Blue Horseshoe Loves This Finance Blog

THERE'S MORE HERE TO BE SEEN... EVEN AN END HAS A START An End Has a Start, Editors Through the summer, 2015 had been a tale of two markets.  Natural resources and Chinese stocks were getting bludgeoned while healthcare and biotech related stocks continued to perform very well.  The relative strength of these sectors was so strong that they actually helped to prop up the broader market for most of the year in spite of massive losses elsewhere. That all changed last week, however, as healthcare and biotech stocks had an allergic reaction to a combination of prospects for a stronger dollar and comments from presidential candidate, Hillary Clinton.  The iShares biotech ETF (IBB) fell more than 10% last week and has entered a very ominous bearish technical pattern... Following the August selloff, the sector retraced to - and ricocheted off of - the 50-day resistance level.  It subsequently broke down below 20-day support and is accelerating to the downside with a widenin...

MODERN PORTFOLIO THEORY IS DEAD... In the wake of the financial crisis, a lot of "market experts" were pondering the death of Modern Portfolio Theory ... it was thought that the benefits of diversification failed to adequately protect investors from the market rout of 2008 and 2009.  However, as was written in a 2012 piece by John Liu (then of Spartus Capital) titled 'Risk Parity or Risk Parody?' faulty applications of the theory were more likely the cause for the perceived failures of diversification: "asset allocators unwittingly diversified their 'sources of return' rather than  their 'sources of risk' as MPT demands.  This failure to properly implement  MPT perhaps contributed more to losses than the failure of MPT itself." During the crisis, hedge fund investments performed very well relative to stocks but they have since lagged dramatically as equity markets rallied... powered by seemingly perpetual monetary stimulus.  Consequently, in...

MIND THE GAP One of the tools I've built and that I use a lot is a predictive factor model that identifies technical trading patterns.  I purposely avoid talking about this model too much because most of it is based on factors I developed through my own research and I consider them to be proprietary. However, given what I'm currently seeing in the market, one particular technical pattern is forming that could explain how the market performs for the next few months and it now seems a relevant topic of discussion.  I call it the 'Fill Gap' pattern. I'm sure I wasn't the first person to notice this phenomenon but I developed the pattern recognition based solely on my own observations and experience... so I'm taking full credit for it! The premise is that moving averages act as support and resistance levels for equity prices and when different moving averages diverge as a result of volatility or momentum a gap is created.  I measure this gap in terms of variance...

BE CAREFUL WHAT YOU WISH FOR, YOU MIGHT GET IT For anyone who has followed this blog, you know that I've been expecting market volatility to pick up for months and now it has - and then some... furthermore, there's a storm brewing of macro-economic factors that could keep it around for a while. First, Chinese markets are in the midst of a correction reminiscent of the US tech bubble of 2001... where short-term valuations got way ahead of the long-term potential of an emerging source of growth.  In an apparent and ill-advised measure to save face, the Chinese government has assumed an interventionist role and has attempted to calm markets with asset purchases instead of allowing a natural correction to run its course.  Estimates for the size of the intervention range between $100 and $500 billion US dollars.  When that intervention ultimately ends, more selling is expected and the contagion effects will be felt globally. Secondly, domestic markets are staring down the firs...