Art & Science of Trend Trading Free Trader’s Report-April 18

Good Day Traders,

Overview & Highlights: Direction is the question moving forward for the Indexes. We are entering the Spring and Summer months which tend to provide muted results due to many factors including a bit of the “Sell in May and Go Away” effect. We must reminder ourselves that Indexes, Stocks, Commodity and Sectors often base going into the last 3 months of the year. Of all the Indexes the NDX tends to perform better this time of year. Favoring this Index from May through October has historically been profitable.

Mike provides a great article on how overvalued the markets have become. At some point there will be a reset, but like we saw back in 1999-2000 an overheated and overvalued market can continue longer than expected. But, when it collapses look out below!

Upcoming Webinars: At Active Trend Trading we offer four webinars per week to provide training plus trade and market updates. See the schedule below for the next webinars.

After Market Monday’s—Free Fast Paced Webinar every Monday after the Market closes at 1:15 p.m. PDT. Find you invitation at: https://www.facebook.com/ActiveTrendTrading/

How to Make Money Trading Stock WebinarFree Webinar every Friday at 11:00 a.m. PDT. This weekly live and recorded webinar helped traders find great stocks and ETF’s to trade with excellent timing and helped them stay out of the market during times of weakness.

How to Make Money Trading Stocks on Friday, April 21st
Register now for the next live webinar at the link below:
Register Here: https://attendee.gotowebinar.com/register/2997465891986137858
Time 11:00 a.m. PDT

Next Training Webinar: April 19th
For Premium Members, our Wednesday evening training is developing some fantastic traders
Topic: Options for Income
** Friday’s “Final Hour”: April 21st **
Time 12:00 p.m. PDT
For Premium Members, provides trades and set ups during the final hour of weekly trading.


Managing Current Trades: Positions open in Strategies I, II & III

Strategy I:

Closed second half of the NUGT trade on 4/18 when the trailing stop was hit at 10.50.
Net Profit = 13.69% or $310


Mike’s Macro Market Musings: Equity Valuations and Market Forecasts Revisited

I have written before of the current extremes in U.S. equity valuations and the historical precedents for the relatively poor long term performance of a passive buy and hold investing strategy in longer term accounts going forward from such extremes. Keeping in mind, however, that valuations are not, and have never been meant to be, of any use as timing indicators. While I have virtually no insight as to what the market might do during the coming days, weeks, or even months, what it might do over the next 8 – 12 years is fairly predictable. And the answer is that the overall U.S. equity markets will likely turn in a very sub-par performance over that time frame with a significant correction (and subsequent bounce) along the way, evidence for which is presented herein. Much of the following is copied and pasted from elsewhere with very little, if any, commentary from me, since much of it speaks for itself. For those interested in further reading on this topic, the full article is really informative, interesting, and an engaging read. Here’s the link: http://www.mauldineconomics.com/frontlinethoughts/stock-market-valuations-and-hamburgers2. “To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.” – Warren Buffett, Fortune magazine Following are a number of our favorite valuation metrics. Let’s take a look at them and see what the research data tell us about probable forward returns (high-priced or low-priced hamburgers):

Median P/E can help us predict what future 10-year annualized returns are likely to be for the S&P 500 Index. Will your future burgers be pricey or cheap? The price at which you initially buy matters.

Here is how you read the following chart. (Data is from 1926 through 2014.):

  • Median P/E is broken down into quintiles. Ned Davis Research looked at every month-end median P/E and ranked the numbers, with the lowest 20% going into quintile 1, the next 20% into quintile 2, and so on, with the most expensive or highest P/Es going into quintile 5.
  • They then looked at forward 10-year returns by taking each month-end P/E and calculating the subsequent 10-year annualized S&P return.
  • They sorted those returns into quintiles and determined that returns were greatest when initial P/Es where low and worse when P/Es were high.

With a current median P/E for the S&P of 24, we find ourselves firmly in quintile 5.That tells us to expect low returns over the coming 10 years. Though it appears that most investors are expecting 10% from equities, history tells us that the market as a whole will have a hard time growing much faster than our country’s GDP does. Note that 4.3% returns are the average of what happens when stocks are purchased in the top 20% of valuations. That forward return number goes down considerably if we are in the top 10% or top 5%, which is where we are today. The reality today is that hamburgers are expensive.

What about Drawdowns?

The following chart is a look at the downside risk by valuation quintile.

When valuations are highest, not only are returns lowest but risk is highest. This chart shows that from where we are today we should expect an 18% drawdown in an average case and a worst-case -51% if there is a recession (more recession probabilities in a moment).

(Mike’s comment – the above chart shows that, since we are currently well into the most expensive quintile of CAPE ratios, history would indicate that sometime in the next three years it would be quite realistic to expect an average pullback in the S&P 500 of 18% and perhaps as much as 51%)

Household Equity Ownership Percentage vs. Subsequent Rolling 10-Year S&P 500 Index Total Returns

This next chart shows that household equity ownership percentage has a high correlation with future annualized returns.

Here’s how you read the chart:
• Think in terms of buying power. If individuals are fully invested in stocks, how much more money do they have available to buy more stocks? More buyers than sellers pushes prices higher. More sellers than buyers pushes prices lower.
• The blue line tracks the percentage of total household financial assets that are equity investments, including mutual funds and pensions.
• Take a look at the top red arrow. At the market top in March 2000, the high level of equity ownership was forecasting a return of -3% annualized over the coming 10 years.
• The black dotted line plots total return over the subsequent 10 years, on a rolling basis.
• Again, focus in on 2000. The dotted black line shows that total return over the following 10 years turned out to be approximately -1%.
• Look how closely the dotted black line tracks the blue line over time.

(Mike’s note – Again, history shows that when the percentage of household financial net worth is somewhere around 52 – 55% equities, 10 year forward returns of the S*P 500, total return including dividends (the dividend is currently approximately 2%) tend to be sub-par. As of 12/31/2016 this metric, which has a correlation of 91% with actual realized historical results, appears to be reading around 54%, implicating a forward 10 year average total annual S&P return, including dividends, of less than 3% from the SPX level of 12/31/2016. With a 2% dividend, this implies expectations of less than 1% average annual nominal price change in SPX, pretty much in line with implications of other metrics.)

Space here limits further discussion of this topic. For further insight and examples and use of other metrics, use the above link to read the full article. The bottom line to all of this is to not expect the next 8 or 10 years to look anything like the past 8 years in terms of equity index price appreciation, and be prepared for a substantial correction and bounce from that correction along the way.


General Market Observation: The 3 Tracking Indexes provide a separate tales on market health. The NDX is holding up well and if price action catches an updraft would provide the best potential to the upside. The SPX and RUT is working with in a down trending channel. Price action on these two Indexes have been drifting slowing downward since 3/17/17.

As we’ve seen the typical Post Election Seasonality has not kicked in earnest, yet. While several negative have rammed the Indexes, each remains resilient. The best way to trade the current Indexes is to wait for price to move to resistance and then trade downward or close out long positions. On the flipside wait for price to reach support and then go long on the pullback. The biggest risk with this tactic is whipsaw.

SPX: Stuck in the downtrend channel in the middle. Wait for move to the top or move back to the bottom for trades.

RUT: Also working in a downtrend channel. Strong level of support between the 1335 and 1340 levels. Currently below the 50 day EMA but showing signaling a potential bounce based on ATTS Rule 1.

NDX: Above the 50 day EMA but below the 8/20 EMA combo. Provided ATTS Rule 1 signal on 4/17/17 with the TSI ticking up. This was confirmed by a green candle closing above a red Hull Moving Average ball.

The longer term weekly chart on each Index looks weak, but longer term Market Forecast Momentum has not dropped hard. Right now, I’m treating current price action as a pullback within the short term trend.

SPX: Downside Market Short the SPY, SPY Puts or SPXU.
Preferred Long ETF’s: SPY, UPRO and SPXL

NDX: Downside Market Short the QQQ, QQQ Puts or SQQQ.
Preferred Long ETF’s: QQQ and TQQQ

RUT: Downside Market Short the IWM, IWM Puts or TZA.
Preferred Long ETF’s: IWM and TNA

How to Make Money Trading Stock WebinarFree Webinar every Friday at 11:00 a.m. PDT. This weekly live and recorded webinar helped traders find great stocks and ETF’s to trade with excellent timing and helped them stay out of the market during times of weakness.

How to Make Money Trading Stocks on Friday, April 21st
Register now for the next live webinar at the link below:
Register Here: https://attendee.gotowebinar.com/register/2997465891986137858
Time 11:00 a.m. PDT

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Index Returns 2017 YTD

ATTS Returns for 2017 YTD Closed Trades

Percent invested initial $116.6K account: Strategies I & II invested at 50%; Strategy III invested at 26.6%.

 

Current Strategy Performance YTD (Closed Trades)
Strategy I: Up $36.10
Strategy II: Up $632.00
Strategy III: Up $4985.99
Cumulative YTD: 4.85%

Active Trend Trading’s Yearly Objectives:

  • Yearly Return of 40%
  • 60% Winning Trades
  • Early Warning Alert Target Yearly Return = 15% or better

For a complete view of specific trades closed visit the website at: http://activetrendtrading.com/current-positions/

Updated first full week of each month. The next update after first week in May.


Outs & Ins: No stocks added to the IBD 50 mid-week. The Fundamental Sort of the mid-week list resulted in following top stocks: AMAT, ESNT, SBCF and NTRI.

Remember earnings season is going on so before jumping into any stock, check to see when it reports earnings. If you enter a pre-earnings trade on any stock close the position prior to earnings unless there is at least a 10% profit margin.

Share Your Success: Many of you have sent me notes regarding the success you are having with the Active Trend Trading System. Please send your stories to me at dww@activetrendtrading.com or leave a post on the website. Thanks.

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