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Sample of Weekly Premium Analysis

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Weekly premium reports include a market recap with commentary, performance report of selected ETFs and portfolios, technical analysis with unique indicators and directional probabilities based on machine learning.

Weekly Market Recap (January 30  – February 3, 2017)

U.S. stocks were higher on the week. The S&P 500 and NASDAQ each gained 0.1% and the Russell 2000 added 0.5%.  Healthcare, consumer goods and utilities led advances. Conglomerates and basic materials led declines. The 10-Year Note yield rose one basis point to 2.49%. Gold and crude oil prices rose. The U.S. dollar index was lower for the sixth week in a row.

Commentary

Small caps gained more than large caps last week. At the same time, low volatility large caps gained but high beta large caps fell. These facts appear contradictory but short-term trends have not changed much. Investors are probably reducing exposure to higher risk large caps while maintaining risk exposure to small caps in hope of gains due to new administration policies.

Specifically, last week, the high beta S&P 500 ETF (SPHB) fell -0.13% versus a gain of 0.4% for the low volatility S&P 500 ETF (SPLV). The ratio of the two increased to 1.107, as shown in the chart below.

The S&P 500 to Russell 2000 ratio fell, as shown in the chart below.

It appears there is some potential for further gains in small caps. However, there is also some irrational exuberance due to high expectations. This may not end well for small caps, especially during a broader market correction.

The SPY-QQQ 60-day correlation has plunged to very low levels. See this article for more details. Unfortunately a significant forecast is not possible from a small sample but still the divergence is important and possibly useful for risk management.

Apple is overbought but overbought/oversold is an interpretation in the context of gambler’s fallacy. I have borrowed this name for an indicator that measures market strength and shown in the chart below.

In Weekly Setups, which will be discontinued March 7, 2017, there was an open long position in AAPL at 121.15 from two weeks ago. The rally due to earnings caused the up gap and the position exited at 127.03, much higher than the original profit target of 124.85. This is nice but random. The gain from the entry price to the exit was 4.85%. The point here is that these gains are rarely realized in portfolios. Actual gains depend on risk assigned to each position. In my case the actual gain was only 1.9%.

I traded for a Swiss Hedge Fund even during the treacherous financial crisis period. As soon as you have your system developed and in operation, generating the signals is the easier part. The most difficult part is risk and money management. How much do you allocate to each stock and how many open positions do you hold? How many long versus short positions? These are serious practical questions that books for traders and investors written by amateurs do not deal with. Apparently, there is an army of trolls in financial social media that ignore the issue of actual portfolio gains versus market gains from specific stock moves. One reason is that most of these trolls have never traded seriously. Saying that a stock gained 5% or 10% is irrelevant. The problem is how much of that you were able to capture based on risk/reward objectives. More in the Weekly Setups for this week.

ETF Performance

ETF Week YTD MAX YTD
SPY +0.2% 2.60% 2.70%
SPLV +0.4% 0.95% 0.95%
SPHB -0.1% 3.44% 4.20%
SPHD -0.2% 1.85% 2.64%
QQQ -0.1% 6.08% 6.18%
IWM +0.5% 1.50% 2.17%
GLD +2.3% 5.95% 5.95%
TLT -0.3% 0.42% 2.9%

Tech stocks (QQQ) are still leading but are now challenged by gold (GLD).  High beta large caps (SPHB) are holding their gains. Small caps (IWM) gains have improved. Bonds (TLT) and low volatility large caps (SPLV) are struggling with year-to-date returns below 1%.

Price Action Lab Diversified Portfolio  

The year-to-date return of the passive portfolio allocation in SPY/TLT/GLD/DBC with weights 50/30/10/10 increased to 1.97%.

The 60/40 SPY/TLT portfolio year-to-date return decreased to 1.60%.

Technical Analysis

The average RSI(14) of the Dow Jones Industrial Average fell to 53.24 last week (daily data) but recovered above the longer-term mean after dropping below it. This indicator is the average of the RSI(14) values of all current constituents of the index, as shown in the chart below.

This indicator points to higher uncertainty in the short-term.

The Trend Momersion indicator (daily data) indicates a strong uptrend in S&P 500 with no sign of a pending reversal.

This indicator is now approaching levels that in the past have preceded short-term corrections.

Bear Market Probability (BMP)

According to BMP indicator in SPY unadjusted daily data, the probability that a bear market will start (or one that has started already will continue) fell to 0.578, or 57.8%. BMP above 60% could be a significant signal of a bear market.

As already noted in previous reports, the BMP indicator generated a series of bear market signals in 2015 (shown in red) and since it has not generated a bull market signal (shown in blue.) This means that either the indicator warned about the 2015 and 2016 corrections but since it has not signaled significant market strength, or it is broken (something to be investigated.)

Machine learning (P-indicator)

Notes

  • In p-indicator results, the Last Date of weekly bars is shown as the first date of the week. The Open, High, Low and Close of weekly bars are based on the actual weekly variation of prices.
  • The calculations are based on weekly adjusted data for Dow-30 stocks since 01/2000

The weekly results indicate neutral/positive short-term bias.

TS is the profit-target and stop-loss file,  P-long and P-short are the long and short probabilities for a position in the corresponding ticker, P-delta is the difference  (P-long – P-short), a measure of the directional bias and S is the significance of the result (for weekly data 0 means low or no significance.) In the results, the Last Date of weekly data is the first date of the week.

There are 18 stocks with positive directional bias and 12 stocks with negative. The ratio of positive to total is 0.60. A ratio above 0.7 indicates strong positive bias and a ratio below 0.50 indicates strong negative bias.

Overbought/Oversold conditions

  • Overbought (OB)/oversold (OS) conditions are based on the average of four indicators: Wilder’s RSI(3), Cutler’s RSI(3), Harris’ RSI(3) and GFI(3). Overbought conditions occur when the average is > 90 and oversold when < 10.
  • ETFs considered: SPY QQQ DIA GLD SLV TLT USO DBC IWM XLF EEM XLE EFA EWJ XLP XLV XRT XLU XLK XLB XLI UNG IBB IYR SMH TAN GDX XHB XME MDY
  • Tickers in bold indicate OB/OS conditions also in the daily timeframe

ETFs

OB: GDX, SLV
OS: TLT

Stocks

OB: AAPL, CSCO, KO, MCD, V
OS: CVX, GE, XOM

If you have any questions, you can email us at: premium@priceactionlab.com

Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting program: Amibroker

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