Random Thoughts and Observations

We are fortunate in life to have been so drawn to the study of the capital markets at an early age which provides an endless opportunity for reward, challenge, commentary, and amusements. This week seemed to be an exceptional example which we’ll share and hope you also find interesting, maybe even entertaining.

• After being included for 92 years (the longest of any company), someone decided to remove Exxon Mobil from the Dow Jones Industrial Average. One journalist wrote that this was caused by the 5 for 1 split in Apple stock effective on Monday and to rotate in Salesforce.com. Where is the “Industrial” component of the Salesforce.com, Nike, United Health, and Walgreen’s business models? And we’re not sure we understand how a stock split by one company justifies the jettison of another?

• The Federal Reserve Bank, after amassing an enormous and ever-growing mound of debt, felt it was a good idea now to target an inflation rate greater than the longer-standing threshold of 2.0%. There are some advantages to this strategy: it shrinks the relative size of existing debt, increases the paper value of hard assets, facilitates price equilibrium and wage adjustments, etc. In this case too, it’s likely that interest rates will remain quite low and the Fed money printing will continue – both favorable for the equity and commodity markets for the long-term.

• I had a 30-something year old colleague share the news that he made 133% in one day with an option contract after positive news was released about a company. Wow – impressive for sure and I hope his string of luck continues. No doubt the epic bull market since March has created quite a few genius-caliber experts in the markets (for now). I reminded him again that it’s hard enough to predict the direction of the market, let alone the direction and the timing necessary to be long-term successful as an options trader.

• Listening to a podcast from Switzerland on systematic investing, the guest speaker suggested that the stock market has progressed from a bubble to a mania. After researching the distinction between the two terms, we found this except from a 2009 book by Peter Kendall called The Mania Chronicles:

1. There is no upside resistance, and rising prices seem to be perpetual.
2. Everyone in the market looks like an expert.
3. There is a flight from quality investments to riskier investments.
4. As financial bubbles pop in one area, they bubble up in others.
5. The crash after the peak takes back all the gains the mania made.

Maybe one example is shares of Tesla will also have a 5 to 1 split on Monday gaining 61% since August 11 news and quintupling in price so far this year. If that is not manic enough, the ratio of put options bought to call options also hit a record low a few days ago, so the majority of option traders seem to comply with 1, 2, and 3 above.

Forte Strategy Update

We executed 8 trades last week for a net gain of 0.2% compared to a gain of 3.3% by the S&P 500. Our YTD net results so far equal a 2.4% gain compared to an 8.6% YTD gain for the S&P 500. Our YTD max drawdown is 9.5% versus 33.9% for the S&P 500. We added two new models (UPRO 3X S&P500 Index ETF and VIXY VIX Futures tracking ETF) into the mix to better accommodate the software automation and to diversify across time. These models actuate based on daily price updates whereas the TQQQ and UVXY are updated at 15 minute intervals.

More details about our trading activity can be found by registering on the Collective2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.

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