Wednesday, April 25, 2018

Short Thought: Tug Of War

Right now there's a tug of war going on in the stock market between earnings {which have been fantastic so far this quarter} and rising interest rates {which investors fear could derail the rally}.  So far interest rates are winning as stocks have had a rather ugly week here so far.

Monday, April 23, 2018

If I Could Only Teach One Financial Lesson…

By Christopher R. English, President of Lumen Capital Management, LLC

My official job is developing and managing investment portfolios using our ETF process.  However, I also spend a lot of time educating my clients and potential investors about our process so that they understand how we are managing their money. 

Investments are complicated, so there is a lot that I try to explain to clients over time. However, if I had to narrow it down to just one lesson, it would be the importance of tracking money flows into and out of any investment that you follow.  Money flows, along with fundamental and valuation analysis, form the triad of our investment analysis.  In modern markets, money flows may be the most important concept for us to follow and try to explain.

The Importance Of Price

Price is one of the most important characteristics of an investment. It measures what someone is willing to pay for something at that current moment. And the more people that want something, the higher the price will go. That is what causes markets to advance; when there are more buyers than sellers, so buyers compete by paying more. The reverse is true in bear markets. Sellers have to lower their prices because there aren’t enough interested buyers. 

How Price Influences Investment Selection

Price and money flows are an important factor in how we choose our investments here at Lumen Capital Management. We have tools that help us track these money flows, which are a major focus in our investment analysis of securities. Two of the most important things we strive to identify are over-bought and over-sold environments, as well as support and resistance levels.  A basic way to define support and resistance is to think about price areas where there is a higher probability that buyers will come in and support a security in a decline, and where stocks will face resistance (ie. sellers will possibly emerge as a security advances).  By analyzing the underlying trading patterns in money flows, we are trying to develop a reasonable set of probabilities as to how a particular security may trend. These probabilities then become the foundation of our investment analysis. We uncover these patterns by embedding proprietary indicators that we have developed onto stock charts. 

What Are Money Flows?

A good way to describe money flows is by comparing them to actual flows of water. The chart patterns that we develop are a lot like river and coastal maps. Unlike maps of mountains or highway systems, rivers are constantly changing. However, they mostly follow distinct and fairly predictable patterns.

If a river map suggests that around a certain bend currents often deposit a sandbar, it would be wise to expect one there or close by. Of course, there is no guarantee that the sandbar will be around the bend every time you pass by, but if eight out of ten times you pass by and sand has deposited in that particular area, there is a higher probability of it being there the next time you journey by that point. If you round the bend with caution, expecting a sandbar, then you will intentionally direct your ship toward deeper water and pass through unscathed. If you ignore the map, you could end up running your ship aground.  Unlike road maps, river maps don’t claim to show exactly what is present at all times. Rather, they show probabilities of underwater obstructions and the like. Any experienced ship captain knows that rivers are always changing and their maps can serve as a reasonable guide, but not a promise.

By tracking money flows into and out of investments, we can create financial chart patterns. Like river maps, they give certain types of clues and probabilities, not promises. Having a system in place to identify money flows makes it possible to take advantage of inefficiencies in prices if and when they occur in the marketplace. While no investment methodology is perfect or will have complete accuracy, our system based on data and probabilities in money flows hopefully increase the odds for investment success. 

If you would like to learn more about our proprietary tools for tracking money flows or how we build investment strategies around them, call my office at 708.488.0115 or email us at lumencapital@hotmail.com. You may never know where the next sandbar will be in a river, but it really helps to know where they have been over the past century.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters.   We also manage a private partnership currently closed to outside investors.   Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing him at lumencapital@hotmail.com.

Just a reminder we will only be posting once a week until further notice as we concentrate on our upcoming office move, however, I may put something up in short bursts depending on what I see out in the markets.

Thursday, April 19, 2018

ETF Returns On Major Market Indices


Above is a chart derived from the performance chart application over at Stockcharts.com.   It shows how some of the major market indices we follow or invest in have performed so far in 2018.    You can double-click on the chart to make it larger.   So far this year the technology heavy Nasdaq 100 index has been the world's fair with over a 7% return so far.  Everything else is sort of meddling along.  All in all not so bad given all the political and international hijinks we've seen this winter.   Returns so far this year fit well into my thesis that we are spending time consolidating the previous year's gains.

Speaking of winter, it snowed here last night.  April 18-19 and it feels more like the end of February!  Also as a reminder we will be limiting our posting starting next week to once a week until after our move.  I need to spend time getting my office ready to ship out!  Back either Tuesday or Wednesday next week.


*Performance data comes from the performance chart utility developed by Stockcharts.com.  While we assume their data is correct, we make no claims and cannot be held responsible for the accuracy of these results.

**Long various indices shown above in both client and personal accounts.  Please note these positions can change at any time without notice on this blog or on any other form of communication including written and electronic.

Tuesday, April 17, 2018

Market Psychology

Market cycle psychology explained in a pretty well thought out graphic.  The question of course is trying to figure out where we are on the chart.  


Of course one of the key principles the chart doesn't show is that markets have different cycles depending on time period.  We break these cycles down into the following via money flows:

-Short Term {Days to Weeks}
-Intermediate Term {Weeks to Months}
-Long Term {Months to Years}

The reason this is important is that we can be in different places in the market cycle depending on your time frame.  We may for example in the short term be much further to the right in the chart above then where we may be if one is thinking longer term {ie months to years}.  I would argue longer term we are somewhere between the "optimism" and "thrill" levels as shown on the chart above.  However, only time will tell.

Back Thursday.  As a reminder starting next week we will be posting only once a week until after our office move.

Link: Psychology of a Market Cycle.  {Originally attributed to WallStreetCheatSheet.com}

Thursday, April 12, 2018

Crude Oil


Back in the winter of 2016 crude oil touched a cyclical bottom trading all the way down to $26 a barrel.  Back then oil was left for dead as electric and hybrid vehicles were going to send gasoline powered cars on the same path to extinction as the dodo bird.  That was then.  As Charlie Bilello points out on his twitter feed, "Crude oil is at hits highest level in 40 months and is up 144% from its closing low in February 2016."   

Now you can make of that what you want.  My guess {and it is truly a guess as I am not an oil analyst} is that supply issues in places like Venezuela, international jitters in various places and a rebounding global economy have all played a part in this.  But you don't hear anybody really talking about the rise in crude.  Also what you don't hear anybody talking about is the fact that energy ETFs like the SPDR Select Energy Fund {XLE} aren't up anywhere near that amount.  

Now there may be reasons for that other than the rise in crude prices.  Maybe investors just feel that buying energy is too much of a gamble given the worlds' obsession with renewables and electric vehicles.  Also many investors have been burned time and again over the past few years when trying to buy into the space.  But if oil stays at these levels or moves higher then the energy space may be an area to watch, if for no other reason than as a barometer of global economic health.  Now please understand  I'm  not making a recommendation or saying one should necessarily invest in the space or even buy at these levels.  There are many things as I indicated above that can move oil prices and it can be volatile. Buying oil, energy related stocks or ETFs means that you are at the whim of crude's gyrations.  If the trend changes there is a higher probability you will lose money for some period of time.  What I am saying to put this on your radar and give it a quick glance every once in a while if you check stock prices.  At the very least it will give you some idea of what you're going to be paying at the pump when you fill up your car.  

Back early next week.  Also a final note.  Charlie Bilello has one of the more interesting twitter feeds out there in the investment sphere.  I read him every day.  You can find him here.

*Long XLE and certain other energy related ETFs in client and personal accounts although positions may change at any time.  We could also be buyers of energy related ETFs anytime after this post.  Please note we post our own personal observations about many different things related to investments on this website.  From time to time we may discuss specific stocks or sectors in the context of something either in a particular name or in a specific space that catches our eye.  We do not give personal investment advice on this blog nor do we recommend any specific securities.  Therefore, nothing in this post or on this website should be construed as a recommendation to buy or sell any particular security.  Before you act on anything you read here or anyplace on the web you should consult your investment advisor if you are not one of our clients, do your own homework if you invest for yourself or talk to us!  We'll be glad to discuss our investment style and discipline, how it might relate to your portfolio and how it might fit into your particular risk/return criteria.


Wednesday, April 11, 2018

Chart Talk {04.10.18-Cash}


The Wall Street Journal a few days ago wrote an article on why cash should be in your portfolio again.  We've never thought that cash doesn't have a place in one's investments.  If nothing else in times of uncertainty it is an asset that doesn't go down, even if it hasn't paid you much to own it these last 10 years or so.  Now that may be changing.  

For the first time in years cash is paying you something again.  What's important for investors is that if cash yields are rising then so are other fixed income returns.  Take a look above.

For years the S&P 500 has bumped along with a roughly 2% dividend yield.  Since the market crash yields on virtually every other financial instrument have collapsed.  I used to say that the S&P 500 paid you a treasury equivalent yield but with growth potential as well.  It was the only game in town. Not anymore as the chart above will attest.  Many other short term investment instruments yield something now close to what the S&P 500 pays out.  Therefore, for the first time in years, investors can begin to contemplate a part of their portfolio with a fixed component that actually yields them something.  These yields are likely to rise as the Federal Reserve has indicated they expect to raise interest rates at least two more times this year and maybe a third.

The upshot of this is that investors may finally start having a tool that reduces volatility and equity exposure in portfolios that actually yields them something again.  The downside is that if market yields need to rise to some level in order to be competitive with bonds, say to that 3% level, then stocks may be encountering another headwind as we move forward.  

Back tomorrow and then next week.

*Long ETFs related to the S&P 500 in client and personal accounts.  Short S&P 500 in a personal account as part of a separate individual strategy.  Investments can change at any time without notice.

Monday, April 09, 2018

Go Read!

Go read this article over at the blog "A Wealth of Common Sense," "Regression to Lumpy Returns".  It points out something that I think it is very important for investors to understand and that is that stock market returns are not constant.  They are all over the board.  A positive year can just as easily lead to losses the next.  A large part of that has to do with the fact that stocks are long dated instruments and while humans care about returns on a yearly basis, markets do not.  The main take-aways from the article are shown below.  {Highlights mine.}

-The worst 5-year total return since World War II occurred between 2004 and the spring of 2009 with a loss of 29% or annualized loss of around 6.6%.  If the S&P 500 lost 30% of its value over the coming five years, the annual return from 2009-2022 would still be 6.8% per year.  That's far better than you could have received from more fixed return oriented investments during the same period but obviously without the same volatility.

-Missing a bull market can be more detrimental to your long term financial health that taking part in a bear market.

-Stock market performance is lumpy.  This should be obvious to anybody who's been at this for a longer period of time but needs to be constantly drilled home to investors.  After a year like 2017 it is very easy to assume markets will always perform just like that and things will be rosy forever.  They won't be.

At any rate a pretty good article and one I suggest everybody go read in full.

Posting schedule:  I've mentioned a couple of times that I will be moving my office at the end of the month and that will necessitate a more limited posting schedule.  I plan to post 2-3 times a week this week and next.  After that through the end of May I will only commit to one posting a week.  We'll figure out what the schedule is going to be over the summer as I have a better feel on my time commitments at that time.  Back Wednesday and Thursday this week.

Long ETFs related to the S&P 500 in client and personal accounts.  Short S&P 500 in a personal account as part of a separate individual strategy.

Tuesday, April 03, 2018

A PE Roadmap


Here's a way to think about the markets in the coming months.  Think of this as an earnings roadmap to chart various levels of valuation on markets, but this time using forward earnings as a guideline for how things might play out.  What I've done is take a weekly chart of the S&P 500 ETF, SPY, and put different Price to Earnings Ratio {PE} numbers on the charts.  We're using current consensus estimates of $158 on the index.  Here's what we can see.  

In the declines so far the market has found support at a level closely corresponding with a 16 PE.    That doesn't seem so unreasonable given the low interest rate environment we are still in and the robust economy we're experiencing.  Earlier in the year we traded at a PE closer to 18 {Not pictured on the chart}.  To get to a 15 PE the market would have to fall another 7.5% from current levels.  A 14 PE would amount to a decline of about 14% from here and a 13 PE translates to a further 20% decline.  Probability suggests that given what we currently know about the state of the economy we're unlikely to see such a drastic decline as those 13 and 14 PE numbers would suggest.  I'm putting this up to give you some idea of what's possible, not what is going to happen.  The environment we're in is suggestive of stocks trading somewhere in that 15 to 17 PE range.  

Keep in mind those PE levels could rise or fall depending on revisions to earnings.  The good news for stocks is that earnings have been revised significantly higher since the beginning of the year.  Also about mid-year investors will start paying more attention to 2019 earnings and right now those numbers are looking about 10% higher than the estimates for 2017.  If they pan out then stocks aren't as expensive right now as some might suggest.  Of course we'll have to wait and see.

As a reminder I'm out the rest of the week attending a funeral and then some meetings.  Posting will resume early next week.  

The chart above is from Tradingview.com, although the annotations are mine.

Long ETFs related to the S&P 500 in client and personal accounts.  Short S&P 500 in a personal account as part of a separate individual strategy.

Monday, April 02, 2018

Chart Talk {04.02.18}


Chart of the S&P 500 ETF, SPY.  Chart is from Tradingview.com, although the annotations are mine.  Is this a new trading range in the making?  We've bounced several times off of that lower support zone now.  I'd also note that we're basically trading at the same point we were back in November.  So far it seems like we are holding to our theory that we're basically consolidating last year's gains.  

I will be headed out later in the week to a funeral.  I will post tomorrow and that is it for this week.

Long ETFs related to the S&P 500 in client and personal accounts.  Short S&P 500 in a personal account as part of a separate individual strategy.

Sunday, April 01, 2018

Easter




Hill of Slane, Co. Meath, Ireland 2008

Christus Resurrectus Est! Vere Resurrectus Est!

Happy Easter!