The Daily Decision for 2.13.18 - What's Next? History Suggests...

The State of the Markets:

One of my favorite jokes about Wall Street goes something like this: The first time something happens on Wall Street, it's called it a trend. If it happens twice in a row, it's a tradition. And if it happens three times in a row, well, it's darned near a commandment!

I guess it is good news then that stocks managed to close higher for a second consecutive session on Monday. It is also good news that stocks appear to be in "bounce" mode - aka phase two of the crash playbook. And on that score, technicians are saying it is good news that the S&P bounced off its 200-day moving average on Friday and as such, the low of the move is "in."

Given (a) the extent of the decline and (b) the dearth of any news or real fundamental support for the big dive, this argument would seem to have some merit. While Ms. Market can and often does do anything she darn well pleases, it was kind of difficult to justify a 12% decline from top to bottom based on the idea that rates and inflation might rise a little faster than expected.

Therefore, one can easily argue that the successful tests of the 200-day on an intraday basis and the 150-day on a closing basis means that it's time to go the other way for a while.

Speaking of bouncing at key technical levels, it was reported that Friday's timely reversal may have been aided by a report from an influential quant over at JPMorgan. Known as "Gandalf" the analyst suggested the selling attributed to volatility trading and strategies involving volatility targeting (such as risk parity and the like), had run its course. As such, traders had the green light to "buy 'em!" without the risk of being run over by additional selling from the quant crowd.

To be honest, we can't ever really know what caused the algos to reverse course and lurch upward. Which, of course, led the trend-following algos to hop on board. This, in turn, led to a nice rebound in overnight trading, which, of course, led to a solid open on Wall Street. And so it goes.

At the very least, it can be argued that we're seeing a bottoming process unfold. Up, down, up, down, up, up. Yea, that sounds about right.

What's Next?

However, the question on everybody's mind at this stage is, where do we go from here?

So, let's look at the history books to see if we can glean anything from the previous 10% declines in the market.

Going back to 1/3/1928, the analysts at Ned Davis Research tell us the S&P has experienced 96 corrections that measured 10% or more. This means that, on average, the stock market sees a drop of 10% or more a little over once a year. As such, it is important to keep in mind that these things are pretty common.

The average duration of a 10% correction has been about 3 months. And unfortunately, the average decline for the moves that make it to 10% is 19.5%.

In terms of what's next, the odds of a 10% correction turning into a "severe correction" (defined as a decline of 15% or more) is about 45%. This means that just under half of all 10% corrections get worse before they bottom.

It is also a bit discouraging to find that the average return 6 months after the peak is -7.3%. And the returns in the ensuing year have averaged -3.6%.

However, the good news is that an analyst from UBS pronounced yesterday that the key to future returns is the state of the market when the correction began. The stat offered is that when a correction of 10% occurs during a secular bull market, such as we're in now, the average gain over the next 12 months was on the order of 19%.

Thus, the conclusion here was clear - everyone should buy the dip. Got it.

Inflation Data Looming

But from a fundamental perspective, let's remember that we've got what could be a pretty big CPI number on Wednesday. Since much of the macro focus has been on the purported increase in inflation expectations, this number could be a market-mover.

In short, a number that is "too hot" could very well bring the sellers back and sent the market into "retest" mode. But a number that is less than robust could easily embolden the bulls. So, for traders, it's time to place your bets.

For the rest of us, this is probably a good time to take a breath and look for signs that the corrective phase has run its course. This would include LESS volatility and maybe some "basing" action where things get boring for a while. One can hope, right?

Thought For The Day:

Even if you're on the right track, you'll get run over if you just sit there. -Will Rogers

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research

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Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None

Note that positions may change at any time.

Today's Model Review:

LEADERS Model: The LEADERS currently holds 20% positions in the Consumer Discretionary, Technology, Industrials, Health Care, and Financial sectors.

CORE Model (Risk Managed Exposure):
Today's CORE model's exposure target: 50%
Current CORE Model exposure: 50%

To review, the goal of this model is to stay in tune with the overall risk/reward environment. Therefore, we make adjustments only when there is a meaningful and sustained divergence between the target model reading and our current positions.

TRADING Model: We currently hold trades in the Russell 2000, India Small Caps, Eurozone, a Marijuana space ETF, and the emerging markets.

2018 YTD Performance Update:
DD CORE: -0.3%
S&P 500: -0.7%

Daily Decision Trading Service
Current Portfolio Summary

% of
Technology Select Sector SPDR XLK 20% 12.1.16 $46.64 Buy
Industrial Select Sector SPDR XLI 20% 8.14.17 $68.58 Buy
Health Care Select Sector SPDR XLV 20% 11.27.17 $81.79 Buy
Consumer Discretionary Select Sector SPDR XLY 20% 2.9.18 $99.67 Buy
Financials Select Sector SPDR XLF 20% 2.12.18 $27.94 Buy

% of
ProShares UltraPro S&P (3X) UPRO 16.67%
(Equiv 50% Long)
Various $98.78 Buy

% of
iShares Eurozone ETF EZU 20% 5.11.17 $40.25 Buy
iShares Emerging Markets ETF EEM 20% 6.112.17 $41.57 Buy
VanEck Vectors India Small-Cap Index ETF SCIF 20% 7.18.17 $58.00 Buy
iShares Russell 2000 ETF IWM 20% 10.19.17 $146.09 Hold
ETFMG Alternative Harvest ETF MJX 20% 1.30.18 $35.29 Hold

% of Model Explained

The number shown in this column represents the percentage of the the model this position represents.

Current Rating Explained

This is our rating for the day. The Current Rating tells you what action we would take if we did not currently hold the position. A "Buy" rating means we would be willing to purchase the position at current prices. A "Strong Buy" suggests this would be our first choice to buy. A "Hold" rating indicates we would not make new purchases at current levels. And a "Sell" rating indicates we will likely exit the position in the near-term.

Positions Can Change

Positions often change during the trading session. Remember that we will send a Trade Alert via SMS Text Message and/or Email BEFORE we ever make a move in the models.

About the Daily Decision Models:
The Daily Decision is designed to be a simple, easy-to-follow e-letter service showcasing 3 different model portfolios. The LEADERS model is the flagship, growth oriented strategy that focuses on "where the action is" in terms of market leadership. The CORE model is a longer-term, risk-managed approach to keeping exposure to market risk in line with prevailing conditions. And as the name implies, the TRADING model is intended to be a tactical, opportunistic trading strategy.

Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: All. Note that positions may change at any time.

Wishing You All The Best in Your Investing Endeavors!

The Front Range Trading Team

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NOT INVESTMENT ADVICE. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Investors should always consult an investment professional before making any investment.

Posted to Daily Decisions Service on Feb 13, 2018 — 10:02 AM
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