Trading the Trend

[Beaches]

I would also like to acknowledge the time Duc has put into this thread and the preceding thread of Trading the Bounce. It is rare in this day and age to find someone with real knowledge of the markets that is willing to share it for no reward or remuneration other than to help others.

As your trading experience and time in the market increases, it becomes increasingly rare that you discover real and useful insights into the workings of the market. There are many opinions and claims around forums and amongst traders, with most being a complete waste of time. However, I would have to say that Duc has provided greater insight into the US market than I have come across for many a year and it has been a refreshing pleasure to follow his posts.

Thanks Duc and I hope you continue to post.

Finally, I would like to endorse this suggestion

I see elsewhere that you were thinking of opening your own thread 'Trading the Chop'. Excellent idea.

 

[qldfrog]

Long-time lurker, first time poster.

Felt I had to register and post so that I can say thanks to duc for the awesome analysis they give. This thread (and trading the bounce) were awesome threads that helped me navigate the pandemic and downturn. I’m certainly no expert and I have learnt a lot about the market as a result.

I am starting to find it very tiring with half of every page filled with petulant bickering, and claims of making xyz%. So much so that I am starting to browse other forums because it is tiring. Arrogance isn’t a favourable trait, nobody here is Warren Buffett, and nobody here is that one in a million trader that calls everything to perfection. If you were, you wouldn’t be here. Telling us how well you performed yesterday is of no use to predicting what’s going to happen tomorrow.

One question I have for the owners of so-called “stay at home tech”. It’s well known (and dead obvious) that stocks like Zoom are incredibly overbought. Surely these stocks have a huge correction on the horizon? It might not be tomorrow or this year even, but once life returns to normal, the EPS of these companies is going to drop dramatically. While some companies are moving to more flexible working arrangements with staff working from home, many (like the one I work for - sits very high up the S&P500) are going to return to normal office life when conditions allow.

Use the ignore function on the people you can not bear anymore.
Stay with us

 

[qldfrog]

A big thank you as well Mr Duc
Great argumented views on the us market, i was there purely for a few stocks and investment in area i can not find here, now it is a much more informed view and a welcome view to sky is falling readings.
Learnt do much in so short a time merci beaucoup

 

[Chronos-Plutus]

Arrogance isn’t a favourable trait, nobody here is Warren Buffett, and nobody here is that one in a million trader that calls everything to perfection. If you were, you wouldn’t be here.

There is no trader that gets it right 100% of the time. I like Warren Buffett, I think he is an outstanding investor, however even he has made some disastrous investments. In fact Buffett nearly went bankrupt with his textile factory when first starting out.

 

[Spaniel14]

There is no trader that gets it right 100% of the time. I like Warren Buffett, I think he is an outstanding investor, however even he has made some disastrous investments. In fact Buffett nearly went bankrupt with his textile factory when first starting out.

That is true, and there is a humility in admitting when a trade or investment goes wrong. Admitting you made a mistake is the first, and most important, step towards avoiding repeating that mistake. But I digress.

We’re into earnings season. Analysts will naturally have their predicted EPS, it’s just a question of how accurate they were. I feel that this season, we will see a higher level of surprise between expected and actual EPS. We’ve never been through market conditions like this in recent history, so I’m expecting analysts to be reasonably wrong across some of the more volatile sectors.

I have a feeling analysts will have underestimated the reduction in EPS within the travel sector, particularly airlines. There are a lot more moving parts than normal in the last quarter. We’ve had the severe drop in the revenue stream (passenger numbers, loyalty revenue etc.), but we have also had wild changes to OPEX (aircraft into various degrees of storage all costs significant money upfront, and a (smaller) continual cost to maintain, staffing redundancies), plus a hit to CAPEX (cancelled/delayed orders, route expansion delays, new product rollout delays etc.). There’s going to be significant non-cash impacts too, many airlines have accelerated retirement of their various fleets (Delta retiring the 777 for example) which will result in significant asset write-downs. In short, pretty darn difficult to solve a multi-variate problem as big as this.

On the flip side, as I eluded to earlier, there is tech. My feeling here is that certain stocks within tech are going to miss their predicted EPS by some margin. Zoom for example, they are a one-trick pony with a single product. Your typical John Doe uses a free version of Zoom (no revenue), so they are relying on corporations to sign on to Zoom. Many (like my own) have jumped on the bandwagon at short notice, as it is an easy to use interface, so companies can roll it out to staff without much pain. However, there are more attractive offerings - take Microsoft Teams. It does the job of Zoom and more, but it is fully integrated with Office 365. It makes no sense for companies to be paying for both products, so those that have jumped on the Zoom bandwagon for now, will revert to old faithful MSFT - less cost, less compatibility and integration issues as you have 1 product suite designed to work together, not 2 different softwares trying to work together (and let’s face it, MSFT have no reason to lend ZM a helping hand with integration, it’s against their own agenda). What does this mean? EPS may be looking good for ZM this quarter, but future quarters are not going to be as rosy. There’s also the question of how much has momentum trading inflated the share price of certain tech stocks (cough Tesla), and will this round of earnings announcements be enough to awaken many investors and send them on a reversal. Crystal ball anyone?

 

[over9k]

Right so I was going to break everything up and address all the drivel point by point but I'll make one large post that should hopefully cover it all:

This thread is called "trading the trend". Let's go back to before coronavirus for a moment.

Before coronavirus hit, there was already a long and consistent trend of business and work moving away from face to face/bricks and mortar and to distance/online based on purely economic reasons. The ability to order items direct from the manufacturer online, the ability for even a middle-man to sell items from a massive warehouse with rent a tenth of the price per square foot and massive economies of scale to boot, the ability for a business to reduce its necessary office space and therefore rent and fitout costs by 20% if its employees were to stay home/work from home just one day a week (let alone all of them), the ability to talk to someone halfway across the world in seconds virtually for free on a zoom call vs having to fly what could be teams of people for a day straight, pay for all their flights, food, accommodation, lost work, time away from home and so on and so forth were all major competitive advantages and resulted in half the bloody economy undergoing a structural readjustment based on nothing other than economic/cost reduction grounds.

This is the very trend I have been talking about ad nausea since my first comments in this thread.

What coronavirus has done is put that trend on steroids. We haven't seen 5% more people working/ordering stuff from home in the last 6 months, we've seen 10x it. Or whatever. Exact numbers don't really matter - it's a massive increase and that's all we need to worry about.

So from there, we ask ourselves, why? The answer is twofold, but both answers share the same source. Firstly, there's the lockdowns. Government imposed lockdowns literally required that many people work and buy from home. Secondly, human behaviour. Many both workers and businesses have voluntarily decided to keep everyone working from home because A: people themselves don't want to get the virus and B: getting the virus stops you from working. Even if you didn't actually care about your employees, keeping them uninfected makes sense from a purely business point of view. What is key with these two realities is understanding that even if all government imposed lockdowns were lifted, employees and businesses are VOLUNTARILY avoiding human contact. This means that government imposed lockdowns or not, the end result is still very similiar: Avoidance of human contact, i.e working & ordering from home if at all possible.

And you can prove this to yourself quite easily - if it was only about the lockdowns, why hasn't stay-at-home tech fallen off a cliff once the lockdowns have been lifted? Why hasn't everything else taken off like a gunshot? Why haven't we seen an inversion of what we saw previously?

There is a reason why what I have dubbed "stay at home tech" has outperformed all the major indices massively. There is a reason why basically all markets except stay-at-home-tech have tanked every single time bad virus headlines/data has hit the news and stay-at-home-tech has often actually increased on those days and that reason is that it is the VIRUS which is dictating human & business behaviour and therefore markets.

But the deeper point that people like duc are failing to recognise is that the coronavirus has not diverted a previous trend or created a new one - it has simply accelerated something which was ALREADY OCCURRING ORGANICALLY.

There is a reason why all the airline execs are saying that business travel will never return to previous levels. There is a reason why the airbnb ceo is saying his business will never return to previous levels. There is a reason why so many companies are mothballing entire floors of offices or buildings. There is a reason why office rents are down 25% and outright purchase prices are down 40%. There is a reason why jets are being retired and scrapped en masse. There is a reason why chief exec's of office furniture companies are saying their business will never return and they're attempting to pivot to home office fitouts. There is a reason why sales on ebay & amazon are absolutely stratospheric even when their bricks & mortar competitors have been allowed to reopen, and the reason is exactly the same for all of these things:

THIS WAS ALL GOING TO HAPPEN ANYWAY.

This is NOT a divergence from a previous trend, this IS the previous trend. It's just been put into overdrive and 5 years of change has occurred in about 5 months.

This is not to say that this is going to continue in perpetuity. I have never claimed that things will. Once the virus, and therefore the reason for the ACCELERATION of this phenomenon is gone, plenty of people will return to the office and plenty of money will go back to consumables like food rather than tv streaming services or what have you. But as long as the virus remains, so will this acceleration of this ALREADY OCCURRING trend.

But once a vaccine is found, things are NOT going to return to their pre-virus levels because those levels WERE GOING TO CHANGE ANYWAY.

I'll bet you any sum of money you like, absolutely anything, that zoom, amazon, ebay et al will NOT return to their pre-virus levels. Any sum you like.

Anyone who thinks that this is some kind of aberration and/or will simply be reversed once a vaccine is found, or that a single day of bounce in the rest of the market in response to, say, better-than-expected employment data disproves my assertion, is utterly, utterly clueless.

Consumer discretionary, flat for a month:

Consumer staples, flat for almost three months, down 6% in the last month:

Energy, flat for 2.5 months and down 15% over the past month:

Healthcare, flat for almost 3 months:

Industrials, done SFA since the end of april and down 10% over the last month:

Materials, flat for just over a month:

Utilities, flat for three months and down 10% over the last month:

Real estate, flat for three months and down 7% in the last month:

Even communications is flat for the last month after its run up until start of june:

Meanwhile, tech has done almost nothing but climb since the march slump and is up over 50% in that time, 20% in the last three months, with 8% of it being just in the last month:

And my "stay at home tech" like zoom:

Ebay:

Amazon:

Are up 100-150% since their march lows and 20% over just the last month.


I said a month ago when I joined that the U.S would see a 2nd wave/2nd slump. Since then, consumer discretionary is flat, consumer staples is down 5%, energy is down 15%, healthcare is flat, industrials is down 10%, materials is flat, utilities is down 12%, real estate is down 7%, and communications is flat.

Meanwhile, tech is up 3% and my stay-at-home tech is up 20%.

And wouldn't you know it, it was basically bang on a month ago that the run we saw (in some sectors) up until the 8th of june reversed at the exact same time that the virus cases started spiking:

So are you still going to sit here & claim I'm wrong and that this is all just one giant coincidence? That the virus data has nothing to do with anything when *nothing* except tech has gained since the reopenings, and most of the indices have actually fallen? All of which flipped trajectory at the exact same moment (like, to the day) that the virus case trajectory also flipped?

You still want to sit here & claim it's all a giant coincidence and that there's no trend here?

 

[Spaniel14]

Use the ignore function on the people you can not bear anymore.
Stay with us

That is an excellent function, I have just put it to good use. Thanks for the tip frog.

 

[ducati916]

The combined market cap of Apple and Microsoft is now 54% greater than the ENTIRE Russell 2000." Adding to that stat, below is a look at the 40 largest stocks in the S&P 500 as of mid-day (7/6/20). Notably, four stocks are now worth more than $1 trillion in market cap, and three of them are actually more than $1.5 trillion in market cap. Apple (AAPL) leads the way at $1.62 trillion, followed by Microsoft (MSFT) at $1.59 trillion and Amazon.com (AMZN) at $1.5 trillion. Alphabet (GOOGL) rounds out the list of four "trillion dollar stocks" with a market cap of only $1.02 trillion.

The four largest S&P 500 companies have a combined market cap of more than $5.7 trillion. That's roughly the same amount as the combined market cap of the remaining 20 companies with market caps above $200 billion. Along with Netflix (NFLX), three other stocks that continue to move up the list are NVIDIA (NVDA), Adobe (ADBE), and PayPal (PYPL). NVDA is now right on the heels of Intel (INTC) as the largest semiconductor company in the US. As of today, NVDA is less than $9 billion away from Intel's $250 billion market cap. PayPal (PYPL) -- which owns Venmo -- is now the 21st largest stock in the S&P 500, which puts it ahead of blue chips like Disney (DIS), Bank of America (BAC), Cisco (CSCO), Coca-Cola (KO), and Exxon Mobil (XOM).

Interesting to note that AMZN, GOOG, FB, BRK/A/B are not actually listed as Tech. although of course they (excluding BRK) use tech. to deliver their services.

Whenever there is a crisis, there is a run to safety. In the 1970's it was the Nifty Fifty etc. The run to safety always includes US Treasuries. It usually includes Gold.

The Big 5 (apart from MSFT which came back to life once they changed CEO from Ballmer) have been the stocks since circa 2003 to be in. They have been the subject of their own little club: FAANG etc. They never (even in this bust became cheap). AAPL in (I think 2002 was a $12 dollar stock and saved by Bill Gates financing Steve Jobs back into the CEO slot) AMZN dropped to low levels etc. If I had even suspected that it would do what it has done...would I have bought it? Of course.

What is the lesson? It is twofold:

(a) In any bust, there will be stocks that given some time will start slowly and gradually outperform for a long period; and
(b) They will often be hard to recognise.

Now one way is to operate some form of mechanical system that buys and sells stocks on set criteria (Mr Skate and all the other mechanical traders). This way you are part of the winners, catch a big chunk of the trend, jump out miss any slow patches, jump back on when the good times resume.

The key is to have a reliable, profitable methodology.

A second way is to do the above on a discretionary basis. Far harder. Why? Time spent researching, psychological issues and we could go on.

A third way is to own them via ETFs. You don't capture the outright outperformance of the individual stocks as they are part of an ETF. But you do gain benefits over simply trying a discretionary based system. A good mechanical should outperform simply buying ETFs.

jog on
duc

 

[ducati916]

So the market? I finished late last night and after addressing other issues (a) was tired and (b) left a final opportunity for Mr 9K to lead the way.

Had I updated last night this is what we would have seen:

On the faster track, still space to move higher. No issues yet, but, potentially building to one later in the week.

On the 50 (slightly slower) track, some issues:

Technically, the market ran into some resistance (excess) which needs to be worked out. This is most likely to be over time as the 20 (atm) still has room to run. This will need to be monitored over the next day or two.

Now we move live to intra-day:

We can see that the big surge from the w/e took us up to the resistance level. Going forward we can have more confidence that these levels will hold because overall volatility is lower, thus the spikes through the levels becomes far less probable. If volatility moves higher, we need to update to the more extreme levels.

So we can see that we are already indicating that stocks have pretty much reached their level of correction for today and will likely reverse tomorrow. We will confirm this after the market close today when we re-examine the two previous charts. I would also check TRIN levels after the close.

Up to yesterday, on a macro-basis: business as usual. No change. The economic data is gradually improving.

jog on
duc

 

[ducati916]

A sector to keep an eye on are the Semi's:

Semis started the month on a negative note last Wednesday, underperforming the S&P 500 by over a percentage point. In the last two trading days, though, the index has turned things around and is only marginally underperforming the S&P 500 MTD. While the index may be underperforming, the vast majority of the index's 30 components are still in positive territory with just five stocks in the index in the red on a MTD basis. Leading the way to the downside, Micron (MU), ON Semiconductor (ON), and Intel (INTC) are the only three stocks down more than 1%. To the upside, Taiwan Semi (TSM), ASML, and Teradyne (TER) are all up over 4%.

Even with the index's recent underperformance, since both the February market highs and the March lows, semis are trouncing the broader market. While the S&P 500 is down 6.41% since its peak on 2/19, the SOX is up close to 3% while Marvell (MRVL), Teradyne (TER), Monolithic Power (MPWR), CREE, NVIDIA (NVDA), and ASML are all up over 20%. Not surprisingly, returns since the March lows have been jaw-dropping. While no stocks in the SOX have seen triple-digit percentage gains, four stocks are up by more than 80%, no stocks are down, and the 'average' stock in the index is up over 51%.

For a group to be considered such a good leading indicator for the broader economy, the fact that semis continue to outperform the broader market is a positive trend.

Just note how far above the sector is from its 50DMA. This will be true of all the leading sectors and the QQQ, which correlates with the 50 chart (previous post). Part of the issue for this market is simply the speed with which it has run. The market has been on a sprint. Markets are marathons. When they sprint, they also pause for breath. The pauses do not indicate a reversal is imminent. Simply a pause is a pause.

jog on
duc

 

[Smurf1976]

So the market? I finished late last night and after addressing other issues (a) was tired and (b) left a final opportunity for Mr 9K to lead the way.

I've nothing useful to add but I'll just say that your posts are extremely informative and useful and are precisely the sort of thing which ASF needs.

 

[ducati916]

So from the data re. S&P500 we can see that the big chaps are dragging the market higher and the smaller chaps are holding it back. That will change (whether the virus remains or not) and positioning yourself now (especially if you have held off entering the market to date) does not expose you to the risk of chasing stocks that have already taken off.

As an example (an ETF that I hold via DFEN) XAR: Military (Industrials) has (as a sector) its earnings guaranteed by law into 2021. In 2021 with a new Cold War, the military budget under either President/Senate/Congress will increase or at worst stay the same. So currently, its not as flashy as the big Tech. but it allows rational entry points and over time, it will resume its trend higher. There are plenty of other examples.

Here is an article on the devastation of retail:

https://www.axios.com/retail-apocal...ing-77b8adf0-2cd1-499c-9375-fb3e05af0730.html

What is the takeaway?

Retail is adapting. Schumpeter's creative destruction. Part is the risk of holding individual stocks as opposed to an ETF due to unforeseen events and part is due to the evolutionary forces of capitalism when it is allowed to take place. There are plenty of crony-capitalism based sectors (Banking, Defence) that will prevent too much change too quickly. Once again, if investing/trading individual stocks, you need a methodology.

jog on
duc

 

[ducati916]

I've nothing useful to add but I'll just say that your posts are extremely informative and useful and are precisely the sort of thing which ASF needs.

Thank-you Mr Smurf, much appreciated.

jog on
duc

 

[ducati916]

Long-time lurker, first time poster.

Felt I had to register and post so that I can say thanks to duc for the awesome analysis they give. This thread (and trading the bounce) were awesome threads that helped me navigate the pandemic and downturn. I’m certainly no expert and I have learnt a lot about the market as a result.

I am starting to find it very tiring with half of every page filled with petulant bickering, and claims of making xyz%. So much so that I am starting to browse other forums because it is tiring. Arrogance isn’t a favourable trait, nobody here is Warren Buffett, and nobody here is that one in a million trader that calls everything to perfection. If you were, you wouldn’t be here. Telling us how well you performed yesterday is of no use to predicting what’s going to happen tomorrow.

One question I have for the owners of so-called “stay at home tech”. It’s well known (and dead obvious) that stocks like Zoom are incredibly overbought. Surely these stocks have a huge correction on the horizon? It might not be tomorrow or this year even, but once life returns to normal, the EPS of these companies is going to drop dramatically. While some companies are moving to more flexible working arrangements with staff working from home, many (like the one I work for - sits very high up the S&P500) are going to return to normal office life when conditions allow.

Thank-you Mr Spaniel, much appreciated.

jog on
duc

 

[over9k]

Here's a method: Understand why particular things are/aren't occurring, and act on/with that knowledge.

Mind-blowing concept I know.

 

[ducati916]

Then the question I have how do we determine it happening before it does?

This goes to the heart of the matter. As already alluded to, recognition in real time, before the move is really hard almost impossible. The answer is:

(a) Run a really good mechanical system or (far harder) discretionary system that picks up outperformance quickly;
(b) Buy sectors via ETFs;
(c) Buy the market.

(a) Will give you the highest returns. Go visit Mr Skate, Peter, Mr Frog et al for mechanical.
(b) Is relatively easy and (relatively) safe, but the returns will not match (a).
(c) Is the easiest of all, but will give the lowest return.

To pick stocks or sectors on the news, can be done, but it is harder.

However the real purpose of this thread is a continuation of Market Bottoms and Trading the Bounce. That is, has the market bottomed, if so jump back in to trade the bounce and hang on to the reversal or if no reversal hold on for the trend until the trend (potentially) ends due to XYZ. It was never really specific advice on buy XYZ as this is whatever. I have indicated what I have bought, but I buy those sectors because I have wanted to own them and didn't. This was my opportunity to grab them cheap. I have been in the market since 2001. Over time I have accumulated sectors that I like at basement prices in various crashes etc. A crash is the time you buy what you always wanted, but could never pull the trigger on when markets were flying.

Of course, psychologically, buying at the bottom or near the bottom is exactly what the majority will struggle with. Who wants to buy in a sea of red?

The purpose of the 3 threads is: you can buy with (relative) confidence because you have tools to track the overall market and therefore to an extent sectors and reduce your paranoia. Individual stocks are a crap shoot without some really robust methodology.

Now I will continue with this thread certainly to the next bust. Whenever that is. Might be years, decades or next month. One thing is 100% certain: the media and headlines will not be the first to tell you about it.

jog on
duc

 

[qldfrog]

I hope this will not corrupt your thread , it actually goes your way in term of choosing etf vs stock picking:

As noted the tech giants are going higher and higher.
I saw mentioned Amazon Microsoft Abobe Google Facebook..
It is actually surprising to see them treated as a whole and the way it is.
As an IT guy, i work with these products
If trying to have a discretionary input, we can look at the basis

Apple: fair got both pc and phones, ultra expensive and brand...but losing China.
Microsoft...got .. windows 10... and skype
For the tech. .NET...and?
Big company, no real growth ahead..why going on?
crazy PE.but Microsoft is the IBM of the 2000...one boat too late
Adobe? WTF?? Seriously? Ah ok, saw the name when loading pdf viewer....for free
Google renamed alphabet..oops
50pc of the retail traders lost...
One of the most innovative omnipresent company in it from pc to mobile to ai.. doing relatively worse than Microsoft ...
Amazon? Yes as it is both the shop you know and the behind the scenes AWS..technically top and omnipresent with edge tech
Facebook, Netflix...really?
even a lambda user should realise the issues

So? Pretty clear the Market trends of the fangs is foremost a brand name popularity contest over any technical or financial analysis.
you will be loser, relatively, if you try a fundamental stock picking.
As for minors like Zoom
2 video conferences with US/oz this week: used Google Meet not zoom...their choice, a first for me
Well as a user, Meet over Zoom..so simple

Duc ETF way over stock picking/gambling..

..

 

[over9k]

It's not gambling frog, I've been a bit more sophisticated than just eyeballing them. I do not hold apple, facebook, google, or slack for example, though I'm now thinking about facebook.

Here's everything:

Iirc I've had one red day in the last month. One. Even today was green whilst the djia dropped 1.5%.

I've been more than open about what I hold/buy & why - if people want to ignore me then that's fine, but as far as I know, my returns have been miles above everyone else's.

Considering that, I would have thought people would WANT to hear what I have to say, but apparently not.

 

[qldfrog]

It's not gambling frog, I've been a bit more sophisticated than just eyeballing them. I do not hold apple, facebook, or slack for example, though I'm now thinking about facebook.

Here's everything:

Iirc I've had one red day in the last month. One. Even today was green whilst the djia dropped 1.5%.

I've been more than open about what I hold/buy & why - if people want to ignore me then that's fine, but as far as I know, my returns have been miles above everyone else's.

Considering that, I would have thought people would WANT to hear what I have to say, but apparently not.

Probably not here on this thread.i think you should create you own as you suggested once and people will follow your progress.
You follow the lemmings and i agree it is the way to go...trend following is that too.just need to jump before the cliff.so how do you detect the cliff?
That is the key interest for your post
I do not have systems on the US market otherwise I would be in zoom surely.

 

[over9k]

Well apparently all the lemming retail robinhood traders have bought into retail stocks lately and have been absolutely slaughtered for it, so the lemmings might have already run themselves off the cliff.

But what I've been saying this whole time is that this stay-at-home tech stuff has a big, BIG fundamental driving it, and that fundamental is only getting worse by the day.

I'll probably start a thread called "trading the virus" or something like that to consolidate all my thoughts, analysis, trades etc soon.