A Quantum Leap in Financial Market Analytics

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  • 31 May 2020 10:38 PM | (Administrator)

    While most market breadth measures simply look at new highs or new lows, we make use of every bit of information we can gather looking at each stock that makes up an index individually.  We find that waiting for a significant number of stocks to hit new highs almost always translates into missing a significant and actionable part of the recovery.  

    In the following study we break each of the major averages into their components and then separate them further into quartiles of performance over the last 63 days (quarter in trading days).  We find that while the Nasdaq 100 continues to lead the way with 79 of its 103 components in its top quartile (and just 1 in the bottom), the S&P 500 is quickly catching up with 268 of its members now in their top quartile.  What we find most reassuring however is that the S&P 400 mid cap index and small cap Russell 2000 indexes, which have been laggards in the recovery, are now showing a significant improvement in market breadth--essential for a continued bull run.  

  • 31 May 2020 10:06 AM | (Administrator)

    Stocks recorded a second consecutive week of solid positive returns, with slower-growing value stocks again gaining ground ahead of more highly valued growth shares.  At its peak this week, the S&P 500 got within 10% of its all-time high, pulling it out of correction territory.  Similarly, the technology-heavy Nasdaq 100 Index climbed within almost 3% of its February peak before retreating.  The Dow Jones Industrial Average rose over 900 points to close at 25,383, a gain of 3.8%, while the Nasdaq Composite added 1.8%.  The large cap S&P 500 gained 3%, while the mid cap S&P 400 and small cap Russell 2000 gained 4% and 2.8%, respectively.  For the month of May the Dow rose 4.3% and the Nasdaq gained 6.8%.  The S&P 500 gained 4.5%, the S&P 400 rose 7.1%, and the Russell 2000 added 6.4%.

    International markets were a sea of green last week.  Canada’s TSX rose 1.9%, while the United Kingdom’s FTSE 100 gained 1.4%.  On Europe’s mainland, France’s CAC 40 rallied 5.6% along with Germany’s DAX which gained 4.6%.  In Asia, China’s Shanghai Composite added 1.4% and Japan’s Nikkei surged 7.3%.  As grouped by Morgan Stanley Capital International, developed markets gained 4.7% while emerging markets rose 3.6%.  For the month of May, Canada’s TSX gained 2.8%, while the FTSE 100 rose 3%.  France’s CAC 40 and Germany’s DAX rose 2.7% and 6.7%, respectively.  China’s Shanghai Composite finished down -0.3%, while Japan’s Nikkei rallied 8.3%.  Developed markets rose 5.3% and emerging markets gained 3%.

    Gold rose 0.9% to close at $1751.70 per ounce, while Silver rallied a fourth consecutive week to close at $18.50 per ounce—a gain of 4.6%.  Oil rose 6.7% to $35.49 per barrel of West Texas Intermediate crude.  The industrial metal copper, viewed by some as a barometer of world economic health due to its wide variety of uses, rose a second consecutive week up 1.6%.  For the month of May, Gold rose 3.4%, while Silver surged 23.6%.  Oil recovered most of its plunge from last month rallying 88.4%.  Copper finished the month up 3.7%.

    The number of Americans applying for initial jobless benefits continued to recede last week, falling by 323,000 to 2.123 million.  Economists had estimated 2 million Americans would file.  Over the past ten weeks, more than 40 million workers have filed for unemployment benefits as a result of the unprecedented shutdown of the economy to slow the spread of the coronavirus.  Continuing claims, which counts the number of Americans already receiving benefits, fell 3.860 million to 21.052 million—its first decline in 11 weeks. 

    The pace of home-price appreciation continued to rise in March despite the spread of the coronavirus according to a major home price barometer.  The S&P CoreLogic Case-Shiller 20-city home price index posted a 3.9% year-over-year gain in March—a 0.4% increase from the previous month.  On a monthly basis, the index increased 0.5% between February and March.  Because of the two-month lag in the data for the index, the effects of the coronavirus pandemic on the housing market were not yet fully reflected in the data.  Home prices have managed to thus far shrug off most of the economic impact of the coronavirus pandemic.  Robert Kavcic, senior economist at BMO Capital Markets stated in a research note, “While March was still early days, it’s looking likely that the initial impact will be felt mostly on plunging sales and listings volumes, not prices.” 

    Sales of new homes ticked up 0.6% in April to a seasonally-adjusted annual rate of 623,000 the government reported.  Compared with the previous year, however, new home sales were down 6.2%.  The reading was far higher than analysts expectations of just 480,000 new homes sold.  However, because of the small sample size used to produce the new-home sales report, it is prone to often significant revisions.  By region, the Northeast experienced the largest increase with an 8.7% uptick, while new home sales rose 2.4% in the both the Midwest and the South.  Sales fell 6.3% in the West.  The median price of a new home sold was $309,900—down 8.5% from the same time last year.  Furthermore, there was a 6.3 months’ supply of available homes on the market.  Six months of inventory is generally considered a “balanced” housing market.

    The confidence of American consumers stabilized in May after sharp drops in March and April the Conference Board reported.  The board’s Consumer Confidence index ticked up 0.9 points in May to 86.6.  Economists had expected a 4.6 point decline to 82.3.  This initial sign of stabilization is particularly important as strengthening confidence should translate into a pickup in consumer spending which is necessary for reacceleration of broad economic growth.  Consumers’ assessment of the present situation remained dire, with that indicator falling 1.9 points to 71.1—its lowest level since August 2013.  However, consumer expectations for the near future rose 2.6 points to 96.9, a three-month high.

    Orders for goods expected to last at least 3 years, so-called “durable goods”, plunged 17.2% in April.  Economists had forecast a decline of -18.2%.  A key measure of business investment which strips out the defense and transportation categories, fell a lesser 5.8%.  Orders for durable goods have declined three out of the last four months.  CIBC economists Andrew Grantham and Katherine Judge in a note, “While the decline in durable-goods orders in April wasn’t quite as bad as expected, the opening up of capacity in the industrial sector and continued struggles in aviation industry will likely mean the rebound in the second half of the year in business investment lags behind other areas of the economy.”

    Economic activity across the nation fell sharply in April according to the latest data from the Chicago Federal Reserve.  The Chicago Fed’s National Activity Index registered a -16.74 in April, a record low.  The index’s less-volatile three month moving average declined to a -7.22 from -1.69, also a record low.  The regional bank noted there is an increasing likelihood of a recession when the three-month moving average falls below -0.7.  The Chicago Fed National Activity index is a weighted average of 85 economic indicators.  A zero value indicates that the economy is expanding at its historic trend rate of growth.  In April’s reading, 79 of the 85 individual indicators made negative contributions, while only 6 were positive. 

    The Federal Reserve’s latest “Beige Book”—a collection of anecdotal reports from each of the Federal Reserve’s district banks about economic conditions in their respective areas, showed economic activity falling sharply and steep job losses nationwide.  Some sectors, like leisure and hospitality continued to be hit hardest by the stay-at-home orders, while factory activity and agriculture continued to deteriorate.  One bright spot was an upturn in auto sales towards the middle of May.  Thomas Simons, money market economist at Jefferies stated, “The bottom line is that the U.S. economy is quite far from being out of the woods yet.  If there is anything to be gleaned about policy, it is that more needs to be done on the fiscal and monetary front, or perhaps both, before a meaningful recovery can take hold.”

    Canada’s economy shrunk the most since the 2008-09 financial crisis, with some economists expecting the deepest contraction since World War 2.  Statistics Canada reported gross domestic product dropped at an annualized 8.2% in the first quarter of the year.  The agency also released preliminary estimates for April that show an 11% plunge in output, which follows a 7.2% drop in March when coronavirus restrictions were imposed halfway through the month.  According to Bank of Montreal’s Doug Porter, Canada’s first quarter contraction is right in the middle of the pack among Group of Seven countries, better than all three eurozone countries but worse than the U.S., Japan and the U.K.  “The new news here is that the figures were a little less dire than feared,” Porter said in a report.

    According to a Guardian analysis, the British economy is showing its first signs of emerging from the worst of the economic damage triggered by the coronavirus pandemic.  Analysts at the Guardian used eight economic indicators as well as the level of the FTSE 100 to gauge the state of the economy.  Two components, the flash IHS Markit and Chartered Institute of Procurement and Supply purchasing managers indexes revealed a steeper pace of economic contraction than expected persisted in May.  Writing in the Guardian, the governor of the Bank of England, Andrew Bailey, said Britain was entering the “second phase” of the crisis and warned the risks are “undoubtedly on the downside for a longer and harder recovery”.  The new Guardian project will track the repercussions of the coronavirus pandemic on the United Kingdom’s economy.   

    For the first time, France has been named the top destination for foreign investment in Europe, overtaking both the United Kingdom and Germany.  In newly released data from 2019, France showed the highest level of foreign investment.  In total, France recorded a 17% increase in 2019 with 1,197 foreign investment projects while the UK showed a 5% rise to 1,109.  Germany flatlined at 971.  Two thirds of business leaders surveyed by consultancy firm EY at the end of April expected to revise their French investment plans this year and 15% expected to push them back to 2021.  None expected to cancel projects.  President Emmanuel Macron has put making France more business-friendly at the heart of his presidency and has introduced a series of measures to boost the country's attractiveness to investors including loosening the strict labor laws.

    The Munich-based economic thinktank Institute for Economic Research (Ifo) stated the German economy could enjoy a strong recovery next year following its record-setting economic slump in 2020.  In an updated economic forecast, researchers reiterated that they expect the national economy to shrink by 6.6% in 2020, worse than a slump of 5.7% brought on by the 2009 financial crisis.

    However, a recent survey indicates that the situation could make a drastic turnaround in 2021, when Ifo predicts that Germany's economy could grow by 10.2%.  The basis for the new forecast is the Ifo Institute's latest survey of 9,000 German companies.  On average, these businesses expect their own economic situation to normalize within nine months, Chief Economic Researcher Timo Wollmershäuser said.  "After a significant slump of 12.4% in the second quarter of 2020, the economy should recover by the middle of next year," he said, adding that only after that point would goods and services be produced on the same level as a situation without the coronavirus.

    China pledged a package of 4 trillion yuan ($559 billion USD) worth of cost cuts for the country’s struggling factories and merchants this year, the largest rescue plan in the country’s history.  The combined cuts on business costs will be in addition to the 2 trillion yuan in additional fiscal spending and government bond issuances announced earlier.  Premier Li Keqiang stated the new round of pro-growth measures would focus on “ensuring employment, people’s livelihoods and [helping] market entities”.  In addition, Li said Beijing has many fiscal, financial and social security policies in reserve, and it will roll out additional policy support “without hesitation”.

    Japan doubled down and delivered the world’s biggest stimulus package to its economy.  Prime Minister Shinzo Abe approved a 117 trillion yen ($1.1 trillion USD) relief package, doubling the amount previously committed in April.  The new measures bring the total of Japan's stimulus spending to 234 trillion yen ($2.2 trillion) — a staggering amount equivalent to almost 40% of the annual output of the world's third biggest economy.  The latest package includes rent subsidies for individuals, and small and medium size businesses hit hard by the Covid-19 pandemic.  The government will also pay 200,000 yen ($1,860) each to front line medical workers.  "The economic revival would be the first priority for my administration," Abe said earlier this week.

    Finally, Sweden pursued its own distinct path when it came to how best to handle the coronavirus pandemic.  By choosing to keep its economy open, rather than instituting a policy of lockdown, it is the only major nation expected to report a positive gross domestic product reading for the first quarter.  Epidemiologist Anders Tegnell, the architect behind Sweden’s policy, has repeatedly doubled down on the merits of his country's approach.  Sweden, he said, is playing the long game despite the country having a much higher death rate than its neighbors.  “In the autumn, there will be a second wave. Sweden will have a high level of immunity and the number of cases will probably be quite low,” Tegnell said in an interview.  “But [neighboring] Finland will have a very low level of immunity.  Will Finland have to go into a complete lockdown again?”  Critics, such as infectious disease expert Stefan Hanson, noted that Sweden’s mortality per million is five times higher than all the other Nordic countries. 

  • 10 May 2020 7:43 PM | (Administrator)

    Subscribers in the Inner Circle were alerted to buy signals in Tesla (TSLA), Dexcom (DXCM) and Zoom (ZM) last Sunday for purchase at the open on Monday May 4th.  Subscribers that entered that trade finished the week up over 15% as TSLA rose 16.9%, ZM added 10.4%, and Dexcom (a recent entrant to the Nasdaq 100) surged 18.2%.  Congratulations to all those subscribers able to bank that profit.  The current week's rankings our now available in the Inner Circle.

  • 21 April 2020 3:21 PM | (Administrator)

    With the market down a second day in a row, and the absolute carnage in the crude oil market, we thought now would be a good time to re-visit some of the analogs to the current market that we've discussed in the Inner Circle.

    Given the speed and depth of the latest crash, highest correlated analog was Black Friday and Black Monday of October 1987.  The conditions triggering the crash then were certainly different than those now, however the basic human emotions of fear and panic are the same.

    Should this correlation with 1987, the retest of the bottom from March 23rd should occur on or around April 28th. 

    Another highly correlated market was the winter of 1973 into early 1974.  Ironically that market crash also revolved around oil.  However in that case, OPEC proclaimed an oil embargo targeting western nations that pushed the price of oil up nearly 400%.

    Again, we look at market analogs to give us an idea of what to expect in the future--however we don't trade on these signals.  For actual trading we use our proprietary trading model that we've backtested over the several market environments since 1996--from the exuberance of the era to the fear and panic following the September 11th attacks.  Our purpose is to provide an investment model that allows the greatest return while keeping risk to an absolute minimum. 

  • 19 April 2020 12:54 PM | (Administrator)

    Since the recent market low on March 23rd, we wanted to see was there solid support behind the move.  So we turned to our analysis software and wrote up the code to run the test.  Even we were surprised to see the result.  In the current market rebound, 86 of the 103 stocks currently in the Nasdaq 100 were within 10% of near-term highs.  That is a lot of strength!  As we've noted before, the reality that the other indexes aren't participating in the rebound nearly as much makes us concerned of the health of the overall market.  However, it may be that similar to the area, the Nasdaq tech index WAS the market.  Here's the graphical result of our study.

  • 12 April 2020 9:42 PM | (Administrator)

    We still rely on our main tried-and-true and robustly back-tested MIS indicators for our actual trading, but I also like to try my hand at forecasting the market--and for that I like to look at cycle forecasts.  While I don't believe 100% in market cycles, my personal experience with cycles such as full moons and their effects on human behavior leads me to believe that their may be some value with regards to market forecasting.  With that being said, let's look at our latest chart of the S&P 500.  In the short term, this cycle forecast appears to catch the turns in the market fairly well.  The latest forecast predicts the market will remain in an overall uptrend until about the first week of May.  We'll see...

  • 10 April 2020 4:18 PM | (Administrator)

    Situations occurring in the present that drive the basic emotions of fear and greed are unlikely to have occurred in the past, but the emotions, and how we allocate money during those time periods are often similar---and therefore quantifiable.  

    The good news out of New York today in its fight against the coronavirus, is for the first time, there is a negative number of ICU admissions for the first time since the pandemic started.  HOPEFULLY, this is not a "one-off" event, and that we can begin to see a flattening of the curve and a return to normalcy.

    This weekend, Marketwatch penned an article stating that March's lows will be re-tested and gave a time frame of 137 days, or August 7th, to be exact.  While we don't officially have a position on whether or not the bottom will be re-tested, we do have software that does allow us to see what has occurred subsequent to prior bear markets that had highly-correlated price action with the current one.  

    First let's look at 1987:

    Correlated to the current market, should a retest occur, it will be on or near April 28th.

    Our next example is the Asian Contagion market of 1998--fears of a domino-effect of defaults swept the countries in the Pacific Rim weighing on global financial markets.

    Should a re-test occur, according to this analog it would occur near April 23rd.

    Our final example is the Gulf War of 1990-1991.  Original estimates were that the conflict could evolve into a much large Arab vs. Western world conflict and estimates put American combat deaths at over 50,000.  Given this analog:

    Should a retest occur, it will be around May 4th.  

    Our difference of opinion isn't whether or not a retest will occur, it lies in the fact that our analysis shows that if a retest is going to occur, it should happen by the end of April or the first week of May.  Given the amount of Fed liquidity, and the positive news out of New York today, we are hopefully optimistic that the market can continue its recovery.  More details will be in the Inner Circle this weekend.

  • 06 April 2020 2:16 PM | (Administrator)

    Analyzing price action over the last 125 days (about half a trading year), we found a few examples of trading eerily similar to the current market.  The most highly-correlated with current action was the crash of 1987.  After the steep sell-off in October 1987 (Black October), the market managed a rebound, ultimately to retest its lows in December.  Transposing that on the current market environment, we could see a retest of March's lows in the last week of April.

    Our software also detected another analog--September of 1990.  Those of us old enough to remember the very beginning of the Gulf War remember Iraqi SCUDS raining down on Saudi Arabia and Kuwait, with the threat of a third world war a strong possibiity. 

    Again, we saw a sharp drop, followed by a rebound, and an ultimate test of the earlier lows.

    To be clear, again, we don't trade off of these charts, but we do use them in our "weight of the evidence" approach to market analysis.

  • 05 April 2020 8:54 PM | (Administrator)

    The market is trading eerily similar to October 1987 according to our analysis.  Should the pattern continue, we expect the market to re-test March's lows sometime around the third week of April.  We don't use these projections for actual trading, but we use them as part of our "weight of the evidence" approach to market analysis. - The Leader in Quantitative Analytics

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