Recency Bias Creates Frustration With Stocks

Many investors, both professional and retail, have grown frustrated over the lack of growth within the U.S. equity market. There are probably several reasons for this, one being the over-confidence that’s been molded out of the lack of price-volatility like we saw on 2011 and 2009. But I think a large chunk of the frustration lies with investor’s recency bias.

The chart below is a simple monthly line chart of the S&P 500 ($SPX). I’ve marked with a blue performance line the 23 month period that ended in October 2014, which shows the market rose 46% during that time period. While the last roughly two years has seen less than 5% growth for the U.S. stock market. Investors grew accustom to seeing double-digit gains on their annual statements, requiring practically no outside diversification away from large cap U.S. companies. That market environment has dissipated and a little more effect has been required. And if there’s anything Americans hate, it’s the need for more effort (which is why we’ve invented self-driving cars, shoes that don’t require laces, and voice-activated text messaging).

spx-frustrationWhile the market lacks the heroin-like stimulus provided by the Fed, stocks must begin to learn to walk and grow on their own. Will we eventually breakout and begin seeing those double-digit returns once again? Or will things flip and those double digits will be to the downside? No one knows. But we must adjust our expectations and realize we may need to look outside simple U.S. large caps to find asset appreciation rather than sit and pout, sending Snapshats and answering Twitter polls waiting for something to happen in the S&P pits.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

The Relationship Between Stocks and Bonds Remains in a Range

Miss me? I haven’t been as active on the blog as I would like but I still share quite a bit on Twitter and StockTwits, so make sure follow me there to keep up with my insights and charts. Anyway, let’s get into it…

We are close to finishing out the historically bearish period of seasonality for equities and while we didn’t see any kind of crash that many traders were hoping for expecting, the S&P is up nearly 4% and saw just a 5% drop back in June. Overall, not a terrible summer when all things considered.

The chart I’d like to discuss today is of the weekly un-adjusted (not accounting for dividends) ratio between the S&P 500 ($SPY) and 20+ Year Treasury Bond ETF ($TLT) over the last seven years. As a reminder, when $SPY is outperforming $TLT the line rises and when the opposite happens the line declines, this doesn’t mean equities are appreciating, it simply shows which data set is rising more (or falling less) than the other.

I think it’s important to monitor the relationship between stocks and bonds and that’s exactly what this chart helps us do. The ratio between these two markets has been in somewhat of a range since late-2013 as it has been unable to produce a meaningful new high or lower lows. This creates a consolidation triangle pattern that we can view as levels of support and resistance with regards to the relative performance of $SPY and $TLT.

As the chart below shows, the ratio has found prior support at 1.45, which if broken could see a decline down to 1.35 which is the last significant area of price memory (2010 turning point and 2013 slight decline). On the upside we have a declining trend line connecting the lower highs since 2015. A break here could see $SPY outpace $TLT with the ratio rising back to its prior high around 1.80. To better gauge a break of either resistance or support (one will eventually have to happen whether it’s due to pacing of time or price movement) I’ll evaluate trend strength (not shown on chart) to better understand the potential the break has ‘staying power’ and the potential of a false break or reversal. But at this point, we have our levels and can be patient, allowing the market to dictate a bias.

stocks-vs-bonds

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

What Nick Saban Can Teach Us About Being Focused

There has never been an easier time to get distracted. Between Twitter, Facebook, SnapChat, fantasy sports betting, blogs on every possible topics, Trump outbursts, etc. there’s a never-ending list of things that can pull your attention and focus away from what matters. This can be detrimental for a trader as they begin falling down a rabbit hole that takes them further away from their portfolio and their investment process.

Nick Saban is arguably one of the best football coaches to step on the field, with multiple national championships under his belt. Back in 2013 Saban was asked if he saw that his QB was on the cover of Sports Illustrated here’s how he responded: 

“Do you think I sit around all day looking at magazines or what? I don’t even know what you’re talking about.

“You ask a question every week that I don’t know anything about. You need to come here and walk around and follow me around for like a week. I haven’t seen a newspaper today, I don’t know what’s happening in the world.

“I watch the Weather Channel for 10 minutes in the morning while I have a cup of coffee so I know what the weather’s going to be so we can practice inside or outside.

“Other than that, I really can’t answer your question because I have no knowledge of any of it.”

Saban didn’t (and probably still doesn’t) give a shit about what’s going on in the world during football season. His focus is on winning games and making sure his team is well prepared for their next game. He knows his goals and he shuts out the noise around him that could distract him from accomplishing them.

Do you have that level of focus when it comes to your trading? The answer is most likely ‘no’ and the second question I’d ask is why not? I know there’s been times where I’ve lost that focus and have to purposefully get back on track. Shutting out the noise is a constant battle with 24/7 news and social media. You can’t simply ignore it but must have ability to parse through what’s irrelevant noise and what matters.

Source: Nick Saban on AJ McCarron SI cover: ‘I don’t even know what you’re talking about’ (SI.com)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.