27 November 2017: Irrational positivity

Two different takes on the contributing factors behind the current bull market’s thunderous run. The first one comes from Andy Hecht, options expert, analyst and author at Seeking Alpha. In his long, nuanced article The Path Of Least Resistance For Stocks And Optimism, published at Seeking Alpha this morning, he elaborates on what he thinks caused the upward momentum over the past twenty-two months. In the article, he convincingly summarizes the underlying factors responsible for the recent rise (or, as he calls it, ‘the path of least resistance’) of stock prices on global stock markets. Fueled by low interest rates, capital has flown into the global stock markets ‘at an astounding rate’. Brief selloffs in stocks happened (Brexit referendum, US Presidential Election), but were immediately followed by quick rebounds. Corporate earnings, the availability of cheap capital, share buyback programs, and improving global economic conditions were the major contributors to the rise of the stock prices. Combined with the sell-off in the US dollar, which helped increase the competitiveness of US companies on their export markets, all these factors in unison ‘create a perfect bullish storm for stock prices’. He concludes his article by stating that ‘the fate of stocks could be in the hands of the future of optimism’.
Jim Cramer, author and host of CNBC‘s Mad Money, takes a different angle on the matter. In an article published last Saturday, he states that ‘the stock market is being irrationally positive thanks to machines’. Meaning that the direction of stock prices is no longer dictated by human investors, but by the (big-money) algorithms that operate on their behalf, yet out of their control, and in ways that defy human comprehension: “I just wish I knew why the algos work as they did.”
Notwithstanding the validity of all the arguments Andy Hecht mentioned in his well-balanced article, Occam’s razor dictates that the simplest explanation is most likely the better one.

white-chapel-logo-smallThe markets kept their upward momentum on (Black) Friday, as investors placed bets on a strong holiday shopping season. Both the S&P 500 and the NASDAQ closed at record highs on Friday’s — holiday-shortened — session. For the first time in its history, the S&P 500 closed above the 2600 level, rising 0.21% (+0.91% for the week). The Dow gained 0.14% (+0.86% for the week), and the NASDAQ added 0.32% (+1.57% for the week). Volatility eased once again: on Monday, the VIX dropped below the level of 11. On Tuesday, Wednesday and Friday (the markets were closed on Thursday for the Thanksgiving holiday), it fell into single digits again, closing at 9.67 on Friday’s shortened session. This is more than 15% lower than the week before, during which the VIX didn’t hit the double digits even once. UVXY ETFs dropped another 0.7%, while the XIV ETNs gained 0.3% Friday.
Danny Daredevil‘s RSS dropped below 9%. Adventurous Anny is still holding cash. Her RSS remained at 15%. Solid Suzy and Lazy Larry‘s RSS rose to just above 78%.
None of our models gave a trading signal at the end of Friday’s session.

Model Holds Start date

RSS

YTD

QTD

AAR

Danny Daredevil UVXY 1 January 2016

8.58%

-73.06%

-22.07%

4%

Adventurous Anny Cash 6 March 2017

15.37%

15.37%

6.34%

22%

Solid Suzy XIV 6 March 2017

78.15%

78.15%

21.79%

123%

Lazy Larry
XIV 6 March 2017

78.15%

78.15%

21.79%

123%

RSS = Return Since Start | YTD = Year-To-Date | QTD = Quarter-To-Date | AAR = Average Annual Return

RS_v05-small

 

Monday morning + heavy rain = exceptionally long traffic jams.
If only everything in life was as easy to predict…

‘Thumbs up’ picture by Piastu (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 4.0-3.0-2.5-2.0-1.0 (https://creativecommons.org/licenses/by-sa/4.0-3.0-2.5-2.0-1.0)], via Wikimedia Commons