A truly disruptive event generates surprisingly large moves – sectors, stocks, and sometimes the overall market. Methods that work well in normal times may break down under this stress. Traders and investors must ask:
- Is my system still working?
- Should I adjust?
- Should I suspend operations for a time?
When trading based upon scientifically developed models, these questions are somewhat easier to answer. We have solid expectations for behavior and performance, because of extensive testing on a generous helping of out-of-sample data. Most importantly, the human managers know and understand the model inputs.
We have great respect for our group of models, but we retain human control. This week, for example, Oscar liked our solar sector. We knew something that Oscar didn’t – the likely effect of Trump policy on solar stocks. What appeared to be a buying opportunity, might be an illusion. The trade might still work, but there are other, safer choices that are nearly as good.
Technical analysts can always be tempted by confirmation bias and their knowledge of events. When using models, you very sparingly use exceptions. If you view every trade as a suggestion, you wind up doing your own trading, with your model advice used only for (biased) confirmation.
The Stock Exchange provides an expert-level debate on technical and fundamental analysis. I have placed more background at the end of the article. Comments, dissent, and specific stock questions are welcome!
This Week—Athena Loves Amgen
This week’s featured expert is Athena. Vince (our modeling guru) designed Athena to be very aggressive in finding new positions, but swift to exit those that were not working. These are not “stops†as we normally think of them. Exits are not based upon specific downside limits. Instead, there is an increased risk warning (IRW) that signals a change of behavior in how the stock is trading. The result is exceptionally good risk control both for individual positions and the overall portfolio. While we have not told the other models, Athena is Vince’s favorite.
Here are the ideas for this week, beginning with Athena, our featured expert.
Athena
I love to make a quick buck finding trends. An insider secret: There’s nothing trendier than the baseless speculation following a big election. My pick this week is AMGN, one of many biotech stocks rocketing skyward since this week’s big news. It’s still attractive at this price, but I’ll dump it in a heartbeat, maybe by Inauguration Day.
[J]Â You actually know about the election?
[A] Yes, but don’t tell the other models. They already resent my wisdom. I do not use fundamental information, but I am aware of it.
[J]Â This choice does seem logical on an earnings basis, as you can see from this chart. The stock trades at a discount and has a nice 2.7% dividend yield as well.
