Stock Exchange: Were You Stopped Out?

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and,
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review:

Our previous Stock Exchange discussed ideas for limiting risk in a volatile market. We reviewed the advantages of being disciplined and objective in avoiding emotional errors when volatility increases. If you missed it, a glance at your news feed will show that the key points remain relevant.

This Week: Did You Get Stopped Out?

Using simple price stops to limit your risk can protect against losses. However, it can also result in the unfortunate situation of automatically exiting your trading positions near the bottom, only to watch prices quickly revert higher thereby causing you to miss out on significant profits. For example, many traders using simple price stops were exited from their positions near the bottom last week, thereby missing out on subsequent gains in the days that followed.

Our trading models consider multiple factors beyond simple price stops. For example, Dr. Steenbarger does an excellent job (as usual) explaining one such factor that can also be taken into consideration: Volume. In this article, he explains how combining both price and volume data can provide a more complete picture to help you execute profitable momentum trades, and avoid potential false positives. According to Dr. Steenbarger:

“When we see added volume, it means that the proportion of directional traders relative to market makers has increased.  This facilitates market movement. Conversely, when we see volume dry up, it means that directional traders are not perceiving opportunity in that instrument.  That leads to less movement on all time scales and what short-term traders experience as “choppy”.”

Another factor we like to monitor is the short-term technical health of the market. As noted in our most recent WTWA, the short-term technical health of the market moved from bullish to neutral (with the potential to move negative) for the first time in months (even though the long-term health remained strongly bullish). And when short-term market health moves to negative we will exit some or all of our trading positions. We have examples of positions we recently exited (and a few we just entered) later in this report.

Model Performance:

Per reader feedback, we’re continuing to share the performance of our trading models, and the following table shows this week’s update.

Important to note, we find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

And for these reasons, I am changing the “Trade with Jeff” offer at Seeking Alpha to include a 50-50 split between Holmes and Athena. Current participants have already agreed to this. Since our costs on Athena are lower, we have also lowered the fees for the combination.

If you have been thinking about giving it a try, click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

Expert Picks From The Models:

This week’s Stock Exchange is being edited by Blue Harbinger (Blue Harbinger is a source for independent investment ideas).

Holmes: This week I bought Avis Budget Group (CAR). Are you familiar with this one?

Blue Harbinger: Holmes—Welcome back! You haven’t shared one of your ideas with me in weeks. And yes, I know Avis Budget Group. This company rents cars (Avis, Budget) and shares cars (Zipcar). Why do you like this stock, Holmes?

Holmes: CAR’s dip over the last month is the sort of set up I like to see. From the chart below, you can see it is below its 50-day moving average, and it has attractive upside over the next six weeks.

BH: Interesting, Holmes. I suppose you could argue that a lot of stocks present a good dip-buying opportunity right now after the recent market sell off, but I agree CAR’s pullback has been more pronounced. Are you concerned with what SRS Investment Management is trying to do? They control nearly 15% of the voting shares, and CAR recently set up a poison pill to protect other shareholders. SRS is still vying for more board seats too, you know.

Holmes: I am aware, but not concerned about that.

BH: This company has a lot of debt, and very low profit margins. Here is a look at the Fast Graph.

Holmes: Check back with me on this one in about six weeks, and we’ll see how this trade works out.

BH: I will. And how about you, Road Runner–do you have any updates for us on your trades? For example, whatever happened to your Amazon (AMZN) trade from last week?

Road Runner: I’m still holding Amazon, Blue Harbinger. I bought it on February 5th. Here is a look at my “buy” chart and my “hold” chart.

BH: I can see why you bought it. As you explained last week, you like to buy stocks at the bottom of a rising channel and then hold them for about 4 week. Why didn’t you sell though? Based on the second chart, it moved way below that rising channel last week.

RR: I don’t use strict stop orders to exit my trades. I look at other factors too, such as the ones discussed earlier in this article (e.g. volume, overall market health). I’m still holding my shares.

BH: I cannot blame you. I like Amazon. As I wrote before: “I’m impressed by a company that can go from an online bookstore, to a $650 billion market cap company that is beating Microsoft in cloud and displacing struggling “brick and mortar” retailers of many types.” And by the way, Road Runner, I didn’t panic and sell any of my stocks last week either.

RR: Actually, I did make a sale this week. I sold my Valeant (VRX) shares on February 13th. As you recall, I purchased these shares back on January 18th. Here is a look at my “buy” chart followed by my “sell chart.

BH: Unlike the Amazon chart you shared earlier, Valeant fell quite a bit below that rising channel you like. Is that why you sold.

RR: Again, my sell decisions are not based on price alone. I look at other factors too, such as the ones discussed earlier in this article (e.g. volume, overall market health).

BH: Okay. Thanks for those updates. How about you, Athena—what have you got this week?

Athena: I like Netflix (NFLX).

BH: Another FAANG stock. What do you like about Netflix, Athena?

Athena: I am a momentum trader. Here is a look at the chart.

BH: You certainly are a momentum trader. It takes bravery to buy a stock that’s just rallied 45% already this year.

Athena: Not really. I’m a model, No bravery involved. Just data and objectivity.

BH: Honestly Athena, I like Netflix too, but for different reasons than you. I recognize that Netflix has an enormous total addressable market, and so many people are just looking for an excuse to cut their cable TV, and for many people Netflix is the solution. By the way, Netflix crushed revenue estimates (in a good way) last month, and the company also knocked it out of the ballpark on new subscribers. Here is a look at the Netflix Fast Graph.

Athena: Thanks for the information, but you seem focused on long-term growth. My typical holding period is only about 17-weeks.

BH: Either way, I still like the stock. How about you Felix—what have you got this week?

Felix: I sold my Urban Outfitter (URBN) shares on February 14th.  If you recall, I bought these shares back on 7/17/17. Here what I said back in July when I bought the shares:

“Urban Outfitters looks extremely uncool right now, and to me, that’s the coolest thing about it. The month and a half long lull is signaling a bottom to me. As a longer term investor, that’s a very important factor.”

And here is a look at the price chart since then.

BH: nice one, Felix—I am impressed. You did well on Urban Outfitters. Do you have anything else for us this week?

Felix: Yes, I also reviewed the stocks in the Nasdaq 100 (QQQ) and my top 20 are listed below.

BH: Thanks for the list. Similar to Athena and Road Runner, I see you also like Netflix and Amazon. And I also see NVIDIA is ranked at the top of your list. I like NVIDIA. They dominate in video game GPUs, there is so much demand for their chips in data centers that they cannot quite keep up, and on the distant horizon they’re eventually going to have AI chips in just about every new car manufactured, if things go well. I even don’t mind the strong price appreciation over the last year considering earnings and guidance both keep going up too.

BH: How about you Oscar—do you have anything to share this week?

Oscar: This week I’m sharing my top 20 ETFs from my diverse ETF universe. Here is the list.

BH: I see IBUY (IBUY) has returned to the top of your list again. This is the online retail ETF that gets people excited about the continuing evolution of more retail sales moving online. I see also that IBUY’s top 10 holdings include Netflix and Amazon. These are clearly momentum investor favorites.

Thanks for sharing, Oscar. I know you are a momentum trader, your typical holding period is about six weeks, and when you exit you usually rotate into another sector.

Conclusion:

Recent market volatility has reminded many traders of the critical importance of risk management. However, simple price-based stop orders can cause subsequent rebound opportunities to be missed. Stop orders can be improved upon with multiple factors including trading volume data and short-term technical health indicators. We find combining factors and trading styles helps us control risks, while providing an attractive return stream with a lower correlation to the overall market.

Background On The Stock Exchange:

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Stock Exchange Character Guide:

Character Universe Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum 17 weeks Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value Long term Risk signals Recession risk, financial stress, Macro

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.

Stock Exchange: Limiting Risk In A Volatile Market

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and,
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review:

Our previous Stock Exchange pointed out signs of extreme market strength, and asked “what can it tell us?” We offered ideas about using a blended trading approach (i.e. momentum and dip-buying) to help mitigate risk exposures. Over the last week, the market has sold off significantly. A glance at your news feed will show that the key points of our previous Stock Exchange remain relevant.

This Week: Limiting Risk in a Volatile Market

After last week’s market wide sell-off, volatility has remained heightened this week, as measured by the VIX.

And many traders are left wondering how to limit their risk exposures while trading under these more volatile conditions. From our perspective, we’ve built multiple methods for limiting risk throughout our entire trading system. Specifically, we do not anticipate market turns, up or down, but we do react in a way that avoids the big losses. For example, our first signal is preliminary – sort of a “heads up.” This means that we pay more frequent attention to all of the indicators. We got that signal last Friday, so we have been closely monitoring the indicators.

The long-term market health remains solid, but the short-term trading conditions might be close to a change. We are at least a few days away from that, but it could happen next week. And when we get the bearish short-term signal we exit all positions in our models other than Holmes. In addition to this overall method, each model has a built-in exit signal for individual stocks. It works more effectively than traditional stops, because it does not depend solely on price.

Jake at EconomPicData offers some important behavioral perspective about trend-following during a market wide sell-off. He writes:

“Trend following has historically provided strong long-term returns with materially reduced drawdowns relative to a traditional buy and hold investment, but none of this matters if an investor cannot stick with the strategy through periods of relative underperformance.”

Our models are objective, and not prone to behavioral mistakes.

And for more perspective about exiting positions, here is a recent Q&A about entering/exiting positions from the highly regarded, Charles Kirk (if you can get on the waiting list for TheKirkReport, it’s highly recommended):

Q: I usually am all in or out – do you feel it is better to reduce the position in stages or trade 100% of the position? My goal is never to have a loss greater than -1% of my trading capital and I position the size of my trade based on that and the stop point.

A: I typically scale into positions in steps of three (1 at starter point, 2 at trigger, 3 at follow through) and I scale out in steps of two (1 at violation, 2 at follow through confirmation killing the play). At times, however, I will scale in only in two steps if I’m buying the initial positon at the trigger – the point where the play fires often in the breakout move if I’ve missed the starter entry. A good example in my the recent trade in the failed play of Jagged Energy (JAG). My starter position was added on the trigger when price broke out, but when there was a bull trap, I sold the position on the trap reversal. A one step in, and then one step out, with a reduced position size. Both the reduced position size and the quick stop kept the loss small, as my entry/exit strategy is designed to do when wrong and there is a play failure. I only increase position size on plays that prove themselves.

It’s always important to stay disciplined regarding risk controls, particularly in periods of heightened volatility.

Model Performance:

Per reader feedback, we’re continuing to share the performance of our trading models, and the following table shows this week’s update.

Important to note, we find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

And for these reasons, I am changing the “Trade with Jeff” offer at Seeking Alpha to include a 50-50 split between Holmes and Athena. Current participants have already agreed to this. Since our costs on Athena are lower, we have also lowered the fees for the combination.

If you have been thinking about giving it a try, click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

Expert Picks From The Models:

This week’s Stock Exchange is being edited by Blue Harbinger (Blue Harbinger is a source for independent investment ideas).

Road Runner: This week I bought Amazon (AMZN) on Monday. I’m sure you have an opinion, Blue Harbinger.

Blue Harbinger: I’m impressed by a company that can go from an online bookstore, to a $650 billion market cap company that is beating Microsoft in cloud and displacing struggling “brick and mortar” retailers of many types. I take it you’re not bothered by Amazon’s thin profit margins relative to its incredibly growing revenues?

RR: My typical holding period is about 4 weeks, so it’s less about fundamentals and more about proprietary technical indicators. As you know, I like to buy stocks that are at the bottom of a rising channel. And based on the following chart, you can see why I like Amazon.

BH: Interesting, Road Runner. Are you at all worried about the continuing market wide sell-off? Amazon is down since you bought it.

RR: I’m a model, not a human, so no I am not “worried.” Besides, I have risk controls in place. For example, I have a built-in exit signal for Amazon (and for all the stocks I buy). It works more effectively than traditional stops, because it does not depend solely on price.

BH: Any other risk controls, during your typical 4-week holding period?

RR: Yes, we monitor for short-term bearish signals, and I’ll exit all positions if we get one.

BH: Well in case you’re curious, Amazon announced earnings after the close on February 1st, the company beat market expectations for earnings and revenues, and the shares were actually up the following day, which also happens to be the day the rest of the market started selling off. Here is a look at Amazon’s Fast Graph.

RR: Thanks for that information. How about you, Felix—what have you got this week?

Felix: I bought Westlake Chemical (WLK) on Monday. What do you know about this company?

BH: They manufacture and market basic chemicals, vinyls, polymers and building products. The company’s products are used in flexible and rigid packaging, automotive products, coatings, water treatment, refrigerants, residential and commercial construction, as well as other durable and non-durable goods. Why do you like it?

Felix: I am a momentum trader, and this stock is still above its 50-day and 200-day moving averages, even after last week’s sell-off.

BH: Interesting pick, Felix. This company’s EPS has been perking back up lately. Here is a look at the Fast Graph.

Felix: Thanks. I typically keep my positions open for about 66-weeks—longer than the other models, and long enough for the fundamentals to be more of a factor.

BH: Anything else?

Felix: Yes, I also ran the Dow Jones through my model, and the top 20 results are shown in the following list:

BH: Thanks for sharing. Personally, I like Microsoft (#5 on your list). Microsoft Azure is no Amazon Web Services, but the company has established itself as the clear number two in “cloud” thanks to Microsoft’s forward-looking CEO, Satya Nadella. Plus its Windows and Office add to the company’s wide moat.

Athena: This week I bought Abercrombie & Fitch (ANF) on Monday. What do you think about that?

BH: Honestly, I am surprised you like ANF. The company is a specialty retailer (they make fashionable clothes for kids and young adults) that still has a significant amount of “brick and mortar” stores. Aren’t you afraid they’re going to get “Amazon-ed?”

Athena: ANF has some good momentum. As you can see in the chart below, it’s above its 50-day and 200-day moving averages.

BH: Yes, but as you can see in the following Fast Graph, earnings is only a fraction of what it once was. Are you waiting for Abercrombie & Fitch to come back in style, or are you trying to re-live your glory years, Athena?

Athena: Neither. I’m a computer. I like momentum. ANF is attractive, and I typically hold my positions for about 17 weeks.

BH: Okay. I’ll check back with you in about 17-weeks. How about you Oscar, what have you got this week?

Oscar: This week I’m sharing my top 20 rankings from our high volume ETF universe.

BH: Interesting, thank you. By the way, I seem to recall last week the inverse volatility ETF (XIV) was at the top of your comprehensiv ETF universe list. It’s been a horrific week for that ETF, as its price went from about $130 to $6.

(image source: One of the Greatest Short Squeezes of All Time).

Oscar: I don’t buy everything on the list each week. And we have risk controls in place, as discussed  earlier in this article. For example, my sell triggers work more effectively than traditional stops, because they don’t depend solely on price.

BH: Thanks, Oscar. I know you are a momentum trader, your typical holding period is about six weeks, and when you exit you usually rotate into another sector.

Conclusion:

Trading in a highly volatile market requires discipline. One of the advantages of our models is they are objective and not emotional. This removes some of the psychological and behavior risks that many traders are prone to (e.g. selling out of fear). With regards to our current open trades, we are just monitoring. Losses in the current range are nasty (especially when coming so quickly) but normal. We are watching closely over the next few days.

Background On The Stock Exchange:

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Stock Exchange Character Guide:

Character Universe Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum 17 weeks Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value Long term Risk signals Recession risk, financial stress, Macro

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.

Disclosure: I am/we are long AMZN, WLK, ANF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Stock Exchange: Extreme Market Strength, What Does It Tell Us?

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and,
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review:

Our previous Stock Exchange asked the question “what can traders learn from poker playing artificial intelligence?” We compared the strengths of machines versus humans with regards to poker, and then discussed their applications to trading. If you missed it, a glance at your news feed will show that the key points remain relevant.

This Week: Extreme Strength. What Does It Tell Us?

The market has been extremely strong over the last nine years. And by many metrics, we’re now entering very rare territory. For starters, here’s a look at the total return of the S&P 500 since the depths of the financial crises, up nearly 400%, truly extraordinary.

And according to this next chart, stocks (as measured by the S&P 500) recently crossed the most overbought level in 22 years.

Similarly, Chris Ciovacco points out that the Dow Jones daily RSI recently printed its most overbought reading since 1955, as show in this table.

Our trend-following trading models (e.g. Felix, Athena) are more sophisticated than simply RSI, but the continuing momentum in RSI helps explain why these models have been working so well (more on performance later).

For more perspective on market strength, Howard Marks (co-founder of Oaktree Capital Management) had this to say:

Most valuation parameters are either the richest ever (Buffett ratio of stock market capitalization to GDP, price-to-sales ratio, the VIX, bond yields, private equity transaction multiples, real estate capitalization ratios) are among the highest in history (p/e ratios, Shiller cycle-adjusted p/e ratio).

And in the same article, Marks also shared the following positive remarks:

The U.S. economy is chugging along, and the recovery that started in 2009 has become one of the longest in history (103 months old at this point). The rest of the world’s economies are joining in for that rare thing, worldwide growth.  Most economies seem to be gaining rather than losing steam, and they don’t appear likely to run out of it anytime soon.

Continuing with our theme of extreme strength metrics, additional unusual things have been happening in the market. For example, this article from Bloomberg shows that a normally reliable trading strategy is going haywire. Specifically, quantitative traders have long used liquidity metrics to identify opportunities. According to the article:

“bets on the least traded stocks should, in theory, outperform the market because there’s a reward for taking on the extra liquidity risk… But since December the opposite has been occurring, with the most liquid stocks rewarding investors to the greatest degree in nine years.”

By contrast, our trading models use the 750 most liquid stocks thereby also contributing to their continuing strong performance.

But what inferences can traders make from continuing market strength? According to the same article by Chris Ciovacco, “after experiencing extremely rare stock market overbought readings, stocks performed very well over the next two years” as shown in the following table.

And consistent with continuing market strength, our momentum-based models have been stronger than our dip-buying models; however both continue to deliver strong returns (more on this later).

And worth mentioning, another outstanding resource for traders is Brett Steenbarger’s Trading Psychology Resource Center. Dr. Steenbarger’s content is organized, extremely valuable, and goes back for more than a dozen years.

Model Performance:

Per reader feedback, we’re continuing to share the performance of our trading models, and the following table shows this week’s update.

Important to note, we find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

And for these reasons, I am changing the “Trade with Jeff” offer at Seeking Alpha to include a 50-50 split between Holmes and Athena. Current participants have already agreed to this. Since our costs on Athena are lower, we have also lowered the fees for the combination.

If you have been thinking about giving it a try, click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

Expert Picks From The Models:

This week’s Stock Exchange is being edited by Blue Harbinger (Blue Harbinger is a source for independent investment ideas).

Road Runner: This week I like Adobe Systems (ADBE). Are you familiar with this company, Blue Harbinger?

Blue Harbinger: Yes, I am familiar. I know Adobe is more than simply a company that lets me save my documents as a PDF before I send them to someone else so I don’t have to worry about the formatting or content getting messed up. Adobe operates through three segments: Digital Media, Digital Marketing, and Print and Publishing. Why do you like this stock, Road Runner?

RR: As you know, I like to buy stocks that are at the bottom of a rising channel. And based on the following chart, you can see why I like Adobe.

BH: Interesting, Road Runner. I see Adobe’s share price seems to have fallen below this “rising channel” you always talk about. What kind of risk management are you using, if any?

RR: You’re right. I purchased this stock on January 26th at the lower end of the channel, and its price did drop a bit in the last few days. I don’t use stop orders like the other trading models, but I do watch it closely. The decline is mostly in line with the market.

BH: Hmm. Interesting, Road Runner. Are you aware of how the new tax laws will impact Adobe? Specifically, did you know the company just recently lifted its 2018 earnings guidance to $6.20 from the prior forecast of $5.50 citing recent tax law changes that are expected to significantly lower its effective tax rate?

RR: I am aware of the tax law. Did you know my typical holding period is only about 4 weeks, and also that Adobe is tentatively scheduled to announce earnings in a couple weeks on February 15th?

BH: I did know that, Road Runner. In case you’d like a little more fundamental information about Adobe, here is a look at the company’s Fast Graph.

RR: That Fast Graph is showing some strong future upside, but again—I typically hold for only about 4 weeks. How about you, Felix—what have you got this week.

Felix: I have no stock picks this week, but I did run the top stocks in the Russell 1000 large cap index through my model, and I’ve included the top 20 in the following list.

BH: That’s an interesting list, Felix. I see a lot of the usual aggressive growth suspects on your list, such as payment processing application Square (SQ), chipmaker Nvidia (NVDA) and now cell-based cancer immunotherapies company, Juno Therapeutics (JUNO), is at the top of your list. All those companies have been performing well. Are you nervous that any of them are overbought and due for a correction?

Felix: I’m a model, not a person. So no, I am not nervous. Besides, the earlier data in this report shows markets often continue rising for two years after printing extreme overbought levels. And in case you have forgotten, I typically hold my positions for about 66 weeks—which is much longer than the other models. I exit when my price target is hit, and I use stops and macro considerations to control risks. And did you happen to notice my strong performance in the performance table earlier in this report?

BH: I noticed, Felix. Nice work. I’m also glad Jeff uses a combination of momentum and dip-buying models, just in case market conditions change. It helps deliver a diversified lower-volatility return stream. How about you, Oscar—what have you got this week?

Oscar: This week I’m sharing my top 20 rankings from our comprehensive and diverse ETFs list.

BH: I see the inverse VIX (XIV) is at the top of your list; that’s been a great trade for years because volatility has been disappearing (the VIX is also known as the market “fear index” because it measures expected future volatility). I especially like that trade now because volatility has ticked up in recent trading days (it’s still no where near financial crisis levels), but that uptick seems to make for a more attractie entry point, assuming the market reverts back towards the ongoing longer-term trend.

Oscar: I agree, and I suspect you’re right (that’s why XIV is ranked so highly). And in case you’ve forgotten, I am a momentum trader, and my typical holding period is about six weeks. I use stops to protect against downside, and I exit by rotating into another sector.

Conclusion:

Just because market strength is unusually high doesn’t mean it’s going to change immediately. In fact, historically, the market has remained strong after reaching extreme RSI levels, such as those it has recently achieved. Nonetheless, we prefer to use a blended approach between momentum and dip-buying models in order to reduce risk while keeping expected future returns high.

Background On The Stock Exchange:

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Stock Exchange Character Guide:

Character Universe Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum 17 weeks Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value Long term Risk signals Recession risk, financial stress, Macro

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.