The market is what you make of it. It’s complicated if you try to assert your dominance over it, and it’s simpler if you follow the weight of the evidence. Over the past couple of years, the market has had to factor in different types of shocks, and if there’s anything that holds validity in the market, it is ‘Never Say Never’. If Crude Oil can trade in negative, then Nickel can rally by 80% in a day. Sure, these are isolated events and aren’t part of the daily moves, but they’re a part of the market. And every now and then, something comes up that makes even the most seasoned players go, ‘Woah’.
As we speak, commodities such as Crude Oil, Nickel, Aluminum, Steel are making historical highs. The Dollar index is trading close to its 2-year highs, and precious metals are finally showing up. It’s been a while since Gold and Silver have been a part of a positive discussion and it seems like those times have finally arrived. On the flip side, the equity market has become extremely specific with regards to positive trends. Sectors related to Energy, Oil and Gas, Commodities, sprinkled with a little bit of Infrastructure, are now dominating the space. So, the Growth vs Value debate is still on, but the tables have turned. It’s time for Energy, Industrials, and Financials (Value sectors) to make their case, and they seem to be making a pretty good argument for themselves so far.
The trend is where it’s been, Commodities and Currencies are in the limelight with clear directions. Stocks and Bonds are sideways, at best. But what’s in it for you? Well, if you’re finding your footing in this market, you can start by focusing on the asset classes. Learn about which asset classes are doing well, and why. Focus on the sectors that are related to those asset classes and identify the trends there. Study intermarket analysis to understand the asset classes could have an impact on one another.
We are in the midst of several different variables showing up in the market with every day throwing in more information than the previous one. All this, while getting on with life in a pandemic and the more recently disturbing news of Russia invading Ukraine. It is easy to become overwhelmed by the events that dominate the world today. It has the power to impact every one of us in different ways. And if you are feeling a little out of sorts, its all right. You are allowed to. Take a break and focus on your health. If you think of it, we’re all just like the charts we analyze. We all experience Bull, Bear and Sideways markets. We just don’t have an exchange that is monitoring these levels on a daily basis. Thank God!
Here’s hoping that the we’re all able to get through difficult times and difficult markets soon.
Until we meet again,
Rashmi Bhatnagar, CMT
President's Letterby Brett Villaume, CMT, CAIA
Included in the mission statement of the CMT Association is the noble and sometimes arduous goal of educating the public and the investment community about the value and universality of technical...
Intermarket Analysisby Drew Wells, CMT, CIMA
As markets become increasingly interconnected, cross-asset price trends should not be ignored. What indicators can be used to perform Intermarket Analysis? In this post, we provide two examples: The...
Fill The Gap Episode 15 with Ian MicMillan: CMT Association's Official Podcastby Tyler Wood, CMT & Dave Lundgren, CMT, CFA
Summary: Ian McMillan, CMT and his colleagues run an RIA in a less-than-traditional approach… They use technical analysis to participate in trends and limit downside risk. For clients who are...
Momentum Signals in Crypto Can Improve Risk-Adjusted Returnsby Jamie Coutts, CMT, CFTe
(Bloomberg Intelligence) — Applying well-established momentum techniques to the hyper-volatile crypto asset class can improve risk-adjusted returns vs. buy-and-hold strategies, while...
Using Relative Strength Adapts to Macro Shocksby Michael Nauss, CMT, CAIA, CDMS
It seems like there is always another macro event coming through that spooks the market. It sometimes feels as though the world has a bottomless well to continue delivering crises: from pandemics, to...
Technical Analysis Practical Applicationby Louis Spector
RPV: Invesco’s S&P 500 Pure Value ETF Over the course of the last year or so, the theme of value over growth has been widely discussed amongst technicians. As of March 1st 2022, out of the 26...
March 2022 CMT Newsletterby Marie Penza
Membership The CMT Association would like to congratulate the following members on their new positions: Sven R Willen, CMT, CFTe, PM Forward Trader at Zürcher Kantonalbank Manuel Tellechea, Senior...
In Remembrance of Van Tharpby Jamie Coutts, CMT, CFTe
Personal transformation through a trading metaphor was how Van described his life’s work. I first met Van in 2012 when I enrolled in his Peak Performance courses, travelling to Cary, North Carolina...
As markets become increasingly interconnected, cross-asset price trends should not be ignored. What indicators can be used to perform Intermarket Analysis? In this post, we provide two examples:
The Copper to Gold Ratio: A Proxy for Economic Growth
The chart below depicts the Copper/Gold Ratio along with the S&P Small Cap 600 Index. At point 1, in the summer of 2018, you’ll see the Copper/Gold ratio declining substantially, signaling a potential global growth slowdown. The stress then cascaded into the equity markets, which made a sharp and fast downturn in the 4Q 2018 before a recovery began to take hold in early 2019.
The Copper/Gold ratio continued to trade lower even as equities moved mostly higher throughout 2019, a signal that all was not well. This divergence held until equities made a strong move to the downside during the COVID pandemic. At point 2, in the first two months of 2020, the ratio began a steep descent and subsequent breakdown, leading Small Caps into a period of heightened volatility.
While the correlation to Small Cap stocks has been mostly positive, the ratio shifts between leading, lagging, and coincidental. In this case, the ratio bottomed a few weeks after equities.
This ratio has been stubbornly flat and trendless for the majority of 2021 and into 2022. In that time, equities have moved off their highs but have also traded mostly sideways.
S&P 500 Low Volatility Index, the S&P 500 High Beta Index, and the U.S Dollar Index
Despite these two relationships coming from completely different asset classes, they tend to trade in sync in periods of heightened uncertainty, as investors seek havens in the form of low volatility stocks and the dollar.
However, no relationship correlates all the time, and the ratio of Low Volatility stocks to High Beta stocks and DXY provide examples of both.
On point 1 in the chart, we see the DXY breaking out in May 2018—long before fears of slowing global growth spread to other markets. The Low Volatility/High Beta ratio finally broke out in October of the same year and continued to trade closely with the DXY until markets recovered in 2019 and 2020. Here we have two “risk-off” relationships that have a history of trading closely together that we should be able to use into the future, right? Well, as we said before, markets never make it that easy for us.
The DXY sold off along with risk assets in the first part of the COVID crash as Low Volatility stocks were outperforming their riskier counterparts. Intuitively this stands against reason, as the DXY “should” be in high demand during periods of extreme uncertainty, particularly compared to other world currencies.
DXY subsequently rebounded over 6% in a matter of two weeks, a large move in that timeframe for all but the world’s most unstable currencies. It wasn’t until the summer of 2020 that the Low Vol/High Beta and DXY relationship once again became positively correlated.
This example illustrates that while Intermarket Analysis can be incredibly powerful, it can also be perilous if it’s the only form of analysis relied upon.
Recent price action has the Low Volatility/High Beta ratio moving sideways while the DXY has continued its ascent; will the DXY once again lead the ratio higher, much like that of Q2 2018? Only time will tell.
Price is king, and the markets are never wrong, but investors can certainly be wrong—it’s important to keep that in mind with any methodology we apply in capital markets.
There are many market relationships that we can use to either add or subtract from the evidence that we are seeing in the major asset classes.
What happens when they disagree? Well, that’s valuable information too.
Ian McMillan, CMT and his colleagues run an RIA in a less-than-traditional approach… They use technical analysis to participate in trends and limit downside risk. For clients who are used to being stuck in a diversified portfolio of passive holdings, the education process can be a paradigm shift.
In the March episode of Fill the Gap, Ian will discuss the challenges of non-trending markets, and the coaching his firm does with clients. Starting with the simple concept of a moving average cross, clients begin to understand the philosophy of trend following.
Ian does not mince words. Gamecocks 2023! And, markets are not efficient. Emotions and cognitive biases lead to poor investment decisions. The flip side of this is that they also create opportunities for those that have mastered investing without emotion. Ian’s podcast co-host and investing partner David Zarling, CMT developed a money management approach for identifying market leadership, risks, and price trends that was designed to consistently participate in themes of strength.
When he is not managing client money, tweeting market observations @the_chart_life, or leading the effort for financial literacy (https://whatisastockbook.com/), Ian is talking with David on their Podcast: The Weekly Trend.
Ian McMillan, CMT has been in the wealth management/RIA arena for 11 years. He currently serves as Market Technician at Client First Tax & Wealth Advisors. Prior to his role at Client First, Ian was a Senior Analyst based out of the Washington DC area. Ian He spends a portion of his time consulting with other firms in the area as to how they can best incorporate Technical Analysis into their own practices and portfolio management strategies.
Ian graduated from the University of South Carolina in 2010 with a Bachelor’s Degree in Finance. Ian then pursued his MBA at The Citadel, with a concentration in Asset Allocation.
Enjoy episode #15 with our special guest Ian McMillan, CMT
(Bloomberg Intelligence) — Applying well-established momentum techniques to the hyper-volatile crypto asset class can improve risk-adjusted returns vs. buy-and-hold strategies, while simultaneously forewarning of major cyclical turning points. Our momentum measure turned bearish in November 2021, near the cycle peak, and has avoided the majority of the current 50% drawdown.
- Crypto Momentum Strategies Uncommon Despite Volatility
Bitcoin proponents rightly argue that volatility is a feature, not a bug, of that asset, but hyper- volatility and regular drawdowns have kept the majority of traditional ﬁnance investors on the sidelines. Against other risk assets, Bitcoin’s volatility has been decreasing since 2018, yet it and other crypto assets remain in a class of their own with 3x the volatility of Bloomberg’s World Equity index and other risk assets. Though volatility and return moderation is expected as Bitcoin marches toward becoming a several trillion dollar store of value asset, investors may want to deploy strategies that can provide better risk/rewards entry points and lower overall volatility.
Crypto Volatility & MaxDD vs. Global Risk Assets
Source: Bloomberg Intelligence
- Weathering Volatility With Trending Indicators
The application of moving averages in a trading strategy has two primary beneﬁts: they smooth out shorter time frame price volatility and identify potentially signiﬁcant price reversals. These strategies are also commonly used by systematic momentum investors to extract signiﬁcant portions of large price movements, which make them more adept for trending markets than sideways or range-bound markets.
The deployment of three diﬀerent time frame moving averages will by default provide a lagging indicator that due to its lower sensitivity should detect the most signiﬁcant and robust trends for an asset. The addition of a trend slope indicator can also enhance the triple moving average signal by ensuring that a signal is only given when the gradient of the longer-term moving average is positive.
Triple Moving Average Crossover Signal
Source: Bloomberg Intelligence
- Trend Signal Improves Risk-Adjusted Returns
Our trend signal, which combines three moving averages and a slope indicator, has identiﬁed signiﬁcant trend reversals for Bitcoin, Ethereum and the Bloomberg Galaxy Crypto Index. When applied as long-only system the strategy demonstrates a meaningful improvement in risk adjusted returns in bull and bear cycles vs. a buy-and-hold strategy. Over the period from 2015 to present, when the strategy was applied to Bitcoin, it produced a Sharpe ratio of 3.81 vs. 1.31 for buy and hold. The signal was positively skewed with a 65% hit rate on the 28 occasions it was triggered. For Bitcoin the trend signal switched from bullish to bearish in November 2021, avoiding two-thirds of the current 50% drawdown. These favorable results are demonstrable for the Bloomberg Galaxy Ethereum and Crypto indexes as well.
Trend Signal Performance 2015-22
Source: Bloomberg Intelligence
It seems like there is always another macro event coming through that spooks the market. It sometimes feels as though the world has a bottomless well to continue delivering crises: from pandemics, to politics, to rate hikes, to war.
As technicians, how do we adapt to these changing events and the changing market landscape they create? It sometimes feels like you need to be a virologist one day, a macroeconomist the next, before ending the month being an expert on global macro political tensions!
Today, I will show you how a relative strength scanning method can help keep you on the right side of these trades while avoiding the need to know about, let alone understand, these events.
I am going to focus on the last three market sell-offs:
- October 2018: the market got scared that the Federal Reserve was raising rates too fast.
- March 2020: Covid-19 Pandemic hit like a black swan.
- March 2022: Ukraine/Russia War.
Each of these sell-offs has a different reason and each caused different sectors to become the place to put your money for safety and growth.
The algorithm I build with trade-ideas is called TI Strength and simply put, it assigns points based on indicator sets that define strength. For example, if a stock is over the 50-day Exponential Moving Average (EMA), give it 5 points; over the 200-day EMA, give it 10. RSI fails to reach oversold on the last pullback? Give it 20 points, and so on.
So why would this method work to adapt to troubling events such as these?
Large institutions and money managers generally cannot hang out in cash. They need to be invested somewhere. And as they move, their buying creates relative strength in names they think will weather the storm the best.
In 2018 the market was worried about the Fed rate hikes that were happening at the time. When rates go up the market likes to have its money now, so it will move to names that payout currently instead of in the future. Note how trading relative strength puts over half the portfolio in Utilities and Manufacturing. These are high dividend-paying names.
In 2020 we had a once-in-a-century pandemic where we were all locked at home. Here we see the same method shifted a large chunk of the portfolio into Pharmaceutical names like Moderna (MRNA) and Novavax (NVAX).
Lastly, today we see inflation and global conflict in the news. Prices for food and oil are rallying. Below is the portfolio split for February. You can see that it’s heavily weighted now in all things that will do well in rising commodity prices environments.
So what’s the takeaway?
Having a good system that looks for the strongest names can allow us to shut off the news and everything happening outside of our control. This is more evidence that focusing on the price of the securities will tell us all we need to know about what’s happening now and what is potentially happening next.
Personal transformation through a trading metaphor was how Van described his life’s work. I first met Van in 2012 when I enrolled in his Peak Performance courses, travelling to Cary, North Carolina to attend in person. After reading ‘Trading Your Way To Financial Freedom’ in 2009 I became acutely aware that everything I was doing in terms of investing was essentially flawed. Van being a trained psychologist, and trading coach for over 3 decades seemed to be an outlier in a saturated market of investing aficionados. He prioritized a strong mental framework in producing long term success in the markets. It was Van who explained one should never trade without a system with strict rules, a teaching that motivated me to complete my CMT designation.
Most people discover Van for the first time reading Jack Schwagers masterpiece “Market Wizards: Interviews with Top Traders’. I highly recommend it if you have not read it. Read that chapter where Van lays out the concepts which would become the principles for his life work.
There are inflection points in everyone’s life that alter our perspective and even our entire trajectory. Attending Van’s course was one of those breakthrough moments for me. The two weeks I spent with Van in North Carolina with my fellow journeymen and women was one of the most enriching experiences in my life. With a finely tuned mix of investment education and personal development techniques and models, Van challenged all our most tightly held belief systems and preconceptions about investing, relationships and reality itself. Nothing since has come close to those workshops.
Van’s contribution to the world of investing and trading deserves much deeper analysis. But in my estimation, there has been no better exponent of the importance of position sizing in determining trading success. Van’s trading games in his workshops revolutionized the way I thought about what is often diminished in other investing body of works. Of course, trading psychology perhaps best encapsulated by his ‘Twelve tasks of trading’ should be instilled into every young trader.
But for Van the man, I will never forget his hospitality and generosity. He would often hold gatherings at his house with his radiant wife, Carla, where we would mingle and socialize with other attendees and staff after a grueling workshop. There, we would discuss, laugh and decompress from a day of exercises which more often than not had brought about a major breakthrough moment for many of us. I met some truly amazing, inspirational people during those weeks, and this was another one Van’s amazing gifts; he brought people together, from all around the world, with vastly different backgrounds and perspectives. Transformation is an often overused and over sensationalized word. But from my own personal experience and what I witnessed happen to others during those weeks, could only be described as Transformational.
Thank you, Van. As you would have said, you have moved into the light.
New Educational Content This Month
October 19, 2022
New Horizons on the Relative Strength Index
Presenter(s): Sofien Kaabar, CFA
October 12, 2022
Are The Streets Still Smart? Evaluating Swing Trading Strategies in Modern Markets
Presenter(s): Davide Pandini, PhD, CMT, MFTA, CSTA
September 14, 2022
Candlestick Analysis, Enhancing Portfolio Management Returns
Presenter(s): Stephen W. Bigalow