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Counting The Down Days For Favorable Odds

SPY closed lower for the fourth consecutive day on Friday. Historical data analysis shows that the probability of another day in red is below 40%. Expected return for the next trading session is +0.3%. S&P 500 and its tracker SPDR S&P 500 ETF (NYSEARCA: SPY ) finished this trading week crashing like there is no tomorrow. It was a move not seen for a while that got market participants panicking. This was also the fourth consecutive trading session when the market went down. With a bit of simplistic historical data analysis I would like to explain why this presents a favorable setup for short term traders. SPY began trading on January 29, 1993, which gives us 5,683 trading days of data. Out of all those days, SPY closed lower on 2,580 occasions. This means that over the last 22 years the probability of a down day was 45.4%. If we investigate at what happens after a down day, we will see that on 1,141 occasions, or 44.2% of time, SPY went lower again. After two consecutive days down, the probability of another close lower decreases to 42.3% (483 instances). Extending this type of analysis to more days, we get the following table: One will immediately spot that thus far SPY has never gone down 9 trading sessions in a row . There was also only one instance when it closed lower for 8 consecutive trading sessions (any guesses when that happened?). More importantly, it is clear that the probability of a down day decreases gradually with each trading session in red. The probability spikes up at the 7th day but the sample in that category is already too small for statistical inference. One caveat about the table above is that some runs will be included in the data multiple times. For example, the recent four day decline will generate one instance (Friday) in the 4 days down bucket, 2 instances (Thursday and Friday) for 3 days down and so on. To account for that, we also take a look at the setups with exact number of down days preceded by a trading session with a nonnegative return: The interpretation of the figures above is as follows: after a nonnegative day, SPY went down 46.4% of times. After exactly one day down, SPY went lower on 45.7% of occasions and so on. Despite a slightly different methodology, the drift remains the same – the probability of a down day decreases gradually as the market slump persists. So with SPY having closed lower for the fourth time in a row on Friday, this gives us a pretty nice setup where the chance of another decline in the next trading session appears to be below 40% . Obviously, the probability in isolation is not enough and we need to complement it with expected return. The next table compares average and median return after exact number of down days: The returns tell even a more persuasive story. It turns out that not only the probability of a decline decreases with each down day but at the same time the expected return rises steadily. History tells us that with the current SPY streak of 4 down days, the expected return for the next trading session is 0.30% . Not a bad profit for a single day, which would compound to over 110% return annualized. This is not to say than one should trade such a setup without taking other factors into consideration. Proper risk management and exit strategies are required. They could also be complemented with trend indicators, seasonality metrics, fundamental ratios, etc. But at the very minimum it is a good starting point. I went long SPY at the close on Friday. Disclosure: I am/we are long SPY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Buying The Fear And Hedging With TVIX

Summary Is there reason to fear? Global markets are tumultuous with good reason. The best way to hedge and profit. Buy the fear; sell the greed. A common piece of advice, this is easier to accomplish in theory than practice. It has been a long bull market, one extended unnaturally in the zero interest rate policy environment since the housing crash. The result is elevated PE levels and absurd valuations for momentum-building story stocks. The rounds of quantitative easing under the Fed’s loose monetary policy have left the bond markets historically bloated, a fact substantiated by such notable personae as Bill Gross and Robert Shiller. In spite of these things and because of these things, historical hedges such as gold have been sold-off at an alarming rate. Pessimist blogger extraordinaire Zerohedge reported that as of July 24, 2015 hedge funds were net short gold futures for the first time ever. Hedge funds were selling short the classic hedge. The stock markets shrugged off the alarming fall of crude starting last fall. They shrugged off the 20% rise in the USD and the implications that had on corporate earnings. Earnings “adjusted for currency” became a nice comforting euphemism to bolster revenues hugely supplemented not by improvements in underlying businesses but in widespread financial manipulation via buybacks. Corporations have clearly lacked emphasis on organically growing revenues, opting to organically grow stock prices, touting it as “returning value to shareholders.” The vast majority of shareholders aren’t the ones getting paid in stock options… Russia fell on crude prices, their ruble falling almost 50% in the past year. Then the Chinese stock market started plunging. The Chinese government though, ever resourceful, opted to ban short selling as well as freeze trading on a good many companies in order to halt the precipitous decline ($2 trillion in value lost precipitous). Then in the past month China decided to let their currency, the renminbi decline in value. We’ll just do it once, they said. It will show that our market is becoming more free, they said. The slowdown in manufacturing growth has stymied the engine of global growth, impacting commodities and the countries that relied on their exports of those commodities disastrously. During this tumultuous time the American stock exchanges have remained remarkably consistent. I’ve been seeing a lot of days I thought would end in the red, but luckily for us all someone has been buying the dips and turning the indices green just enough. Today the buying finally lost its luster. The greed palpably began to turn to fear, sending the volatility index (VIX) shooting up over 25% on the day for August 20 . The Dow and S&P 500 both dropped over 2% for the day, and the assuredly-not-irrationally exuberant Nasdaq plummeted over 2.8%. Meanwhile the SPDR Gold Trust ETF (NYSEARCA: GLD ) spiked just shy of 1.75% for the day. Must be pretty worried about rate hikes, huh? That has been the primary focus of investors, as reported by mainstream journalists. How the Fed raising interest rates .25% from effectively zero will cause us all to lose our heads and immediately sell off everything. While markets have certainly responded to FOMC minutes and economic data, these reactions have been little more than knee-jerk ripples for quite some time. I think it is quite apparent that the powers-that-be in the investment world are much more worried about other things: like if our economy isn’t heading for another recession, when Greece will be allowed to default and focus on fixing their economy instead of haggling for more loans, how much China is slowing down, and the absurd amounts of sovereign debt in some pretty important developed countries. Remember when the U.S. sovereign credit rating wasn’t lower than Australia’s? Since S&P downgraded the U.S. in 2011 to AA+ we have added $4 trillion in debt. What’s a trillion a year anyway. What to do The first thing that I had to tell myself: Stop trying to predict the oil bottom. We are awash in an oil supply glut and Iran is gleefully coming to hawk their crude wares to the world. Demand hasn’t caught up to supply, and stock prices in oil companies haven’t caught up to their protracted loss of revenue. Slowdown of Chinese demand made that knife accelerate its fall, and I’m getting far away. it’s simple: when demand starts comfortably outpacing supply it would be wise to evaluate opportunities in the integrated oil market. So what can we do now? If you believe that volatile times are ahead, as I do, you can capitalize on that risk with a hedge that trades in it, the VIX. There are a few ETNs, or exchange-traded notes, whose values track the futures contracts of the volatility index. When the market goes down and the buyers’ market becomes the sellers’, the VIX spikes, and ETNs that track it spike with it. For those who are supremely confident that the economic situation is deteriorating, and fear is coming, there is a VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ: TVIX ), up over 20.5% in market and after-market hours on August 20. If you do not want to expose yourself to leverage (I respect that), you can look into the iPath S&P 500 VIX Short-Term Futures ETN ( VXX), the unleveraged counterpart that tracks the VIX. This simple way to hedge against the market moving against you can be a powerful part of your portfolio. Rather than the small movements of a fund that sells short the Dow or the S&P, you have a hedge that encapsulates fully a diversified buy-the-fear strategy. (click to enlarge) TVIX wasn’t traded on exchanges during the Great Recession, as you can see it only tracks to 2011. That spike in 2011, when the U.S. was bumped down from the highest credit rating and given a negative outlook, could easily be replicated in October. National debt is already over the debt ceiling, as the U.S. treasury website attests, and it is projected to rise through at least 2025. Buckle, up, it’s going to be a volatile fall. If you are more traditional in your tastes, I would suggest the thousands-of-years old gold hedge. China has been buying it en masse, and they seem to be the only ones really controlling the markets, so a follow-the-leader doesn’t seem like too bad of an idea (I jest…sort of). In all seriousness, the rapid devaluation of gold has presented a fantastic buying opportunity. This is a commodity that has held value far beyond the lifespans of empires. For those of us that for some reason can’t have physical gold, a fund that holds gold bars is a suitable substitute, barring a complete shutdown of our financial system. Stan Drunkenmiller, of betting against the pound fame, recently bought $300 million worth of SPDR’s gold ETF that I mentioned earlier . Betting with a billionaire is a good strategy; betting with a billionaire hedging against oncoming catastrophe with an undervalued asset is a fantastic strategy. For long-term peace of mind, buy gold. For short-term profit, buy fear itself. Disclosure: I am/we are long TVIX, GLD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Fidelity Suffers Massive Active Funds Outflow

Summary According to Morningstar data, US-focused mutual funds and exchange-traded funds have seen $78.8 billion worth of outflows in the first seven months of 2015. Fidelity Investments witnessed the biggest outflows on the active side for both July and 1-year period. The Fidelity Contrafund Fund, the Fidelity Growth Company Fund and the Fidelity Low-Priced Stock Fund accounted for outflows of $2,360 million, $2,111 million and $1,463 million in July. We present 5 funds that were in the Top-Flowing Active Funds list. In our previous article, we discussed that domestic equity-focused funds are facing tough time in terms of fund outflows. According to Morningstar data, US-focused mutual funds and exchange-traded funds have seen $78.8 billion worth of outflows in the first seven months of 2015. Continued transfers from open-end mutual funds to collective investment trusts at Fidelity triggered much of the outflows. This is higher than any full-year outflows since 1993. The money had instead been poured into international funds. This time, we will look into the flows in active and passive funds; which in fact shows how outflows in active funds have led to record dismal numbers. The active funds saw outflows of $20,446 million in July, while inflows of $6,175 million were recorded on the passive side. Over the last 1-year period, $158,607 million flowed out of active funds, while the passive funds added $140,836 million. Inflows into passive funds failed to offset the outflows from the active U.S. equity funds. In July alone, estimated net outflows from U.S. equity funds increased to $14.3 billion from $8 billion in June. Outflows a Trend Now? According to the Morningstar Direct U.S. Asset Flows Update, passive U.S. equity funds saw inflows of $166.6 billion, while active U.S. equity funds lost $98.4 billion in 2014. Reportedly, 2014 was one of the worst years for active managers. Based on Standard & Poor’s 2014 SPIVA Scorecard (S&P indexes versus active funds), only 23% of actively managed domestic stock funds were reported to have outperformed the Standard & Poor’s Composite 1500 in 2014. Separately, Morningstar had revealed earlier that indexed equity vehicles, mutual funds and exchange-traded funds attracted $1 trillion in the five years ending March 31st. On the other hand, active management saw redemption of $266 billion over the same period. Many active managers run at a disadvantage against the indexed funds owing to higher costs of active management, efficient capital markets and intense competition. While a spokesman for Fidelity Investments called it a “cyclical trend”, a MarketWatch article notes that it is not cyclical, as investors are starting to understand this being a permanent trend. Fidelity Investments Witness Huge Outflows Fidelity Investments witnessed the biggest outflows on the active side for both July and 1-year period. Again, much of Fidelity’s outflows indicated continued transfers from mutual funds to collective investment trusts. Fidelity witnessed outflows of $10,101 million in July and $18,928 million over 1-year period. The Fidelity Contrafund Fund (MUTF: FCNTX ), the Fidelity Growth Company Fund (MUTF: FDGRX ) and the Fidelity Low-Priced Stock Fund (MUTF: FLPSX ) accounted for outflows of $2,360 million, $2,111 million and $1,463 million in July. Ironically, earlier this year, Fidelity ads had been vocal about the “power of active management”. Fidelity promoted via an ad featuring Joel Tillinghast, speaking in favor of active management and how its top stock pickers outperformed rivals. The Tillinghast managed Fidelity Low-Priced Stock fund claimed in the ad that it has outperformed the Russell 2000 index by 4.66% on annualized basis since its inception in 1989. A Bloomberg Markets Global Poll of financial professionals showed 42% were in favor of indexed products as the better option for retirement savings. Instead, only 18% supported actively managed funds. The waning popularity of actively managed funds was thus a wake-up call for Fidelity, which has built its reputation on active management. For the 1-year period, Fidelity saw outflows of $18,928 million on the active side, while passive funds accumulated $23,015 million. Franklin Templeton Investments and PIMCO were also big losers over the 1-year period. They witnessed outflows of $10,422 million and $176,451 million, respectively. Bottom & Top Flowing Funds Below we present 5 funds that were in the Bottom-Flowing Active Funds list: Source: Morningstar *Note: T. Rowe Price New Income witnessed $1,160 million of inflows over 1-year period. However, these funds have encouraging year-to-date and 1-year returns. They also carry favorable Zacks Mutual Fund Ranks. The Fidelity Growth Company carries a Zacks Mutual Fund Rank #1 (Strong Buy). It has returned 8% year to date and 14.6% over the last one year. The Fidelity Low-Priced Stock and the T. Rowe Price New Income Fund (MUTF: PRCIX ) carry a Zacks Mutual Fund Rank #2 (Buy) and have year-to-date return of 3.8% and 0.6%, and 1-year return of 6% and 1.6%, respectively. The Fidelity Contrafund also carries a Buy rank and has a year-to-date return of 7.8% along with 1-year return of 10.9%. The PIMCO Total Return Fund (MUTF: PTTAX ) carries a Zacks Mutual Fund Rank #3 (Hold). Below we present 5 funds that were in the Top-Flowing Active Funds list: Source: Morningstar Here, both the PIMCO Income Fund (MUTF: PONAX ) and the Metropolitan West Total Return Bond Fund (MUTF: MWTRX ) carry a Zacks Mutual Fund Rank #2 (Buy). However, Morningstar notes that inflows into PIMCO Income were not sufficient to offset outflows from PIMCO Total Return. PIMCO Total Return has lost $122.5 billion since September 2014. The fund family itself has seen substantial outflow as PIMCO’s total outflows since January 2014 was at $212.8 billion. Nonetheless, Morningstar opines that the numbers proving PIMCO Income to be a better performer is not completely fair. The Morningstar Direct U.S. Asset Flows Update mentions: “PIMCO Income is in the multisector-bond category as opposed to the intermediate-bond category, and it can afford to look for alpha by having much higher allocations to emerging-markets and high-yield bonds, for example”. Mutual funds would definitely want to see more inflows than the outflows. For that to happen, the domestic strength is of particular importance. China has sparked many concerns recently, and if investors decide to keep the money within the domestic boundaries, it would help domestic-stock focused funds to see inflows. However for active funds, it is getting difficult, as many active managers run at a disadvantage against the indexed funds owing to higher costs of active management, efficient capital markets and intense competition. Nonetheless, a turnaround would definitely cheer up the active funds. Original Post