Last week, the major averages demonstrated strength by either breaking out to all-time highs or, in the case of the NASDAQ Composite, posting a trendline breakout. A number of leading stocks including those on our Focus List are confirming this market action.
That said, a number of times over the last couple of years, when the markets look about ready to fall apart, they find a shallow floor and move higher. This action was observed over the last few weeks in major indices and leading stocks. Case in point, the FANG stocks at one point were all trading below their respective 50-day moving averages for the first time this year. But to the day, that was the worst of it. FB is once again at new highs, NFLX and GOOGL both regained their 50-dmas, and AMZN is 1% off old highs.
We added a few new names to the focus list, also indicative of a recovering market, though one must remain on their guard against one-day sharp drops which wipe out a month's worth of baby-stepped gains in the major averages as that has been the rhythm of the market since March of this year, an unprecedented occurrence in the major market averages, and has challenged the VIX Volatility Model (VVM). Indeed, QE manipulation prevents meaningful corrections from occurring, thus the worst correction so far this year has been a scant few percent but volatility instruments such as XIV, which the VVM buys when sensing flat or uptrending markets, can lose big all of a sudden during one-day selloffs. Such action is highly unusual for the XIV which usually gives warning ahead of the drop. That said, with the adjustments and fine-tuning in place, XIV avoided a big loss on 6-29-17 by moving to cash on 6-27-17. Further, we were quick to call the start of the correction in tech stocks on 6-9-17 as you can hear in our real-time webinar starting at 8 min 12 sec: https://www.youtube.com/watch?v=pQR6btI0q2I&feature=youtu.be
Nevertheless, volatility has often been at all time lows which adds to the challenge for the VVM. While the Market Direction Model is up around +40% over the last 12 months, the unusual market action since April had caused issues for the VVM which was up over +50% earlier this year. These steep gains were reversed after the adjustment was made to the model on April 3. Further fine-tuning has greatly helped as illustrated above. The issue was discussed in the "Results table" section here. VVM is up from its lows as it makes its way back, though in this unprecedented ultra-low volatility environment, gains are slow. Fortunately, markets change so this setback should be temporary.
Ultimately, even in these challenging markets when sharp one-day drops have occurred, our Ugly Duckling long entry methods, such as the Undercut & Rally (U&R) and the Moving Average Undercut & Rally (MAU&R), have enabled investors to move back in once the market and leading stocks stabilized. A disciplined approach to minimizing risk on entries and keeping stops tight has worked well in this environment.
Market Lab Report - Weekend Wrap / Premarket Pulse 7/17/17
|Published:||17 Jul 2017 09:21 ET|
Like what you read?
Let us help you make sense of these markets by signing up for our free Market Lab Reports:
This information is provided by MoKa Investors, LLC DBA Virtue of Selfish Investing (VoSI) is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. VoSI reports are intended to alert VoSI members to technical developments in certain securities that may or may not be actionable, only, and are not intended as recommendations. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to VoSI, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Virtue of Selfish Investing. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2019 MoKa Investors, LLC DBA Virtue of Selfish Investing. All rights reserved.