The ACD Method

[srinir]

From a fundamental perspective, if above average GDP growth is perceived, the following happens:
LONG equities due to expected growing earnings
LONG crude oil due to growing demand
LONG copper due to growing demand
SHORT bonds due to expected rise in interest rates
SHORT dollar index due to higher inflation

It is better to decompose the sources of returns for each asset classes and look at it together, instead of looking single factor model (GDP growth) of yours.

Sources of returns for equities: Dividends+reinvestments(stock buyback)+Earnings growth (tied to GDP growth) + PE expansion. Assuming dividends and reinvestments are constant most of the return comes from Earnings growth and PE expansion. PE expansion is one of the main reasons we had spectacular run-up even though GDP growth was inline or slightly negative to long term trend line.

Commodities= GDP growth + Demand and supply shocks. These shocks have outsized effect compared to GDP growth. For eg: Negative supply shock in 70's due to oil embargo, Negative demand shock in 2008, Positive supply shock due to shale in 2014.

Bonds: Treasuries mostly due to term premium and change in interest rates and for long term bonds unexpected changes from inflation (Expected inflation will be priced in). For corporates you need to take into consideration default rates.

For dollar index: You need to consider rate differentials, Changes in expected inflation, Changes in balance of trade and some premium for being world reserve currency.

 

[eurusdzn]

Central banks , monetary policy , swamp all textbook historical causal relationships in this new regime. Factoring new inputs real time such as tax policy , trade, balance sheet reduction certainly contribute to intermediate term price swings in assets.
New regime US central bank is THE major player by a wide margin in determining the future of global growth and asset prices IMO. Too dramatic?

 

[Maverick74]

Central banks , monetary policy , swamp all textbook historical causal relationships in this new regime. Factoring new inputs real time such as tax policy , trade, balance sheet reduction certainly contribute to intermediate term price swings in assets.
New regime US central bank is THE major player by a wide margin in determining the future of global growth and asset prices IMO. Too dramatic?

I disagree with this. The US is taking a backseat now to the ECB which is distorting curves all over the world. The reason our 10 years are not upticking is because Bund yields are still flat to negative. Our FED is letting QE et al roll off their balance sheets. Talk to any bond trader and they are watching the ECB like a hawk, not our FED.

 

[tonysoprano]

Yes, I meant 30 day confirmation. I do my number lines different then Fisher. Mine are better.

Hello Mav, A couple of number line questions:
1) Once the NL30 confirms, say with 2 consecutive days >=9, what causes it to reset/un-confirm?
2) Regarding scoring a day ... How would you score a day where the day opens and closes right at or very close to the high where the high was not able to make it to the A level. It would seem to be quite a strong day (at least to me) though if it didn't even make it to the A level how could the score be anything other than zero?

 

[Maverick74]

Hello Mav, A couple of number line questions:
1) Once the NL30 confirms, say with 2 consecutive days >=9, what causes it to reset/un-confirm?
2) Regarding scoring a day ... How would you score a day where the day opens and closes right at or very close to the high where the high was not able to make it to the A level. It would seem to be quite a strong day (at least to me) though if it didn't even make it to the A level how could the score be anything other than zero?

I usually use a +1/-1 for re-sets. If the market opens at the high and closes at the high, did it make a failed A down? If the market closes on the high but that is the same as the open price, it's not terribly bullish. You have to account for the weakness earlier in the day. If it made a failed A down it will get a +1.

 

[tonysoprano]

OK, let's start here. Why did you choose this stock?

Hello Mav,
Let's relate this question (why this stock) back to posts 7244 and 7253 which were your initial posts about the US Steel trade you highlighted back in 2013. Out of the ocean of stocks how did X bubble to the surface .. how did you find it? You talked about its number line showing strength while the chart of X was not showing strength ... OK, but there are likely many stocks exhibiting that characteristic (or maybe not). Thanks

 

[Maverick74]

Hello Mav,
Let's relate this question (why this stock) back to posts 7244 and 7253 which were your initial posts about the US Steel trade you highlighted back in 2013. Out of the ocean of stocks how did X bubble to the surface .. how did you find it? You talked about its number line showing strength while the chart of X was not showing strength ... OK, but there are likely many stocks exhibiting that characteristic (or maybe not). Thanks

Man alive, it's a good thing I don't have dementia yet. LOL. You keep asking me to recall posts from 5 years ago in perfect detail. I barely remember where I put my car keys.

I'm going to take a guess. I think that year was a relatively bad year for stocks and many thought the economy was going to crash. Shocking I know. This stock had gotten hammered over the last year and was left for dead. The 30NL was showing a heartbeat. The patient was alive! And getting ready to come alive. The chart looked like shit. The economy looked like shit. But the 30NL said buy with both hands. So I did. The 30NL was right, the economy was fine, we basically blasted off from that level and X doubled in a month or two.

This was similiar to the Bond trade in 2012 where everyone was predicting bonds were going to crash due to the first ever US debt downgrade. Of course everyone was dead wrong. Biggest bond rally in history took place after the downgrade. The 30NL telegraphed that one as well.

A lot of these trades are obvious. You have sentiment VERY strongly one way and the chart looking suspect (makes for an easy trap) and the 30NL going counter. Those are layups when you can find them. But it takes some digging.

 

[tonysoprano]

Man alive, it's a good thing I don't have dementia yet. LOL. You keep asking me to recall posts from 5 years ago in perfect detail. I barely remember where I put my car keys.

A lot of these trades are obvious. You have sentiment VERY strongly one way and the chart looking suspect (makes for an easy trap) and the 30NL going counter. Those are layups when you can find them. But it takes some digging.

I've recently gone through the whole thread and jot the questions down as I review the comments. What I was getting at was what brought X to your attention versus some other stock? I.e., was X a stock on your perpetual watch list, did you find it as you were clicking through all the charts in the SP500, did it appear in a scan of some sort, etc. I.e., once you saw the chart of X and the NL30 it was probably obvious there was a divergence but getting there ... was it happenstance or part of the structure by which you review stocks? Thanks

 

[Maverick74]

I've recently gone through the whole thread and jot the questions down as I review the comments. What I was getting at was what brought X to your attention versus some other stock? I.e., was X a stock on your perpetual watch list, did you find it as you were clicking through all the charts in the SP500, did it appear in a scan of some sort, etc. I.e., once you saw the chart of X and the NL30 it was probably obvious there was a divergence but getting there ... was it happenstance or part of the structure by which you review stocks? Thanks

I'm a macro guy. I watch material stocks closely. I think stocks like X tell a better story about the economy then say FB. That's also why I keep a close eye on copper.

 

[Cswim63]

Dr. Copper.