Art & Science of Active Trend Trading Plus the IBD 50 for Sept 12th

September 12, 2017

Good Day Traders,

Interesting price action going into the 2nd week of September.  The Indexes are showing that even when historical seasonality says prices should be weak–the Indexes will do what they want to do!  I would like to see  solid pullback through the rest of September to provide for a seasonal move up in October.  Will it happen?  We shall see! This week is monthly option expiration week so expect a slight upside bias through Friday.

Mike’s Macro Market Musings:  No Brown M&M’s and Other Indicators

I never was, and continue not to be, a fan of the rock group Van Halen.  However, I am aware of some of their behavioral antics when they enjoyed the peak of their success and notoriety.  They are famous (or perhaps infamous) for having insisted on a bowl of M&M candies in their backstage party area with all of the brown colored candies removed (let’s please disregard the possible political incorrectness of that demand for now, it was a long time ago).  Most of those who know of this consider it to be just ego driven capriciousness and rock star narcissism, but it turns out there was a reason for it.

The Importance Of Effective Indicators

Van Halen’s 1982 world tour was a massive production, involving a tremendous amount of gear and technical complexity. The contract the band sent in advance to venues was so thick due to all the details within, it was referred to as the “Chinese Yellow Pages”.  Non-compliance with the requirements in the contract could have serious consequences that could ruin the show, or even jeopardize lives.  So when the band rolled up to its next venue, it needed a quick way to determine if the stage crew there had complied with all of the specifications within its contract.  And that’s why the “no brown M&Ms” rider was inserted. The band could simply hop off the bus and check the candy bowl. If they found brown M&Ms, they knew the contract hadn’t been carefully read. And then they’d immediately call for a full-line check of the entire set.

Genius.  Through its rider, the band had created a easy-to-monitor and trustworthy indicator. No brown M&Ms, and the show was likely set up to go smoothly. But if otherwise, don’t perform until the entire venue is scrutinized for other missed requirements.  The lesson to take from Van Halen’s wisdom is that having good indicators is key to achieving success.  This is also extremely true for the world of investing, where you are deploying capital based upon an expected future return. How do you determine when it’s a good time to enter into an investment? Once in it, how do you monitor the conditions supporting your rationale for holding it — are those changing? And if so, are they getting better or worse? When should you exit the position?

We all tend to rely on many of the standard indicators included in most charting platforms, indicators such as MACD, RSI, stochastics, etc., and they certainly serve a purpose and can be effective when properly utilized.  There are other indicators out there often associated with more macro economic and market conditions that are certainly worth knowing about and potentially quite useful when utilized to manage longer term investment capital.  Allow me to introduce a couple of these.

One of these is the percentage change in annual Real Value Added to the US economy, a metric that hadn’t been on our radar beforehand. This has been a reliable indicator of recession in the US for nearly 70 years, and is now signaling that we’ve likely already entered one:

Note that over the past 70 years every economic recession in the U.S. has been preceded by, or in conjunction with, a decline in this metric below 0.  And note where it is currently.  The only variable seems to be the magnitude and duration of the associated recessionary period.  And, recessions are usually accompanied by significant equity market corrections.  It’s quite possible the economy has already entered into a recession – the government data utilized to officially define a recession always (seriously) lags and is usually evident only when the recession has been well under way for a good while.  Also, note that readings in this indicator of -5.0 or lower are usually correlated with bottoming conditions and precede major economic and market upswings.

Another is the commodities to equities ratio as determined by the ratio of the GSCI Commodity Index to the S&P 500, which currently strongly suggests a bubble peak for the S&P.  The following chart shows that over the past 45 years that declines in this ratio to levels of between 1 and 2 have preceded serious market downturns (even if those corrections don’t occur immediately and take a long time to fully play out) and have been associated with major intermediate to longer term market tops.  Currently this metric is the lowest it has been in more than 45 years, just slightly above 1.  On the other hand, peaks in this ratio above 7 – 8 have been associated with important market bottoms, presenting longer term investment opportunities that should not be ignored.  It has happened before and it’s quite likely to happen again.  The originators of this chart currently predict a secular bear trend for stocks (possibly paired with a new bull trend in commodities):

Finally, due to its size and involvement in many important aspects of the U.S. economy, GE (as a company and as a stock) is considered a reliable bellwether and leading indicator for the overall health of the economy.  Over the past 20+ years, major recessions and market declines have corresponded with breaks in trendlines that have supported important multiyear uptrends in the stock of GE, as evidenced below:



No comment necessary here; I believe the chart is self-evident.  When smart analysts independently find the same patterns in different data metrics, it may be prudent to take notice.

Here’s the link for those who may be interested in reading the full article from which the above information has been summarized:





Running List & Strongest Fundamental stocks on the IBD 50 for September 12th

Look for more earnings excitement next week as other leading growth stock report. Will the market continue to demonstrate a mixed behavior? we shall see!

Running List: 179 growth stocks have appeared on the IBD 50 in 2017.  No stocks were added to the IBD 50 today.   Here is the total Running List, download the full list here: Running List 9-12

Additionally, when the new IBD 50 list comes out twice per week I conduct a fundamental sort which results in the top fundamental IBD 50 stocks being identified. The top fundamental stocks for this week are: COHR, BABA, LRCX, ANET, YY. This sort is provided at: IBD 50 9-12 Sorted

Lastly, to sign up Free Webinars for this week at the GO HERE links below!

After Market Monday Webinar Sept 18th: GO HERE

Making Money Trading Stocks & ETFs Webinar: GO HERE