This Week in Barrons –
7-16-2017:
“It’s different this time – we learned how to defy
gravity.” … Andrew Lo
The phrase “It’s different this time”
has almost worn out its welcome within financial circles. It’s often the
rationale given for why bullish investors (at their own peril) dismiss various
stock-market warning signals. In the
late 1990s, critics said that the Internet would change the world – and it did. But the investing sectors still had their traditional
number of losers and winners. And in
2008, when the ‘wisdom of crowds’ gave way to the ‘madness of mobs’, investor
reaction swung between emotion and instinct – leading to either irrational
exuberance or panic selling.
But Andrew Lo (director of the MIT
Laboratory for Financial Engineering and a leading authority on behavioral
finance) believes the phrase “It’s different this time” means that many of the
old investment rules are less true – making investing a lot harder. His book “Adaptive Markets: Financial
Evolution at the Speed of Thought,” describes aspects of the market and human
behavior that prompts a new look at the traditional investment paradigm. Lo believes that investors (after an 8-year
period without a correction) are perceiving a reduction in risk, and are
responding like Evil Kenevil and taking on additional risk. Then when a bad event happens, investors will
freak out and go to the opposite extreme.
And after the fear subsides, they will then realize that the opposite
extreme isn’t appropriate either, so will start the cycle all over again. Lo believes that the next financial crisis
will be the result of J. Q. Public over-risking themselves. Because high frequency trading funds have
created links and contagion across previously unrelated asset classes –
managing risk via asset allocation does not currently yield the proper
result. Instead you also need to
diversify across stocks, bonds, international, currencies, commodities and other
smaller asset classes. So, maybe “it is
different this time”.
What’s also “different” now is that a $6
bottle of Australian red wine (St. Andrews Cabernet Sauvignon 2016) earned the
coveted ‘double gold’ medal from a panel of sommeliers, retail buyers,
distributors and exporters at the Melbourne International Wine Competition last
week. It beat out over 1,100 other wine
submissions from more than 10 countries.
Wine connoisseurs will love it for its black cherry and cranberry aroma,
and for its intense flavors of cinnamon with balanced acidity and soft
tannins. The rest of us will just be
thrilled that it’s under $10. Other top
finishers under $10 were: (a) a Savino Prosecco from Italy ($8.99), (b) a
California 2015 Bogle Chardonnay ($9.99), (c) a Costieres de Nimes 2016 Chateau
de Campuget, (d) a Diablo Malbec Concha y Toro ($7.99), and (e) a 10 Span
Vineyards Pinot Noir ($8.99).
That is what lures actor, producer and
seed-stage startup investor Ashton Kutcher into investing in companies such as:
Airbnb, Uber, Spotify, Skype and Warby Parker in their early days. Mr. Kutcher, who once played the role of
Apple co-founder Steve Jobs, told Stephen Colbert this week that he’s
interested in startups when they are a little more than “two guys, a dog, and a
Power Point.” Ashton talked about his
latest investment – a company called Acorns.
Acorns is essentially a digital change jar meant to add up to substantial
investing profits when linked with special investment portfolios designed by
Nobel economist Harry Markowitz. I
personally was introduced to Acorns in 2013 when Acorns personnel CD and TC did
a successful entrepreneurship project with my CMU class. Back then the class and I agreed on what a
great and unique solution Acorns was.
Glad to see that Acorns is still a hit in 2017. I guess not everything “is different this
time around”. J
The Markets:
A pair of typically closely correlated
equity benchmarks haven’t been seeing eye to eye, lately. The Dow Jones
Industrial Average (DJIA) and the S&P 500 Index (SPX) usually move in
lockstep, and display what is known as a positive correlation. But lately, the equity indicators have seen
their lowest level of correlation since 2003.
A reading of 0.00 describes no relationship between the two assets,
while a reading of 1.00 means that the two indicators are perfectly aligned,
moving in the same direction at the same time. A 15-year average of the
DOW and the S&P 500 shows that the relationship is nearly perfect with a
0.9557 correlation. However, the latest
rolling 20-day period shows a stark erosion of that relationship down to a
reading of 0.4655 – marking the lowest level of correlation between the S&P
and the Dow industrials since Aug. 4, 2003. “The disconnect is probably
due to the downturn in tech stocks – because some of the biggest companies are
tech, but not many of them are in the DOW,” said Randy Frederick, managing
director of trading and derivatives at Schwab Center for Financial
Research. The big takeaway here is that
when the correlation between the DOW and S&P goes out the window – so do
words like ‘diversification’ and any semblance of how to calculate portfolio
risk.
“This is your brain on stocks…”
Last week Canada's largest bank said that
it’s time to tighten policy. So, while
everyone has been trained to believe that the market only goes up, and every
dip should be bought – no one is paying attention to the idea that the Bank of
International Settlements (BIS) wants its member banks to clamp down on their
free money policies. So, over the coming
months we should start to see the ‘smart money’ start to sell into the hands of
those willing to buy at any cost (J. Q. Public). I don't think we'll
see a fast correction, but rather a stair step lower. Traditionally the ‘smart money’ selling to J.
Q. Public will happen over and over again, until one day everyone realizes that
the market isn't going to bounce to new highs anymore – and then we will see
more serious selling.
After all, envision an on-line trading room
– crammed with 1,000 traders all exchanging ideas and speaking their mind. The market has been on a tear to the upside
for the past 8 years, and valuations are stretched to the limit. I overheard the following dialogue between
Trader A and the Moderator:
-
Trader A: “Can you explain position sizing to me,
as I just quit my job to trade full time.”
-
Moderator: “Why did you quit your job?”
-
Trader A: “Why would I want to go to work, when I
can sit here and make 3 times as much trading?”
-
Moderator: "Have you been successful in your
trades?"
-
Trader A: “Yes, very much so. It’s easy.
The market really doesn't go down any more. You simply double down on every dip, and in a
week or so, you're back making big money."
-
Moderator: “Do think this market is normal?”
-
Trader A: “Yes, this market is the NEW normal."
Well, maybe Trader A is right? Maybe it is a Teflon market where nothing
sticks – not war, not debt, not lousy fundamentals. After all, just consider that it’s been: (a)
247 days since a 5% correction, (b) 341 days since a 10% correction, and 2,086
days since a 20% correction. Even FED
Chair Yellen turned dovish during her two-day Congressional testimony last
week. In 1999, it was fun selling Yahoo
for $25 more per share in the afternoon than it opened in the morning. In 2017, it’s fun selling NVDA for $14 more
per share after holding it for just 2 days.
Enjoy the fun.
I for one do not believe that “it’s
different this time”, and that this market is NOT the new normal. And according
to the most recent financial institutional survey – others seem to agree. Currently the S&P Index (SPX) sits at
2,459. The following predictions show
where these organizations think the SPX will end 2017 (spoiler alert: only 2
organizations believe that the S&P will end the year higher than it is
right now):
-
2,300 = Bank of
America, Morgan Stanley, Credit Suisse, UBS, and Goldman Sachs,
-
2,325 = Citi and
Jeffries,
-
2,350 = BMO,
Deutsche Bank, and Federated Investors,
-
2,400 = JP
Morgan, Societe General, Barclays, and Blackrock,
-
2,500 = RBC, and
-
2,575 =
Prudential.
I (like 85% of the financial institutions on
the list) believe that this market will end the year lower than it is right
now. But, this turn will not happen
overnight. This market has had forward
momentum for so long, that just because I’m beginning to see some people fold
up their tents, there's still enough picking them back up to push us forward. I
still see one more FED rate hike in September.
Any Trump tax cuts, infrastructure spending, or health care reform won’t
happen in 2017 – if at all. Our societal
demographics push health care long-term, but there is no short-term catalyst to
ignite the sector. Housing permits,
starts, and construction data have gotten stronger – but starts are
historically below trend and are forcing home prices higher – which will choke
off demand. For banks, a modest number
of rate hikes will happen, but these will only add small interest rate-driven
profits. Prepare for the final innings
in the later part of 2017. I think big
changes are on the horizon.
Tips:
Year-to-date: Facebook + Apple + Microsoft +
Google + Amazon have averaged +26.68%.
The entire NASDAQ has averaged +18.89%.
Therefore, it’s not a stretch to say that 5 stocks are holding up this
market. I’m scared of this market,
because market volatility is at its 2nd lowest level – ever. The SPX (sitting at 2459 with a 19.42 weekly
expected move) is expected to close between 2439.50 and 2478.42 next
Friday. That is the lowest expected move
in SPX history. It just doesn’t feel
right.
My recommendations:
-
Veeva Systems
(VEEV = $64.25) = All of the moving averages are stacked nicely on top of one
another, the MACD and StochRSI are in the right place and right direction, my
momentum trend indicator is 100% green, it’s an IBD 50 stock, and daily and
hourly squeezes about to fire long.
o
Sold the +60 /
-65 July 21 Put Credit Spread
o
Bought the 60
September 15 Calls
-
Russell Small
Cap Index (RUT = $1,428.82)
o
Bought the +1420
/ -1440 July 21 Call Debit Spread
-
Biotech Index
(XBI = $79.07)
o
Sell the +75 /
-76.5 July 21 Put Credit Spread
-
Vantiv (VNTV =
$65.19) = If you’re looking for unusual activity, look no further than lightly
traded payment processor Vantiv (VNTV). There was unusual options activity in the
August $70 calls last week. A single
options trade accounted for nearly 100 times the normal daily call volume. After recently acquiring U.K. based Worldpay,
and with earnings approaching on July 27 – this might hint at VNTV beating (or
blowing away) expectations.
-
Apple (AAPL) =
Buy the July 21 Butterfly centered around $150,
-
Simon Property
Group (SPG) = Buy the July 21 Butterfly centered around $160, and
-
Home Depot (HD)
= Buy the July 21Butterfly centered around $155.
To follow me on
StockTwits.com to get my daily thoughts and trades – my handle is:
taylorpamm.
Please be safe out there!
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