Market review 23.04.23
My trading approach and current selective opportunities
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Today, I want to discuss how I approach markets. Then I’ll apply my framework to the current market – which continues to have very selective opportunities and some potential landmines.
There are countless strategies and an endless number of datasets that one can use to trade the market.
The main strategies include fundamental, macroeconomic, technical, and sentiment/positioning.
The first two are more for those that try to piece together the market from the bottom up. That requires fitting the market into fancy models, which are full of assumptions and lagging data. Even then, they often miss a significant element that drives markets: human behavior.
The latter 2 are more top-down approaches. It’s admitting that we don’t know and don’t care about the “why” behind market moves. If used correctly, they can be used to follow what the ‘smart money’ is doing.
Technical analysis (specifically trend following & momentum) can be used to track the ‘footprints’ that institutions leave in the price action from their buying & selling.
Sentiment tells us when markets are saturated (e.g. the pool of buyers or sellers is exhausted, and the trend is near completion). Positioning directly tells us what institutions or smaller speculators are doing with their money.
Within each these, there are many ways to go about it.
Technical analysis can include not just raw price but statistics (e.g. seasonality), fancy indicators (e.g. Coppock curve), cycles & waves, etc. Then there’s a wide range of timeframes to choose from.
Sentiment/positioning includes countless datasets: Retail vs. institutional, surveys vs. actual positions, and individual stocks vs. the broad market. Some even track Twitter feeds, media personalities, and magazine covers – which are often conflicting.
It’s very easy to get lost in complexity! Don’t fall into this trap. Also, technical analysis often gets a bad rap because it is highly abused.
My philosophy is to keep things very simple:
The ETF leadership board helps me separate leaders from laggards.
Just a simple horizontal line on a weekly chart helps me manage risk. No technical indicators, statistics, or patterns. Weekly candles reduce noise while still being timely.
Only positioning of commercial hedgers. No other sentiment data.
I updated the ‘About’ page on this blog. There’s a summary of my approach, a trade example, and what this blog is about. I like to remind myself of the big picture in markets and how I approach markets. That page helps with the latter.
The ETF leaders board finished the week like this:
Leaders (within 5% of 52-week highs):
Regions: Europe (VGK), Japan (EWJ, DXJ)
US Sectors*: Industrials (ITA, XLI), Tech (XLK, IBB), Discretionary (BJK, XHB)
Commodities: GLD, SLV
US Sectors: Banks (KRE), real estate (LAND, XLRE)
Commodities: LIT, REMX, URNM, UNG
* One thing I’ll note about sector leadership: Many global sectors are outperforming their US counterparts (e.g. industrials, staples, and health care).
The leaders keep making a fresh batch of breakouts each week. However, some markets are also running into big resistance levels (among other signs of caution).
I will discuss the good and bad for each sector. Then, at the end of the post, I’ll show how I’m weighing the evidence and allocating within my portfolio.
Again, Japan and Europe are both global leaders right now.
I’ve highlighted Japan in a few blog posts over the past year (see here and here). DXJ is a holding that has been the least amount of drama. Just look at the beautiful weekly chart below – it’s unlike the chopfest in broad US ETFs:
SPY and VEU (World ex-US) were each down over 16% last year, while DXJ was up 6%. This outperformance wasn’t just during a bear market. This year, while SPY and VEU are each up less than 9%, DXJ is up 14%!
Last Summer and Fall, I wrote about how major indices and sectors were hitting multi-decade support levels. However, after a nice run, many parts of the market are hitting resistance here. One example is the German DAX:
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