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Stock Exchange: Brilliant Trading Or Is The Market Just Up?

Summary:
The Stock Exchange is all about trading. Each week, we do the following: Discuss an important issue for traders;Highlight several technical trading methods, including current ideas;Feature advice from top traders and writers; andProvide a few (minority) reactions from fundamental analysts.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: Do You Evaluate Your Trading Mistakes? Our previous Stock Exchange asked the question: Do You Evaluate Your Trading Mistakes? We reminded traders that it is important to evaluate your past trading mistakes, and to do so objectively. Specifically, leave your emotions and excuses at the door. Rather, try to learn from your mistakes, and

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The Stock Exchange is all about trading. Each week, we do the following:

  • Discuss an important issue for traders;
  • Highlight several technical trading methods, including current ideas;
  • Feature advice from top traders and writers; and
  • Provide a few (minority) reactions from fundamental analysts.

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: Do You Evaluate Your Trading Mistakes?

Our previous Stock Exchange asked the question: Do You Evaluate Your Trading Mistakes? We reminded traders that it is important to evaluate your past trading mistakes, and to do so objectively. Specifically, leave your emotions and excuses at the door. Rather, try to learn from your mistakes, and improve–systematically.

This Week: Brilliant Trading Or Is The Market Just Up?

It’s easy to feel smart when the overall market is up. But just because your account balance is getting fatter, does that mean you are a brilliant trader, or is their something else going on?

Some investors point out that the market goes up over time, whereas others are deathly afraid of market volatility so they cluster their nest egg in cash or highly rated investment grade bonds (regardless of the disgusting low interest rates).

Others offer trading strategies that have lower correlations with the overall market so they can can earn strong returns over time that also offer some important diversification benefits versus straight stock market investment strategies.

On the other hand, perhaps you do deserve some credit for being brave enough to be in the market thereby benefiting your nest egg with a higher balance. And then of course there are those who only brag about the their successes when the market is up, but “crickets” when the market is down.

Stock Exchange: Brilliant Trading Or Is The Market Just Up?

A classic 60/40 mix of stocks and bonds works for some, and you can cater those percentages up or down based on your preferences. And you can also mix in a trading strategy that offers long-term return potential with less “stock market risk” (or “beta risk,” depending on who you’re talking to).

Model Performance

We are sharing the performance of our proprietary trading models, as our readers have requested.

Stock Exchange: Brilliant Trading Or Is The Market Just Up?

For more information about our models (and their specific trading processes), click through at the bottom of this post for more information (readers are additionally invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models).

Expert Picks From The Models

Note: This week’s Stock Exchange report is being moderated by Blue Harbinger, a source for independent investment ideas.

Holmes: I bought shares of Ollie’s Bargain Outlet Holdings (OLLI) on 6/14. You can see the chart below.

Stock Exchange: Brilliant Trading Or Is The Market Just Up?

Blue Harbinger: I know you’re a “dip buyer” Holmes, and I can see the dip in the chart.

Holmes: Yep, that’s correct. I use a mean-reversion approach to identify stocks that have moved “abnormally” far from their recent price history. And Ollie’s did, and I also identified the additional conditions necessary for me to purchase. Sometimes market conditions may impact my trades, but since these mean-reversion stocks are often at a low recent price point, they are generally less impacted by market “beta” as you say. Besides, beta is a longer-term horizon metric anyway, and I typically hold for around only 6-weeks.

BH: Interesting, but with the market up so much in the last few years, I think a premium high-end store could be a better idea than something called “bargain outlet,” but alas you are the dip buyer. By the way, Ollie’s other brands are called “Ollie’s Bargain Outlet, Good Stuff Cheap, Ollie’s Army, Real Brands Real Cheap!, Real Brands! Real Bargains, Sarasota Breeze, Steelton Tools, American Way, and Commonwealth Classics names.” Anyway, here is a look at the FastGraph.

Stock Exchange: Brilliant Trading Or Is The Market Just Up?

Road Runner: I recently bought some shares of Planet Fitness (PLNT) on 6/12. I like to purchase stocks in the lower end of a rising channel and then hold them for about 4-weeks. What do you think about that?

Stock Exchange: Brilliant Trading Or Is The Market Just Up?

BH: Well I think Planet Fitness is probably getting some good rent concessions because every time I hear about a struggling shopping mall REIT, management is always talking about renting the former space of bankrupt retailers to fitness franchises. Here is a look at the Fast Graph.

Stock Exchange: Brilliant Trading Or Is The Market Just Up?

RR: The Fast Graph and fundamental data are nice, but as we’ve discussed previously, I look for a certain type of situation (some call it a pattern, others may call it a setup, etc.) where the probability of a particular action is not a matter of chance (50/50) but has been historically noted to result in a greater tendency towards a particular outcome. “Trending in a channel” is one such situation. An equity will often “cycle” between the upper and lower bounds of that channel for substantial periods of time. My model design attempts to take advantage of this property by identifying stocks trending in an upwards channel and waiting until the stock price drifts to the lower bound, making it a candidate for purchase. These types of situations have a relatively high probability of positive outcome with a reasonable profit potential. Planet Fitness can be seen to be in this type of a situation. This is a short-term trade that has traditionally shown profitability when the right conditions have been met. One way or another, I’ll be out of it shortly – usually after about 4 weeks.

BH: Thanks for that explanation. And how about you, Athena – do you have any trades to share this week?

Athena: I bought shares of Tableau Software (DATA). How do you feel about that?

Stock Exchange: Brilliant Trading Or Is The Market Just Up?

BH: I think that is a powerful growth stock that you ought too hold for many months. Here is a look at the Fast Graph.

Stock Exchange: Brilliant Trading Or Is The Market Just Up?

Athena: Well, for your information, 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 Tableau. A quick look at the chart makes 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 Athena, that is interesting stuff and a nice trade idea. And how about you, Felix – anything to share this week?

Felix: No trades, but I do have a ranking to share. This week, I ran the stocks of the Nasdaq 100 through my technical trading model, and my top 20 are ranked in the following list.

Stock Exchange: Brilliant Trading Or Is The Market Just Up?

BH: Mylan, Felix? Really. That’s a pharmaceuticals company, and together with its subsidiaries, it develops, licenses, manufactures, markets, and distributes generic, branded-generic, brand-name, and over-the-counter (OTC) pharmaceutical products in North America, Europe, and internationally. I suppose that’s in the healthcare sector (which is down this year), and it seems like long-term demographics eventually need to drive the sector higher. Thanks for sharing that list.

Oscar: This week I ran the stocks of our comprehensive and diverse ETF universe through my model, and my top 20 are ranked below:

Stock Exchange: Brilliant Trading Or Is The Market Just Up?

BH: I swear, Oscar–you’ve had that Invesco Solar ETF (TAN) ranked at the top of your list for a while now. But I suppose it is up over 50% year-to-date. Thank you for sharing.

Conclusion:

The S&P 500 (SPY) is up over 17% this year, so it’s easy to feel like a genius if you’ve just been holding stocks. But how were you feeling during Q4 of 2018 when the market was down sharply? Less of a genius? Many traders focus on alpha, but beta can be a far bigger driver of performance if you’re not careful. Choose your beta wisely. And on the other hand, if you are a long-term investor–beware of beta disguised as alpha. Just because the market is up, that doesn’t mean you are a trading genius.

Getting Updates

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome. You can also access background information on the “Stock Exchange” here.

Trade alongside Jeff Miller: Learn more.

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