A whole lot of peddling…

Friday, 27 October 2017
Melbourne, Australia
By Kris Sayce

  • Fight robots with robots
  • This Is Where Stocks Are Likely To Go Next…

We confess. Sometimes, the market makes us laugh.

As reported by Bloomberg:

Amazon.com Inc. showed investors it can run grocery stores, churn out gadgets, expand its cloud-computing business and invest in new markets, all while selling more products online and managing expenses.

The company reported third-quarter sales and profit that topped analysts’ estimates. The results reassured investors that the company can integrate its biggest-ever acquisition — Whole Foods Market Inc. — without disrupting its dominating e-commerce performance.

The market reaction? In after-hours trading, the stock gained 8.5%. Investors loved it.

Of course, while investors may have loved it, we also know that sometimes investors live in a fantasy world.

Because as we look at Amazon.com Inc’s [NASDAQ:AMZN] quarterly results, we see that the company recorded revenue of US$43.7 billion. An impressive number. It’s a big increase on the same quarter last year, of US$32.7 billion.

That’s the fantasy. Now the reality.

To offset the increased revenue, the ‘cost of revenue’ is also up — by US$6.3 billion. Plus, ‘operating expenses’ are up too — by US$5 billion.

The net result is that for all the effort of increasing revenue by US$11 billion, Amazon.com’s net profit increased by just…US$4 million.

It’s like the cyclist who is in too low a gear on a flat road — a whole lot of peddling, without getting very far.

Markets

Overnight, the Dow Jones Industrial Average closed up 71.4 points, or 0.31%.

The S&P 500 gained 3.25 points, or 0.13%.

In Europe, the Euro Stoxx 50 index closed the day up 45.74 points, for a 1.27% gain. Meanwhile, the FTSE 100 gained 0.53%, and Germany’s DAX index added 1.39%.

In Asian markets, Japan’s Nikkei 225 index is up 203.46 points, or 0.94%. China’s CSI 300 is up 0.23%.

In Australia, the S&P/ASX 200 is down 19.9 points, or 0.34%.

On the commodities markets, West Texas Intermediate crude oil is US$52.63 per barrel. Brent crude is US$59.38 per barrel.

Gold is trading for US$1,267.92 (AU$1,660.22) per troy ounce. Silver is US$16.77 (AU$21.97) per troy ounce.

The Aussie dollar is worth 76.35 US cents.

Bitcoin is US$5,921.76.

Fight robots with robots

From Bloomberg:

Active fund managers, reeling from years of underperformance, are increasingly reaching for quantitative tools to gain an edge as competition from cheap passive products and looming MiFID II regulations lead them to rethink their businesses.

“It’s not about the magic sauce anymore,” said Rob McCreery, founder of Libra Investment Services, a London-based provider of quant research for active managers for 14 years. Stock pickers “are becoming much more open-minded towards anything that can help with timing and screening good ideas.”

As the markets become more and more and more computerised, automated, and dare we say it, robotic, the greater the advantage there is for those who can trade in such a way.

Those people are known as quantitative traders, or ‘quants’ for short. They are a rare breed. Few genuine quants exist outside of the big Wall Street banks. But we’re lucky enough to have found one.

And what’s more, he works for us. He runs one of our most popular and successful premium trading services, Quant Trader. Next week, the quant himself (Jason McIntosh), will reveal some of the secrets to successful quant trading.

You truly won’t want to miss it. Look out for details.

In the meantime, Jason has been kind enough to share some of his thoughts on trading with us. So, we’ll now hand you over to Jason’s capable hands…

Cheers,
Kris

……………………………………………………………………………………………………..

This Is Where Stocks Are Likely To Go Next…
Jason McIntosh, Editor, Quant Trader

‘Then and now’ comparisons are fascinating.  

It always amazes me to see how times change (or don’t).

Maybe it’s a family photo or a city skyline…community values or changing fashions. No matter what the subject, a contrast with the past is always interesting.

A few years back, I tracked down an old photo of my family home. The picture dates to 1906 — the year of construction. 

I’ll never forget seeing the photo for the first time.

Yes, it was my house — the windows, chimneys and gables were unmistakable. But the setting was totally different. The ‘then and now’ contrast was much more than I was expecting.   

The photo shows the original family standing in front of their new home. You can also see buggy tracks in what was at the time a dirt road, and a long forgotten neighbouring house to the side. 

It was like seeing an old friend, but with a completely different life to what you knew.   

Images like this captivate me. I imagine the period of the original photo. I wonder what the people were thinking. I wonder what it would have been like to be there that day.

But pictures are just one way to make comparisons. Another way is to look back at statements about the future. Some are hopelessly wrong. But others get pretty close to the mark.

Have a read of this:     

I recall you writing a very good article some while ago about the market, looking forward, where you thought stocks were looking bullish going into 2017/18 and beyond.

I’m wondering whether you still think that?

Member, Les

Les is referring to a pair of special updates I wrote in February.

The crux of the updates centred on my view that stocks would surge higher. My opinion was based on a rare alignment of three indicators. The last incidence of this was at the GFC lows.

You can read the issues in full here and here.

So, does my view still hold?

I’ll answer this in a minute.

But first, here’s an update on the indicators…

Where are they now?

The first indicator is hugely important. It shows what the professionals are doing.

Have a look at this…



chart image

Source: Bloomberg
Click to enlarge


Now, this is the same chart you saw in February. It’s by Bank of America Merrill Lynch, showing the average cash balance for 213 fund managers (I’ve added the circles and dotted arrow).

This group manages over US$563 billion — these are the big hitters.

You’ll notice cash balances mostly swing between 3.5% and 6%. The low readings are when managers are largely bullish, while higher numbers occur when they’re fearful.

The key takeaway was — and is — this: Cash levels are dropping, and money is flowing into the market. The latest reading shows cash levels are still at a historically high 4.8%.

I believe this remains a tailwind for equities.  

The next indicator is a mystery to most traders. You’ll rarely — if ever — see mention of it in the mainstream media. But it has a history of predicting big upward shifts in stocks.

Check out this chart, which looks at optimism levels for small business in the US:



chart image

Source: nfib.com
Click to enlarge


This is one of the most impressive indicators I know. It pre-empted stock market accelerations in 1991 and 1993. It then gave buy signals near the major lows of 2003 and 2009.       

Now, I won’t go over all the details again. You can read about them here.

But I will say this: The latest spike in optimism is the largest on record. And the index has held at these higher levels for the past eight months.

As I said in February, I believe this sets the scene for a big rally in stocks — one that will likely take most people by surprise.

The final indicator is one I developed myself. I use it to help identify key turning points in stocks. It’s called the Quant 300.

Again, I won’t go through all the details in this update. You can read how the Quant 300 works here.

But I will show you the most recent data.

Have a look at this: 



chart image

Click to enlarge


In brief, the indicator mostly ranges between 25 and 225. Low numbers occur at stock market lows, while high numbers coincide with peaks.   

You’ll notice a green circle on the chart. This highlights the past eight months. The indicator is around the same level it was in February.

What does this mean?

Well, it indicates that stocks have plenty of upside potential. History says it’s only a matter of time before the indicator climbs towards the previous peaks.

Should this happen, I expect ASX stocks to be significantly higher.

Out of step

2017 has been a rough period for local traders. Stocks have been stuck in a narrow range.

Have a look at this:



chart image

Click to enlarge


The All Ordinaries is slowly marking time. I can’t recall the index being this quiet for so long. In percentage terms, I believe it’s the tightest range in decades.

But this isn’t the case elsewhere. Many stock markets are rising.

Here’s how the rest of the world is doing (sourced by Platinum Asset Management):

  • MSCI World Index is up 11.9%
  • MSCI Asia Index (excluding Japan) is up 22.2%
  • MSCI Europe Index is up 16.8%
  • MSCI Japan Index is up 9.1%

Yes, 2017 has been a strong year for many regions.

It’s also worth noting that these gains are only for the last eight months. They cover the period from 3 February — the date I made my forecast for ‘a big rally in stocks’.

The All Ords is yet to benefit from the positive backdrop. This is frustrating for many traders, and is not the situation I was expecting. Local shares often take their lead from overseas.

But there are encouraging signs in individual stocks.

Here are some of Quant Trader’s signals since 3 February:

Code Name Signal Entry Date Gain
TWE TREASURY WINE ESTATE 3 14/02/2017 26.60%
ASL AUSDRILL LIMITED Overflow 17/02/2017 39.50%
AEF AUSTRALIAN ETHICAL Overflow 21/02/2017 44.10%
FWD FLEETWOOD CORP 1 22/02/2017 39.70%
CGC COSTA GROUP HOLD 2 27/02/2017 49.00%
LYL LYCOPODIUM LIMITED Overflow 27/02/2017 39.70%
SIQ SMARTGRP CORPORATION Overflow 28/02/2017 50.80%
REX REGIONAL EXPRESS Overflow 01/03/17 62.00%
WOR WORLEYPARSONS LTD Overflow 01/03/17 38.40%
PEP PEPPER GROUP LTD Overflow 02/03/17 33.70%
A2M THE A2 MILK COMPANY 2 28/03/2017 159.20%
JIN JUMBO INTERACTIVE 1 28/03/2017 40.70%
LVT LIVETILES LIMITED Overflow 05/04/17 29.20%
A2M THE A2 MILK COMPANY 3 27/04/2017 115.60%
AIZ AIR NEW ZEALAND 1 02/05/17 29.90%
ACK AUSTOCK GROUP LTD Overflow 09/05/17 25.00%
ALU ALTIUM LIMITED Overflow 10/05/17 33.40%
HUB HUB24 LTD Overflow 25/05/2017 63.70%
AQZ ALLIANCE AVIATION Overflow 20/06/2017 48.40%
APX APPEN LIMITED Overflow 18/07/2017 38.10%
MIN MINERAL RESOURCE 1 21/07/2017 46.10%
MIN MINERAL RESOURCE Overflow 21/07/2017 46.10%
SW1 SWIFT NETWORKS 1 21/07/2017 43.50%
SW1 SWIFT NETWORKS Overflow 21/07/2017 43.50%
LVH LIVEHIRE LIMITED Overflow 02/08/17 46.30%
BAL BELLAMY’S AUSTRALIA Overflow 08/08/17 30.30%
SPL STARPHARMA HOLDINGS 2 01/09/17 36.40%

The table lists open trades that are ahead by more than 25%. You’ll notice the gains are over a broad range of industries. This suggests to me that the underlying tone of the market is positive.

There’s been much talk about an impending collapse in stocks. Bearish forecasters often cite concerns including valuations, debt, house prices, and political instability.

Yes, these will almost certainly be an issue in the future.

But that could be a long way off.

I believe conditions are right for higher stock prices. This is already playing out in global equities. In my opinion, it’s only a matter of time before the All Ordinaries follows suit.

Until next week,
Jason

Editor’s note: Remember to look out for Jason McIntosh trading masterclass series. Invitations will go out from Monday.

Quant Trader sources all images and graphs unless otherwise stated.