Author: Beau Wolinsky, KC Capital Management
Covestor model: Quantitative ETF
In April we saw the market reach an overbought level and took a short position in ProShares UltraPro QQQ (TQQQ). The precipitous drop that followed was due to socialist election gains in both Greece and France, and we managed to identify the worst 5 day period for NASDAQ100 (NDX) stock indices with this trade.
We are expecting to close our position in TQQQ with one of our largest profits ever. While I’m disappointed in the annual performance of the Quantitative EFT model, my estimation of the average profit is about 8.5%, versus an average loss of 11%. The win percentage is also much higher in the backtest than the live results show. The overbought condition means that we expect the market to reverse to an oversold level, and that appears to be what has happened during the short in TQQQ through early May.
Earnings out from from Apple (AAPL) indicate an overwhelming demand for their products, and there is a group of fund managers and investors who now argue that Apple should be its own asset class. I do agree with that logic, because the most highly valued company in the world has a $533 billion market cap close to the value of the entire retail sector.
Apple should be considered a commodity rather than merely a stock share of ownership. Its influence on the market is due largely to expectations that it will earn around $50 per share. We believe that may be true but as the market has started to make consecutive lower highs, the recent downturn may indicate the start of a bear market trend.
Even though our Price Physics Trend Following algorithms still say we’re in a bull trend, the shorter term need to retrace some of the gains that led us to our short position in TQQQ. We’re still at a higher low on longer term charts, where the last higher low was marked around the 2,200 level on the index. So this low around 2,600 may indicate further price appreciation in the index and for all stocks remains a possibility.
Should a continuation of lower highs start to appear and we fail to breach to higher highs, this will mark the end of this bull market and the start of a downtrend. I don’t have estimates for how shallow or deep that decline will be, but as we’ve been making consistent lower highs the impetus for making new highs makes those chances much more unlikely. The decline I see is driven by deflationary price action to counterbalance the Federal Reserve’s printing of money.
