The importable EDS file based on Markos Katsanos’ article in the April issue of Stocks & Commodities, “Detecting High-Volume Breakouts,” can be obtained on request via email to info@TradersEdgeSystems.com.
Excerpt “Is there anything more satisfying for a trader than capturing a huge breakout? The usual practice for breakout entries is to simply buy new highs. This method, when used in isolation, will often result in false breakouts. It is, therefore, better to wait for volume confirmation before entering the trade, as high-volume breakouts usually last much longer. In this article, I will show you how to detect breakouts using only volume, sometimes even before price breaks out, by introducing a new volume breakout indicator. “
The code is also available here:
!Detecting High-Volume Breakouts !Author: Markos Katsanos, TASC April 2021
!Coded by: Richard Denning, 02/18/2021
!INPUTS:
period is 30.
smoLen is 3.
vpnCrit is 10.
maLen is 30.
V is [volume].
!FORMULAS:
MAVol is simpleavg(V,period).
MAV is iff(MAVol>0,MAVol,1).
Avg is ([High]+[Low]+[Close])/3.
MF is Avg - valresult(Avg,1).
ATR is simpleavg(max( [high]-[low],max(val([close],1)-[low],[high]-val([close],1))),period).
MC is 0.1*ATR.
VMP is iff(MF > MC, V, 0).
VP is sum(VMP,period).
VMN is iff(MF < -MC, V, 0).
VN is sum(VMN,period). EDSPN is (expavg(((VP - VN) / MAV / period),smoLen))*100.
MAVPN is simpleavg(VPN,maLen).
Code for the VPN indicator is set up in the EDS code file. Figure 9 shows the indicator on a chart of Tesla Motors Inc (TSLA).
FIGURE 9: AIQ. The VPN indicator is shown on a chart of Tesla Motors Inc. (TSLA).
With the price of the Dow Jones 30 (ticker INDU) in your WinWayCharts reaching beyond 32760, your Market Chart may be experiencing a spike in Charts. A new updated file for INDU is now available for you at www.aiqsystems.com/INDU.dta
Close all open WinWayCharts programs. Click the link above and Save INDU.dta to c:\wintes32\tdata, say yes when asked to overwrite. Once done, open Data Manager, click on Utilities, Rebuild Master Ticker List.
OK, for the record, I have stood in enough long lines next to impossibly sweaty people (Full Disclosure: They likely feel the same way about me) to know that all of the talk of “Disney” and “Magic” is strictly for marketing consumption. That being said – and despite the fact that you cannot attend the flagship property in sunny CA, and likely will not be able to for some time – there is something about “going to Disney” that still strikes a chord with a whole lot of people.
Of course, my interest here is more financial in nature.
Now the “rational” thing to do in the minds of most investors is to ask and answer some serious questions regarding “theme park attendance.” in the age of COVID-19. Questions like “will attendance pick up anytime soon” and “will DIS continue to be an economic powerhouse if attendance does not return to pre-Covid levels?”
Here is a link to a factual, well-researched and well-written article noting that Disney World attendance as of 8/21/20, attendance was down 80% from a year earlier. Scary stuff, right? And the snap implication is fairly obvious – theme parks are suffering and may continue to do so for the foreseeable future.
But as I mentioned, my interest is more financial in nature. And I tend to look at things from a slightly different angle than a lot of other people. Part of that is because I have come to recognize that (like a lot of other people, but sadly unbeknownst to a lot of those same people) I (and they) am not very good at accurately answering “questions about the future”, such as those posed above about theme parks.
I read that theme park attendance is “down 80%” and instantly that voice in my head loudly issues that age-old “DANGER! WARNING WILL ROBINSON” alert and I feel the urge to scurry off in the other direction. But fortunately, I have gotten pretty good at not overreacting to that initial warning and coming back for a second glance.
Consider Figure 1. The date marked by the vertical line is August 21, 2020, i.e., the day that the news came out that “Disney World attendance is down 80%, that heavy discounting going on, that Disney stock is down for the year and that it is lagging the major stock indexes.”
Since that “DANGER! WARNING WILL ROBNINSON” moment, DIS is up +34% in 4 months, versus +9% for the S&P 500 Index (FYI, DIS is now up 18% for 2020 vs. 14%+ for the S&P 500).
Are the financial markets a perverse beast, or WHAT!?
The “Real Magic” of Disney Stock
So, what the heck happened to make DIS stock burst higher even in the face of seemingly very bad fundamental news? Well, long story short, October 1st happened. Wait, what? October 1st? Surely it can’t be that simple!?
Here’s the thing: it probably should not be that simple. And there is absolutely no guarantee that it will continue to be that simple. But for the past roughly 6 decades…. it has been just about that simple. Consider Figure 2.
Figure 2 displays the cumulative % gain for DIS stock held ONLY from October 1st each year through the end of May the following year, every year since 1962.
Figure 2 – DIS % +(-) during October through May (logarithmic scale)
An initial $1,000 investment in DIS stock held only October through May starting in 1962 is worth $108,512,237 as of 12/18/2020, or a gain of +10,851,124%.
Figure 3 displays the cumulative % gain for DIS stock held ONLY from June 1st each year through the end of September that same year, every year since 1962.
Figure 3 – DIS % +(-) during June through September (non-logarithmic scale)
An initial $1,000 investment in DIS stock held only June through September starting in 1962 is worth $44.86 as of 12/18/2020, or a loss of -95.5%.
The Upshot
Many investors will ask the obvious question of “Why does this work?” And the most succinct answer I can proffer is “It beats me.” Obviously, many investors will not be satisfied with that answer. And that is perfectly OK by me. As a proud graduate of “The School of Whatever Works” I tend to value “consistency” more than I do cause and effect. Not everyone is wired that way and that’s OK.
Speaking of consistency, for what it is worth Figure 4 displays decade-by-decade results for the Oct-May period versus the Jun-Sep period.
Figure 4 – DIS decade-by-decade
The key things to note are that:
*The Oct-May period showed a pretty substantial gain during each of the 6 previous decades.
*The Jun-Sep period showed a gain during the 60’s but lost money in every subsequent decade
(Note 2020 results through 12/18 are included in the table but are not a part of the commentary above).
Summary
Clearly the Oct-May period has been pretty “magical” for DIS stock investors for a long time. Will this continue to be the case in the future? Ah, there’s the rub. And as always, I must repeat once again my stock answer of “It beat’s me.”
But the real point is that in the long run investment success has a lot to do with finding and “edge” and exploiting it repeatedly. Or as I like to say:
“Opportunity is where you find it.”
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
In many ways the markets imitate life. For example, the trend is your friend. You may enjoy your friendship with the trend for an indefinite length of time. But the moment you ignore it – or just simply take it for granted that this friendship is permanent, with no additional effort required on your part – that’s when the trouble starts.
For the stock market right now, the bullish trend is our friend. Figure 1 displays the 4 major indexes all above their respective – and rising – long-term moving averages. This is essentially the definition of a “bull market.”
In addition, a number of indicators that I follow have given bullish signals in the last 1 to 8 months. These often remain bullish for up to a year. So, for the record, with my trusted trend-following, oversold/thrust and seasonal indicators mostly all bullish I really have no choice but to be in the bullish camp.
Not that I am complaining mind you. But like everyone else, I try to keep my eyes open for potential signs of trouble. And of course, there are always some. One of the keys to long-term success in the stock market is determining when is the proper time to actually pay attention to the “scary stuff.” Because scary stuff can be way early or in other cases can turn out to be not that scary at all when you look a little closer.
So, let’s take a closer look at some of the scary stuff.
Valuations
Figure 2 displays an aggregate model of four separate measures of valuation. The intent is to gain some perspective as to whether stocks are overvalued, undervalued or somewhere in between.
Clearly the stock market is “overvalued” if looked at from a historical perspective. The only two higher readings preceded the tops in 1929 (the Dow subsequently lost -89% of its value during the Great Depression) and 2000 (the Nasdaq 100 subsequently lost -83% of its value).
Does this one matter? Absolutely. But here is what you need to know:
*Valuation IS NOT a timing indicator. Since breaking out to a new high in 1995 the stock market has spent most of the past 25 years in “overvalued” territory. During this time the Dow Industrials have increased 700%. So, the proper response at the first sign of overvaluation should NOT be “SELL.”
*However, ultimately valuation DOES matter.
Which leads directly to:
Jay’s Trading Maxim #44: If you are walking down the street and you trip and fall that’s one thing. If you are climbing a mountain and you trip and fall that is something else. And if you are gazing at the stars and don’t even realize that you are climbing a mountain and trip and fall – the only applicable phrase is “Look Out Below”.
So, the proper response is this: instead of walking along and staring at the stars, keep a close eye on the terrain directly in front of you. And watch out for cliffs.
Top 5 companies as a % of S&P 500 Index
At times through history certain stocks or groups of stocks catch “lightning in a bottle.” And when they do the advances are spectacular, enriching anyone who gets on board – unless they happen to get on board too late. Figure 3 displays the percentage of the S&P 500 Index market capitalization made up by JUST the 5 largest cap companies in the index at any given point in time.
Figure 3 – Top 5 stocks as a % of S&P 500 Index market cap (Courtesy: www.Bloomberg.com)
The anecdotal suggestion is pretty obvious. Following the market peak in 2000, the five stocks listed each took a pretty significant whack as shown in Figure 4.
Figure 4 – Top Stocks after the 2000 Peak
Then when we look at how far the line in Figure 3 has soared in 2020 the obvious inference is that the 5 stocks listed for 2020 are due to take a similar hit. And here is where it gets interesting. Are MSFT, AAPL, AMZN, GOOGL and FB due to lose a significant portion of their value in the years directly ahead?
Two thoughts:
*There is no way to know for sure until it happens
*That being said, my own personal option is “yes, of course they are”
But here is where the rubber meets the road: Am I presently playing the bearish side of these stocks? Nope. The trend is still bullish. Conversely, am I keeping a close eye and am I willing to play the bearish side of these stocks? Yup. But not until they – and the overall market – actually starts showing some actual cracks.
One Perspective on AAPL
Apple has been a dominant company for many years, since its inception really. Will it continue to be? I certainly would not bet against the ability of the company to innovate and grow its earnings and sales in the years ahead. Still timing – as they say – is everything. For what it is worth, Figure 5 displays the price-to-book value ratio for AAPL since January 1990.
Figure 5 – AAPL price-to-book value ratio (Data courtesy of Sentimentrader.com)
Anything jump out at you?
Now one can argue pretty compellingly that price-to-book value is not the way to value a leading technology company. And I probably agree – to a point. But I can’t help but look at Figure 5 and wonder if that point has possibly been exceeded.
Summary
Nothing in this piece is meant to make you “bearish” or feel compelled to sell stocks. For the record, I am still in the bullish camp. But while this information DOES NOT constitute a “call to action”, IT DOES constitute a “call to pay close attention.”
Bottom line: enjoy the bull market but DO NOT fall in love with it.
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented represents the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
English