude and strength of the current trend is by using the Average Directional Index (ADX) indicator, which measures the strength of a trend, no matter its direction. Below is a weekly chart of the S&P 500 going back to 1990. The sixth month ADX has only been as high as it is now three times: the start of the tech boom, the crash after the tech boom,and the 2008 financial crisis. So while a sample size of three is hardly anything to put weight on, before we call this current rise ‘too much too fast’, all three of the prior price movements that were this strong did not stall out once their ADX levels reached historic highs like they did. So if you’re looking to pain the current market as bearish, you can’t use its current trajectory as a bullet in your arsenal, not based on history at least.

Confirmation in Equity Participation
For a little while we were just seeing strength coming from the Advance-Declining Line of the large- and mid-cap indices, I shared this chart in my Year In Review to highlight the lack of confirmation from small-caps. However, the recent move in 2018 has helped correct that divergence and we now have all three asset sizes making new highs in their Adv-Dec Lines – a positive sign for the current up trend in equities.

New 52-week High Reaches a New Recent High
Rachel Shasha (h/t Callum Thomas) recently pointed out on Twitter the number of stocks on the S&P 500 that have hit a new 52-week high is at the highest level since 2014. This can be viewed one of two days… 1. Trends often change direction following divergences in this type of breadth data. meaning, as the index is making higher highs less of its component stocks are doing the same which eventually pulls the index itself lower. So this new high would be viewed as bullish since a divergence has not developed. 2. Corrections and small pullbacks can occur when breadth sees a burst higher like this. In fact, that’s what happened in April 2014 when we last saw this many new 52-week highs, the S&P had a slight pullback of about 4% before continuing higher, trend intact. Which would cause you to pause with this burst higher, expecting a pullback like we saw in ’14. It’s up to you which line of reasoning you take with this data.

Sector Performance
While we are just two weeks into the new year, below is a chart of the performance for the S&P sectors, all but consumer staples and utilities are currently outperforming the S&P 500 after the first 10 days of trading.

Sector Relative Rotation Graph
As we could see in the chart above, energy, consumer disc., and industrials are the strongest sectors YTD. They also are the only three sectors to in the ‘leading’ category of the RRG chart. While staples are the second worst performer for 2018 (again, its only been 10 days), they are making a nice move through the ‘improving’ quadrant and may be a sector that sees better performance soon. Meanwhile, the other two defensive sectors, utilities and health care, remain in the ‘lagging’ category; which is something equity bulls may like to see – viewing it as a sign that traders are showing stronger preference for the higher beta sectors.

Broad Sector Performance
If we broaden the scope of sectors we can see that autos, energy, aerospace and retail are showing good strength to start the year.

Retail
Last year it seemed the focused was squarely on tech in the retail space and the cannibalization of traditional brick and mortar retailers. However, in the first two weeks of trading its been the regional department stores that have been the strongest industry inside the retail space. Convenience stores (while this list just includes 3 stocks) are up 11% YTD after not evening finished 2017 in the black.

Crypto Stock Hysteria
One popular theme for stocks is to enter the blockchain/crypto space, often changing their company name to make it painfully obvious that retail investors should gobble up their shares, sending the price violently higher. Chris Mayer shared this table of blockchain-related stocks and their resulting price action over the last two months. As you can see, the average move higher has been 165% (median 126%)….in just two months! Do note the number of these stocks that started their pump advance under $5/share.

Earning Seasons Expectations
Earnings season will soon be upon us and based on estimates from Fact Set, the bar has been set quite high. The focus on many of the earnings calls will surely be on the recent tax bill and the implications it’ll have on individual businesses. But if all goes to plan then we should see the third year of 10+% earnings growth, a sign Wall St. will surely be pleased with.

Future Cap-Ex Spending
Along with the discussion of the tax bill implications, earnings calls will likely include a great deal of capital expenditure. At least that’s what’s being expected of them. In fact, future cap ex spending expectations are at one of the highest levels in 30 years via this chart from the WSJ.

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.

We close the books on 2017 with many records either set or broken by financial markets. Whether it’s the hundred (thousands in some cases) returns by cryptocurrencies, strong growth in every major OECD economy, record bullishness based on several surveys, economic growth surpassing economists expectations by a near record amount, every country-specific ETF finishing in the green with an average return of 28%, or the pure lack of volatility in just about any asset class. the S&P 500 put in its best annual return since 2003. Overall, 2017 was a great year for financial markets and many hope that strength progresses into 2018. Many traders and market commentators will be pointing to the strength in ’17 as a cause of concern in ’18, however, as Ryan Detrick, CMT has pointed out, when the Dow has been up over 25% (like it was in 2017), eight of the ten following years were also positive with an average gain of over 12%.

Equity Trend
First and foremost before we get into any other chart I believe it’s important to acknowledge the overall trend is firmly bullish for the U.S. equity market. We continue to see higher highs and higher lows in price with intermediate and long-term moving averages also rising.

Asset Class Return in 2017
Bespoke put together a great table showcasing the returns of the major asset categories and groups in 2017. Below you can see the returns for countries, sectors, commodities, fixed income, and major currencies.

Overall Market Breadth
Looking at the Broad market via the Wilshire 5000 Composite, which is a good representation of the entire equity market, we have a continuation of higher highs. This trend has continued to be confirmed by the breadth measurements of mid and large cap advance-decline lines, with a slight negative divergence seen in small-caps . We saw something similar in October when stocks rallied and small caps adv-dec line took a little longer than everyone else to eventually make a new high. It’s good to see broad market participation in the up trend as we progress into a new year.

Long-Term Trend in Breadth Has Begun to Rollover
There are two ways that you can look at this type of breadth data, one is short-term which is looking for confirmation on each in the overall trend of the equity market. However, there’s another viewpoint that can be taken that I don’t believe very many traders use – and that’s the broad trend of breadth and its relation to equity trend. Most recently, we’ve had several bearish divergences in the five-day total of net new highs on the NYSE as shown by the black lines on the chart below. However, the 1-year trend of the net new highs had been either still rising (early-2017) or flat (mid-2017) as shown by the red arrows, which negated the short-term divergences as price continued higher. However, we’ve now seen a shift in the trend of breadth, as the 1-year Moving Average has begun to make a lower high.

In the last 10 years we’ve seen this happen three times. In 2011 the 1-year MA flat-lined before declining and diverging with price before the S&P 500 corrected. In 2014 the trend of breadth peaked and trended lower for the full year and into 2015 before several equity markets put in double-digit declines. Finally in 2007, like many breadth-related indicators, a bearish divergence in the breadth trend was set as the equity market peaked. So what can be gleaned from these past examples is the lack of efficient timing, 2011 and 2007 lasted just a few months before price rolled over however the down trend persisted for over a year before the 2015 correction. Bringing the focus back to today, the breadth trend is still very early in its directional change and is something to be viewed in conjunction with other pieces of price-related data, but nonetheless not to be ignored.

10-Year Treasury Yield
I recently tweeted that I believed we would see a shift in trend for the 10-year Treasury yield in the coming weeks. While I have several reasons for this believe, I’ll share a few of them here. First, we have yield sitting at resistance that’s defined the long-term down trend for the last 20+ years. What I’m referring to is the 100-month Moving Average, which has been ‘tagged’ five previous times, each occurrence sending yield lower.  Also, note the size of the monthly candles over the last few months – we had a large monthly move off 2.1% in September but they’ve steadily tightened during the advance, with minimal upside progress made in November or December. If you are a fan of Fibonacci ratios (I’ll admit, I personally don’t use them very often) then you’ve probably noticed that the 10-yr is roughly at the 38.2% retracement from the 2014-2016 decline.

Commodities
John Murphy, CMT shared a similar chart in his stockcharts.com note last week – looking at the ratio between the CRB Commodity Index and the S&P 500. Below is a weekly ratio of the two markets, John pointed out the near double bottom in December and June with a bullish divergence in momentum, which points to a favoring of commodities.  Commodities have been under-performing stocks since 2011, and the Relative Strength Index (RSI) has been in a bearish range since 2012, as shown by the dotted green line. What I’ll be watching going forward is for the RSI to continue rising higher and breaking out from its range. That would add weight to the potential of a trend change in relative performance as commodities strength. I’d also like to see the ratio break above its prior November high. I’ve seen a few traders reference a belief that 2018 may be a good year for commodities, pointing to poor weather, supply, and price action.

Growth vs. Value
2017 was a great year for many growth-related stocks, with the lack of volatility in equities as a whole, momentum names did quite well. We can see this represented by the up trend in the ratio between the S&P 500 Pure Growth ETF (RPG) vs. the S&P 500 Pure Value ETF (RPV) up until the November weekly high. However, momentum began to diverge in September with a lower high and a second lower high in November which has been followed by a shift in relative performance that’s favored Value (RPV). We saw a similar divergence in momentum back in 2015 which led to Value leading Growth for much of 2016 before the ratio bottomed and we saw a trend change in ’17. With the weakness in Growth vs. Value, the ratio has broken below its prior Sept. and June lows. Will 2018 see a replay of 2016 in Value taking the lead over Growth? This is one chart I’ll be watching closely in coming weeks.

Strength Begets Strength
Steve Deppe posted this chart on Twitter, showing the markets forward return when the prior fourth quarter for the S&P 500 returned over five percent and was above its 1-year moving average. Steve notes that the market was higher in the first quarter 14 of the 17 occurrences.

A Record Setting Year
Many records were set or broken in 2017, one of which was the monthly strength of the S&P 500 (total return) being positive every month last year, the first time this has occurred in market history as noted by Ryan Detrick, CMT. The Dow also saw a string of advances, up nine months in a row which it hadn’t done since 1959.

A Lack of Drawdown in 2017
With strong monthly performance, we also had a lack of downside price action, specifically in the Dow. Dana Lyons ran the numbers and found that the cumulative annual drawdown was one of the lowest since the early 1900s, “As of December 27, the DJIA had lost a cumulative -27.36% on all of its down days throughout 2017. That shattered the prior record of -31.45% set in 1965 which, by the way, is the only other year that saw less than -38% in total losses.”

Record Low Volatility Across the Curve
We closed out one of the least volatile years in history with the Volatility Index futures curve at its lowest level in the last 10 years, besting even 2007.

The Fed’s Balance Sheet
One chart that will likely get a lot of focus in 2018 is this one from Callum Thomas via Cam Hui, which shows the Federal Reserve’s balance sheet. What’s been called one of the greatest financial experiments in history, the Fed’s multi-year QE program will begin to be unwound this year. While the market showed its resilience and ability to rise without continued pumping by the central bank in 2016 and 2017, we now will begin to witness how the market will act once the flows begun to reverse as the Fed goes from buyer to seller.

Mid-Term Election Year
The Stock Trader’s Almanac discusses the market seasonal pattern surrounding the presidential cycle, specifically the mid-term election year, dubbing it “a bottom pickers paradise” due to 9 of the last 17 bear markets having bottomed in a mid-term election year. In fact, the STA notes the Dow has gained on average nearly 50% from its mid-term low to the following year’s high since 1914. The seasonal pattern for the Dow (and the other major indices look similar) has historically seen a high in April followed by a summer pullback with a rally into the year-end, as shown on the chart below. Looking at the past few mid-term election years, 2014 did not see a significant decline, 2010 had a 13% drop, no major weakness in 2006, and 2002 was a major bottom.

Many bears will point to the centennial pattern, with this year being the 8th year and looking at what happened in 2008. However, what they wont tell you is how the market rose 48% in 1928, or 34% in 1958, in fact the Dow has only been negative in a year ending in eight three times since 1928 (’48, ’78, & ’08) according to the STA.

As we start a new year I wish you all the best and I look forward to sharing, learning, and growing with you all as we tackle a new year and new challenges. Cheers!

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.

Today’s Week in Review is a little shorter than normal as I was extremely busy this weekend. However, below are still some of the top charts I collected over the last week or so.

Sector Performance
Over the last month (20 trading days) the best performing sectors have been Financials Industrials, and Consumer Discretionary. Health Care, Energy, Tech, Materials, and Utilities have under-performed the S&P 500 with Utilities being the only sector in the red. 

Another Sign of Risk Taking in the Financial Markets
Not that this means there’s excessive risk built into the market, but here’s another sign of positive risk-taking from the WSJ, as investors continue to seek out opportunities to generate income and alpha, “Would you invest in a company that couldn’t tell you what its business was going to be?Some would, in fact they are doing so in record amounts. Blank-check companies, otherwise known as special purpose acquisition companies, or SPACs, are listed companies that raise money from investors to go and buy a company as yet unidentified.”

FinTech Growth Strengthens Internationally
Howard Lindzon has been pounding the table about FinTech and the ripe opportunity for the financial industry to be disrupted. While many new companies have come to market with their tech offerings in finance, the trend is even stronger in int’l markets. From Bloomberg, “For now there’s one big thing keeping the tech predators at bay: Getting into finance would pull Amazon and its ilk into closely regulated businesses in the U.S. But Fidelity and others see no guarantees this will deter tech companies forever. And beyond U.S. borders, where many financial companies look for growth, tech is already breaking through.”

The Most Valuable Company of All-Time
I found this extremely interesting, while the topic of what company will be the first trillion-dollar market cap, many point to Apple or Amazon, the first may have been the Dutch East India Company. Adjusted for inflation it was worth nearly $8 trillion. From the Visual Capitalist,  “Companies like the Dutch East India Company (known in Dutch as the VOC, or Verenigde Oost-Indische Compagnie) were granted monopolies on trade, and they engaged in daring voyages to mysterious and foreign places. They could acquire exotic goods, establish colonies, create military forces, and even initiate wars or conflicts around the world. The Dutch East India Company was established as a charter company in 1602, when it was granted a 21-year monopoly by the Dutch government for the spice trade in Asia. The company would eventually send over one million voyagers to Asia, which is more than the rest of Europe combined. During this frothy time, the Dutch East India Company was worth 78 million Dutch guilders, which translates to a whopping $7.9 trillion in modern dollars. In fact, at its height, the Dutch East India Company was worth roughly the same amount as the GDPs of modern-day Japan ($4.8T) and Germany ($3.4T) added together.”

Strength During Tightening Campaigns
The Federal Reserve just raised interest rates by another quarter point. The current S&P 500 trend has been the strongest of the last five Fed tightening campaigns. According to Bianco Research, “The chart below shows total returns for the S&P 500 during each tightening campaign since 1983. The S&P 500 is now +29% on a total return basis since December 2015. Though equities have tended to rally as the Fed tightens, the current performance far outpaces all prior tightening cycles.”

Best Sectors Based on the Surprise Index
The Citi Economic Surprise Index is at the high-end of its range, and as the chart below shows, is well above its 75th percentile.

Liz Ann Sanders shared these charts, which provide insight into what equity sectors have historically been strongest when the Surprise Index is this high. The best sectors over the next month after has historically been technology, consumer discretionary and real estate.

Volatility Last Week
Spot Vix closed down near a new low last week. Based on this table shared by the CBOE,  just three of the Volatility indices saw an increase, the VIX for Goldman Sachs, IBM and interestingly – the VIX itself via VVIX. It’s interesting to see the VVIX 15 points above its low, implying theirs a greater expectation for movement in the VIX than in the S&P itself.
Strong Performance of Short-term Volatility Short vs. Mid-Term
The performance of the XIV, the short-term inverse volatility ETN, has been very strong compared to the longer-dated inverse volatility ETN, ZIV. XIV holds short positions currently in the Dec. ’17 and Jan. ’18 volatility futures market while ZIV owns a mix of the April ’18, May ’18, and June ’18 futures contracts. With the lack of volatility and the steepness of the yield curve staying so consistent, XIV is seeing its best 30-day relative performance relative to ZIV. As you can see on the chart, when the 30-day relative performance favors the short-term ETN it’s often been followed by a period of weakness (although the moves have been quite varied in their degree) – which is associated with a rise in market volatility (VIX).

Off-Topic

Here are some great pictures of newspaper clippings from the early 1900s of letters kids wrote to Santa. (Mental Floss)

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 S&P 500 was able to squeak out a gain last week, finishing up 0.35% with the Dow closing up 0.40% but we saw a decline in small caps as the Russell 200 closed lower by 1.05% and international equities (EFA) closed basically flat. Bitcoin futures began trading last night, and will likely make up the lions share of commentary this week. With just one mention of crypto, here are the charts and news stories I found of importance over the last week.

Sector Performance
Looking beyond just the major ten S&P sectors, Zacks shows the following breakdown of YTD returns for 16 equity sectors. Aerospace is currently the best performer, lead by the defense stocks. Retail, which makes up both online and brick and mortar stores, is the second best performer as internet commerce lead the way, up 59% while regional department stores are down 18% YTD.

Sector Correlation
Turning our attention to the S&P sectors and their correlation among the ten over the last 20 trading days. Industrials and Consumer Discretionary stocks have the highest correlation to the S&P 500. Technology and REITs have moved to be negatively correlated to the broad market.

Sector Momentum
Over the past 20 days Financials and Industrials have seeing the most improvement in their respective Relative Strength Index (RSI) indicator readings. Six of the ten sectors saw positive movement in their RSI. Meanwhile, similar to their correlation to the S&P – Tech and REITs have seen the largest declines in their momentum indicator.

Unique Price Action in the S&P 500
Last Monday brought an interesting event in U.S. equities with the S&P 500 gaping higher at the open but then closed in the red by the close. John Kicklighter, Chief Strategist for DailyFX.com, noted the unique price action and that it’s something we’ve only seen occur a handful of times since 1950. 

Momentum Leads the Pack of Factors in 2017
James Picerno of CapitalSpectator.com recently took a look at the performance of the most popular factors used in investing. So far this year momentum has been the clear winner, followed by quality and low volatility.

Poor Performance Continues for Many of 2016 Worst Performers
Investors have often had success looking to the prior year’s worst performers as investment ideas for the coming year. Looking to take advantage of a period of mean-reversion in the bottom of the barrel of S&P 500 components. Bloomberg notes prior years success of this strategy, “In 2016, for instance, the worst performers of the S&P 500 from the year before were up nearly 53 percent. Since 2010, the dog packs have staged an average rebound of 28 percent in the year after their poor performance.” However, 2017 has not played to the same tune as the 2016 or 2010. Below you can see the past performance of one year’s trash being the next year’s potential gold.

In fact, they may produce a negative return – following the beat set by 2015. As noted above, momentum has been the best performing factor strategy so far this year, which is bad news for those seeking mean-reversion trading opportunities. Below is a chart of the 2016 worst performers and their current ’17 return. Charts courtesy of Bloomberg.

Correlation Between Equities & Volatility Rises
While equities and the Volatility Index are long-term negatively correlated, they do go through periods where correlation rises and becomes positive for a few days at a time. In fact, when using a look-back period of two weeks (10 trading days), the recent correlation between the S&P 500 and the $VIX has been the highest in the last 20 years. In my Week in Review post on October 30th, I noted the rise in correlation that had taken place the week before that was quickly followed by a near 20% rise in volatility in one day before the VIX declined back near its low.

Household Leverage Continues to Decline
Urban Carmel shared this chart on Twitter last week, which shows a decline in the third quarter of the average debt-to-net worth of the U.S. household. We are now back near the prior low and at a level that we haven’t seen very often except after the tech wreck and the 1970s.

Biggest Money Mistakes
CNBC recently reported on a survey conducted by GoBankingRate which asked consumers what their biggest money mistake has been over the last year. Not too surprisingly, “More than one-third of Americans — 36 percent — said their biggest financial regret of 2017 was not saving enough money.”

Strengthening IPO Activity
Callum Thomas of Top Down Charts shared this chart of IPO activity, which has seen a recent pickup. While the 3-month average of IPO withdrawals has seen a decline in 2017, the average number of filings has risen near to a 10-year high. Callum notes that the trend in filings typically tracks the overall trend of the equity but a bearish sign can occur when a divergence of lower highs as the market continues to make higher highs.

The Rotation Out of Tech May Be Just a Shift in Factors
While many investors were calling for a rotation out of tech during the recent period of weakness, one explanation is a shift in factors. From Bloomberg, “The popular narrative is that stock pickers are selling tech after the massive runup this year and are piling into companies set to benefit from U.S. tax cuts. But observers such as Andrew Lapthorne of Societe Generale SA don’t buy it. They look at the contours of the selloff over the past few days and have a different take: A few heavy hitters are dumping factor positions that incidentally hurt chipmakers and software companies and once they’re done, the rally will resume.”

Focus More on The Fed Funds Rate Rather Than The Yield Curve
Bill Gross believes investors are miss-focused when reviewing the fixed income market. Specifically, Gross believes investors shouldn’t worry too much about the flattening yield curve but to pay more attention to where the Fed Funds Rate is headed. From a report from Bloomberg, “ A fed funds rate above 2 percent could prove too high, according to Gross. “The critical factor is really the level of short rates and what is the real neutral fed funds rate,” Gross said, referring to the central bank’s main interest rate after it’s been adjusted for inflation. Fed officials and market observers currently see that real neutral rate around zero, placing the nominal fed funds rate at around 1.5 percent to 2 percent, he said. As long as the fed funds target doesn’t top that 2 percent level, “the flat yield curve should not be as important as in prior cycles where flat curves were a result of excessive Fed tightening.”

What We May Be In Store From D.C. in 2018
Josh Brown has a good piece up looking at what may be in store from the Trump administration in 2018.  “The hard turn toward authoritarianism is already at hand. The President and his state-run media apparatchiks at Fox News are already hard at work gaslighting the 30 million or so fanatics that they can count on no matter what. It went from “no contact with Russians” to “okay, some contact but it was about adoptions” to “yes, collusion, but the President’s inner circle didn’t know about it” to “collusion is okay because Hillary.” After an extremely tepid 2017, there’s a great chance we see more political-induced shocks to our system in 2018.

Caution towards Cryptocurrencies May Be Warranted
When Fred Wilson, a VC who also serves on the board of CoinBase, speaks about crypto it’s probably worth listening, “I think we are going through a similar phase of growing pains with crypto/blockchain. And things will be messy for a while. So proceed with caution, don’t get too far out over your skis, don’t invest more than you can afford to lose, and be prudent.”

Britain Makes Progress on Its Eurozone Exit
While far from being completely settled, Britain has reached an important check point in their eventual exit from the Eurozone. From The Financial Times, ” “Britain has reached a historic deal on its EU exit terms, enshrining special rights for 4m citizens and paying €40bn to €60bn in a hard-fought Brexit divorce settlement that clears the way for trade talks next year. Theresa May, the UK prime minister, and Jean-Claude Juncker, the European Commission president, met in Brussels early on Friday to sign off a 15-page “progress report” that will allow EU negotiators to recommend opening a second phase of talks on post-Brexit relations.”

Off-Topic

Maine Sees a Drop in Lobster
Fan of lobsters? Well There is a reason for concern as Maine has seen a large drop in the number of lobsters off its coast. From The Boston Globe, “In the colder waters off the coast of Maine, lobstermen have been hauling in record catches. But south of Cape Cod, where rising sea temperatures have contributed to the decimation of the lobster population, the industry has collapsed. In some areas, catches have plunged 90 percent below their peak in the late 1990s, leaving scant hope that a once-storied fishery can recover.”

Best. Christmas. Gift. Idea. Ever
If you’re a carnivore then this is an item you’ll wan tot add to your Christmas list this year. A $2,600 nine pound box of wagyu beef. From Food & Wine, “This bento box is an entire Japanese beef experience. First, the actual box—which is nearly two feet wide, constructed from solid wood and weighs about 33 pounds when filled—has compartments in the shape of a cow with each one approximately corresponding to the cut of beef it contains including prime rib, tenderloin, sirloin tip, brisket, chuck tender, tongue and temple.”

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