/ February 17 / Weekly Preview
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Monday:
Market Closed (Presidents' Day)
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Tuesday:NY Empire State Manufacturing Index (-1 exp.)
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Wednesday:
Building Permits Prel. (1.45M exp.)
Housing Starts (1.39M exp.)
FOMC Minutes
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Thursday:
Initial Jobless Claims (216K exp.)
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Friday:
S&P Global Services PMI (53.2 exp.)Existing Home Sales (4.17M exp.)
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Monday:
Market Closed (Presidents' Day)
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Tuesday:Arista Networks
Bumble
Cadence Design
Devon Energy
Halozyme Therapeutics
Occidental Petroleum
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Wednesday:
Analog Devices
Wix.com
Klaviyo KVYO
Carvana
CF Industries
Innovative Industrial Properties
Vimeo
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Thursday:
Walmart
Builders FirstSource
Cheniere Energy
TripAdvisor
Booking Holdings
Wayfair
Dropbox
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Friday:
N/A
Enthusiasm Returns To The Market
Last week, markets were able to shake off news on the inflation front and equities broke out of the bullish consolidation over the last few weeks. Gold and Commodities were the true stars, as a physical delivery crunch in bullion has taken over the precious metals trade. Some analysts are even saying an audit of Fort Knox is in order, following unprecedented delays in physical gold deliveries from the Bank of England's vaults. This suggests there is a disconnect between paper gold holdings and actual physical gold availability. In the context of broader inflation concerns and geopolitical uncertainty, this is a story worth following, with GLD by far the best performing asset-class ETF since the start of the year (+10.13%).
Besides the surge in Gold, retail investors continued to pour money into the stock market, as share buybacks and trend-following models amplify price moves. The bullish bias led to an upside break-out, as SPY closed at a record all-time-high on Friday. Resistance now rises to $617 (M-Trend & Gamma Flip level), with short term support at $598 (50-DMA).
While the overall vibe has now shifted positive, it is worth noting that we are entering into the seasonally weak part of February. It’s no guarantee that any selling pressure will present itself, but it’s worthwhile to pay attention to risks during the next couple of weeks, especially in a market pushing more optimistic deviations.
While our own measure of sentiment is very close to “Neutral” at the moment (55 / 100), it is calibrated to work on a 2-year historical timeframe. Taking a longer look, Sentiment Trader recently posted a great piece on the market’s Sharpe ratio:
“When the going gets easy for investors, it’s natural to let one’s guard down and become complacent. That’s a dangerous condition for all but the longest-term, long-term, unleveraged investors. Markets can be their most dangerous when they look the safest.
Using the Sharpe ratio as a proxy for how good it’s been for U.S. investors, we see above that there aren’t many times in history when it’s been better than the past six months, and there are signs that it’s ending. That can mean more volatility, but it doesn’t necessarily mean negative returns. The biggest takeaway has been moderate returns, with much more of a two-way market than investors had gotten used to in the months prior.”
— You’ll soon be able to produce the same type of analysis on Signal Sigma V2 — and we do agree with the conclusions, namely that more volatility is expected and normal than has been the case in the past 6 months.
The optimism surrounding the stock market comes in direct contrast to some less than stellar economic data. Labor market indicators are mostly positive, but there are indications of stagnation. Continuing jobless claims have been increasing, reaching their highest levels in more than three years. The JOLTS hires rate has fallen to its lowest point in a decade. Although layoffs are still relatively low, the reality is that employers are not actively hiring.
The chart below shows that the Total Non-Farm hires rate has now fallen below pre-pandemic levels. Increased uncertainty in the labor market may lead consumers to start to spending less and saving more, resulting in contracting economic activity.
Expectations of real household incomes have also plummeted to near Covid-era lows, according to the latest University of Michigan data (Expected Household Income Change During the Next Year).
The rise in part-time employment, slowing hiring rates, and increased continuing jobless claims do not suggest a robust consumer backdrop going forward — hence the contrast with the stock market’s evolution.
The risk in this equation is the Fed. Overestimating employment strength has led the Fed to delay necessary rate cuts in the past. Once economic conditions really start to deteriorate, the Fed is forced to reverse course abruptly. Especially since the early 90’s, the hiking cycle has tended to be gradual, while cuts came very fast by comparison. To a certain extent, the cuts that the Fed has enacted so far since the second half of 2024 are designed to “front run” a large scale reversal.
Our Trading Strategy
Like playing a game of musical chairs, we must remain invested until “the music stops”. If (or rather… WHEN) a liquidity event occurs, the risk is substantially higher than most investors realize. All of the indiscriminate buying which has fueled the market over the last decade may turn into indiscriminate selling in the case of an “unforeseen, exogenous event”. Unfortunately, such events are identified AFTER the fact and usually when it’s too late to do anything productive anyway. The only thing that we can be sure of is that the “event” is always credit-related.
As such, we must remain vigilant, and monitor our risk exposure carefully. Alternating periods of low to high volatility and vice versa have been a hallmark of the financial markets since the turn of the century. With the help of our automated models and common sense positioning, we should be well positioned to outperform. Perhaps now is as good a time as any to repeat our investment rules:
1. Cut losers short and let winners run. Scale up into positions that work, rarely vice-versa. Refer to our Removals guide.
2. Set actionable goals. Decide the proper position sizing, Profit Taking and Stop Loss price for each position, when doing your investment planning. Do this when the market is closed. In the “heat of the moment”, during the live session, consult your pre-set plan. Use the Portfolio Tracker to monitor positions and risk.
3. Abstain from emotional mistakes. Emotionally driven decisions void the investment process. Use the Sentiment indicator to avoid buying in Greed and selling in Fear.
4. Never let a “trading opportunity” turn into a long-term investment. Until your thesis is proven correct, a position in your portfolio is “just a trade”. Many traders become “long term investors” when their positions under-perform. Refer to rule #1.
5. An investment discipline does not work if it is not followed. “Just do it” - easier said than done, but focus on the process rather than returns, and profits will eventually materialize.
6. “Losing money” is part of this game. You should not be investing if you are not prepared to take losses. Refer to Rule #2 to understand the risk you are taking.
7. Strive for a “70% win rate”. No strategy works 100% of the time. There’s no “magic bullet” when investing. However, doing research, managing risk and emotions can be practiced every day and will lead to successful outcomes given time.
Signal Sigma PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!