Tag Archives: events

Chart Of The Week – 2008 Or 2011?

By Joseph Y. Calhoun Credit spreads are a big input to our investment process. It was the widening of spreads that convinced us to reduce our equity allocation before the volatility of last year. But active asset allocation requires that you get two consecutive decisions correct and that isn’t an easy task. Right now, for instance, we are watching spreads intently trying to figure out whether the all clear has been sounded. Spreads have narrowed considerably over the last five weeks, and if they continue to do so, we will, in keeping with our process, be forced to raise our risk budget. When we did our monthly Global Asset Allocation review 11 days ago, the trend was still toward widening and the decision was obvious but spreads have continued to narrow. So, the big question facing us and all the other tactical allocators is this: Is it 2008 or 2011? If it’s the former, we have just been given a wonderful opportunity to get more defensive. If it is the latter, we need to figure out how to raise our risk allocation. Click to enlarge So which is it?

Playing The Oil Trend With UWTI

The best way to cash in on a trend in crude oil is not by buying and selling the contracts but watching ETFs that track their prices. Over the past two years, these exchange traded funds have become very popular as oil prices plunged to sub-$30 levels. In a MarketWatch article , the VelocityShares 3x Long Crude Oil ETN (NYSEARCA: UWTI ) was cited as being the fifth most traded security by millennials. UWTI is hardly a tool for hedging against the risk of volatile oil prices. Instead, traders use the derivative as way to bet on different oil trends hoping to cash in on the accelerated payout it offers. This ETF generates a whopping 119 million shares of average volume despite year-to-date losses of over 38%. Its popularity trumps both the iPath S&P Crude Oil Total Return Index ETN ( OIL) and the United States Oil ETF ( USO), which average about 5 million and 51 million shares with YTD losses below 25%. There’s no doubt that UWTI provides traders the opportunity to cash out on an accurate projection of oil prices, but its high leverage and volatility can translate to large, sudden losses if a trend reverses. The best way to reduce risk created by unexpected, short-term fluctuations is to buy at the very bottom of the trend and hold until it tops off in the long run. With the market beginning to tame, investors should start to consider this trade before it’s too late. During the week ending March 12th, the price of West Texas Intermediate contracts rose from the low $30’s as investors finally saw production slow down. Baker Hughes reported earlier that week that rig counts fell to an all-time record low of 480 instigating pent up bullish sentiment. Recent evidence showing a decline in production has caused gains of just over 20% in the past month of trading sessions. While analysts are looking forward to a smaller supply in the future, traders can’t ignore the risks of the current fundamental situation which is still oversupplied by the extra oil still sitting idle in storage. Given how volatile oil trading has been over the past year and a half, skeptics have reason to doubt the rebound and may even see another plunge coming. That would mean complications for those waiting to bet on a bottom. I’m here to tell you not to worry. It’s time to bet on that bottom. Introducing the Deviation Moving Average first published and constantly updated on my blog here . This indicator is similar to a trend line with an adjustment that accounts for a constant deviation in price. The blue line follows WTI price, and is coupled with the orange line, a 50-day moving average plus the 10-day moving average of the actual price’s deviation from its 50-day moving average. With this enhancement, traders can track actual price movements against a deviation that the group has determined is acceptable. Because of intraday trading, the actual price will move either above or below its trend line. Crossover points show a reversal in short-term sentiment. The gap (length of time over or under the orange line) between each point is usually the same size and the variance (absolute value of the difference between the two lines) peaks at about the same height. This idea can be better visualized by the difference chart which is plotted over the past year. In the very volatile 2015, the gaps of smaller sentiment trends lasted just under a month with variance peaking at about $4.00. Using these observations, investors can predict where a small reversal may take place and where the momentum of those reversals are pushing the overall trend. Looking back at the first chart, one can see a curious trend that has developed over the past month. The actual price has not crossed over its deviation moving average line since February 12th, 2015. In fact, the variance has continued to stay constant despite reaching a difference of over $5.00. If the volatile trend of 2015 were to continue, WTI price would have started to fluctuate back downward about a week ago. So why has this not happened? Why has the gap been sustained? The chart shows a change in trend that occurred because of the shift in expectations from oil and gas investors. With the lower rig utilization and the hope of OPEC members freezing output, the buzz saw trend has softened with stability in the long-term price a reality. The new, smaller price channel that emerges might not reach above $50, but it will ease the uncertainty that has plagued oil corporations and oil exporting countries. Because UWTI is a derivative based on the price of oil, volatility there will begin to soften like it has in the WTI spot price trend. As the danger of a sudden plunge in price wanes, it will be safer to establish a long position consisting of UWTI or other energy ETFs. From there, one can ride a long-term trend upward without having to worry about a replay of the bearish tsunamis that drowned out the first month of 2016. Even if WTI were to crossover its deviation moving average in the near future, that point would be linger around the low- to mid-$30 range which is far from the bottoms established in January. With the deepest valley in the past, a smooth, upward climb for the price of oil will allow investors to cash out using the accelerated UWTI exchange traded fund. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Can You Trust A Roboadvisor With Your Money?

The definition of robo-advisor still isn’t fully set in stone, but roughly speaking it’s a software tool which manages your portfolio and gives financial advice and action items without the need to consult (often) an outside human advisor. Because there are so many Americans with similar financial goals, responsibilities and amounts saved it makes sense to offload some of the advisor burden onto an algorithm; unlike in business, often the best move with your finances is just to do exactly what others are doing and have done before. Can You Trust a Roboadvisor? Survey Says… Gallup set out to answer that very question, asking Americans if they would want a single human financial advisor, a roboadvisor, a combination of the two, access to on-call financial advisors… or other/none/not sure. The plurality went to the human advisors: 49% saying they wanted the individual attention of a single advisor, and 18% opted for the stable of on-call advisors. There was a follow-up question as well which really underscored how wary of roboadvisors we still are: 62% of respondents wanted only human help or a majority of human help, while 27% preferred to trust a roboadvisor with a majority of decisions… with humans on call. Only 9% of respondents wanted only digital advice… surely an important datapoint for the large number of Financial Technology companies currently targeting the space! Robots Don’t Have Good Bedside Manner The survey is worth reading in full, but it leads us to bring up a lot of interesting, recurring themes with human experience and automation. Although we’re warming up… at least in part… to the idea of some of our financial advice and investing tips coming from an algorithm, humans still prefer the emotional check of another human to the cold, calculating rationality of a machine. Can you Trust a Roboadvisor? “Take me to your bank account routing number!” (And this comes up over and over again in various fields!) We alluded to the bedside manner of doctors in this section’s heading, which has long been an important field of study , and can certainly help patient outcome . It came up in elevators – where humans resisted user-operated elevators when elevator operators once were supreme – which has echoes today in state laws and policy. And, perhaps at the forefront of public discussion – it comes up in automated cars (ironically, automated automobiles ), where the safety record of robot-operated vehicles is superb compared to our fallible human peers. Perhaps, like so many other things in life, our reluctance to trust a robo-advisor comes at least in part because of psychology. There is a concept where things that look real but not exactly real (a concept known as the uncanny valley ) cause the greatest reactions of disgust amongst humans (So, FinTech… careful about how friendly you make your robo-advisors). A psychological explanation might mean we are wary of robo-advisors for the same reason we’re wary of zombies – we don’t want something to try to be human, we want there to be some human with responsibility at the end of the day. (Even if we lose a few basis points with the human.) What Benefits Will Come if We Trust our Roboadvisors? There are many great theoretical effects that would come to us if we can convince enough of our peers to trust a robo-advisor. First, the cost benefit is incredible . Like all software, the marginal cost of spinning up another instance of a roboadvisor is just-about non-existant. Just as the marginal cost of you reading this webpage is immeasurable (we serve up 100s of thousands of pageviews a month for < $10), automating common financial advice could go a long way to expanding access for those in most need of help. In other words, it can go a long way towards solving that paradox of financial advice – often those who need it the most are the least able to pay. Second, it can automate a lot of the incredible value-adds that are tough to do today. Tax-loss harvesting is the first thing that comes to mind. If you’re unfamiliar, the IRS allows you to write down your income when you sell stocks at a loss, so long as you don’t buy the exact (or substantially similar) asset within a fixed time frame. It’s incredibly tedious work to always be shifting in and out of funds to capture tax benefits and computing the breakeven for when it is worth making the switch – not to mention the reporting requirements for your tax returns. On top of tax-loss harvesting, robo-advisors and algorithmic management can help you find opportunities in account types, tracking eligibility to the dollar in real time as you earn throughout the year. It can help recognize shortfalls and surpluses in checking accounts, automatically moving money to long term savings. With a little advancement, it can even help you plan purchases – finding the best combination of savings vehicle, and maybe even one day the best rewards when you go to pay for whatever you are buying. And that’s just off the top of my head. Surely you can think of some more. Third, it opens up the best financial advisors to more people. Humans are always going to be better at the human element, no matter how much we end up trusting our robo-advisors. However, a move to majority automatic financial advice would mean our best advisors would have more throughput and be able to see more ‘patients’ – either for periodic checks on a long term plan, or to address those corner cases which software wasn’t built to handle. What Will We See Next? Just like the aforementioned driverless cars, expect to see a lot more innovation in the robo-advisor field. As people appear to not mind at least some of their advice coming automatically, expect to see a lot of financial technology firms moving to advisor-guided robo-advisement sessions, or more human staff on call while people have their robo-advisement sessions. The future is undoubtedly bright in the field, and the momentum towards automation is clearly there. Clearly we’re going to see big changes – even innovation that we had no idea was possible or probable – before too long. The only thing we know for certain is that big changes are coming… and people will probably become more and more comfortable with the offerings out there. So, dear reader – could you trust a roboadvisor with your money today? What would it take for you to give a robot control – or at least allow it to guide you? What do you think we’ll see in the next few years?