Reasons to Stay Bearish

2016 is proving to be anything but boring so far. U.S equity markets rang in the new year with a significant sell-off that has left the S&P 500 roughly 10% off its highs. This recent volatility has many debating whether we are experiencing a mere market correction within a long-term bull market or the end of the bull market. Is this the beginning of a cyclical bear market for stocks? Based on the technicals and current market conditions I have a bearish, risk-off outlook and personally have been taking more short positions than I ever have in the past.

The Bull Market is Getting Old

Screen Shot 2016-02-19 at 2.39.07 PM

Perhaps one of the most basic arguments favoring the bears is the average longevity of a bull market.  The data I am looking at comes from an analysis done by Mackenzie Investments (pictured above) that examined bull and bear market periods of the S&P 500 index dating back to 1956. The report shows that bull markets last an average of 4.3 years (51 months) and in that time gain an average of 153%. The current bull market has lasted almost 7 years now (83 months) and returned 206% (2016 not included.) It’s important to note that there’s much discrepancy in how analysts measure and define a bull market, but no matter how you look at it, it’s clear that the bull market investors have enjoyed since 2009, is getting long in the tooth and a cyclical bear market may be on the horizon.

The Technicals

Screen Shot 2016-02-23 at 6.45.54 PM

In my opinion, the most compelling argument favoring the bears lies in the long-term charts of the major U.S. indices.

Above is a 20 year chart of SPY, a popular ETF that tracks the S&P 500 index. A solid resistance level was formed in 2008 when the index failed to breakout above the high’s from the year 2000. The index was able to breakout above this level in 2013 and has since extended well above. Typically when price breaks out above a resistance level, this former resistance level then acts as support when price revisits it. I expect the 140-160 level that served as resistance in ‘00 and ‘08 will act as a trampoline of support once it’s tested. Unfortunately for the bulls the S&P will need to fall roughly another 20% until it reaches this key level. For anyone interested in Fibonacci patterns, one of my favorite technicians, J.C. Parets has been very vocal in pointing out that in 2015 the market reached the 161.8% fibonacci extension of the ‘07-’09 decline (In red above). He explains the importance of the 161.8% fibonacci extension in his post “Is This Why The S&P500 Stopped Going Up?”



The January Barometer is one of the most basic concepts in the study of seasonality. It states that as the S&P 500 goes in January, so goes the rest of the year. Since 1950 this indicator has accurately predicted the direction of the market 87.7% of the time! For example in January 2000 the S&P fell 5.1% and finished the year -10%. In addition, in January 2008 the S&P fell 6.1% and finished the year down 38.5%. In January of this year the S&P fell 3.4% which suggests more pain for the rest of 2016. Furthermore, Santa was a no show this year for investors expecting the famous “Santa Claus rally.” The Santa Clause rally is the tendency for stocks to rally in the last 5 trading days in December and the first 2 in January. In the past, the absence of such a rally during this period has been known to be a predictor of bear markets.

The volatility we’ve seen recently in equities is an indication of the level of uncertainty that exists among market participants. In these times of uncertainty it’s important to tune out the noisemakers and financial news media and trust only price action and historical data. Long-term charts and data show us that we may be due for a bear market and seasonality indicators suggest more pain ahead for 2016. Some financial pundits are saying this 10% decline is nothing more than a great buying opportunity, but it is important to keep in mind the presence of bearish conditions that have the potential of turning a “correction” into a recession.

As always, feel free to email me with any questions or comments

How Do Millennials Approach Investing?

Who are millennials anyways, and what makes us so different? 

Millennials are the roughly 80 million Americans born between the years 1980 and 2000 (ages 15-35). Our world views, attitudes and tendencies have been shaped by two decades of dramatic changes in technology and communication as well as the worst financial crisis our country has seen since the great depression of 1929. We are the trailblazers of social media and mobile communication. There is no doubt we communicate and gather information differently than our parents’ generation. Therefore, it comes as no surprise that millennials approach investing differently than generations in the past.

Scarred by the Great Recession 

We’ve all heard stories of grandparents who lived through the great depression and keep cash or gold tucked away under their beds out of distrust for banks and the financial system. While 2008 wasn’t as severe as the great depression it still caused similar fears among the generation that grew up seeing family or friends foreclose on their homes, or  loose their jobs and retirement savings. A Money Pulse survey shows that only 26% of adults under the age of 30 own stocks,  compared to 58% of investors 50 years and older. In addition a U.S. Trust report found that 51% of high net worth Millennials fear they will lose money in the stock market while 64% said they were more comfortable investing in physical assets rather than stocks. In addition the financial crisis crippled the labor market for young people, making it harder for young people to find well-paying jobs and invest.

Leveraging Online Tools

For millennials who are willing and able to invest in stocks, their approach is unique due to their familiarity with technology and the internet. We have grown up in an Information Age where the answer to any query is right at our finger tips. “Just Google it” and the answer is just a click, swipe or tap away. The internet has made information more accessible then ever thus making it easier for individuals to make more informed investment decisions. Millennials leverage the power of social media to find stock picks, and gain investment insights. Platforms like StockTwits and Twitter have made ideas and information flow more efficiently in the markets and young people understand how to take advantage of these platforms. Apps like RobinHood, allow clients to trade stocks completely commission free. The average user of RobinHood is about 27 years old as opposed to a more traditional online broker like Charles Schwab whose average client is in their 50’s. The chart below shows that millennials surveyed are significantly more likely than their elders to use online tools for investing.

Screen Shot 2015-10-29 at 12.18.07 PM

(Source: Etrade)

Impact Investing

Millennials want to be invested in companies that have a positive impact on society. Impact investing refers to investments made in companies that put capital to work in a socially responsible and sustainable manner. Stocks like SolarCity (SCTY), Tesla (TSLA) and Whole Foods (WFM) are appealing to younger generations because investing in those companies is a way to make a difference while gaining financial returns. The chart below shows that Millennials are more willing than other generations to take on more risk and less return in companies that reflect positive values. Screen Shot 2015-10-29 at 11.25.13 AM

(Source: Motif Investing)

Rather than simply donating to a charitable foundation, millennials see impact investing as a way to profit from companies that have a positive impact on society or the environment. While impact investing is not exclusively for young people, many experts believe millennials will be the ones to bring this trend mainstream.

While it’s clear that not all Millennials are fully willing and able to participate in the stock market, those that are are able to invest, go about it in a unique way. Our familiarity with technology allows us to utilize online resources and mobile apps when making financial decisions and investing. When making specific investments we tend to gravitate toward companies that have a positive impact on society and the environment. Fintech startups and financial advisors look to better understand these trends to be able to adapt and serve the needs of this new bread of investors.

An Introduction to Seasonality & Stock Market Cyclicality

Seasonality is a term that refers to the recurring tendency of the stock market’s performance to behave in a pattern according to the time of year, day of the month or other cyclical occurrences such as presidential cycles. Understanding seasonal patterns and cycles that influence the markets can allow you to increase your odds of success. Take for example the old adage “Sell in May and Go Away”, not only does it roll right off the tongue, it is a time tested strategy based on the stock market’s monthly performance averaged over many years. In addition to this strategy I will be discussing some other influential seasonality patterns and how to profit from them.

It’s important for me to note that history doesn’t repeat itself exactly. Skeptics will point out that markets do not conform to these patterns 100% of the time, however historical data shows us that market fluctuations very frequently do follow predictable patterns. It is pretty hard to argue with statistics.

“Sell in May & Go Away” (Best 6 months switching strategy)

This is a well known strategy based on monthly historical data revealing the tendency for the market to perform stronger on average between the months of  November and April and weaker between May and October. The strategy therefore would be to either be underweight or completely out of equities during the “worst 6 months” and overweight or fully invested in the “best 6 months.” Academics largely ignore this strategy as it goes against the efficient-market hypothesis. However, when you back test this strategy, it is hard to ignore that it is quite profitable.

The chart below is from Stock Trader's Almanac, the bible for seasonality. It shows that if you were to invest $10,000 in the Dow Jones during only the "worst 6 months" beginning in 1950 you would now have lost $6,500 as opposed to investing during the "best 6 months" in which case you would have a current total of $2.3 million. Even when compared to the simple buy & hold strategy, the returns that result from the "best 6 months" strategy are undeniably better.

The chart below is from Stock Trader’s Almanac, the bible for seasonality. It shows that if you were to invest $10,000 in the Dow Jones during only the “worst 6 months” beginning in 1950 you would now have lost $6,500 as opposed to investing during the “best 6 months” in which case you would have a current total of $2.3 million. Even when compared to the simple buy & hold strategy, the returns that result from the “best 6 months” strategy are undeniably better.

January Indicators

There are several key indicators to watch for in January that really set the stage for the rest of the year. 

The January Effect 

Investment banker, Sidney Wachtel, coined this phrase “January Effect” to describe the tendency of small cap stocks to outperform large cap stocks in the first month of the year. This effect is likely due to end of the year tax-selling that drives down the price of small-cap stocks making them cheap and undervalued at the beginning of the new year. The “Free Lunch” strategy is used to capitalize on this tendency. In this strategy you buy beaten down small cap stocks at the end of December and sell in February, taking advantage of the January effect. 

The January Barometer

The January Barometer describes the predictive nature of the month of January. The belief is that January’s return (positive or negative) is a good indication of the rest of the year’s performance. Since 1950 this indicator has accurately predicted the direction of the market 88.9% of the time. For example, if January is positive there is a strong chance that the rest of the year will also be positive. This tendency has largely been attributed to congress reconvening in the first week in January including the newly elected members of congress. In addition the President gives the state of the union address outlining goals and laying out the annual budget.

Santa Claus Rally 

The Santa Clause Rally is the tendency for stocks to rally between Christmas and the New Year. There are plenty of theories that try and explain this phenomenon, including people buying to take advantage of the lift of the “January effect.” The absence of a Santa Claus Rally can be a warning flag for the year to come. For example at the end of 2007 the Santa Claus rally period had a negative return of -2.5% What followed in 2008 was the worst stock market decline since the great depression. Furthermore, in 1999 the market had a negative return of -4% during the Santa Claus period. This was followed by the burst of the tech bubble in the next year which sent stocks tumbling.

Screen Shot 2015-10-13 at 4.50.36 PM

(Chart Source: Humble Student of the Markets)

Presidential Cycles

The presidential election cycle has a statistically significant influence on the market. Take a look at the two charts below and you will notice that the 3rd year of a president’s term has historically been the best performing year. In the third year the market has returned an average of 18% and has been positive 94% of the time since 1946! To take advantage of this pattern it would be advisable to be overweight equities in the third year and underweight in the weaker years of the presidential cycle.

Screen Shot 2015-10-13 at 5.35.47 PM(Chart source: GoBankingRates

One of the explanations for this tendency is that the third year is also the pre-election year, in which a president will go to great lengths to get re-elected. While in office a sitting president will try and manage the economy in a manner that will set the stage for good economic times leading up to the election.

While these patterns and cycles are averages and won’t always play out exactly as they did in previous years, over the long run taking advantage of these seasonal and cyclical market anomalies may help you to reduce risk and profit from uncertain markets.

The Dangers of Leveraged ETFs

Since the 2008 financial crisis exchange traded funds have become popular investment vehicles for traders and investors alike. Leveraged ETFs are a type of exchange traded fund that track a benchmark or underlying index and use leverage to maximize the performance of the underlying benchmark (typically an index or commodity). They are offered in the form of 2x (ultra) or 3x (pro) leverage and can be either bullish meaning long the underlying asset or inverse, meaning short the underlying asset. For example a popular 3x leveraged crude oil ETF is UWTI. If the price of crude oil goes up 2% the price of UWTI will go up 6%. Some other popular leveraged ETF’s include:

  • SSO – 2x Ultra S&P500
  • AGQ – 2x Ultra Silver
  • NUGT – 3x Daily Gold Miners Bull Shares
  • DWTI – 3x Inverse Crude Oil
  • YANG – 3x Daily China Bear Shares

These instruments have quickly rose to popularity and have seen huge inflows amid the recent volatility in commodities. Despite they’re growing popularity, few retail investors and traders truly understand the dangers associated with these complex products. This lack of understanding is concerning considering their growing popularity. CEO of BlackRock, Larry Fink has even publicly commented on the systemic risk they pose to our financial system by saying “leveraged exchange-traded funds contain structural problems that could “blow up” the whole industry one day.” This is an alarming statement seeing as Fink’s company BlackRock is the largest ETF provider!

Leveraged ETFs allure retail traders with huge daily price swings. Especially inexperienced traders who are looking for investments with big returns to help grow their portfolios. In addition to offering big returns they also offer traders leverage without needing a margin account. It’s normal to see these ETF’s move 5% or more in a day. Wild daily price swings like these have traders licking their chops and many impulsivly jump right into them without fully understanding how they work.

One of the biggest mistakes people make with leveraged ETFs is buying and holding them as long-term investments rather than using them as short term trading vehicles. The intended purpose of these products is to take advantage of daily price movements. Therefore, the appropriate way to use leveraged ETFs is to day trade them. The reason they pose a greater risk when holding for a longer time frame is because every night these funds go through rebalancing where the fund manager has to re-allocate the funds assets to accurately track the underlying index or commodity. Rebalancing every night causes price decay known as beta slippage. The longer the time they are held for the greater the potential for slippage. To learn more about leveraged ETFs and the math behind slippage check out this video. 

Another quality of leveraged ETFs that make them potentially dangerous is that they are often difficult to analyze. Many retail traders don’t realize that typical technical analysis and charting doesn’t work well on leveraged ETF charts due to the daily rebalancing. Instead you must analyze the chart of the underlying asset.

Leveraged ETFs can be useful for day traders looking to leverage their position without using margin however things like rebalancing are things people need to consider before using these products. In addition, management fees and slippage are two main characteristics of leveraged ETFs that should make them unattractive to long-term investors. If you do decide to trade these products, it’s imperative that you have a thorough understanding of some of the risks that are associated before using them.

Intrexon: A Stock Poised for Growth

Intrexon inc. (NYSE:XON) has been one of my favorite stocks for 2015. The company is a leader in an exciting emerging area of biotech known as synthetic biology. It offers a diverse portfolio of synthetic biotechnologies that have a wide range of  applications in industries including health, environmental, food and energy. The game changing potential for these technologies have given investors a very bullish long-term outlook on the stock with investing titans like Bill Miller of Legg Mason dubbing Intrexon as “the AAPL of the next decade”. Further optimism for the company hinges on its stellar management team led by billionaire biotech investor Randal J. Kirk.

Synthetic biology is essentially the manipulation of DNA which allows you to design and control cells for a specific function. Intrexon calls this technology a “paradigm shift” in the analysis of biology which will allow for numerous innovations across many different industries, from creating targeted cancer therapies to apples that do not brown.

Intrexon is different from most biotech companies that typically have one or two speculative drugs or therapies in the works. Companies like this depend on the FDA’s approval, thus presenting a significant risk if their product is not approved. Rather than developing a couple of drugs and treatments Intrexon designs, builds, and regulates gene programs, which are DNA sequences consisting of key genetic components. The company applies these technologies and monetizes them through strategic partnerships that they call “exclusive channel collaborations”. Many publicly traded biotech companies have entered into these collaborations with Intrexon. Here are just a few:

  • Sanofi (NYSE:SNY)
  • Johnson & Johnson (NYSE:JNJ)
  • Fibrocell Science, Inc. (NASDAQ:FCSC)
  • Synthetic Biologics Inc. (NYSEMKT:SYN
  • ZIOPHARM Oncology Inc. (NASDAQ:ZIOP)

All of these companies use Intrexon technologies for the research and development of their own drugs and therapies. Due to its diverse portfolio of technologies and partnerships Intrexon is inherently less risky than many other companies in the biotech sector. Any significant successes or breakthroughs coming from the company’s partners could boost its own stock significantly.

Intrexon is currently trading around $51 which is about 26% off its recent all time high made just last week at $69. It sold off sharply after missing its Q2 earnings estimates. This recent correction is, in my opinion, a great long term buying opportunity. Earnings are important, however, earnings were hurt by capital expenditures which are necessary to fuel future growth. The company still exhibits undeniable growth with revenues increasing 300% year-over-year. As you can see in the chart below, earnings have fallen despite healthy revenue growth. Most likely this can be attributed to expensive investments in research and development which should pay off in the future.


Technical Analysis

The chart below shows the stock’s performance this year with the 50 day moving average overlaid, one of the most widely watched indicators. As you can see,the stock sold off sharply after becoming very overextended from the 50-DMA. Recently it has dipped under the moving average, and  historically when this occurs it has been a great time to buy. The stock has some real potential and is worth keeping an eye on.

Screen Shot 2015-08-13 at 12.46.25 PM

Tesla’s Second Quarter Earnings Preview

Tesla Motors inc. ($TSLA) is scheduled to report their second quarter earnings results after the bell on Wednesday August 5, 2015.

Here’s a link to the article I wrote for StockTwits blog.

EPS: Estimates range from $0.57 to $1.39

Revenue: revenue is expected to come in around $1.16 billion

Here’s some key points to be watching for:

  • Additional capital expenditures
  • Delivery numbers, the company expects 55,000 deliveries in FY’15
  • Sales growth in China and the impact of a strong dollar
  • Comments regarding new developments (Model 3, Gigafactory, Powerwall)