For the past 25 years, my expertise has been in applying mathematical models and quantitative methods to financial markets to determine the direction, momentum, and volatility of price trends in order to identify emerging trends as they emerge and capitalize on them until they change in order to uncover potentially profitable price trends with an asymmetric risk/reward.
A position with asymmetric risk/reward is one in which the possible profit is larger than the potential loss, or the size of the expected gain is greater than the magnitude of the loss.
It's the combination of these asymmetric risk/reward payoffs that provide us with asymmetric investment returns, where the downside when the ASYMMETRY® Managed Portfolio is in drawdown is multiples less than it's upside over full market cycles.
To achieve this asymmetric payoff, we must necessarily predefine our risk and then let our profits run until the weight of the evidence indicates the trend has changed or is more likely to reverse.
By predefining the risk, we determine when to sell a position if it's declining to cut the loss short to limit the loss.
To capitalize on the trend until it changes we apply multidimensional exits with varying time frames and objectives.
I thought of this early today as I looked at a price chart, a visual representation of the trend, and noticed the S&P 500 is at an inflection point. I'll use this chart of the price trend, which is a simplified idealized way to see trends as I do, and I'll leave out the other details to keep is simple.
I use the equally weighted stock index to gauge the overall market trend because it's a better representation of the stock market because it holds just 0.25% in each of the 500 stocks instead of weighting them by their size. For example, the table below is the current holdings of the cap-weighted S&P 500 which has 7% in Apple simply because it's the largest of the companies.
Currently, the cap-weighted index is as focused in the top holdings than it's ever been because the largest companies have been the strongest recently, but past performance is no guarantee of future performance, and this trend will eventually change.
With data from Barchart we draw a time series chart of the S&P 500 Equal Weight Index. Equal-weight indices include the same stocks as their respective market-cap-weighted indices, but each company is allocated a fixed equal weight in the index at each quarterly rebalance.
The black line is the index trend, the red dots are a volatility exit system, and the blue line is a trend following indicator based on the recent average price. The blue line in the block below that is a measure of short term relative strength that measures the price or index momentum which tells us how fast it's moving. Let's point out first that over the last year, we could say the trend is up, but volatile. At first glance, you may have thought the trend was sideways because the index of stocks has been unable to make any real definitive directional move up or down, but there's several swings up and down. Those are countertrends. However, if we simply define a trend as higher highs and higher lows, upward to the right, the market is in an un uptrend technically speaking, but it's a weak and volatile uptrend. It's the kind of trend that's difficult for investors to hold on to because the countertrends are sharp and scary. Countertrends are even more scary when we consider the eriod before this was a -23% decline as you can see in the below we created with YCharts.
Back to the trend chart, I say the overall stock market is at a short term inflection point because it's pulled back to the volatility exit point which, if pierced, would indicate the price is no longer trending within a normal movement is has the last few weeks. That is, the trend would have shifted outside the normal noise of the market.
The next signal is the lower relative strength indicator measuring the speed of the above move, and it's testing the midfield. Thinking of a football field, the 50 yard line is midfield. When both offense and defense are lined up midfield, the play can go either way. The offense could fumble the ball that's picked up by the defense who runs it back the other way. Or, the offense could run the ball over and over until it reaches the higher level to the endzone. The offense would also throw the ball hard and fast to the endzone for a quick score.
The point is, it's at an inflection point, the point were the direction is going to be turning point.
Haven observed these trends like this daily for over two decades, my best guess is if today's inflation report is as expected and not a surprise, this recent pullback of -3% or so is a normal retracement of the prior gains from the market waiting to see what's next in the macroeconomic data.
Then, it may be able to hold this line and reverse back up into a continuation of the trend.
On Tuesday, I shared on update X (formerly known as Twitter) the Fear & Greed Index has declined with falling stock prices. In the post before that on June 13th I pointed out the Fear & Greed Index was tapping its high for extreme greed.
In other words, a few months ago the market was very bullish, to the point of an extreme as measured by the seven investor sentiment indicators within the Fear & Greed Index. See the lower chart above.
Once most everyone is already bullish and thinking the stock market will continue its uptrend, the buying enthusiasm eventually becomes exhausted, so there's not enough buying pressure to dominate selling to keep pushing prices higher.
Over the past few weeks, we once again saw that play out.
Next we'll see if the decline in the stock market also drove down sentiment enough to make another run to the upside!
Mike Shell is the founder, President, and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of Asymmetry® Managed Portfolios. Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies. Shell Capital provides investment advice and portfolio management to clients with separate accounts at Goldman Sachs Advisor Solutions with an investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not individualized advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. If this website contains information regarding Options Trading, please read the Characteristics & Risks of Standardized Options, also known as the options disclosure document (ODD). Options involve risk and are not suitable for all investors. The views and opinions expressed in Asymmetry® Observations and Asymmetric Investment Returns are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.