Trend Prophets Academy: April 23, 2024
Hi reader
Welcome to another edition of the Trend Prophets Academy Newsletter!
In this edition, we look at:
- Examining historical patterns of Nasdaq and the S&P 500 reveals what could come next.
- How Trend Prophets has protected capital during the recent pull back.
Since we know your time is valuable, we summarize each section with its key points on top so that you can get all the important information in less than 2 minutes. Those that want to learn more and see the graphs and visuals, can continue reading further down.
Understanding Market Moves: Lessons from History
The summary:
- Matrix profiles reveal that the closest historical parallels to today’s market trends in the Nasdaq and S&P 500 suggest potential downtrends, similar to those observed in 1983 and 1965.
- These profiles compare current market data against past sequences to forecast future directions, showing a cautious outlook for the upcoming periods.
- Despite similarities to past market cycles, no analytical tool can predict market movements with certainty, underscoring the importance of broader financial strategies.
Why is this important?
- Understanding historical market behavior can guide current investment strategies, but reliance on pattern recognition alone overlooks the unpredictable nature of financial markets.
- Diversification and a robust investment process remain crucial, as historical parallels provide context but not concrete predictions.
See below to read the full article.
Current Market Overview and Strategic Implications
The summary
- Last week saw significant market pullbacks due to reduced expectations for interest rate cuts, despite strong economic indicators such as full employment and solid GDP growth.
- Upcoming big tech earnings are critical and will likely dictate short-term market direction, highlighting the importance of strategic response to volatility.
- Trend Prophets has adjusted by moving riskier investments to cash, effectively shielding against a potential 10% loss in sectors like semiconductors and tech-focused funds.
Why is this important:
- The ability to swiftly adjust investment strategies in response to economic signals and market performance is crucial for protecting investments.
- Using tools like Trend Prophets for timing entries and exits can significantly enhance outcomes over full market cycles, demonstrating the power of tactical asset management.
See below to read the full article.
The Big Picture
Understanding Market Moves: Lessons from History
As investors, we often look to the past to discern the future. It’s a natural inclination—finding parallels in history that might hint at what’s next. Financial strategists, for instance, frequently overlay recent stock index performances onto past years, searching for clues about future movements.
Among the myriad of techniques for comparing time series data, I find matrix profiles particularly intuitive and revealing. This method involves selecting a segment of recent market data, comparing it to historical sequences, and identifying periods with the closest similarities based on ‘pairwise distances’—a fancy term for how each point in the data compares to past points.
However, it’s crucial to remember that no method offers perfect predictions. Our insights are only as good as the data range we analyze. While matrix profiles provide a clear view of historical parallels, they should be seen as one of many tools in our analytical toolbox.
For those interested, matrix profiles were pioneered by Eamonn Keogh and Abdullah Mueen. Their work is well-documented, and for the technically inclined, the Python library Stumpy (created by Sean Law) is an excellent implementation of this concept.
Recent Market Performance and Historical Parallels
Consider the Nasdaq’s (QQQ) recent trajectory: down 7.11% from its last high. Before last week’s 5.39% drop, the index was up by nearly 7.5%. Using matrix profiles, I discovered that 2024’s performance closely mirrors that of 1983—a year I vaguely recall through the lens of childhood TV favorites like G.I. Joe and Transformers, and my father’s concerns over a lingering recession.
Figure 1: Matrix profile pattern matching reveals that current 2024 performance for Nasdaq resembles late 1983 to 1984. Source: Yahoo! Finance, Trend Prophets.
Here’s a quick snapshot of 1983:
The year kicked off with the U.S. economy recovering from the severe 1981-82 recession.
- High initial interest rates at 21.5% due to rampant inflation were cut to 10.5% by mid-year.
- Inflation itself cooled significantly, from 13.5% in 1980 to 3.2%.
- Corporate earnings rebounded, spurred by lower rates and easing inflation, particularly benefiting sectors sensitive to interest rates, such as construction and industrials.
- Despite economic expansion, unemployment hovered around 10%.
This historical context raises an intriguing question: if 2024 mirrors 1983, what might cause a similar dramatic pullback in the Nasdaq? It’s worth noting that the Nasdaq of 1983, mainly composed of over-the-counter (OTC) stocks, isn’t directly comparable to today’s Nasdaq, now hosting some of the world’s most significant companies.
Broader Market Trends: A Look at the S&P 500
A similar analysis of the S&P 500 shows it aligning with 1965—a period marked by economic prosperity, rising interest rates to curb inflation, strong corporate earnings, and a tight labor market. Yet, as history tells us, this stability preceded more turbulent times.
While it’s tempting to seek definite patterns in these historical comparisons, the stock market’s inherent unpredictability defies simple forecasts. Remember, drawing parallels from previous periods is more academic than actionable. The market doesn’t always follow a predictable path—it rhymes rather than repeats.
The best strategy for investors remains diversification and a deep understanding of the risks involved. Sticking to a well-thought-out investment process is your safest bet for long-term success. And while tools like Trend Prophets can provide safeguards against downturns, they should complement, not replace, a sound investment strategy.
Current Market Overview and Strategic Implications
Last week proved challenging for many markets, with significant declines from recent highs largely due to revised expectations for fewer interest rate cuts this year. This is compounded by key economic indicators remaining robust:
- We have full employment.
- GDP continues to be strong, and Q1 GDP is expected to come in at+2.5%.
- Strong retail sales show that the consumer will still contribute positively to future GDP readings.
However, inflation hasn’t slowed sufficiently to prompt the Federal Reserve to consider more than two rate cuts this year, if any. This inflation outlook sparked a noticeable shift this month, with investors moving from riskier assets to safer ones. Figure 3 in our report illustrates this trend, showing significant underperformance in almost all risk asset classes relative to the S&P 500.
This week, the focus shifts to major tech earnings, which are likely to dictate short-term market movements and determine whether the recent pullbacks will deepen into a more sustained correction. We also have Q1 US GDP numbers coming out later this week and we will get a look at the associated Q1 inflation readings. Given the down trends that have emerged in many asset classes, the Trend Prophets system has shifted to cash to safeguard against further losses.
Table 1 outlines the year-to-date performance of these riskier strategies. Notably, our approach has effectively shielded investors from a 10% downturn in the semiconductor sector, exacerbated by specific losses in companies like Nvidia, and similar trends in other high-volatility areas such as ARKK.
The Value of Timing with Trend Prophets
The recent market dynamics underscore the importance of timely strategic adjustments. Using Trend Prophets to time entries and exits has proven invaluable, particularly through volatile market cycles. This tool’s ability to navigate quick and sharp market movements is a critical asset for investors looking to optimize their market positions over full cycles.
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That’s it for this edition of the Trend Prophets newsletter! Please contact us at info@trendpophets.com for any questions.
Cordell L. Tanny, CFA, FRM, FDP
President & Founder
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Disclaimers: Past performance is no guarantee of future results. This newsletter should not be considered as investment advice and is intended for information purposes only. Please see our Terms and Conditions for all disclaimers.