Market Correction October 10th, 2018
This is to address the current market correction that began approximately 5 days ago. The S&P500 is off 3.7% from its highs sitting currently at 283 on the SPY. The QQQ or Nasdaq sits currently at 175 off its highs by 6.4%. The current reason the market down is due to the acceptance that higher interest rates are here and they will offer competition to stocks. This is true. The market needs to adjust. Meetings have been held and traders have been given their marching orders – to sell some holdings. Mutual funds are raising cash (selling) to see where the fallout takes us and then determine at a later date how to adjust back into the market. It’s not good or bad but rather obvious and in fact is very normal.
Algorithmic Intelligence – Moved 1 month ago
About a month ago, as many of you know who trade the S&P500 Benchmark system – our tactical model – the system exited at around 285. The tactical model at that time said the risk reward characteristics were unfavorable. The market subsequently went another 9 points higher until the last 5 days. This is EXACTLY why we have a tactical model.
At many times it feels “awkward” to not be in the market when it’s making new highs – after all that’s why we invest, right? Wrong! We invest only when risk reward is in our favor, regardless of where the market is. A PRO bets when the odds are with them and an inexperienced trader bets because they feel they have to. All users of the FLIP platform have algorithms making strategic decisions to invest in the market using tactics that provide solid risk management techniques. See the chart below:
The red arrow points to the day we exited our customers through the tactical model. Our customers know this by looking at the cash in their accounts being at high levels – anywhere from 30 – 60 percent. The day is not done (October 10, 2018), but currently the price of the S&P500 (SPY) is where the blue arrow is pointing at 283. BELOW from where we sold almost 2 months ago. In other words, iFlip Users tactically reduced the exposure of their account to the market (reduced risk). This is important because for those two months you have had less risk which means if a calamity should occur you would not be exposed to it.
Algorithmic Intelligence – Will Move Again Soon
Note this too. If all things remain the same by the close of the day the system will BUY the market tomorrow morning on the open. Why? Because risk reward is more favorable. Why more favorable? Our risk is just to the blue line around 276. If the market is at 283 when you BUY tomorrow then your new exposure to the market is just 283-276=7 SPY points or 7/283 = 2.4%.
Market Crash for Beta Stocks (Netflix, Amazon…etc.)
*Further note: For those of you who have beta stocks and most of you do e.g. (AMZN, NFLX, etc.) those stocks have been hurt worse than the S&P500. But if you are holding your betas with algorithmic intelligence (benchrisk), then you will exit those positions if the market S&P closes below 276. The beauty of managing investing using a (Algorithmic Intelligence) tactical system is to know that at any given time you may be holding all cash – not just cutting back on positions. Too often I hear managers extoll that they feel the market is risky so they cut back positions. But they are generally only cutting back by 10% or even less. That’s pointless – they leave you 90% exposed! We are far more binary in our approach. We are in or out. Not 90% in like a mutual fund. That is why they can’t perform – that is why they can’t truly reduce risk.
*Final note on Beta stocks (AMZN, FB, NFLX etc). They will come back. Why? They are leadership. Leadership always “leads” the way. In market crisis they will always be hurt more but (because they have beta) the underlying view must be that they will find the best way to manage growth and earnings or find and/or buy the technology needed for them to advance. These are the stocks that make people wealthy if they can endure the swings. But we manage those swings by using algorithms. Remember: You can’t beat the market unless you have beta. I fully believe that AMZN will go to 2500 and that NFLX will go to 500 and that FB will go to 225. It may take till next year or so, but these stocks will lead the way even in a higher interest rate environment.