Play BALL!

March 29, 2021

Weekly Market Outlook

By Keith Schneider


blankActive investors and traders can learn a lesson or two from watching baseball, and...

This week on April 1, all 30 Major League Baseball (MLB) teams will begin their 2021 season and hopefully survive a full schedule of 162 games plus playoffs ending close to November 2021.

In both baseball and trading…

One way to win more often is to have an edge (a real statistical advantage) and play your game with strategies and tactics that exploit it.

Sometimes the edge has a short-term duration.
When it’s in play, you need to take action to capitalize on it.

Sometimes, playing with an edge requires a longer-term strategy of showing up and playing your game consistently with tactics that benefits from the edge.

The best of times come when short-term and long-term edges converge and compound in effectiveness.

The first steps in playing (trading) with an edge are knowing that it exists and then recognizing that it’s in play.

This Spring we’re hopeful that the professional baseball season will usher in the start of warmer weather, barbecues, swimming, boating, getting together with friends and family, and some sense of normalcy.

You may recall that the MLB only played 62 regular season games last year with no fans in attendance.

What you may not know is that…

An interesting edge for baseball players disappeared in the 2020 season, and even those who don’t know about this anomaly will be very happy to see it return in 2021.

I hope it returns because, like a “market truth”, it impacts how the game is played and enjoyed by even casual fans like me.

Even as a casual fan, baseball brings back great and vivid memories of growing up in NY.

I recall the “treat” of getting to go to a game and experiencing the sounds of baseball...the crack of the ball hitting the bat; the vendors calling out “beer here” and the smell of fresh cooked hot dogs with stadium mustard and of course the occasional bag of peanuts where I could throw my shells below me near my shoes.

I vividly recall the diehard fans tracking the progress of the game and the performance of the players with their scorecards.

They recorded everything - the number of hits, the batter’s records, the pitcher’s balls and strikes, and more.

These diehard fans recorded every player that touched the ball on every play.

Of course, every other fan watched the most popular statistic, the score, in the same way that the average investor focuses on the ups and downs of the Dow Jones Industrial Average.

But as a reader of this post, you probably know that the Dow is just the “tip of the iceberg” and the keys to building wealth in the market are found elsewhere…

The excitement of the game of baseball, and the manual recording of all the game’s action was very analogous in many ways to my days of being an independent floor trader following the markets with hand-drawn point and figure charts.

To this day, amid all the noise and excitement created by the fans and players, there is another game being enjoyed by people collecting data and anticipating outcomes.

Now, with digital scoreboards and big data computing power, we’re all a few clicks on our phone away from every baseball statistic known to man. This data describes the efficiencies of each player, the defense, at-bats, and more.

As a result, team managers can identify the most valuable players in baseball for any position and every game-time situation.

This is particularly powerful considering that if 2 or 3 players get “hot” with unstoppable batting or unhittable pitching, they can give the team enough of an edge to consistently win games.

The edge of having the right player at the right time is often compounded by the tendency players and teams to experience “streaks”, much like traders, investors and markets do.

In baseball, a good streak means better stats or more wins. In trading, it means a bigger account balance. Either way, it’s a “market truth.”

The proof of this “market truth” plays out every year as baseball moves into its post season and the hottest players are traded as frantically as the stock market’s swing traders are currently buying and selling shares in SPACS on the hopes of what they might become in the very short-term future.

Additionally, baseball managers play a never-ending game of tactically putting players in the game precisely when they believe they have an edge that will outperform the competition under certain circumstances.

PLAY BALL WITH US

Understanding baseball can make us all better investors.

Baseball games and markets are both full of streaks, surprises, and reversals of fortune. As a result, they can both become an emotional rollercoaster.

As I’ve suggested, they both also have short-term and long-term edges.

These ‘edges’ are conditions or sequences of events that are recognizable and give anyone choosing to identify them an advantage over those who ignore them.

As I began above, in 2020 baseball players lost an edge that has existed for over century.

This is what I was referring to…

Have you ever experienced a home team transition from a group of players quietly losing a game into a team of rock-star performers who can do no wrong as the sound of the stadium builds from a dull hum into a deafening roar?

Sometimes it starts with an exciting play like homerun.

Sometimes it starts with a simple base hit that puts a “tying run” on base, and that sparks a new feeling of hope for what could come next.

And sometimes…

It starts with the home-town fans deciding that it’s time to get loud to motivate their team.

Regardless of how it begins, once underway…

The events and the energy of the crowd that follows have a predictable pattern.

Players perform at their best.

The stadium roars.

And then… the home team often wins.

This is baseball’s home field advantage at work.

Sure, this sequence of events can happen for the away team, but…

Statistically, however, the away team doesn’t enjoy this edge.

I don’t bet on sports games, but if I did…

I’d place my bets on the home team when this comeback momentum is underway.

I do bet on market, and when I do…

I like to have a “home team” edge.

As you can see by the chart below, the home team has a statistical edge. Looking back over 100 years, the home team has won roughly 54% of the time.

Interestingly, and to further prove the point, in 2020 when fans were not able to attend games, the edge all but disappeared.

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Of course, the markets don’t have a home and away team, but they do have ‘bulls’ and ‘bears’ and plenty of analogous conditions, sequences of events, and human emotions that lead to the same predictable result.

Since the obvious fuel for both the bulls and the bears is derived from the current and expected future political and economic conditions, let’s start there.

On the bullish side…

  • The economy is opening back up.
  • People are feeling more positive about going out in public and with the vaccines, they are less worried about contracting COVID.
  • The Government is throwing tons of money at the problem. (positive now but may have negative consequences later)

On the bearish side…

  • With the economy opening up and loose monetary policies around the world, inflation is heating up.
  • The cost of building supplies, food and energy are going up quickly.
  • Interest rates are from the “re-opening” of the economy.
  • Consumer sentiment readings are high from expectations that things would improve, but they are stalling.
  • China is curtailing what products can enter into their country, and a deeper trade war heating up as they test the new administration.

Important factors that could support fuel bullish or bearish sentiment…

  • Shift in government sentiment to higher taxes and more regulation.
  • More scrutiny about company’s earnings and the transparency of their position on race, social issues and compliance to government oversight.
  • The Dollar is gaining strength worldwide which will affect trade.

With all that in mind…

Who’s got the home field advantage? Bulls or bears?

For better or worse, answering that question by betting on the direction of the whole market is just one of many ways to make money in the market.

Additionally, as a trader or active investor, you need to be clear about whether you’re placing your bets on an edge that is relevant to the baseball equivalent of whether or not the next batter will get on base, or your team will win the current inning, game, series of games, or even the whole season.

At MarketGauge, we’re careful to match our strategies, automated trading models, and tactics to the time frames in which they have an edge, and therefore, also outperform.

For example, if I were to describe the MarketGauge mechanical models using baseball analogies….

  • Our Alpha Rotation models only enters trades when the bulls have a clear home field advantage, or when the bears have their very different home field advantage.Alpha Rotation seeks to win the season without focusing on every game.
  • On the other hand, the sector models take trades that could be viewed as betting on the teams that have a current and historical precedent for winning in the current market environment.There are sectors that will have winning streaks even in bearish markets, so you’ll have a winning season by focusing on the teams that are going to win consecutive games but may not be the best team of the season.
  • The All-Stars models bets on the best players (stocks) which have demonstrated an edge that has generated market beating performance based on data going back to the 1920’s.In much the same way that 2 or 3 hot players can carry a team to consistent wins, our All-Stars models have proven that a well-managed group of 5 market-leading stocks can dramatically outperform the market’s returns and have substantially smaller drawdowns (losing streaks), while completely eliminating the need to consider a buy and hope approach to investing.

As an active investor, it’s important to be aware of what strategy you’re using and why. This ensures that you stay disciplined, which is important for being profitable over the long-term.

Each strategy will, at times, enjoy its own home field advantage, but you also need to recognize that there will be more difficult times too. This is why position sizing and diversification is important.

Finally, you don’t need to choose to play with only one strategy. Diversifying into more than one strategy can reduce your portfolio's volatility.

As the market pulls back, it’s a good time to review the strategies you’re employing and why to help maintain good discipline, diversification and position sizing.

If you have any questions, don’t hesitate to reach out to us for help.

Here are this week’s latest highlights:

  • Risk Gauges fluctuated this week from risk off mid-week to risk on by the Fridays close.
  • Volume patterns across all four US equity benchmarks are still in neutral territory.
  • US equities were led by Big Cap (DIA) and Value Stocks (VTV) which has resumed its bullish outperformance of foreign equites including both Emerging (EEM) and more established markets (EFA).
  • Soft Commodities (DBA) gave up leadership verses the S&P 500 but kept its bullish market phase.
  • Grandpa Russell (IWM) dropped -2.79% for the week and closed in a warning phase. The NASDAQ 100 did the same.
  • IYT (Transportation) was the standout of the Modern Family closing on new highs with great volume as the focus on Capitol Hill is infrastructure spending.
  • Volume patterns across all four US equity benchmarks are still in neutral territory.
  • Long Bonds (TLT) managed to bounce +1.42% for the week getting that mean reversion bid from the sharp selloff we highlighted last week.
  • The Modern Family continues it leadership rotation to the Financial Sector (KRE) while Semi’s (SMH) and Biotech (IBB) stayed weak.
  • Big Cap Value (DIA) continues to outpace its piers.
  • Market Internals including the McClellan Oscillator pattern moved back to neutral zone. However, the number of new highs is looking weak which is bearish.
  • Sentiment indicators are looking more bullish as IWM is working off oversold levels (# of stocks under its 10-DMA)
  • Volatility as measured by the VIX, is easing back down and trading under 20, violating this important level and can only be interpreted as bullish.
  • Energy (USO) got hit hard on Thursday and bounced on Friday holding its 50 DMA and has an inside day pattern.
  • Gold (GLD) was down marginally and is compressing which means the move out of this zone could be substantial.
  • Soft Commodities (DBA) need to hold current levels on weekly charts to keep a bullish posture.

Have a great weekend and best wishes for your trading.


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