The Stock Exchange is all about trading. Each week, we do the following:
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: ETFs Kill Fundamentals, Technicals Matter
Our previous Stock Exchange teased the idea that ETFs Kill Fundamentals, and Technicals Matter. We noted that a growing percentage of investment assets are managed according to passive ETF strategies, and suggested this dynamic emphasizes the importance of technical analysis. We asked readers for their views on this dynamic, and received varying responses in terms of the evolution of their individual trading strategies.
This Week: These Styles Will Come Back
Mark Twain is often attributed with saying:
History doesn’t repeat itself, but it often rhymes.
In some regards, this seems applicable to the stock market as it constantly rotates and cycles in ways similar to the past but never exactly the same. For example, various sectors and styles rotate in and out of favor as the market progresses through each cycle.
And a couple “styles” that are out of favor this year include energy and healthcare stocks, as they’ve under performed the S&P 500 considerably, as shown in the following chart.
And more recently, software stocks:
Our technical models will have specific examples of recent trades in each of these sectors/industries later in this report. But it is worth asking the question: when will these styles come back? Are energy stocks doomed forever? Is healthcare now permanently a losing business? Has the long-term rally that has fueled high beta software stocks finally come to an end? We’ll have more to say about each of these questions later in this report.
And even though Jeff often watches CNBC with the sound off, CNBC’s Bob Pisani recently had some interesting things to say about the big rotation taking place in the stock market, including Cyclicals vs. Defensive, Low Volatility versus High Beta, Growth versus Value and Momentum. For example, he shared the following chart showing how momentum stocks have recently taken it on the chin versus value stocks.
Model Performance:
As noted previously, I am suspending the publication of the performance table. While performance has lagged since last fall, that is not my main reason.
The purpose of the Stock Exchange series is to feature trading methods, problems, and some specific ideas. We added the table when some readers requested it, partly to compare the different models. Instead of being a supplement that would allow readers to cheer for a specific approach, it became the focal point for many.
I also discovered that some readers thought this to be a performance report for all of the NewArc programs. That is definitely not the case. We invite interested readers to reach us directly about any of our programs. My own fundamental choices often contrast sharply with those of the model, as readers of my WTWA series would expect.
Meanwhile, our trading models, including some new additions, will continue to feature approaches and ideas each week. This has always been a sampling of what we are doing, chosen for generating interest and discussion. I hope readers will continue to enjoy the series in the intended spirit.
Expert Picks From The Models
Note: This week’s Stock Exchange is being edited by Blue Harbinger. Blue Harbinger is a source for independent investment ideas.
Holmes: I bought shares of Noble Energy Corp (NYSE:NBL) on October 1st. How do you feel about that trade?
Blue Harbinger: It’s an energy E&P company, Holmes. It trades with a pretty high correlation to oil prices. And the entire energy sector has been out of favor this year, as we saw in the earlier energy ETF chart. Why’d you buy it?
Holmes: I purchased for technical reasons. Specifically, I am a dip buyer, and I like to buy attractive pullbacks, as you can see in the chart above.
BH: I see the pullback you’re talking about, and it looks attractive so long as you believe the fundamentals are sound and oil isn’t going permanently out of style.
Holmes: Wrong and wrong again. You’re wrong twice. As a technical trader, with a holding period typically around 6-weeks, I don’t care too much about long-term fundamentals or the long-term price of oil. I’ll be out of this trade long before the long-term. Why? Do you think carbon-based energy is going permanently out of style?
BH: Probably not in my lifetime. And for the record, I do care about fundamentals and the price of oil. I think Noble is interesting at these levels, but I also like other energy stocks too, such as BP (LON:BP) and Shell (LON:RDSa), as I recently wrote about here and here. I guess I am a bit of a dip buyer too. Anyway, thanks for sharing this trade, Holmes.
Road Runner: Interesting discussion guys. I recently purchased shares of Atlassian Corp (NASDAQ:TEAM) on 9/30. Any comments or questions?
BH: Why’d you buy? Atlassian is an workflow management software company. And if you recall from earlier in this report, software stocks have been out of favor with the market lately. Are you also a dip buyer?
RR: I like to buy attractive momentum stocks in the lower end of a rising channel, as you can see in the following chart.
BH: Ok. It seems the dip that you bought has only lasted about month, and it exists within a rising channel.
RR: That’s correct. There are a lot more data points that go into each trade. But essentially, yes–you got it.
BH: Okay, I think that’s a decent trade. Thanks for sharing. And how about you, Athena–any trades to share this week?
Athena: I bought shares of Tandem Diabetes (NASDAQ:TNDM) on October 1st.
BB: That’s a healthcare stock (they make diabetes equipment), and healthcare stocks have been out of style this year. Are you betting on a rebound?
Athena: I look for stocks having strong positive trends and then select only those with the very strongest trends (“king of the hill”), constantly replacing the ones with weaker trends. It should not surprise anyone that I bought Tandem. A quick look at the chart should make the strength of the trend fairly obvious. And I generally continue to hold my positions until either the strength of the trend abates or a stock with an even higher trend strength comes along. I don’t have a set “holding period” for a position. I will exit only when either a stronger stock comes along or if market conditions dictate a strong potential for loss – capital preservation remains the key driver in all situations.
BH: Thanks for sharing. And how about you, Emerald Bay? What out of style stock did you buy recently?
Emerald Bay: I bought shares of Vulcan Materials (VMC) way back on July 10th. And it’s not out of style at all. It’s a construction materials company.
BH: Wow, that’s quite a trend line. It looks like these shares have been rising steadily in a very tight channel for months before and after you purchased.
EB: I seek exposure to the highest momentum names in our large cap equity universe, adjusted for volatility. Specifically, I like to base my position sizes on volatility with more capital invested in the less-volatile stocks.
BH: You’ve been doing quite well with this position. And that sounds like quite an interesting and attractive strategy. Thank you for sharing.
Conclusion
The market doesn’t necessarily repeat itself, but it does rhyme as it rotates through market cycles. And sometimes, it’s better to buy in anticipation of the future rotation instead of based exclusively on what happened in the past. The challenge is knowing when the big market rotations are coming, and how much longer you can ride the current trends. Disciplined yet malleable strategies can help you navigate the rotations. Have you been buying under performing energy and healthcare stocks, or are you sticking with momentum trades for now?
The Stock Exchange is all about trading. Each week, we do the following:
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: ETFs Kill Fundamentals, Technicals Matter
Our previous Stock Exchange teased the idea that ETFs Kill Fundamentals, and Technicals Matter. We noted that a growing percentage of investment assets are managed according to passive ETF strategies, and suggested this dynamic emphasizes the importance of technical analysis. We asked readers for their views on this dynamic, and received varying responses in terms of the evolution of their individual trading strategies.
This Week: These Styles Will Come Back
Mark Twain is often attributed with saying:
History doesn’t repeat itself, but it often rhymes.
In some regards, this seems applicable to the stock market as it constantly rotates and cycles in ways similar to the past but never exactly the same. For example, various sectors and styles rotate in and out of favor as the market progresses through each cycle.
And a couple “styles” that are out of favor this year include energy and healthcare stocks, as they’ve under performed the S&P 500 considerably, as shown in the following chart.
And more recently, software stocks:
Our technical models will have specific examples of recent trades in each of these sectors/industries later in this report. But it is worth asking the question: when will these styles come back? Are energy stocks doomed forever? Is healthcare now permanently a losing business? Has the long-term rally that has fueled high beta software stocks finally come to an end? We’ll have more to say about each of these questions later in this report.
And even though Jeff often watches CNBC with the sound off, CNBC’s Bob Pisani recently had some interesting things to say about the big rotation taking place in the stock market, including Cyclicals vs. Defensive, Low Volatility versus High Beta, Growth versus Value and Momentum. For example, he shared the following chart showing how momentum stocks have recently taken it on the chin versus value stocks.
Model Performance:
As noted previously, I am suspending the publication of the performance table. While performance has lagged since last fall, that is not my main reason.
The purpose of the Stock Exchange series is to feature trading methods, problems, and some specific ideas. We added the table when some readers requested it, partly to compare the different models. Instead of being a supplement that would allow readers to cheer for a specific approach, it became the focal point for many.
I also discovered that some readers thought this to be a performance report for all of the NewArc programs. That is definitely not the case. We invite interested readers to reach us directly about any of our programs. My own fundamental choices often contrast sharply with those of the model, as readers of my WTWA series would expect.
Meanwhile, our trading models, including some new additions, will continue to feature approaches and ideas each week. This has always been a sampling of what we are doing, chosen for generating interest and discussion. I hope readers will continue to enjoy the series in the intended spirit.
Expert Picks From The Models
Note: This week’s Stock Exchange is being edited by Blue Harbinger. Blue Harbinger is a source for independent investment ideas.
Holmes: I bought shares of Noble Energy Corp (NYSE:NBL) on October 1st. How do you feel about that trade?
Blue Harbinger: It’s an energy E&P company, Holmes. It trades with a pretty high correlation to oil prices. And the entire energy sector has been out of favor this year, as we saw in the earlier energy ETF chart. Why’d you buy it?
Holmes: I purchased for technical reasons. Specifically, I am a dip buyer, and I like to buy attractive pullbacks, as you can see in the chart above.
BH: I see the pullback you’re talking about, and it looks attractive so long as you believe the fundamentals are sound and oil isn’t going permanently out of style.
Holmes: Wrong and wrong again. You’re wrong twice. As a technical trader, with a holding period typically around 6-weeks, I don’t care too much about long-term fundamentals or the long-term price of oil. I’ll be out of this trade long before the long-term. Why? Do you think carbon-based energy is going permanently out of style?
BH: Probably not in my lifetime. And for the record, I do care about fundamentals and the price of oil. I think Noble is interesting at these levels, but I also like other energy stocks too, such as BP (LON:BP) and Shell (LON:RDSa), as I recently wrote about here and here. I guess I am a bit of a dip buyer too. Anyway, thanks for sharing this trade, Holmes.
Road Runner: Interesting discussion guys. I recently purchased shares of Atlassian Corp (NASDAQ:TEAM) on 9/30. Any comments or questions?
BH: Why’d you buy? Atlassian is an workflow management software company. And if you recall from earlier in this report, software stocks have been out of favor with the market lately. Are you also a dip buyer?
RR: I like to buy attractive momentum stocks in the lower end of a rising channel, as you can see in the following chart.
BH: Ok. It seems the dip that you bought has only lasted about month, and it exists within a rising channel.
RR: That’s correct. There are a lot more data points that go into each trade. But essentially, yes–you got it.
BH: Okay, I think that’s a decent trade. Thanks for sharing. And how about you, Athena–any trades to share this week?
Athena: I bought shares of Tandem Diabetes (NASDAQ:TNDM) on October 1st.
BB: That’s a healthcare stock (they make diabetes equipment), and healthcare stocks have been out of style this year. Are you betting on a rebound?
Athena: I look for stocks having strong positive trends and then select only those with the very strongest trends (“king of the hill”), constantly replacing the ones with weaker trends. It should not surprise anyone that I bought Tandem. A quick look at the chart should make the strength of the trend fairly obvious. And I generally continue to hold my positions until either the strength of the trend abates or a stock with an even higher trend strength comes along. I don’t have a set “holding period” for a position. I will exit only when either a stronger stock comes along or if market conditions dictate a strong potential for loss – capital preservation remains the key driver in all situations.
BH: Thanks for sharing. And how about you, Emerald Bay? What out of style stock did you buy recently?
Emerald Bay: I bought shares of Vulcan Materials (VMC) way back on July 10th. And it’s not out of style at all. It’s a construction materials company.
BH: Wow, that’s quite a trend line. It looks like these shares have been rising steadily in a very tight channel for months before and after you purchased.
EB: I seek exposure to the highest momentum names in our large cap equity universe, adjusted for volatility. Specifically, I like to base my position sizes on volatility with more capital invested in the less-volatile stocks.
BH: You’ve been doing quite well with this position. And that sounds like quite an interesting and attractive strategy. Thank you for sharing.
Conclusion
The market doesn’t necessarily repeat itself, but it does rhyme as it rotates through market cycles. And sometimes, it’s better to buy in anticipation of the future rotation instead of based exclusively on what happened in the past. The challenge is knowing when the big market rotations are coming, and how much longer you can ride the current trends. Disciplined yet malleable strategies can help you navigate the rotations. Have you been buying under performing energy and healthcare stocks, or are you sticking with momentum trades for now?