The Nine Rules of Research According to Ned Davis

There’s always a news story blowing in the wind that can catch your attention and in turn shift your bias and focus. However, the first half of 2016 seems to have contained an abundance of such stories ranging from profit margin contraction, Fed policy, country’s leaving unions, police shoots, and whether certain political candidates are either racists or criminals.

As traders our job is to focus on what the market is telling us – for many of us that involves a form of analysis based on price movement and for others it incorporates corporate reporting and macro economics. No matter your market paradigm, staying focused on what matters is crucial.

This is why I thought it’d be a good idea to share the nine rules of research as created by Ned Davis, founder of the well-respected market research firm, Ned Davis Research…

  1. Don’t Fight the Tape – the trend is your friend, go with Mo (Momentum that is)
  2. Don’t Fight the Fed – Fed policy influences interest rates and liquidity – money moves markets.
  3. Beware of the Crowd at Extremes – psychology and liquidity are linked, relative relationships revert, valuation = long-term extremes in psychology, general crowd psychology impacts the markets
  4. Rely on Objective Indicators – indicators are not perfect but objectively give you consistency, use observable evidence not theoretical
  5. Be Disciplined – anchor exposure to facts not gut reaction
  6. Practice Risk Management – being right is very difficult…thus, making money needs risk management
  7. Remain Flexible – adapt to changes in data, the environment, and the markets
  8. Money Management Rules – be humble and flexible – be able to turn emotions upside down, let profits run and cut losses short, think in terms of risk including opportunity risk of missing a bull market, buy the rumor and sell the news
  9. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes

You’ll notice that nothing is profound among the nine. You likely have heard some version of each of them before. But when the voices get loud and volatility picks up, it’s nice to have a reminder in what’s important and why we do what we do.

Source: Ned Davis’ 9 Rules of Research (LinkedIn)

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.

Complacency in the Volatility Market

I was away from the office for a few days but upon returning it’s nice to see that trades have pushed equities higher as some of the major indices approach their prior highs. However, this has caused volatility to get back under 14 and the level of compression within the $VIX has hit such a level that causes me to give pause.

Volatility of volatility (as measured by VVIX) has fallen back to a level that for the last year and half has marked several low points for the $VIX.

VVIX

This, along with several other indicators that I closely monitor, has me watching volatility right now. While we head into a long holiday weekend, Jason Goepfert of SentimenTrader notes that since 2010 seasonality after Memorial Day hasn’t been extremely bullish for stocks, “Since 2010, the week of the holiday (next week) was positive only once (+1.2% in 2014). The other five years averaged a loss of 1.9%. None of the six years saw the S&P rally any more than 1.5% at its best point during the week.” Not that markets must follow their past playbook, but this negative slant of seasonality paired with what I’m seeing in volatility markets could play out in the bears favor in the coming weeks with a pop in the $VIX. We’ll see what happens.

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.

Why It’s Tough To Get Excited About Equities Right Now

Saturday marks the one year anniversary of the all-time high for the S&P 500 – and yet since then the market has been just a few percentage points away almost the whole time. How depressing is that? This range bound market has tested the patience and fortitude of many traders as they try to find an edge in a painfully boring tape. While we’ve seen some swings in both directions, stocks have largely been unable to show any strength after the weight of the evidence back in July turned bearish, which I wrote about back in late-July in a post titled The Greatest Risk of A Market Peak Since 2007.  

While there’s several pieces of data you could point to that show hints of brighter days ahead, when you look at just a basic chart of the major indices, it’s tough to get very excited. The S&P 500 as created a clear level of resistance at 2110. the Dow Jones Industrial Average has put in a false break out from its prior high as price has come back into its year-long range. The Russell 2000 is in a down trend of lower highs and lower lows – as is the international index MSCI EAFE.

equity

Eventually we’ll see a breakout. It could be to the upside or to the down, at this point this look more poised for the bears to retain control but as a price-focused trader I’m prepared for either conclusion. Patience has never been more of a virtue than the last twelve months in the equity markets.

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.