Happy 1st Birthday, Forte!

On Monday, February 5, 2018, Maestro Capital Research went live with our first publicly-available trading and investment strategy, called Forte.  We are extremely proud to announce our 12-month results:

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As you can see, we handily beat both the S&P 500 and the Barclay Hedge Fund Indexes.

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MCR continues to make tremendous strides in identifying opportunities to mitigate downside risks, and even profit, through volatility plays.  This has been more recently evident over the last couple of months as we’ve successfully gained during market selloffs while roughly tracking the S&P 500 Index throughout the market’s retracement over the last 4 weeks.

For more Forte performance statistics and information on how to subscribe, please click here.

Mr. Buffett draws down too…and big!

According to Wikipedia, Warren Edward Buffett is “considered one of the most successful investors in the world and has a net worth of US$82.9 billion as of February 17, 2018, making him the third wealthiest person in the world.”. The Oracle of Omaha has earned a compounded annual gain in Berkshire Hathaway’s stock value per share of an amazing 20.9% by largely adhering to Benjamin Graham’s philosophy of value investing.

But even Berkshire isn’t immune to periodic (and painful) drawdowns. Here’s an excerpt from page 12 of the Berkshire Hathaway Inc. 2017 Annual Report:

“Berkshire, itself, provides some vivid examples of how price randomness in the short term can obscure longterm growth in value. For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares have suffered four truly major dips. Here are the gory details:”

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“There is simply no telling how far stocks can fall in a short period…your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

Although Maestro Capital Research’s Forte Strategy is based on a more nimble, swing position trading approach versus Berkshire’s long-term investment philosophy (by the way, MCR humbly and respectfully acknowledges our relative diminutive stature!), we share in common our persistent quest for maximized returns with minimized drawdowns. But as cliché and oft-repeated as it sounds, reward does not come without risk. The key to successful investing is to understand and accept that drawdowns are simply part of the game. Even the great Mr. Buffett acknowledges this. He continues:

“In the next 53 years our shares (and others) will experience declines resembling those in the table. No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow…That’s the time to heed these lines from Kipling’s If:

‘If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you . . .
Yours is the Earth and everything that’s in it.'”

Well said (and quoted), Mr. Buffett.

The Selloff

The S&P 500 closed at an all-time high of 2872.87 on Jan 26…and has been in freefall since.  So what the heck is going on? Well, at Maestro Capital Research, we believe this is merely a healthy bull market correction and that we have possibly witnessed the selloff’s capitulation during the Feb 9 trading session. Here are our thoughts:

Corrections can be healthy
For long-term investors saving for retirement, it’s been a fun upward ride for the last several years (not as much fun for active traders who prefer volatility). As a reality check, the S&P 500 hasn’t experienced a correction greater than 6% in 2 years. Last time we saw a drawdown of this magnitude, the S&P 500 suffered a 14.5% pullback from Nov 3 2015 to Feb 11 2016. We believe pullbacks of this magnitude should not only be expected once or twice a year, but are healthy, especially after the near vertical run-up we’ve seen since the first of January (Santa Claus and his annual rally just kept on ho-ho-ho-ing along well into January). Historically, when price versus the 50-day simple moving average (SMA) exceeds 6%, consolidation and/or a selloff commonly follow. On Jan 22 through Jan 26, the S&P 500 crested 6%.

No yield curve inversion…yet
We mentioned this on our Jan 7 blog: the last couple of major market tops happened soon after short-term treasury yields exceeded rates on the 10-, 20, and 30-year bonds. Why does this happen? Basically, investors believe the long-term economic outlook is bad and that a reduction in yields on longer-term fixed income investments is imminent. Whether or not the predictive power of a yield curve inversion is lessoning has been debated, but we believe it should remain one of a handful of factors to watch for.

It’s “Hammer-time” (sorry, I couldn’t resist)
Yes, this beloved candlestick pattern is what many successful market technicians look for before a near-term trend reversal. After another wild ride on Feb 9, a bullish hammer formed into close, leaving us to believe that an end to the selloff is nigh:

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Best 8-days
For those who contribute to a 401K plan through their employer, funds are systematically deducted from their paycheck and invested into pre-designated equity or bond funds (along with employer match dollars, if applicable). When does this happen most frequently? On the 1st and 15th of each month (and the handful of days that straddle those days), a significant chunk of dollars flows into the stock market. That’s obviously bullish…and the 15th is coming soon.

Decreasing volume
As you can see, volume over the last few days of this selloff has been decreasing. This price/volume correlation is a common sign of an impending reversal:

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Elliott says so
Although at Maestro Capital Research we don’t put a huge amount of weight on Elliott Wave Theory, we do like to take a broad and balanced approach to our analysis, looking at multiple technical patterns, data points and concepts including EW. In the left image below, notice the classic 1-2-3-4-5 wave pattern (with wave 3 always the strongest), then a-b-c reversal. The image on the right shows the current S&P 500 chart with our pattern labels. Despite the sometimes subjective nature of EW wave labeling, we do see a compelling case for a bullish a-b-c reversal:

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Note that many of the points mentioned above factor into Maestro Capital Research’s flagship Forte Strategy which is available for subscription through Collective 2.  For more information, click here!

Inverted Yield Curve?

There’s been an increase in chatter within the investment community lately about the risks of an inverted yield curve and its potential to serve as a signal for market tops. Where are we at now? Investopedia defines an inverted yield curve as “an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality…and is considered to be a predictor of economic recession.” Take a look at the following graphs:

Here’s the inverted yield curve at 2000’s S&P 500 top…

…and a more normal yield curve at the ’03 subsequent market bottom…

…and the top in ’07…

…and bottom in ’09…

…and here we are at the end of ’17…

It doesn’t appear short-term interest rates have crested 10, 20 or 30-year treasuries yet, but with the Fed well into it’s tightening cycle, we believe it’s just a matter of time. Stay tuned!