Stocks & Equities
In this week’s issue:
- Weekly Commentary
- Strategy of the Week
- Stocks That Meet The Featured Strategy
In This Week’s Issue:
– Stockscores at the Toronto Money Show
– Stockscores’ Market Minutes Video – Do You Know Who is Winning?
– Stockscores Trader Training – Fooled by Randomness
– Stock Features of the Week – Stockscores Simple Weekly
–
Stockscores at the Toronto Money Show
I will be doing two presentations at the Toronto Money Show in September, one free and the other a Master Class that you can purchase a discounted ticket to until August 17th. For more information on these two presentations, click here.
Stockscores Market Minutes – Do You Know Who’s Winning?
Traders need to know what is working best now and that is often not answered best by the performance of the market indexes. This week, I look at the importance of knowing who is winning in the market, my regular market analysis and the trade of the week on TEVA. Click Here to Watch
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Trader Training – Fooled by Randomness
We have all heard the story about the King who asks a group of blind men to feel an elephant and report back on what an elephant is. Each feels a different part and as a result, each has a very different perception of what the elephant is. They fail to accurately understand the Elephant because each does not touch the entire animal.
Many traders fall in to a similar mistake when evaluating their approach to the market. It is very easy to misjudge the effectiveness of trading rules by looking at the result of the last trade. If you buy a stock because it is breaking to new highs and the trade ends up failing, it is easy to say that buying stocks breaking to new highs is not an effective strategy.
This concept is referred to by some as being fooled by randomness. By drawing conclusions from a small sample of data, the trader makes an incorrect assessment of cause and effect.
To really judge the effectiveness of strategy rules requires they be tested over a large sample size, at least 30 trades but more is better. Only then can you start to see patterns and correlations. Only then can you assess cause and effect.
Suppose you are sitting in front of your computer and you decide that you will buy shares in Herbalife (HLF) if the next car that drives past your window is blue. The next car that drives by is blue so you buy HLF and the trade ends up making you a $1000 profit.
Encouraged by your result, you take a look at Pfizer (PFE) and again determine that you will buy the stock if the next car that drives past your window is blue. The next car surprises you by being blue so you buy and again, you make a profit. Trading seems easy!
What do you think would happen if you carried out this rule for your next 30 trades? Since most will realize that there can be no cause and effect between a blue car and a winning trade, most will say that the overall result should not be positive. Intuitively, you know what there can be no correlation between the color of the car that drives past your window and the performance of your trades.
However, what if your test actually finds that 25 out of the 30 trades you do end up being winners? Is there now reason to believe that blue cars predict strong stocks?
The problem is that even when there seems to be a correlation between one factor and a result, it could simply be that there is another cause at work. The reason that there was 25 winners out of 30 could simply be due to a strong trending market that makes most stocks rise.
This example highlights two important considerations when assessing the effectiveness of strategy rules.
First, make sure you test a rule over a large sample to get data that is reliable.
Second, test your strategy rules over varying market conditions so you can remove bias.
When testing the rules of a strategy, do not stop at the entry rules. Evaluate the exit strategy and how you size positions and do risk management. Small changes in any of these areas can have dramatic effect on your profitability. I recently completed a two week test of one of my day trading strategies and found that a couple of minor changes to the exit strategy more than doubled the profitability of the strategy during the test period.
If you want to truly understand how well your trading strategy works, take the time to compile data on a large number of trades across varying market conditions. Avoid looking at just one factor or the results of your last trade.
Ran the Stockscores Simple Weekly Market Scans for the US and Canada, checking out the 3 year weekly charts for opportunities with a focus on stocks under $20. Here are some that have good potential for Position trades:
1. GLUU
GLUU breaking up from a rising bottom on good but not great volume. Support at $2.65, 7/10.
2. CSTM
CSTM making a cup and handle break with strong volume support. The breakout signal is valid so long as support at $8.
References
- Get the Stockscore on any of over 20,000 North American stocks.
- Background on the theories used by Stockscores.
- Strategies that can help you find new opportunities.
- Scan the market using extensive filter criteria.
- Build a portfolio of stocks and view a slide show of their charts.
- See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.
FS Insider recently spoke with John Derrick, CFA, President of the Derrick Letter, regarding his outlook on the dollar, the US stock market, and more. Derrick believes there is a good case to be made that we are nearing the end of the dollar’s decline and that the risks of a near-term correction in the US stock market have increased (see Derrick: Retail Investors Buying As Institutions Trim Back for audio).
Dollar Weakness Set to Reverse The dollar has traded lower over the course of this year, and it’s now approaching an extreme, Derrick noted.
Right after the election, there was a great deal of enthusiasm for President Trump’s agenda. With the expectation of greater economic growth and fiscal stimulus, the dollar rallied strongly as investors anticipated a shift towards tighter Fed policy in response.
However, for most of 2017, investors have lowered their expectations both on Trump and on the Fed’s response, leading the dollar to reverse all of its initial post-Trump gains…and then some.
As of now, we’re down nearly two standard deviations from the high and right at a key support zone, Derrick told listeners.
“That dollar trade is likely to reverse,” he said, also pointing to positioning in the futures market, which, as you can see below, shows speculators are no longer excessively long and back to a slight net bearish position.
Near-Term Risk of a Correction in Stocks
It’s been over a year since we’ve had even a 5 percent correction, Derrick noted. This is the longest streak of low volatility since 1996.
Though we’ve had a strong earnings season, the market is basically in the same place it was 2 months ago. We’re starting to see churn, and the market is starting to struggle a little bit.
“My thinking is that the trade—particularly in the same technology names—is getting tired,” Derrick said. “We’re getting to the point where seasonals are working against us now, and equities are expensive.”
Derrick sees the opportunity to rebalance portfolios and take gains from stocks that have done well, such as the FANGs, and possibly reposition into defensive plays, such as healthcare, utilities, telecoms and consumer staples.
“The key message is, it’s not the time to take that incremental risk and grab for something else,” he said. “It’s time to take risk off the table.”
Long-Term Outlook Looks Clear
While Derrick sees a correction of possibly 5 or 10 percent in the near-term, the picture is different further out.
It’s important to keep in mind that leading economic indicators are still growing.
“From an economic perspective, that basically signals the economic all-clear for at least the next 12 months,” Derrick said. “With the Conference Board’s LEI making new highs, I think it’s really dangerous to get too bearish and too cautious.”
The global economy is on a good path, Europe continues to show strength, and China has stabilized, he added.
Risks are higher than average over the next 1-3 months, Derrick said, but we’ll want to see more deterioration in longer-term indicators before calling for a top in the market.
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Since I am hanging out there with a view on USD that goes against all current trends (up in the anti-USD trade and down in Uncle Buck), may as well micro-manage it until resolved.
Daily USD is in its 2nd day of flagging after breaking the harsh downtrend channel, post-jobs.
….continue for more charts and analysis HERE
…also from NFTRH:
Participation from the S&P 500’s ‘equal weight’ components is thinning out markedly after putting on a mini-surge in June.
Having watched the VIX break the psychological 10 level once again today, it looks comfortable in single digits having digested Fridays NFP’s report. YTD, it remains down around 25% but with volumes so low, we must ask the question – does this indicator still warrant such attention! As traded volumes decrease and market participants walk to the side, we watch a rally that still no-one has especially as we hit record high after record high. This has been the most hated bull market in history and still investors watch the DOW setting records daily.
One of the main reasons the fear cage is at such levels is precisely because people have missed this rally! If you don’t own it – why hedge? The velocity of money is also telling us that we are in a period of deflation and with the misunderstanding of QE only just distorting the picture. Yes, there are scary stories of geopolitical concerns but when the asset bubble is in the bond market, why fear the stock market.
So is the VIX the calm before the storm? We certainly need a good scare to get people convinced they were right all the time and its really a bear market that keeps going higher – you can’t fool them!
….also from Martin:
US Share Market Broad Overvaluation Index – One of the Best Leading Indicators We Have Ever Created
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