Stock Exchange: What Can Traders Learn From Poker AI?

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 “are you still on the sidelines?” We reminded traders that waiting for the perfect “dip-buying” opportunity (i.e. “waiting on the sidelines”) can work, but it has not been the best trading strategy considering the continued market rally. If you missed it, a glance at your news feed will show that the key points remain relevant.

This Week: What Can Traders Learn from Poker AI?

Artificial Intelligence (“AI”) continues to be more pervasive in the world each day, considering advancements in such things as self-driving vehicles, smart phones (mine seems to track my every move), and even Jeopardy (Watson beat Ken Jennings).

The above graphic is an excerpt from a detailed infographic on the advancements of AI in the field of poker, and there are some interesting lessons that are highly relevant for traders too. For example, this next graphic describes the benefits of artificial intelligence over humans in the field of poker, but it might as well be for the field of trading as well.

For example, per the infographic…

  1. AI doesn’t get tired or make poor decisions when fatigued. This is a common psychological error among traders, and it’s also a big part of the reason our trading models (discussed below) are successful (i.e. they don’t get tired).
  2. AI doesn’t feel the value of money. This is another common psychological problem for humans (money can make them nervous) that our non-human, emotionless, trading models are able to avoid.
  3. AI is not afraid of risks. Machines have no fear (yet), and this is good thing.
  4. AI has no emotions. Neither do our quantitative and technical models, and we like it that way.
  5. AI can identify specific weaknesses in players. Our models beat human traders, but are not really learning-based. 4 out of 5 isn’t bad.

You can check out the full infographic (it’s really very interesting) here:

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 Whiting Petroleum (WLL). Are you familiar with this company, Blue Harbinger?

Blue Harbinger: I am familiar. Whiting is an oil and gas exploration company, primarily in the Rocky Mountain region. And like a lot of oil and gas companies, the shares tanked in the second half of 2014. They fell from over $370, and they were under $16 earlier this year. However, the share price has shown some signs of life in recent months as energy prices have started to climb again. For example, crude prices have surged almost 40% in the past six months. 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 Whiting.

BH: Interesting idea, Road Runner. I read in the Wall Street Journal this week that “U.S. oil companies are on track this year to generate more cash than they spend, a first in the age of shale.” For your reference, here is a look at the Fast Graph for Whiting.

RR: I am aware of oil prices and industry dynamics. Are you aware that my typical holding period is about 4-weeks, so I’ll likely be out of this stock long before this year’s earnings is announced?

BH: Well considering your momentum strategy has been doing extremely well lately (per the performance info in our earlier table), I really hope this one works out for you. I’ll check back with you on this trade in about 4-weeks. Anyway, how about you, Athena—what have you got this week?

Athena: This week I like Vipshop Holdings (VIPS). What do you know about this stock?

BH: Well, aside from the fact that Holmes bought this stock on the dip back in late October, I know VIPS is an online discount retailer for brands in China. Don’t you think you’re a little late to the party, Athena? Why do you like this stock now?

Athena: I am a momentum trader. I typically hold my positions for about 17-weeks, and VIPS looks very attractive right now.

BH: Revenue has been growing like crazy for Vipshop in recent years, but profitability has been razor thin. The company announces earnings again in a little over three weeks, so you could be in for a wild ride (to the upside) considering emerging markets (China in particular) has been very strong lately. Here is a look at the Fast Graph.

Athena: Thanks for that perspective. And just so you know, I exit when my price target is achieved, and I use stops to control risks.

BH: Thanks for that info, Athena. How about you Felix—what have you got this week?

Felix: I have no stock picks this week, but I did run the S&P 500 stocks through my model, and I’ve ranked 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 chipmaker Nvidia (NVDA) and one of my personal favorites, Netflix (NFLX). I realize both of those stocks have very strong sales growth, but considering they’re up 22% and 41% this year (and 127% and 94% over the last 12 months), aren’t you getting a little nervous?

Felix: I’m a model, not a person. So no, I am not nervous. Did you learn nothing from our earlier discussion about artificial intelligence?

BH: I was just checking, Felix. By the way, are you aware that Nvidia’s graphics processing chips are proving extraordinarily valuable in the artificial intelligence functions within data centers?… that’s a big part of the reason that stock has been on fire. Nonetheless, remind us, Felix—how will you know when it’s time to sell?

Felix: I am aware that Nvidia chips are being used in data center AI. They’re also being used by over 70 different automakers as they develop self-driving vehicles. Anyway, 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: Nice job, Felix.  Not surprised your style is shining in this market. How about you, Oscar—what have you got this week?

Oscar: This week I’m sharing my top 20 rankings from my High Volume ETF universe.

BH: I see oil (USO), Emerging Markets (EEM) and the Nasdaq 100 (QQQ) are all on your list. That bodes well for Road Runner’s oil and gas pick (WLL), Athena’s emerging markets pick (VIPS), and some of Felix’s top picks (NVDA and NFLX are both in the S&P 500 and the Nasdaq 100, for example).

Oscar: That is correct. 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:

Artificial Intelligence continues to advance in many fields including smart phones, self-driving vehicles, and even poker. And interestingly, many of the advantages of AI in poker (i.e. no emotions) are also advantages when it comes to our trading models—which, by the way, our models do consistently beat humans (traders in this case) for a variety of reasons, such as their lack of emotion and their ability to sift through a lot of data very quickly.

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: Are You Still On The Sidelines?

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 “will market sentiment turn bearish soon?” We reviewed the continuing market rally, and warned against complacency in trading. If you missed it, a glance at your news feed will show that the key points remain relevant.

This Week: Are You Still On The Sidelines?

The stock market has been “off to the races” to start 2018, and that is creating an uncomfortably eerie feeling for many traders. Perhaps still emotionally scarred from the terrible start to 2016, some traders are missing out on the gains, choosing to instead sit on the sidelines.

According to famous hedge fund manager, Victor Niederhoffer:

“The stock market has had one of the biggest rises in the first two weeks in history and based on past years, it is due for a pull back.”

Niederhoffer shares a total of ten interesting observations in this recent article: Nobody Asked Me, But…

However, according world renowned independent trader and mentor, Charles Kirk:

“it still remains a bull market until proven otherwise. While we recognize the market is long overdue to see corrective price action, we are not seeing evidence of it in the price action other than very high levels of strength that can bring it on.”

Mr. Kirk’s private membership for investors and traders is an excellent way to learn if you can get into his class. Interestingly, Kirk goes on to say:

“This quant study most quoted in social media last week was this – when the first five days of a new year are up +2% or more the full year the follows has been higher 15 out of 15 times with an average +18.6% yearly return * Meanwhile, frothy market conditions remained the top focus by the quants again this week as study after study after study after study suggest potential for short-term consolidation but higher highs beyond it.”

Perhaps it is this short-term consolidation that many traders are waiting for as an opportunity to get off the sidelines.

Taking a different view on the right time to get off the sidelines is this article from The Trade Risk, which suggests “end of day trading is superior.”

Further still, this article from Adam H. Grimes suggests there are no shortcuts to becoming a world class trader. Grimes says experts know how to:

“cut through the garbage and to reduce any discipline to its most essential points.”

His article goes on to say:

“If you truly want to excel at something… You will spend hours, days, weeks, and years refining small elements of your approach. Some of this just takes time, and there are no shortcuts.”

Model Performance:

Per reader feedback, we’re continuing to share the performance of our trading models, as shown in the following table.

Importantly, 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 Melco Resorts & Entertainment (MLCO). This stock’s recent dip is the sort of setup I like to see. From the chart below, you can see the dip, and you can see it has attractive upside over the next six weeks.

Blue Harbinger: Interesting pick, Holmes. I do see the dip, and I know you bought earlier this week (as you always do), so you’re off to a good start on this trade. Can you give us a little more color on why you like it?

Holmes: As you know, my style is based on dip buying and mean reversion. However, you may not be aware that I’m really into protecting assets, too. My process drastically reduces vulnerability to drawdowns while attempting to stay invested for the longest possible period of time. I use a mix of trading techniques (including profit taking, stops, and trailing stops) and technical analysis.

BH: Well you are in good company on this pick, Holmes. Morgan Stanley lifted its long-term industry-wide revenue forecast and price targets on key casino stock names, such as Melco. Lots of stocks across this Macau casino group are higher this week. And why shouldn’t they be as the economy remains strong and per capita income rises. Here is a look at the FastGraph.

Holmes: You’d think it’d be challenging to find good “dip-buying” opportunities considering the market has been so strong lately, but it’s not—there’s still lots of good trades out there.

BH: Thanks, Holmes. I’ll check back with you on this trade next month, considering your typical holding period is about six weeks. How about you, Road Runner—what have you got this week?

Road Runner: This week I like Ensco (ESV). Are you familiar with this stock, Blue Harbinger?

BH: I am familiar. Ensco is an offshore drilling company with a market cap just below $3 billion. And with the strength we’ve seen in oil prices in recent months, it’s not surprising you’d like this type of company.

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 Ensco.

BH: Well, you’re arguably in good company on this trade, Road Runner—apparently David Einhorn of Greenlight Capital also recently initiated a position in Ensco. This company was unprofitable through the first three quarters of 2017, but it announces fourth quarter earnings next month, and the market could be in for a pleasant surprise, unless you’re one of the short sellers (currently about 15.8% of the shares are sold short, and that’s down from over 30% in October). For your reference, here is a look at the Fast Graph.

RR: I am aware of oil prices and the short interest. My typical holding period is about 4-weeks, so I’ll likely be out of this stock before the company’s next earnings announcement. And worth noting, options expiration is this Friday, and that could cause some exaggerated market moves too.

BH: Interesting information. I’ll check back with you on this one in about 4-weeks. Anyway, how about you, Athena—what have you got this week?

Athena: This week I sold my shares of Sprint Realty (SRC). If you recall, I bought the shares back on June 26, 2017.

BH: Based on the above chart, it looks like you did alright on this trade. Remind us, Athena—what is your trading style?

Athena: I am a momentum trader. I typically hold my positions for about 17-weeks, although this one was a bit longer. For risk control, I use price targets and stop orders.

BH: Well it’s interesting to see you trading a big dividend REIT (SRC yields 8.8%). And it looks like you bought shortly after it announced unusually high credit losses and lowered AFFO guidance. I’d likely have stayed away from a low quality REIT like SRC, but I’m glad to see your trading approach was successful.

Felix: I have no stock picks this week, but I did run the Nasdaq 100 stocks through my model, and I’ve ranked 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 chipmakers Nvidia and Micron, and FANG stocks Netflix and Amazon. I’m assuming you’re a momentum trader? And apparently you’re not afraid the market is frothy?

Felix: Correct. I am a momentum trader. And I’m not afraid the market is frothy. 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: Nice job, Felix.  Not surprised your style is shining in this market. How about you, Oscar—what have you got this week?

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

BH: I love this list, Oscar. You have all kinds of momentum ETFs on your list ranging from the inverse volatility index (XIV) which is a trade that’s been absolutely winning for about 2-years straight now, to the online retail ETF (IBUY), to the semiconductor ETF (SOXX). This is good stuff, Oscar. Thanks for sharing.

Oscar: You’re welcome. 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:

It’s easy to say you’re waiting for a pullback before you enter the market. Unfortunately, that’s a strategy that hasn’t worked all too well lately considering the market’s strong start to 2018 is essentially a continuation of its strong performance in 2017. As you can see in our earlier performance table, our “dip-buying” strategy (Holmes) has put up positive numbers in recent months, but not nearly as positive as our momentum traders. In aggregate, we prefer a blended approach including both momentum and dip-buying strategies. And we’re not sitting on the sidelines with our capital because we believe we can continue to generate strong trading profits whether or not that market pullback arrives anytime soon.

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: Will Sentiment Turn Bearish Soon?

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 “how soon will tax cuts be forgotten?” Specifically, does our recent market rally already fully reflect Washington tax reform, or are there more adjustments to come? If you missed it, a glance at your news feed will show that the key points remain relevant.

This Week: Will Market Sentiment Turn Bearish Soon?

Aside from the ongoing stock market rally, and declining market fear/volatility (as shown in the following chart), there are plenty of indications of strong bullishness in the market.

For example, James Mackintosh had two great bullish indicator charts in the Wall Street Journal this week. First, he shows bulls outnumbering bears by the most since 2010.

And next, he shares another survey indicating bulls outnumbering bears by the most since 1987.

It seems the stock market rally, tax reform, low unemployment, and the Fed’s willingness to move interest rates back up toward normal are all indicators and drivers of bullish market sentiment. However, it’s important to not get too comfortable with current market conditions, and to instead stay disciplined in your trading approach. For your consideration, here are a few recent, yet timeless, trading tips from experts. Let us know in the comments which ones you are following and/or challenged by.

1. “Only trade the charts and ignore all other extraneous information.”

This is according to Dave Landry’s trading resolutions for 2018, and it can be a tough one to follow, but also critically important. We live in the information age, and there are all kinds of extraneous information everywhere that can distract and disrupt your trades if you’re not disciplined.

2. “Trading is easier when we don’t have opinions.”

This is according to a Trade Risk article called How I Took My Trading to The Next Level, and it makes a lot of sense. The article goes on to say: “When you trade on your personal opinions, and not what the market is actually showing you, it can lead to some difficult situations.”

3. “Practice Does Not Make Perfect, Perfect Practice Makes Perfect.”

This is according to Vince Lombardi, but it was referenced by Brett Steenbarger in TraderFeed this past weekend, and it’s a good point to consider. Don’t just go through the motions, stay disciplined in your strategy, and it will make you a better trader.

4. “I will place a protective stop after a trade triggers.”

This is one more resolution from Dave Landry (above), and it’s important, as we wrote about in our Stock Exchange 2-weeks ago: Do You Know When to Fold Your Trades?

It’s easy to get lackadaisical in your trading approach, especially in consistently strong conditions (like our current market), but don’t. Market conditions may turn bearish, even for a short while, and if you’re not disciplined in your approach then the impact could be severe.

Model Performance:

Per reader feedback, we’re continuing to share the performance of our trading models, as shown in the following table.

Importantly, 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 United Rentals (URI). Are you familiar with this stock, Blue Harbinger?

Blue Harbinger: Yes, I am familiar. URI is a North American rental company. They rent all sorts of things like air compressors, scissor lifts, and light towers. 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 United Rentals.

BH: Interesting pick. This company’s stock price did extremely well in the second half of 2017, as the US economy continued to grow. Also, they completed a big acquisition in April, and they dealt with challenges and opportunities created by hurricanes. There was really a lot going on here, Road Runner. Here is a look at the Fast Graph:

RR: I am a trading model, not a person, so I am not “distracted” by all of the data points you mentioned. Also, as you mentioned earlier “trading is easier when we don’t have opinions” (I am totally objective). Besides, my typical holding period is about 4-weeks. I’ll be in and out of this stock before the company’s long-term fundamental story plays out.

BH: Fair enough. I’ll check back with you on this one in about 4-weeks. Anyway, how about you, Athena—what have you got this week?

Athena: This week I like Teva Pharmaceuticals (TEVA). What do you know about this stock, Blue Harbinger?

BH: I know Teva produces generic and specialty pharmaceuticals. It trades as an ADR. And the shares are up about 12% since Tuesday. When did you buy?

Athena: Early this week, like every week I do trades.

BH: And why did you buy, Athena?

Athena: I am a momentum trader. And you can see why I like this stock based on the following chart.

BH: That’s an interesting chart Athena. What is your typical holding period?

Athena: I typically hold my positions for about 17-weeks. For risk control, I use price targets and stop orders.

BH: Teva presented at a big JP Morgan conference earlier this week, and apparently the big institutional audience members liked what they heard and bought up the shares. The company is facing some big challenges and they’re being forced to take steps with urgency. For example, the company has significant debt obligations coming due in the next four years, and they’ve been facing more competition than expected in generics. Teva is trying to reduce their cost base and divest of non-core assets just to meet liabilities. Here is a look at the Fast Graph.

Athena: Thanks for that information, but I’m not thinking about the next four years. As I mentioned, I typically hold positions for about 17-weeks, and Teva is looking good.

BH: Fine—thanks, Athena. How about you Felix—what have you got this week?

Felix: I have no stock picks this week, but I did run the 30 Dow Stocks through my model, and I’ve ranked the top 20 in the following list.

BH: What? GE didn’t make your top 20? That company is on fire this year (+9%), and now that Immelt is gone, the new CEO is going to lead GE much higher.

Felix: I am a momentum trader. And 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.

BH: So as a momentum trader, I suppose that means you didn’t like GE’s 45% price decline last year? I also suppose your top 3 (Boeing, Caterpillar, and Walmart) also make sense considering they outpaced the market significantly last year. And I guess as long as the market keeps booming there is reason to believe they too will keep gaining, although I’m personally more of a contrarian myself.

Felix: Did you happen to notice my strong performance in the performance table earlier in this report?

BH: Nice job, Felix. How about you, Oscar—what have you got this week?

Oscar: This week I’m sharing my top ranked high-volume ETFs. The following list includes my top 20.

BH: Wow—you’ve ranked (JNUG), the 3x Bull Gold Miners Index first. I guess you liked the strong December? You also have Oil (USO) and Oil and Gas (XOP) ranked highly. I am tempted to call you a contrarian invetor considering all of those ETFs are down a lot in recent years. But I know you like momentum, correct?

Oscar: That’s correct. I am a momentum trader, and my typical holding period is about six weeks, not years! I use stops to protect against downside, and I exit by rotating into another sector.

Conclusion:

It’s important to not get too comfortable with the markets. Strong economic conditions have been leading the market higher for a while now, but that doesn’t mean sentiment can’t turn bearish quickly, thereby causing significant challenges for traders. It’s important to remain disciplined in your approach so when market sentiment does change, you can remain profitable in your trades. We prefer a blended approach including both momentum and dip-buying strategies. And we believe we can continue to generate trading profits whether or not sentiment turns bearish.

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.