XBI: #BTFD

If you want to skip the entertainment below and get straight to the punchline: XBI has been in a steady uptrend and recently experienced a pullback. It looks like the drop has stabilized so I’m going to jump in and try to ride it back higher.

However, if you want to read on for what too often passes for trade analysis, feel free to keep going…

Obligatory Macro Environment Analysis

Trade war jitters are yet again on the table as the most likely cause cause of the pullback. Of course, maybe you just had a bunch of people decide to take profits, which lead to a cascade of sell orders from algorithms and monkeys. Honestly who knows but we just experienced a risk-off period that created a buying opportunity for us.

Chart Analysis of Questionable Value

I could draw a bunch of random lines on the chart to pretend like they show support and resistance levels. News flash: they don’t. But the chart below clearly shows the classic technical pattern called Satan’s Snowball setting up. It’s one of the lesser-known chart patterns.

2018.08.01 XBI - BTFD

Obligatory comment on what’s driving sector support

XBI should stay fairly insulated from all the nonsense and noise coming out of Washington. XBI is US-focused and represents a lottery ticket for a lot of investors. The only thing XBI has to contend with is if people think the multiples they’re paying are ridiculous or we hit a risk-off period and drug pipelines and massive acquisitions at giant multiples are abandoned. But hey, that’s next year’s worry. Not this week’s, which is where we’re playing with this trade.

VNQ – Add Another Leg

Back in early March I published a post that detailed Signalee’s Core Positions. The two areas I detailed were real estate and South Korea. South Korea has bounced around until it dropped 10 percent in mid-June but VNQ has steadily trended upward. Both of them at the time represented good value and paid a decent dividend. Since then, war tensions on the Korean peninsula have abated but the stronger dollar impacted the value of South Korea equities, which had a stronger effect than the threat of war on ultimate prices. In each case, only a partial position was initiated because one of the main ideas of trading is to limit risk until the signs point to you being right. One of the easiest ways to limit risk is to use a partial position to start a trade and then slowly add to it as it goes in your favor.

Since South Korea has dropped, we’ll use the immortal words on a handwritten note tacked to John Tudor Jones’s wall:

Losers average losers.

JTJ

While fortunes have been made doubling down on a losing position, more have been lost. So I’m focusing on VNQ for today’s post about adding another leg to the trade.

2018.07.23 VNQ

VNQ initially sold off because investors felt the pace of interest rate hikes would be faster than the economic expansion that would allow landlords to hike rents. Historically, real estate has generated positive real returns in a rising interest rate environment simply because a rising interest rate environment has a growing economy supporting it. The ups and downs of a REIT’s stock price is largely determined by which will go up faster: interest rates or rental demand.

With the burgeoning trade war it appears that investors think the pace of rate hikes will slow while demand for real estate will remain robust. It could also be a safe haven play for yield. It could also be investors getting over their fears that Amazon was going to cause a retail apocalypse and destroy demand for retail space.

I don’t know – I could be completely wrong on all of the above. I also have no idea whether the current dynamic that is playing out will continue and we’ll see further price appreciation in VNQ.

But if I knew for certain then I wouldn’t leg into a trade as it moved in my favor. I’d leverage myself to the hilt and put it all in now. This is simply the nature of the game: do your best to understand the fundamental or psychological drivers that are moving markets. Recognize that even if you’re right about the fundamentals, if enough people disagree with you then you can still lose money if you don’t manage the downside. So use the full risk management toolbox available to a trader and leg in while using any long-term moving average of your choice for the exit.

For today, that means adding another leg to VNQ.

IWF: #STFR

And one day later: #STFR. Quick hits are the best hits.

2018.07.06 IWF - STFR

I don’t put a lot of faith in support and resistance because the entire history of the stock market is one of breaking support resistance levels. However, it typically takes more time for price to grind through new highs instead of returning back to where new highs are a possibility.

So I made a quick buck and am hunting for the next trade.

IWF: #btfd

If you want to skip the entertainment below and get straight to the punchline: IWF has shown strength over the past X months and recently experienced a pullback. It looks like the drop has stabilized so I’m going to jump in and try to ride it back higher.

However, if you want to read on for what too often passes for trade analysis, feel free to keep going.

Obligatory Macro Environment Analysis

Trade war jitters probably caused the pullback. I’m thinking interest rate hikes might be another likely culprit. Of course, maybe you just had a bunch of people decide to take profits, which lead to a cascade of sell orders from algorithms and monkeys. Honestly who knows but we just experienced a risk-off period that created a buying opportunity for us.

Chart Analysis of Questionable Value

I could draw a bunch of random lines on the chart to pretend like they show support and resistance levels. News flash: they don’t. The classical interpretation or the price action on the chart is a rising wedge. Some technicians would have you wait until price breaks the upper line that represents overhead resistance, some would have you wait until price breaks the upper line and then “retests it,” while others would have you enter off support of the lower line. I’m a short-term mean-reversion trader so I’m doing the latter.

Just so we’re clear: I’m not actually using that “rising wedge” to guide my trade because you could also interpret the price action as a tiny dwarf wielding a really long whip that’s about to be cracked. I’m not sure what you do with that information, but there it is.

2018.07.05 IWF - BTFD

Since the randomly drawn lines above are not predictive we always use the pioneering work done by the Franciscan friar William of Ockham (of Occam’s Razor fame) to double check our assumption. It’s a 4 step process:

  1. Pour yourself a shot of your favorite liquor.
  2. Take the shot.
  3. Now squint at the chart for no more than 2 seconds. A real technical analysis pro will use his peripheral vision while squinting.
  4. Answer one question: did the blurry, squiggly line you thought you saw go from the bottom left of the chart to the top right?

If you answered “yes” to the fourth step above then you’re in luck! The trade has been confirmed. If you’re somehow not sure, then repeat steps 1 through 4 above until you have your answer.

Obligatory comment on what’s driving sector support

A lot of movement in markets is random noise. Narratives happen that get overblown, which leads to a sell-off. At some point that narrative goes quiet or gets replaced. Since the trade war rhetoric has simmered down and news is out that Europe is actively seeking a way to diffuse it the next narrative is likely to be the old narrative: the US economy is still growing, unemployment is really low, and inflation is still contained. So go buy growth.

ECH: #STFR

I always love dumb luck. Sometimes mean-reversion trades take an extra day or two to find their footing and resume the prior trend. Sometimes they pop the next day. These trades don’t happen often and they’re certainly not due to skill: just luck.

2018.05.10 ECH - STFR

We hopped on, ECH popped, then we hopped off. Sure, it was dumb luck but a well-defined process helps you take advantage of it when it happens.

#BTFD: ECH

It’s always fun to speculate as to what is driving markets. Trump pulled us out of the Iran deal and the European Union is scrambling to keep it in place. Do they think the deal is effective or do they want to maintain the lucrative market access that lifting the sanctions gave them? Does Trump think he can get a better deal or is he just playing to his base of supporters and can give a rats about actually following through at the negotiation table?

Who knows.

The reality is that the global economy is still chugging along. While the rest of the world may be slowing down a little, the US is showing few signs of taking a breather. There is some rumblings that China has shut down port offices and are not issuing new certificates cargo ships to import various products into China. I’m assuming it’s targeted at US farmers although a lot of other industries are finding themselves caught up as collateral damage.

There are so many storylines out there to try to guess where the market is going to go. Or if you prefer: to guess where other people will guess where the market is going to go.

Instead, stick with a repeatable process: look for uptrends, wait for the pullback, buy once it looks like it is stabilizing, sell when it mean-reverts.

Which brings us to ECH.

2018.05.09 ECH

ECH has been in a strong uptrend for the past couple of years but has spent most of 2018 in a trading range. Trading ranges work for us too. Regardless, price pulled back to the bottom of the range, looked like it caught a bid around $51 and moved up again today. The fun thing to note on today’s price range: it looks like someone forgot to use a limit order and got taken advantage of.

Entered at $51.67. Stop loss is at $48.75.