Trend Prophets Academy: April 8, 2024
Hi reader
Welcome to another edition of the Trend Prophets Academy Newsletter!
In this edition, we look at:
- Last week’s job report showed unexpected strong growth, but digging into the details shows some potentially concerning trends and it might not be as rosy as it seems.
- How intraday volatility is resulting in too many days where the market cannot hold onto gains.
- How to build a stable core component in an investment portfolio.
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.
Tip: Don’t accept headlines at face value and you need to investigate the details.
The summary:
- Headlines are designed to grab your attention. But the true importance of the information is found by analyzing the details. For example, Friday’s US employment report showed a gain of 303K jobs, which at first glance could mean a hot economy that could prevent the Fed from cutting rates as much as the market would like.
- But to see if the jobs picture is that good, we need to look at the details:
- Are the gains in the private sector or in the public sector?
- Are they concentrated in any industry?
- Are they full-time or part-time?
- Wage growth continues to moderate.
Why is this important?
- Analyzing the details will provide more information as to what it really means for the economy and the stock market.
- Digging deeper into the Household survey will reveal that full-time employment has been down since last November, and that part-time employment is up.
- This is the kind of crack that is subtly appearing in the jobs scene that Federal Reserve officials must keep an eye on.
- Policy mistakes can occur very quickly, and monetary policy cannot remain too tight for too long, or recession fears could creep back into the market.
- Slowing wage growth is a good sign of decreasing inflationary pressures.
See below to read the full article.
Intraday Volatility for Most Indices is Picking Up
The summary:
- Intraday volatility is characterized by sharp differences between the daily high and low. Reversal days are those where the price has gone up considerably during the day, only to reverse course and finish lower for the day.
- Over the past 28 trading days for the S&P 500 (SPY), 8 days exhibited reversals. That’s over 28% of all days.
- Last Thursday saw a major reversal after several Fed officials gave speeches saying that one rate cut may be enough. Most are now saying there is no rush to lower rates.
Why is this important?
- Increased intraday volatility is a sign of market jitters and gives an indication of how quickly things can change when new information comes out.
- The markets will likely continue to be very sensitive to every statement made by central banks. The market has settled into a scenario of 2-3 rate cuts this year, with the first expected in June.
- However, many recent Fed statements are threatening this scenario, and the markets typically react negatively.
See below to read the full article.
Building the Core Part of a Portfolio
The summary:
- The core part of a portfolio should consist of stable, high-quality investments. This can be done with individual equities, exchange traded funds, and some good mutual funds.
- Most individuals do not have the time to do the research and follow individual stocks and thus prefer passive index funds.
- A solid portfolio management process delivers results and removes emotion from the equation.
Why is this important?
- Investors sometime struggle to identify how much risk to take.
- Creating a personal risk budget framework is not easy, especially when our emotions get in the way. But process is important and will prevent extreme losses that can ruin a financial plan.
- Trend Prophets offers a core ETF strategy that has greatly outperformed a buy and hold benchmark: Trend Prophets Conservative Canada has returned 721% between 2012 and April 5th, 2024, vs. 409% without our system.
- The US conservative strategy has produced a 700% return vs. 502% on the buy and hold portfolio (2010 to 2024-04-05).
- Our conservative portfolios offer improved returns, lower volatility, and incredible downside protection (it’s passive investing 2.0!). Visit trendprophets.com to learn more.
See below to read the full article.
The Full Articles
1. Our Tip to Make you a Better Investor:
Don’t take headlines at face value and you need to investigate the details.
Last week’s US employment report showed a much stronger than expected gain in new jobs, coming in at 303,000. At this point of the business cycle, good news is considered bad news since an overheating economy could keep inflation higher than what the Federal reserve is targeting. Sticky inflation will make cutting rates this year difficult. And it is the expectation of rate cuts that has propelled the market to all-time highs.
If the report was so strong, then why did the markets rally on the news?
In most situations, we can never know exactly why the market reacts the way it does. This is why media headlines on most days should be scrutinized. This brings us to this week’s tip on how to be a better investor: Ignore the headlines and dig into the details.
This week’s job report is a perfect example. The initial expected reaction to a strong jobs report would be a market selloff because it would rattle our interest rate cut expectations.
But if we look at the details beyond the headline, we might uncover some important information that could shed light on what is happening in the job market. Like everything in life, you should have a process. And the process for examining the job reports should be as follows:
Are the gains in the private sector or in the public sector?
This can be determined by looking at the individual line items in the establishment report or on tradingeconomics.com. Last week, there were gains of 232k in the private sector and 71k in the public sector. If most of the job gains were in government while the business sector showed a decline, then we might need to worry.
Are the gains concentrated in any sector?
Most of the gains continue to be in the health care sector (up 72k), government (71k) and construction (39k). Most industries experienced a negligible change. In this aspect, job growth was not broad across all industries.
Are the job gains full-time or part-time?
Increasing part-time work due to economic reasons is not a good thing. This means that people are accepting part-time work because they cannot find full-time employment. Figure 1 shows the current trend in part-time and full-time employment.
Figure 1: US Employment Household Survey, full-time and part-time employment gains (losses). Source: BLS, FRED, Trend Prophets
We can see that since last November, full-time employment has been down while part-time employment has been up. This is the kind of trend we need to pay attention to as it could mean a deterioration in the job market and a potential slump in consumer spending down the road. This is something that the Fed must be paying attention to because keeping rates too high for too long could result in a policy mistake that could quickly result in a deteriorating economy.
This could be one reason why the market rallied on Friday (remember, slightly bad news is positive for stocks right now). The other reason could be because wage growth is increasing at a slower rate. Average hourly earnings is the key inflation gauge in the employment report, and it is currently signalling that inflation is moderating. Figure 2 shows the year-over-year change in average hourly earnings in the private sector. We can see the steady decline in the yearly change, and this continues to be a very encouraging sign.
Bottom Line: The market had a terrible week with indices pulling back from all-time highs. Friday’s relief rally could be just that; a rally after 4 successive down days. However, we are at the point now where every economic data point and every word uttered by a Fed official can create volatility. And this is exactly what we look at in the next section.
2. Intraday Volatility is Picking Up
Intraday volatility measures the range between daily highs and lows and how quickly prices shift between them. Imagine a day where SPY opens +0.5% from the previous day’s close, then hits a daily high of a +1% gain, only to finish the day down -0.25%. This is a classic sign of a jittery market and tends to occur at market tops.
Figure 3 plots the daily high percentage change reached on a given day (x-axis) against the closing percent change for the day (y-axis). I structured this analysis to look for days that opened higher than the previous day’s close, hit a daily high and then at some point lost at least -0.25% from the previous day and then closed down for the day. I did this for all of 2024. In the past 28 trading days, there have been 8 days that fit this pattern. That means over 28% of all days since the end of February had major reversals.
That is not the sign of a calm market even when making all-time highs.
In contrast, figure 4 shows the number of reversal days during the last two months of 2023, which witnessed an incredible rally few expected.
Figure 4: Characteristics of significant daily reversals for SPY November – December 2023. Source: EODHD, Trend Prophets.
We can see only three reversal days, and none nearly as bad as the one we witnessed last Thursday which at one point posted a 0.9% gain, only to end down -1.2%.
To add more information to these graphs, I coloured each dot with the time the reversal occurred (once it fell below a -0.25% loss for the day. We can see in Figure 3 that most occurred in the afternoon. Coincidentally, they occurred after a Fed official spoke. Figure 4 shows that most of the daily highs occurred right after the market opens.
This is a great example of a jittery market that is priced for a Goldilocks environment characterized by full employment, low inflation, and solid corporate earnings. Anything, and anyone who threatens the stability of this soft-landing scenario could cause sharp market losses.
3. Building the Core Part of Your Portfolio
A portfolio should consist of different assets that reflect your overall investment objectives and risk tolerance. Most pension funds today have moved to a Total Portfolio approach. This means that professional investors do not look at their assets and asset classes in silos, but instead allocate risk across their different asset classes and consider how these risks work together to produce the results they need. An individual’s portfolio should be no different. And the core part of your portfolio should be the stay-at-home defence sleeve (relative to the other parts of your portfolio).
For example, imagine a portfolio that is composed of:
- 50% high quality equities that Warren Buffet would approve of.
- 25% fixed income securities to act as ballast against the equities and reduce portfolio volatility.
- 15% Alternative investments where you can add real estate, hedge funds, and non-traditional asset classes.
- 10% high risk trading strategies.
In such a structure, we have allocated risk across different buckets in line with what we want to achieve at the top line. The problem is that most people do not do this and have no process. And good portfolio management is about adopting a process and removing emotion from the equation.
Now our 50% core doesn’t have to be invested in stocks because it could mean owning 20-30 individual companies. Some investors might not have enough capital to allocate to so many names. They may also not have the time to research and understand the companies. And with so much information out there, who has the time to comb through all of it and come up with informed decisions? And then do this over and over!
This is why ETFs have become so popular. They provide instant diversification and are cheap to own. However, they leave you fully exposed to all the losses that come with market corrections and recessions. And there is no one there to guide you through these turbulent periods.
But what if you had access to a system that can tell you when these wealth destroying events are more likely to occur and tell you to sell and stay in cash? You would be able to:
- Improve your long-term returns.
- Reduce overall portfolio risk.
- Create long-term wealth far above simply buying and holding index funds.
And this is exactly what Trend Prophets offers.
Our conservative portfolio suggestions offer investors a core portfolio that should be in line with the objectives of the stable sleeve of your portfolio (click here to see this on our site).
For example, the following two graphs show the risk and return profiles for our two conservative options: one intended for Canadian investors and one for US investors. The idea behind these graphs is to show you where your portfolio ranks in terms of risk and return against other investments. We all want the best return for any level of risk taken. Why would anyone take more risk to achieve the same level of return as a less risky option?
Figure 6: The risk-reward trade off for our US Conservative Portfolio is greatly improved as compared to the same portfolio without applying our system. Source: Trend Prophets.
On these graphs, you want to be on the top left. This means you are getting high returns for low levels of risk (we use volatility as our risk measures since it gives you an indicator of how much your investments are expected to fluctuate in value). And this is exactly what our portfolios do. They shift everything to the top left: higher returns for lower risk! The cross-hairs represent the S&P 500. We use that as our point of reference to compare the Trend Prophets portfolio and the benchmark portfolio which consists of the same ETFs, but not applying our system and signals to it.
Equally important is that we give you a process and take emotion out of it.
Here is the performance for both portfolios:
Calendar Year Performance for the Canadian Conservative Portfolio
Table 1: Calendar year performance for the Canadian Conservative Portfolio. Source: Trend Prophets.
Calendar Year Performance for the US Conservative Portfolio
Table 2: Calendar year performance for the US Conservative Portfolio. Source: Trend Prophets.
Notice that the Canadian portfolio has not had a negative year, while the US portfolio had only one negative year (in 2022, and still way better than the buy and hold case).
The concept of portfolio diversification hasn’t become obsolete. It has evolved. And all investors must start looking at including new technologies in their process.
Don’t wait. Subscribe today and see what we can do for you.
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.