Stock Exchange: Despite Fundamentals, We Nailed RH, Again

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 considered the benefits of using a blended approach to trading in order to reduce volatility and correlation with the overall stock market. If you missed it, a glance at your news feed will show that the key points remain relevant.

This Week: Nailing Restoration Hardware–Again

The stock market can be humbling. No one wins all of their trades, all of the time. The trick is to make more money on your winners than you lose on your losers, preferably a lot more. We’ve developed a group of trading models, based on different technical and quantitative factors (e.g. momentum and dip-buying) designed to systematically identify attractive opportunities. We’ve also built into the models a variety of risk controls, including position sizing, stop orders, and macro factors.

Our models often identify trading opportunities that are immediately dismissed or ridiculed by fundamental analysts. For example, 2-weeks ago, several of our models purchased Restoration Hardware (RH), and the feedback from some of the fundamental-based commentators was brutal. For example:

“RH being recommended tells me you don’t understand anything but charts. Fundamentally, RH is one of the worst stocks you can buy.”

or

“RH gonna crash hard.”

and

“Even charts show strong resistance at $95, not a place to enter now.”

However, here is a look at Restoration Hardware’s performance since our models purchased shares (i.e. the shares are up more than 20% in the last 2-weeks):And this isn’t the first-time we recommended RH. Our models also purchased shares of RH back during the week of August 21st, and here’s what happened to the stock price after that purchase:

Our big gains on RH have come at the chagrin of many short-selling fundamental analysts considering the percent of RH shares sold short was recently over 46%. Our point is that technical trading and long-term fundamental investing can be very different. For example, most of our models only hold their positions for 4 to 6 weeks, as shown in the following table.

And if you still believe technical-based trading is all witchcraft and mumbo-jumbo, you might consider reading this recent article from Dr. Brett Steenbarger:

Trading Model Performance:

Per reader feedback, we’ve recently started including a table summarizing the performance results for our trading models. The table (below) shows actual client results after commissions and fees (I watch this every day, and now readers can see it as well). We’ll share additional information, including test data, with those interested in investing. For our weekly updates, we use only real-time results.

The results in the table above include all of the positions (10 for Road Runner and Athena, 16 for Holmes, and 20 for Felix), not just the specific stock examples we discuss in the Stock Exchange every week (and sorry Oscar, you have too many individual stocks and trades to be part of this approach). We’ve included six months of data since that is the shortest real-time record we have. All of the models are expected to perform well over longer time periods. Holmes, for example, has returned over 20% in the last eighteen months.

And worth noting, our models tend to have a low correlation with the overall stock market, which can be extremely valuable for diversification and risk management purposes. Further still, when “blended” (see table above) our models deliver very compelling risk-adjusted returns.

Expert Picks From The Models:

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

Road Runner: Earlier this week I bought, RH, Inc. As you know, I like to buy stocks that are at the bottom of a rising channel. And based on the following chart (from earlier this week), you can see why I bought Restoration Hardware:

Blue Harbinger: I know you don’t win all of your trades, Road Runner. But I’ll give you a pat on the back for this one. As we already discussed earlier in this report, RH is up more than 20% since you placed the trade. Nice job.

RR: Don’t forget, not only did I buy RH earlier this week, but I also bought it during the week of August 21st, and I nailed that trade too—I made over 40% in a matter of weeks (remember, I typically hold my positions for only about 4-weeks at a time).

BH: Nice Job, Road Runner. Just this week, RH raised guidance significantly, and according to the press release, the company is forecasting improved margins and more growth:

“Looking forward, we are forecasting margins to rise and costs to fall as we cycle our efforts to reduce inventory, and benefit from our new operating model. In fiscal 2018, we believe we have a clear line of sight toward achieving net revenue growth in the range of 8% to 9% on a comparable 52-week basis and adjusted operating margins in the range of 9% to 10% while generating free cash flow in excess of $240 million.”

The stock was up 25% on the news, but I suppose we shouldn’t be surprised considering Chairman and CEO Gary Friedman continued to buy the stock in recent months, taking his ownership up to 2.2 million shares.

Anyway, how about you, Holmes—Do you have any “non-RH” trades for us this week?

Holmes: This week I bought GGP, Inc (GGP). Are you familiar with this company?

BH: Yes, Holmes. I am. I actually did a detailed “members-only” fundamental report on GGP earlier this week: A Retail REIT Bottom? Parent May Pillage Brookfield’s Bid For GGP. But I am curious, Holmes—why do you like this stock?

Holmes: I am able to sift through data on many different securities, and GGP ranks highly in my model. Specifically, GGP’s dip this year is the sort of set up I like to see. From the chart below you can see its price now versus where it was earlier this year. GGP has attractive upside over the next six weeks.

BH: Holmes, I know you are a disciplined, data-driven model, but are you even aware that Brookfield Property Partners (BPY) made a bid to acquire GGP over the weekend, and that is why the stock price is up?

Holmes: Interesting. Tell me more.

BH: Look Holmes, GGP is a high-end shopping mall REIT, and shopping mall REITs have gotten slaughtered this year as online stores like Amazon keep winning business away from “brick and mortar” stores like the ones that lease property from GGP. Brookfield Property Partners is know for being a smart value investor with a track record of buying low and selling high. If they’re interested in GGP—that could be a sign that there is hope for some shopping malls. For your consideration, here is a look at GGP’s Fast Graph.

Holmes: Thanks for the fundamental data, but my typical holding period is about 6-weeks, so I’ll be in and out of this trade long-before the fundamental story plays out.

BH: Fine. If you’re not interested in the fundamentals then I won’t even bother to tell you about all the conflicts of interest in this deal between GGP, Brookfield Property Partners and Brookfield’s parent, Brookfield Asset Management (BAM). Nor will I tell you how I think you should “play it.”

Holmes: Okay by me. You spend your time dwelling on the fundamentals, I’ll spend my time making money. Check back with me in 6-weeks and we’ll see how this trade works out.

BH: Great. How about you Felix, what have you got this week?

Felix: This week I have run all of the S&P 500 stocks through my model, and the following table shows which ones rank the highest.

BH: That is interesting. Thank you for sharing. And remind us—what is your approach?

Felix: I am a momentum trader, but I typically hold my positions for about 66-weeks, which is longer than the other models. I exit when my price target is achieved. I also use macro factors and stops to control risks.

BH: Hmm… mometum-based? I can see that seems to makes sense with some of the names on your list, such as Boeing and Nvidia—they’ve both been unstoppable this year. I also appreciated that you too ranked RH highly 2-weeks ago. How about you, Athena—any picks this week.

Athena: I don’t have any picks this week. And when I don’t see attractive opportunities—I just don’t force anything. But I know you like my RH pick from 2-weeks ago.

BH: Okay, yes—you made a lot of money Athena—thanks. How about you Oscar?

Oscar: I have ranked a handful of attractive ETFs, as shown in the following table.

BH: interesting. Remind us Oscar—what is your strategy?

Oscar: I’m a momentum trader. I rotate in an out of sectors, and I use stops for risk management purposes. I usually end up holding my positions for about 6-weeks at a time.

BH: Honestly, I’m not sure what to make of your list, Oscar, because there are so many diverse ETFs included. On one hand you’ve got “growthy” mostly-large cap technology ETFs like QQQ and XLK, but then you’ve also got small caps (IWM) as well as utilities (XLU) and energy (XLE). If I had to pick one, I’d say I like IWM (small caps) just because I am a contrarian value investor, and small caps have lagged so much this year that they’re eventually due for a rebound. I don’t know when, but eventually it is coming. And to be honest, I like small cap value (IWN) even more, for the same reasons, but that one didn’t make your list. Very interesting nonetheless. Thank you.

Conclusion:

Even though they involve the same securities, trading models and long-term investing are very different. Not only can the holding periods differ (e.g. weeks versus years) but the methodologies can differ (e.g. technicals versus fundamentals). What can look like a terrible idea under one framework, can be very attractive under the other. Each methodology has advantages. Importantly, the two methodologies can often be combined to build custom portfolios that are less correlated with the overall market, but still deliver attractive overall returns.

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.

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.

Weighing the Week Ahead: The Millennial Effect on the Housing Market

The economic calendar includes many reports, but few of the most important. I expect the housing market to attract attention. There are several relevant releases on tap, and the sector is especially important. Some will take up a special slant, asking:

Will Millennial buyers extend the housing market rebound?

Last Week Recap

In the last edition of WTWA I mused on the confluence of records in the data and in stock market indexes. I suggested that some of the punditry would start worrying that things were “as good as it gets.” This was a topic for some, including David Templeton, who responded with a qualified “no,” but suggested the need to look beyond the mega cap stocks. Check out his reasoning and persuasive charts.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the loss of 0.21% on the week. Once again, it was a week of very low volatility; the intra-week range was only a touch more than 1%. Historically 1% moves are commonplace — each day!

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news has been mostly positive, as summarized by New Deal Democrat’s helpful compilation of long, short, and coincident indicators. His conclusion is neutral on the long term and positive in shorter time frames.

The Good



  • Job openings increased….and other good news from the JOLTS report. No one does a good job of analyzing this report. Many try to interpret it as a sign of employment growth, a purpose for which it was not designed. With fewer indicators to summarize this week, let me suggest the key things we should watch for.
    • Ratio of unemployed to job openings.


  • Beveridge curve – indicator of labor market structure.


  • Reason for job separations —layoffs or voluntary. Layoffs get a lot of news. A high quit rate shows confidence on the part of employees.


 

 

The Bad

  • Jobless claims were 239K, 10K higher than last week, and worse than expectations.
  • Response to earnings was weak. Bespoke reports that despite solid earnings, there is a divergence between the overall S&P and the average member stock.


  • Michigan sentiment dipped to 97.8 from last month’s 100.7 and expectations of 101.
  • Rail traffic weaker via Steven Hansen of GEI. He looks beyond the headline data to elements he has identified as more predictive. While still better than a year ago, the improvement is decelerating.
  • Hotel occupancy rate declined 0.9% last week. The rate remains ahead of the record-setting pace of 2015. (Calculated Risk)


 

The Ugly

Each week seems to bring another case of outlandish violence. While there are some common themes among the perpetrators, there is no consensus about solutions – or even whether to act. Opinions about the best policy reaction seem to depend more upon beliefs rather than facts. That is always a tough situation for public policy proposals.

Millennial Notes

My research always leads me to a few items that are interesting, but not necessarily relevant to the week ahead. One such item was a list of terms and expressions that Millennials would use, but older people would not. I had the inspiration to write a paragraph or two using these terms, in the Blazing Saddles tradition. Mentioning this to Mrs. OldProf, she informed me that this was one of my dumber ideas. She was right, of course. A quick look at another source showed that many terms from the first source are now (already?) retired.

Millennials are far more likely to prefer bitcoin to stocks or bonds.


And this is despite their low ownership; only 4% have ever owned bitcoin.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

We have a normal calendar. The inflation data is edging up to a level where it will attract more interest. Retail sales is always an important report, as is industrial production.

That said, I see the Friday reports on housing as the most significant news. Building permits are an important leading indicator. That data series and new housing starts are volatile series. That makes them a challenge to interpret, but no less important.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.


Next Week’s Theme

The calendar is a busy one, but not one to suggest important surprises. If inflation picks up, that will attract more analysis of the business cycle and the Fed. With several housing reports on tap, that may well be the focus of attention. So far, the recovery has been led by consumer spending, with little help from business investment or housing. If the rebound is to continue, more sources of growth are needed. The answer may come from the changing U.S. demographics, leading people to ask:

Can Millennials provide the push for an extended housing rally?

Here are some perspectives, in my customary bearish to bullish range.

  • Get ready to revisit the housing bubble! (The IMF – a partial warning; Jesse Colombo, who sees many, many bubbles; and 58% of homeowners themselves)
  • Housing growth is stalled by several headwinds
    • High prices (contra-Calculated Risk)
    • Rising mortgage rates
    • More rigor in loan requirements
    • Lack of supply (Zillow)
    • Down payments a challenge for new buyers
    • Tax proposal killing the mortgage interest deduction (By the Numbers)
  • The numbers do not lie

  • Now the largest group of home-buyers (Washington Federal)
  • Factors sparking the decision to buy a home (few readers will guess the most frequent – answer at the end of today’s post)

As usual, I’ll have more in the Final Thought, where I always emphasize my own conclusions.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot


 

The Featured Sources:

 

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools.

Doug Short: Regular updating of an array of indicators. Great charts and analysis.

Guest Source:

The BLS. Most observers engage in plenty of discussion about the initial release of employment data. Why? It is an important topic, so people grab on anything, ignoring the problems in short-term measurement. Each quarter the BLS releases a new installment of the Business Dynamics series. Because this uses state employment data, reviewed and aggregated for this purpose, it is much more accurate than the monthly estimates. In fact, it makes sense to review the various estimates using this result as the “right answer.”

For Q1 2017 the net increase in private jobs was 654K. The sum of the initial monthly reports on employment Friday was 553K. The actual difference would have been a major source of debate if known at the time.

Also worth noting is the massive change – much more important than the net result. 7.3 million jobs were created. And of course, 6.7 million were lost. Opening establishments accounted for 1.3 million new jobs, something that the birth/death adjustment truthers should study.

It also demonstrates that many more people are touched by unemployment than the official rate indicates. No wonder economic perceptions are often worse than the data seem to show.

 

Insight for Traders

We have not quit our discussion of trading ideas. The weekly Stock Exchange column is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. This week’s post continues our discussion of the strength of combining different trading approaches – a blended approach. To illustrate, we provided some historical data on the trading models. And of course, there are updated ratings lists for Felix and Oscar, this week featuring small caps. Blue Harbinger has taken the lead role on this post, using information from me and from the models. He is doing a great job.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Brett Steenbarger’s analysis of Frustration, part of his trading psychology series. While I most frequently cite Dr. Brett when we specifically deal with a trading theme, there is often an overlap with investor decision making. This is such a case. Investors with a sound overall approach can become frustrated at a stretch of losses or concern about reaching their goals.

…frustration is a great example of the principle that strengths, taken to an extreme, can become vulnerabilities.  When we are achievement oriented and demanding of ourselves, having something get in our way breeds a natural frustration.  That frustration, in turn, triggers a fight/flight state and suddenly we are no longer nicely grounded in our brain’s prefrontal cortex.  Instead, we activate motor areas to cope with the situation and act in ways that we would never entertain if we were calm and focused at the start of the trading day.

This often describes the behavior of individual investors, especially those who constantly chase what worked last month or last year. Polling from Pew Research shows that many share this sentiment.

[Investors feeling frustration might find helpful my paper on Investor Pitfalls. If your frustration relates to missing the rally and/or being behind on your retirement program, I have another piece on how to edge your way back into the market. Both are available for free from main at newarc dot com].

Scott Grannis shows how the perceived problems have actually provided fuel for the stock rally.

Stock Ideas

 

“Doghouse stocks?” Ray Merola is reviewing some recent occupants. In this post he is analyzing Celgene (CELG). He takes note of the high risk in trials and the disappointing sales of a key product. He concludes that the market has over-reacted. This is a data-driven analysis worth reading.

Starbucks or Facebook? Peter F. Way’s unique approach to risk/reward suggests Facebook. Check it out.

Brian Gilmartin shows what’s hot and what’s not in corporate earnings trends. Energy rolling, and financials depressed. Which is the opportunity?

Homebuilders “hammered” by the tax plan?

Interested in Speculation?

Brad Thomas looks at Puerto Rican debt via DDR Corp. (DDR)

Or Contrarian Choices?

Here are the six most shorted Nasdaq stocks.

Personal Finance

Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. While his series’ theme emphasizes financial advisors, the topics are usually of more general interest. His own commentary adds insight and ties together key current articles. It is a valuable daily read. My favorite this week discusses the possible value of an annuity in your retirement plan. He cites an article by Dick Cotton, showing how the annuity can provide a foundation for other, more aggressive investments.

This is a great example of Gil’s series expanding horizons for many advisors.

Alan Steel (HNW Magazine) shares his customary wisdom with a discussion of current exaggerated pessimism, something that many seem to ignore. Here is his analysis:

Some folks are calling it a secular bull that is both old and decrepit, and busily sunning itself through its golden years from the light of a few big stocks as it has done since about March 2009. 

Others consider the market crashes within that eight year (plus) period, like the 21.6% S&P 500 drop from May to October 2011, and the recession-level peak-to-trough numbers in the US, Japan, China, and emerging markets (amongst others) from mid-2015 to early 2016 (details here), put the age of this bull at somewhere around 4.5 years, or perhaps just a year and a half. 

Then there are the gloomier folks who, despite the long-term upward trend, positive corporate earnings, basement level inflation, low unemployment, respectable jobs growth, and historically low interest rates, habitually pick at the scabs of negative investor sentiment and draw dotted lines between now and the ghosts of recessions past. 

These apostles of Joe Granville have helped position that latter category as the people’s choice.

As such, independent investor sentiment levels about the stock market are about as euphoric right now as a stomach ulcer.

He goes on to cite the Gallup data I noted above, before concluding:

For me, I think the majority of investors are doing what they always do – waiting around for some kind of wonderfully perfect moment that will finally have built up enough financially fibrous scar tissue to replace the skin torn away by events like 2008/09, 2000/02, and even (for the oldies) way back to 1987 and its less memorable ilk.

Unfortunately, market nirvana is almost always either a day away or the day we missed.

So, when it comes to investing, perfect is always the enemy of good.

Abnormal Returns is always interesting, but the Wednesday edition is especially geared to individual investors. My favorite this week takes up specific steps that investors might follow to “improve our behavior.” These are great ideas, but my sense is the choice of “hire a coach” might be the only real winner for most people.

Watch out for….

Consumer staples stocks. Barron’s notes that the sector might not be as safe as most think. (I agree). The full article provides a complete analysis, but here is a helpful summary.

Tupperware (TUP). Simply Safe Dividends looks at the sustainability of the dividend.

Stocks attracting the rare Wall Street “sell” rating.

 

Final Thoughts

Taking advantage of demographic trends is an important way to improve your investment results. The growing economic significance of Gen Y is obvious. The change in the housing market is an important example.

Housing àEconomic Growth à Stronger Stocks

Strength in housing ripples through many other parts of the economy, including materials, employment, construction, and transportation. (Ritholtz). I have recommended home building stocks many times over the last year, and it has worked out well.

The “bubble” skeptics seem to reason that if sales or prices reach a former peak, that should be a warning. This simplistic approach would never recognize an overall positive trend in anything!

Here is a look at the 2018 Housing forecasts (Calculated Risk).


 

What worries me…

  • The debt limit is now on our radar. It is time to see some progress on this issue.
  • Trade issues. While there were no accidents on the Asian trip, there are also no indications of policy progress. The I wish the President had more willingness to use expert advice. The advantage of free trade is probably the most widely shared conclusion of economic experts.

…and what doesn’t

  • Stalled tax reform. The current plans are very unlikely to get enough votes within the Republican party alone. Taking more time and gaining some bipartisan support will not happen until next year, but the result will be stronger.
  • The economy. Our indicators show little risk and there is plenty of upside.

Surprising answer to a key reason for Millennial home buying: Dogs.

Stock Exchange: Fearing Macro Headwinds? Try A Blended Approach

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 considered the benefits of trading strategies that have a low correlation with the overall market (i.e. such strategies can be attractive, especially for investors fearing a market-wide pullback—or simply uncomfortable with volatility). If you missed it, a glance at your news feed will show that the key points remain relevant.

This Week: Fearing Macro Headwinds? Try A Blended Approach

This week’s Stock Exchange continues the discussion of the benefits of low-correlation trading strategies. For example, the traditional wisdom for reducing risk has been to invest in less stocks and more bonds. However, with interest rates still near historically low levels (and expected to keep rising, thereby putting downward pressure on bond prices) bonds are decidedly less attractive for many investors. And with the threat of inflation on the horizon, bonds can be even less appealing considering their low real returns. Further complicating the macroeconomic environment, the president’s new pick for fed chairmen is expected to not rock the boat significantly, but he does add some uncertainty.

Other macroeconomic headwinds include dynamic international trade policies which could have long-term impacts on the strength (or weakness) of the US dollar, proposed changes to US tax rules, and simply the fact the markets continue to set new highs thereby making many investors increasingly nervous that this rally cannot continue forever. For perspective, the following chart shows which market sectors typically perform best during different stages of the market cycle, and the recent strength we’ve experienced in technology stocks, for example, is consistent with the idea that the current market rally will eventually capitulate.

Source

Trading Model Performance:

In managing our trading models, we find that low correlattion trading strategies can keep returns high while simultaneously reducing the volatility risks associated with many of the macroeconomic headwinds that keep traditional stock market investors up at night. And per reader feedback, we’ve recently started including a table summarizing the performance results for our models. The table (below) shows actual client results after commissions and fees (I watch this every day, and now readers can see it as well). We’ll share additional information, including test data, with those interested in investing. For our weekly updates, we use only real-time results.

The results in the table above include all of the positions (10 for Road Runner and Athena, 16 for Holmes, and 20 for Felix), not just the specific stock examples we discuss in the Stock Exchange every week (and sorry Oscar, you have too many individual stocks and trades to be part of this approach). We’ve included six months of data since that is the shortest real-time record we have. All of the models are expected to perform well over longer time periods. Holmes, for example, has returned over 21% in the last eighteen months.

Unlike most equity strategies, our approach has a very low correlation to the market. This is an attractive quality because it can reduce risk (as measured by volatility) while simultaneously keeping returns high. If you are uncomfortable with macroeconomic volatility, our lower correlation strategies can be attractive and worth considering.

Expert Picks From The Models:

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

Holmes: This week I bought Itau Unibanco Holding (ITUB). Are you familiar with this company?

Blue Harbinger: Yes, Holmes. This is the largest privately owned bank in Brazil. And I’m very curious, what has gotten you interested in this stock?

Holmes: It ranks highly in my model. I am able to sift through data on many different securities (including ADRs, like ITUB). And ITUB’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: Holmes, this stock scares me. It seems the Brazilian economy has a lot of political and inflation risks right now. For example, Brazil has a large budget deficit (including huge pension liabilities) and I’m afraid the government may basically try to print money in order to meet its obligations (like they’ve basically done in the past). This would spell bad news for banking stocks like ITUB. For further perspective, here is a look at this company’s FastGraph.

Holmes: I am a trader, and my typical holding period is about 6-weeks, so I’ll be in and out of this one before the long-term inflation risks set it. I am attracted by the current price (i.e. it has upside).

BH: So you’re not concerned with the macroeconomic risks facing this stock?

Holmes: I’m a trading model, and my security selection and holding period is far less correlated with the overall market than a buy-and-hold strategy. Besides, when you combine my trades with the other trading models, we deliver strong returns that have low correlation with the market. If you’re concerned with macro headwinds, my trades should be attractive to you

BH: I’ll keep a close eye on ITUB, and let’s discuss in about 6-weeks (i.e. after your typical holdings period).

Holmes: Deal. How about you Road Runner, do you have any trades for us?

Road Runner: I don’t have any new buys this week, but I sold XPO logistics (XPO) last week. If you recall, I bought that one back on September 7th, and the trade worked out quite well for me, as you can see in the following chart.

BH: Remind us Road Runner, what exactly is your style?

RR: I like to buy stocks that are at the bottom of a rising channel.

BH: Sounds like a combination of mostly momentum and little “dip buying.” Momentum trades have been working great in our current macro environment (the market has been rallying), and I appreciate buying things on the dip. XPO has been exhibiting strong fundamentals too (as you can see in the following FastGraph), but the industrial sector as a whole has been doing well considering where we are in the market cycle as shown in our earlier sector table.

RR: If you’re worried about a market pullback, consider a blended approach. As the earlier performance table shows, a blended approach between our trading models has been performing quite well.

BH: Thanks Road Runner. How about you Athena, do you have any trades for us?

Athena: I sold my Tesla (TSLA) shares last week.

BH: Any particular reason?

Athena: the trade simply wasn’t working out  as well as expected, so I exited the position for risk management purposes. I originally bought the shares on July 20th as we discussed in this article.

BH: I won’t give you a hard time on this trade considering your overall track record has been stellar as shown in our earlier performance table. Besides, Tesla has been disappointing from a fundamentals standpoint (as shown in the following FastGraph), and cyclical stocks in general are starting to make people nervous.

Athena: That’s interesting that people are getting nervous, as you say, but I’m an emotionless model. I don’t let emotions cloud my judgement. Besides, I typically hold my positions for only a few months or less, and market cycles don’t usually play out in that short of a time period.

BH: Fair enough, Athena. How about you Felix—what have you got for us?

Felix: I ran the 30 Dow Jones stocks through my model this week, and the following list includes the top ranked names.

BH: Thanks, Felix, and that’s interesting. I take it you are a momentum trader considering the names at the top of your list have been performing well this year.

Felix: I am a momentum trader, but I typically hold my positions for about 66-weeks, which is longer than the other traders. I exit when my price target is achieved. I also use macro factors and stops to control risks.

BH: It seems to me like you’re basically “chasing returns,” but I know there is a lot more to your strategy. I also know you have a very strong track record of performance. Plus, volatility is reduced significantly (and returns remain attractive) when your picks are combined with the other models’ picks. Thanks again for sharing your rankings.

Conclusion:

If you are worried about macroeconomic headwinds and market wide volatility, you might want to consider a blended approach. For example, there are benefits to blending our different trading models. And there are also benefits to blending our trading models with traditional long-term stocks. Specifically, they are less correlated thereby providing less volatility while also keeping returns high.

Stock Exchange Character Guide:

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.

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.