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
To get instant updates when I upload a new video, subscribe to the Stockscores YouTube Channel

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.

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

Over the past two decades we’ve seen two major bubbles develop: the internet bubble, which burst in March 2000, followed by the real estate and mortgage bubble, which burst in 2007.

Now, we’re entering a stock market bubble in a manner we haven’t seen before, said Jim Puplava, founder of Financial Sense, in a recent podcast, Anatomy of a Bubble.

Bubble Stage One

It all begins with an attention-grabbing idea, Puplava stated.

“For bubbles to take place, what you usually see throughout history is suddenly the whole community becomes fixated on one object and they go mad in pursuit,” he said. “Millions of people become simultaneously impressed with one illusion, which develops into a delusion.”

We’ve seen this play out throughout history, with the Tulip Mania in the 1600s or, more recently, with internet stocks and real estate.

As the bubble forms, what fuels it is the prospect of imaginary wealth. The public becomes infatuated with the idea that promises fast, easy money, Puplava stated.

Next, the idea becomes widely publicized, and this publicity reinforces the idea, which begins to transform into an illusion. Next, cheap money and credit fuel its rise.

“When the prospect of great riches and fast and very easy money is made, what are investors tempted to do?” Puplava asked. “They go out … and borrow money.”

Leverage comes in, and the banking system gets involved because there is a spread between low interest rates and the cost of borrowing money, which encourages banks to lend money, Puplava noted.

Bubble Stage Two

This is the euphoria phase, where an investment concept that likely had merit originally, shifts into the illusory phase of speculation.

“What was once rational becomes irrational, with everyone seeking to become rich,” Puplava said, “because there’s nothing more disturbing to one’s psyche, well-being, and judgement, as to see a friend get rich.”

When whole institutions begin to get rich, the exuberance catches a large swath of the population’s imagination. Then speculation moves away from what is normal and becomes irrational behavior, and that’s when the bubble begins to inflate with rapid speed.

There’s no fundamental analysis. People just buy the underlying asset without thinking. After the public swarms in, and everybody thinks nothing can go wrong, we turn to the final phase of the bubble.

Bubble Phase Three

In the final phase, as we watch the bubble’s speculative mania continue, we see a number of things.

First, interest rates begin to rise, which is what we’re seeing now, Puplava noted. Next, money velocity starts to increase, and prices continue to mount to the point where unease and financial duress begin to take hold.

At this point, the smart money — those closest to the exits — begin to gradually move out of the asset and into cash to get liquid. As this trend builds, it results in severe consequences for asset prices.

Eventually, there’s a realization that the bubble isn’t sustainable. From here, what was a gradual exit transforms into a selling stampede. There is usually an event — an overleveraged player that goes belly up — that takes place toward the end that precipitates a crisis.

“That’s the thing about the bear market,” Puplava said. “A bull market climbs a gradual step. … Bear markets happen rapidly, and the declines are swift. All of sudden, greed turns to panic, which turns to revulsion.”

Where Are We Now?

These are the conditions we’re seeing develop in the index funds and index ETFs right now, Puplava stated, and this is the epicenter of the current bubble. He thinks we’ll enter into the final stages at the end of this year or the beginning of next year.

This move toward passive investing in the form of an index ETF or an index mutual fund is generating the same behavior we’ve see in past bubbles.

“It’s being driven by computers,” Puplava said. “No thought is given to what is bought or sold. It’s the downfall of human psychology.”

Right now, it is estimated that $800 billion will flow into index ETFs this year, up 60 percent from the previous year, and next year it’s estimated we will top over $1 trillion.

As we’ve seen in every crisis, the implosion of margin debt eventually brings this to an end. As this happens, it accelerates the stampede out of the bubble asset. That’s how every cycle always ends.

Echoing Ray Dalio’s recent comments, Puplava, who has been managing money for over 30 years, ended by saying, “Right now, we’re still dancing.” However, as we move into the final phase of the bubble, Puplava intends to take profits, raise cash, and take advantage of potentially cheaper prices once the tide turns.

Read next: Leading Indicators Still Not Suggesting Imminent Market Peak, Recession

The following is part of Pivotal Events that was published for our subscribers July 27, 2017.

Perspective

The political numbers for Europe are startling. With 23% of the world’s GDP, it foots the bill for 58% of the world’s welfare spending. Clearly not a system designed for sound economic calculation. In 1848, Bastiat observed: “The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.” Politically motivated bullies seem compelled to keep trying to justify the distortions. Why?

And then there are continuing reports of record cold weather and snowfalls in both hemispheres in the same month. Quite likely this is unusual and the combination could be part of a trend change in climate. Weather reports of highs in both hemispheres would suggest that the old warming trend is still on.

On the nearer-term, it strongly suggests that the 2016 El Nino warming weather event is over. The Solar Minimum continues. None of this is being reported by the MSM, which suggests there could be some cold-weather surprises when the Northern Hemisphere tilts into winter.

Stock Markets

Is the market up when it should be? Yes. On the last Springboard Buy in April we had a target for speculative excesses to be reached at “around June”.

Are there signs of speculation? Technical indicators have reached excesses only seen near major stock market peaks.

How sound is the fundamental story? The Trump “reformation” will significantly improve the economy. Which while “in the market” is not yet in place. But it brought the public in. Ironically, central bankers continue to add equities to their reserves.

As the ChartWorks noted a couple of weeks ago, the slide in the dollar is materially helping on the recent advance. In turn, this has been exciting London and European stock markets.

Along with the probability of a speculative thrust into early summer, was that the NY market would also make a thrust into September.

Other support has been likely from industrial commodities being firm into August. It adds up to new highs for the senior indexes as well as confirmation of the bull market with the Transports making new highs a week ago. This was also the case in July 2007.

This is similar to the patterns in 2007. In which case, the action in the credit markets is critical. In this regard, there is no need to limit the examples. Bull markets become overdone and become vulnerable to changes in the curve and spreads. And at extremes, there is no evidence of the senior central bank preventing the reversal.

Currencies and Commodities

Our June 28th Pivot concluded that the decline in the DX could continue to the 93 to 92 level, with the Weekly RSI close to 30.

Yesterday’s low was 93.1 and the RSI was down to 28, which is the most oversold on this measure since April 2011. This suggests that the worst of the decline is in the market. Yesterday’s ChartWorks outlined the pattern that would conclude that the bottom is in.

Of interest, is that the dismal low of 72.70 in 2011 was accompanied by a rare signal from our Momentum Peak Forecaster. This had been calling for a speculative thrust in commodities to blow out in that fateful spring. Base and precious metals were the hottest items and we called for a cyclical bear market for both. In that bear markets for industrial commodities had accompanied recessions, we called for a recession. Which did not happen. The bear market did!

Last week, we noted that the Canadian dollar had reached resistance, which was also our target, at 80 and that the Weekly RSI was approaching the momentum reached in 2011. The high has been 80.6 yesterday and the RSI reached 72, which is the most overbought since November 2007.

Tuesday’s ChartWorks noted technical excesses for the Canadian.

The combination of excesses in both currencies is setting up a reversal, which could be associated with the end of this rally in industrial commodities. Our case has been that the latter would be firm into August.

The reversal could occur by late in the month or early in September. It could be profound.

Note the failure of the Nikkei and STOXX to confirm the new highs in the S&P

Link to July 28, 2017 Bob Hoye interview on TalkDigitalNetwork.com:http://www.howestreet.com/2017/07/28/gold-silver-ratio-volatility/

Listen to the Bob Hoye Podcast every Friday afternoon at TalkDigitalNetwork.com