Daily State Of The Markets: Tips From Real-World Wendy Rhoades

by: David Moenning

Last week I attended NAAIM's annual active management conference.

For me, the highlight was Brett Steenbarger's presentation on trading psychology.

The Real-World Wendy Rhoades had some interesting insights about the current market environment.

It was a very busy week/weekend as I first attended NAAIM's (National Association of Active Investment Managers) annual conference. The conference was stellar, and it was great to hang out with so many like-minded investment professionals Sunday through Wednesday.

I picked up some trading psychology tips from Brett Steenbarger, PhD, who was at one time, a real-world Wendy Rhoades for Paul Tudor Jones' shop. One of Steenbarger's major points on the markets was that understanding the psychology of key market participants is critical these days. I found his insight and approach valuable and plan on following his musings on a regular basis at TraderFeed.

For example, Steenbarger provided some interesting insight into what hedge fund managers are thinking right now. Supporting some of Marko Kolanovic's work that I have detailed recently, Steenbarger suggested that hedge fund managers have missed a fair amount of this year's joyride to the upside and are now busy playing catch up.

Hedgies Trying to Catch Up

Dr. Brett says the hedgies are playing the usual "mo-mo" game in order to attempt to close the performance gap. As you might suspect, this implies chasing the momentum names and "allocating more capital to the winners."

The problem, Steenbarger opines, is that hedge fund managers were late to the game and as such, can't afford to take losses/give back gains. This suggests that the hedgies could become the "weak hands" in any meaningful decline. The idea is with hedge fund managers being quick to pull the trigger on the sell side, any downside action in the near-term could become exaggerated.

Another way to look at this situation (my opinion, not Steenbarger's) is "the chase" could keep on keepin' on until (A) the hedgie money gets put to work, (B) the hedgies catch up, or (C) the game changes (it always does at some point!).

From my seat, this means that if the "Sell in May" crowd can't get something besides a one-day wonder going soon, the slow "melt" higher could continue. As long-time stock market players know, Ms. Market often does her level best to frustrate the masses. So, with everybody and their uncle looking for a dip to buy (a strategy I wholeheartedly endorse, btw), an "easy" entry point may not make itself available.

This idea makes this morning's action all the more interesting to watch. To be sure a "dip" will occur on Trump's latest round of threats toward China. However, most investors still expect a deal to get done. And if this narrative continues, the question is when the dip will be bought, not if.

Top Reasons For Investor "Failure"

Another strong part of Dr. Steenbarger's presentation was his top three reasons for what he called "investor failure." In his world, the term "failure" isn't about "blowing up" or losing all your capital. No, it's about failing to perform on a consistent basis.

Cutting to the chase, the former trading psychologist for Tudor Jones says the following are the primary reasons investors (of all colors, shapes, and sizes) fail to perform:

  • Inability to Adapt to Changing Market Environments
  • Consensus Thinking
  • Lack of Strategy Diversification

Given that I've been preaching flexibility, adaptation, and the need to identify/understand the market environment for a couple decades, Steenbarger's explanation of the first bullet point certainly rang true with me.

As did bullet point number three. Steenbarger's insistence that investors utilize multiple strategies fit well into the panel discussion I moderated entitled, "You're Doing It All Wrong - Modern Portfolio Design for Modern Markets."

My presentation and panel discussion espoused the importance of diversifying by investing methodology (Ex: Passive, Strategic, Tactical, Equity Selection and Alts), by investing strategy, by manager, and by time frame. A song that I've been singing for many years now and for which I earned the nickname "The Right Reverend" (as in The Right Reverend of the Church of Portfolio Diversification) at the shop I was with from 2015 through 2017.

For me, the insights from Dr. Steenbarger were well worth the price of admission to the NAAIM conference. However, I also found the global macro presentation from George Pearkes of value. Bespoke's Chief Global Strategist suggested that cyclicals are the place to be right now, which certainly goes against the general consensus thinking that we are late in the bull/economic cycle. Give this some thought during your next period of "quiet time" that Dr. Brett suggests all managers should include in their daily routine.

Finally, NAAIM's Shark Tank Investing Strategy Competition Finals was a highlight of the conference for me. My friend Len Fox of Scarecrow Trading become the organization's first two-time winner. Apparently the audience still enjoys his aggressive approach and big numbers. Second place went to Copperwynd Financial as the live track record of David Daughtrey and David Varadi's CW Livermore Momentum stock selection method got folks' attention.

On to St. Louis

Then it was on to St. Louis late Wednesday night so that I could join the family in watching my oldest defend her PhD dissertation and become Dr. Amy Boland!

I am proud to say her presentation was impressive and her defense was flawless. Yes, yes, I might be a bit jaded here, but her defense board - i.e. the "opposing counsel" - termed the work "an impressive piece of scholarship" and passed her defense "with distinction."

From there it was time to play, play, play with our grandson (my wife and I kicked the youngins out on Saturday night so we could babysit) and spend some quality family time in St. Louis.

Of course, on Sunday it was time for Billions and GOT. So, it's been a packed weekend to say the least. I'm actually looking forward to getting back in the saddle and returning to my market routine, if for nothing else, to get some rest!

Weekly Market Model Review

Now let's turn to the weekly review of my favorite indicators and market models...

The State of the Big-Picture Market Models

I like to start each week with a review of the state of my favorite big-picture market models, which are designed to help me determine which team is in control of the primary trend.

View My Favorite Market Models Online

The Bottom Line:

  • The Primary Cycle board remains in good shape. This tells us to expect any market weakness to be short, shallow and temporary. Bottom line: This remains a "buy the dip" environment. This week's mean percentage score of my 6 favorite models slipped to 83.9% from 84.7% last week (Prior readings: 74.6%, 58.0%, 49.5%, 47%, 50%, 47.9%) while the median held steady at 86.7% from 86.7% last week (Prior readings: 81.8%, 65.9%, 50%, 50%, 50%, 50%, 50%).

The State of the Trend

Once I've reviewed the big picture, I then turn to the "state of the trend." These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.

View Trend Indicator Board Online

The Bottom Line:

  • As the saying goes, all good things must come to an end. Such is the case with the Price Trend Board's streak of perfect 10 readings. It was the Cycle Composite, which now points lower for a couple weeks, which spoiled the fun. Thus, it wouldn't be surprising to see the recent sloppy action continue for a while. However, the recent strength of the market indicators suggests that any dips are likely to continue to be bought.

The State of Internal Momentum

Next up are the momentum indicators, which are designed to tell us whether there is any "oomph" behind the current trend.

View Momentum Indicator Board Online

The Bottom Line:

  • The Momentum board remains in good shape overall, but it is clear that some of the indicators are starting to wobble a bit. While it is true that "Weebles wobble but they don't fall down," it is worth noting that the volume relationship indicators leave plenty to be desired here and both U.S. and Global Breadth models are starting to show signs of weakening. And while this situation is easily rectified, risk managers need to be paying attention.

The State of the "Trade"

We also focus each week on the "early warning" board, which is designed to indicate when traders might start to "go the other way" - for a trade.

View Early Warning Indicator Board Online

The Bottom Line:

  • The message from the Early Warning board continues to be the equivalent of yellow flag being waved. The bottom line is the odds of some kind of a pullback/corrective action remain high.

The State of the Macro Picture

Now let's move on to the market's fundamental factors - the indicators designed to tell us the state of the big-picture market drivers including monetary conditions, the economy, inflation, and valuations.

View Fundamental Indicator Board Online

The Bottom Line:

  • Although there were no overt changes to the Fundamentals board this week, there were some modest improvements to three underlying models. First, one of the monetary composite component models improved. Second, one of the economic model components upticked. And finally, one of the valuation model components peeked its head into positive territory. Thus, we will continue to suggest that the Fundamental board favors the bulls and that this remains a buy-the-dip market.

Thought For The Day:

The real voyage of discovery consists not in seeking new lands but seeing with new eyes. - Marcel Proust