First-Half 2017 GDP is Up

First-Half 2017 GDP is up Maybe 2% – Half Trump’s Goal

by Louis Navellier

May 31, 2017

*All content in this Introduction to Marketmail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

Last week the S&P 500 rose 1.43%.  I was on CNBC late last Friday talking about the “melt up” in stocks.   I said the shorts are being squeezed and this remains a great buying opportunity.  I also reiterated that I think June will be a great month.  I’d say we look good through July; then it could get bumpy in August.

Made in the USA Image

The U.S. GDP is rising, although slowly.  On Friday, the Bureau of Economic Analysis revised its first-quarter GDP estimate up to a 1.2% annual pace, from 0.7% initially estimated.  Meanwhile, second-quarter GDP estimates have been reduced from a robust 3.3% to a revised 3.0% due to a rising trade deficit in April.  Put those two numbers together and first-half growth looks to be about +2.1%.

The economy is probably growing fast enough for the Fed to go ahead with their next interest rate increase scheduled for the next meeting of the Federal Open Market Committee in mid-June.  The minutes of their last (May 2-3) meeting, released last Wednesday, confirmed that the Fed is leaning toward raising rates by 0.25% in June.  However, the surprise in the FOMC minutes was that the Fed does not want to sell any assets from its $4.5 trillion balance sheet, preferring to let their balance sheet shrink from “attrition,” by letting the securities mature.  This “dovish” statement caused Treasury bond yields to remain near their 2017 lows, which is very bullish for future stock prices.  Essentially, even if the Fed raises short-term rates, Wall Street does not seem to care, since long-term Treasury bond yields remain near 2017 lows.

In This Issue

It was an exciting market week and our writers had a long weekend in which to ruminate on these events.  Bryan Perry starts out by rating the likelihood of a Fed rate increase and a European “taper tantrum” this summer.  Then, Gary Alexander examines false fears surrounding rising P/E ratios – which are sometimes justified.  Ivan Martchev reviews our Presidential “apprentice” and his impact on the markets, focusing on his promise to cut the trade deficit with China.  Jason Bodner focuses on the energy sector this week while I explain what “quantitative analysis” means to our portfolio strategies and the overall market dynamics.

Income Mail:
The Fed Starts to Lay Out Its Exit Strategy
by Bryan Perry
Will Europe Experience a “Taper Tantrum”?

Growth Mail:
Should We Worry about a Lofty P/E Ratio?
by Gary Alexander
June is (Usually) a Neutral Market Month

Global Mail:
Record TV Ratings for “The Presidential Apprentice” (Season 1)
by Ivan Martchev
The Chinese Wild Card

Sector Spotlight:
The Stock Market is Not a Roulette Wheel
by Jason Bodner
The Energy Sector is Crapping Out…Again

A Look Ahead:
How I Measure Risk in Markets and Stocks
by Louis Navellier
Do “The Quants Run Wall Street Now”?

Income Mail:

*All content of "Income Mail" represents the opinion of Bryan Perry*

The Fed Starts to Lay Out Its Exit Strategy

by Bryan Perry

The stock market maintained its pattern of ‘buy-the-dip' trading following the one-day (May 17) drubbing – which came after a New York Times article outlined a potential obstruction of justice move by President Trump. The allegation prompted the stock market's worst one-day decline since September. The next day, however, the first priority of many investors was to reclaim what was lost by buying more, or holding on.

After a cautious beginning last week, the FOMC minutes from the May 2-3 meeting became the catalyst for a midweek move that got the benchmark index up and through the 2,400 resistance level to new record highs on three straight days. The S&P 500 added 1.43% for the week, closing at 2,415.82.

In the minutes of the early-May meeting, the Fed revealed a new approach to unwind its massive balance sheet – which was a concern of many economists. The market’s concern about reducing the balance sheet is that it could essentially act as a de facto tightening, but the Fed said that it would like to introduce a gradual increase of caps to limit the reinvestment of maturing securities. In addition, the Fed's willingness to discuss the issue showed that the central bank has a high level of confidence in the U.S. economy.

That was what the market was waiting for, and the Fed gave the market something to celebrate. There is now widespread optimism supporting the viewpoint that the Fed wouldn’t be considering this step in normalizing its balance sheet if the outlook for corporate earnings weren’t materially improving.

It’s quite possible that the Fed had advance information regarding the late week upward revision for first-quarter GDP from 0.7% to 1.2%. However, even with the more positive revised reading, 1.2% growth was the weakest gain since the first quarter of 2016, and well off the 2.1% gain in the prior fourth quarter.

The sluggish pace of growth last quarter is very likely not a true reflection of the health of the economy, given the strong data from labor markets, home sales, and planned business investment for factories and equipment. (Source: WSJ May 26, 2017 U.S. GDP Growth Revised up to 1.2% Rate in First Quarter)

Consumer spending, which accounts for nearly two-thirds of the GDP, was revised from 0.3% up to 0.5%, but it was still way down from the strong 3.5% rate registered for the fourth quarter. The upward adjustment in all the data now has the fed funds futures market pointing to the June 14 FOMC meeting as the most likely time for the next rate-hike announcement with an implied probability of 83.1%, up from last week's 78.5%. (Source: CMEGroup.com, “Fed Watch Tool May 26, 2017 Countdown to FOMC”)

Effective Federal Funds Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

A rate increase in June would raise the Effective Federal Funds Rate (now 0.91%) to a new target range of 1.00% to 1.25%. The economy is in a better place than three months ago and it is gaining momentum, so a rate increase seems to be the right decision – and that, in turn, is why stocks are still rising.

Will Europe Experience a “Taper Tantrum”?

The U.S. equity markets experienced a “taper tantrum” (a financial fit) when the Fed finally announced a scaling back of quantitative easing (QE), resulting in a surge in U.S. Treasury yields. QE was intended to be a short-term solution, but oh how the stock market and investors got hooked on that drug!

European Central Bank (ECB) President Mario Draghi was well aware of the narcotic effects of QE when he said on April 4 that “any exit strategy talk for the time being is premature.” Despite new growth in Europe, he said downside risks prevail: “We are past the worst but that is not to say that the crisis is over.”

After pumping a trillion euros into the system, Europe is clearly on the mend. Germany ended 2016 as the world’s fastest growing advanced economy (see chart, below). And now, with the rest of the Eurozone showing similar recovery, it is my view that we’ll start to hear a more ‘tapered’ tone from Mr. Draghi in the next few weeks. How the market reacts is anyone’s guess, but what we know from the U.S. tantrum in 2013 is that our financial fit was short-lived and well-contained – representing a great buying opportunity.

Real Annual Gross Domestic Product of the World's Advanced Economies Bar Chart

Looking forward, if the ECB follows the Fed’s playbook – as they have pretty much been doing all along – then the gains seen in European ADRs will likely have more legs in the months ahead. Many of the banks still trade at or below book value – some at a 40% to 50% discount – where if there is any kind of repeat performance in the financial sector mirroring what happened in the U.S. in 2013, there remains a lot of money to be made in the financial sector. It might be that simple – and most of us love ‘simple.’ 

Growth Mail:

*All content of "Growth Mail" represents the opinion of Gary Alexander*

Should We Worry about a Lofty P/E Ratio?

by Gary Alexander

We finished last week with three consecutive all-time highs in the S&P 500.  Year-to-date, the S&P 500 has set 20 new all-time closing highs, which is already above the average number of new highs per year (16) since 1954.  At the same time, volatility has been extremely low.  Year-to-date, the S&P 500 has seen single-day volatility of 1% or more just four times.  The average (per year) since 1954 is 50 times!

According to Sam Stovall, writing in U.S. Investment Policy Committee Notes by CFRA last week, there were 17 years since 1954 when the S&P 500 set more than the average number of new highs (16) AND had a below-average frequency of 1% daily volatility (50).  In those 17 years, the S&P gained an average 19.4% for the full year and it was up all 17 times, with gains ranging from 4.5% in 1992 to 45% in 1954.

Year-to-date (according to “The Bespoke Report,” May 26, 2017), the S&P 500 is up 8.61%.  As your Growth Mail editor, I am happy to report that the S&P 500 Growth ETF (IVW) is up far more, +13.53% YTD.  In their chart-heavy “start of summer” May 26 report, Bespoke also noted that “while the five largest stocks have accounted for a good chunk of the S&P’s gains this year, the rest of the index is participating as well.  This is evidenced by the fact that the cumulative advance/decline line of the S&P 500’s underlying members made a new high along with the index this week.”  Their proprietary chart shows the cumulative A/D line rising from 1975 a year ago to a new “bullish” high of 7413 last week.

As always, politics leads the news, but stock prices follow earnings more than politics, and first-quarter earnings were stunning.  According to Thompson Reuters (“This Week in Earnings,” May 19, 2017), first-quarter S&P 500 earnings “are expected to increase 15.2% from Q1 2016,” the best gains in two years.

Writing in their “On the Markets” report for May 2017, Morgan Stanley argues, “We frequently hear that the current forward price/earnings (P/E) multiple for the U.S. stock market is exceptionally high. At an 18 P/E, that is a factual statement, but not necessarily an accurate one. Based on the past 40 years, the P/E ratio for the top 500 U.S. stocks has ranged between six and 32, and 18 ranks in the 87th percentile. However, such a cursory statement does not take into account the exceptionally low interest rate environment. Comparing P/E ratios today with those in the early 1980s—when interest rates were in double digits—is comparing apples and oranges.”  Morgan Stanley thinks the “base case” 12-month P/E for the S&P could rise to 19, with a “bull case” for a rise to 21.  With S&P earnings at 142, they project a 2,700 S&P 500 “base case” price target, and a 3,000 12-month target for the S&P 500 in their “bull case.”

Last Tuesday (in “Few Differences This Time?” May 23, 2017), economist Ed Yardeni wrote, “Since 2011, the forward P/E has risen from roughly 10 to 17, well above its average of 13.8 since 1978.”  But, he said, concerns over a high P/E ratio ignore the fact that we have a very low “misery index” of 6.3%. That’s the combined inflation rate (1.9%) and unemployment rate (4.4%).  Long-term bond rates are also very low, creating an opening for a potentially higher P/E ratio.  Over a year ago (May 2, 2016), Warren Buffett whimsically said on CNBC that “If you had zero interest rates and you knew you were going to have them forever, stocks should sell at, you know, 100 times earnings or 200 times earnings.”  That’s because low interest rates favor stocks over bonds for after-tax income or total capital gains over time.

Standard and Poor's 500 Forward Price to Earnings Ratio Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

More recently, On February 27, 2017 – a day on which the S&P 500 hit a record high of 2,370, Buffett said on CNBC that U.S. stocks are “on the cheap side,” adding that “we are not in a bubble territory.”

Confirming that stocks still remain cheap, Ed Yardeni reported that the Fed’s Stock Valuation Model showed that the S&P 500 was undervalued in April by 61.9% using the U.S. Treasury 10-year bond yield. He said, “This confirms Buffett’s assessment that stocks are relatively cheap compared to bonds. If more investors conclude that economic growth (with low unemployment) and inflation may remain subdued for a long while, then they should conclude that economic growth and inflation remain historically low. That’s a Nirvana scenario for stocks, and would be consistent with valuation multiples remaining high.”

Fed's Stock Valuation Model Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In his briefing the next day (“Global Synchronized Moderate Growth,” May 24), Yardeni showed how the year-over-year real GDP growth for the UK, Eurozone, U.S., and Japan “suggest that the global economy is enjoying global synchronized growth.”  Over the Memorial Day weekend (on May 27), The Economist showed how the world’s developed economies sported similar 2% estimated growth rates for all of 2017:

2017 Developed Nations Gross Domestic Product Table

Some developing economies are growing even faster, notably India (+7.1%) and China (+6.6%), with Venezuela as the only major economy on earth going in a negative direction – down an estimated 6.4%.

June is (Usually) a Neutral Market Month

Speaking of Europe, last year brought us the “Brexit” crisis and a brief market panic on June 24.  Nevertheless, the S&P 500 rose by 0.1% in June 2016.  In the previous four years, June rose twice – up 4% in 2012 and 2% in 2014 – and fell twice, by 2.1% in 2015 and 1.5% in 2013.  In addition to Brexit, there have been several “Grexit” scares in May and June in recent years.  Greece went to the fiscal cliff in four consecutive years in late Spring – May 2-6, 2010; June 17-29, 2011; June 17, 2012; and June 11-24, 2013.  That tended to make June a scary month in recent history, but there appears to be no big threat coming out of Europe this year, after two relatively mainstream candidates won in Holland and France.

Now that Europe is finally growing again, we can expect this coordinated global growth to continue.  That should fuel higher market aggregates.  On the scary day when the Dow fell 382 points (May 17), Kevin O’Nolan, a multi-asset portfolio manager at Fidelity International, had the courage to say that earnings impact markets more than politics.  In a Fidelity customer alert that afternoon, he said, “Political swings may trigger volatility in the short term; longer term, they are unlikely to have a major effect on the U.S. stock market.”  He concluded that “U.S. stocks trade off earnings [and] earnings are linked to growth.”

Global Mail:

*All content of "Global Mail" represents the opinion of Ivan Martchev*

Record TV Ratings for “The Presidential Apprentice” (Season 1)

by Ivan Martchev

With the reality show “The Presidential Apprentice” (Season 1) dominating the daily news, last week felt a little anti-climactic – as the President was abroad on his first foreign policy trip – but the specter of trade wars was again raised after Mr. Trump said in English that “the Germans are bad, very bad” regarding their huge trade deficit with the U.S. The original German translation of his remarks mistakenly said the Germans are “evil.” One can safely say that in this case the nuance lost in translation was rather dramatic!

Last week also delivered a series of all-time highs in the S&P 500 amidst the temporary quiet of the “Russia-gate” scandal, which looks ready to heat up with the President retaining private legal counsel and planning a war room inside the White House to deal with the situation. Former Republican Speaker of the House, John Boehner, unloaded on the administration and characterized their performance so far as “a complete disaster,” aside from foreign policy. Boehner, the former third in the line of succession for President, sounded rather concerned about the course that his own party has taken in the White House.

I continue to believe that the bond market – not the stock market – will be the first to deliver a market verdict on the President’s economic agenda. With a couple of Fed rate hikes expected for the rest of 2017, a decline in long-term rates along with short-term rate hikes will continue to flatten the yield curve in 2017.

United States Ten Year Government Bond Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

A flattening yield curve is normal for a mature economic cycle that will be eight years long next month. With the right tax reform, I thought it was likely that the President would be able to navigate the economy and beat the record of economic expansion – which is 10 years (March 1991-March 2001), but without the necessary tax reform I do not think this is likely. An inverted yield curve on the 2-10 spread – a situation in which the 10-year Treasury note yield is below the yield of the 2-year note – has preceded every one of the past five recessions. We are far from that situation now, but we are getting closer as the 10-year note yield drops and the 2-year note yield rises – thanks to the current series of Fed rate hikes.

I have predicted that the U.S. will see a recession by the time Mr. Trump completes his first term on January 20, 2021, assuming he completes his full term. That means that the likelihood of the 10-year Treasury note seeing its yield at 1% or lower is also very high, probably better than 50%, in my opinion. While I do not see a recession coming in 2017, extrapolating the White House drama and lack of progress on key tax reform and infrastructure spending fronts, I am not so sure about 2018 or 2019.

The Chinese Wild Card

The chaotic maneuvers of the White House affect not only the domestic economy but every important trading relationship. If the Germans are indeed “very bad” with their $114.2 billion worth of exports to the U.S. and only $49.3 billion of U.S. imports, then the Chinese must truly be evil, based on their $462.8 billion of exports to the U.S. in 2016, offset by only $115.8 billion of imports – a $347 billion deficit.

Top United States Trade Partners in Total Export Goods Value Table

The U.S. trade deficits in 2016 were large (between $64 and $69 billion each) with Japan, Germany, and Mexico, but the Chinese trade deficit with the U.S. was five times bigger than the next highest (Japan); but the Chinese are off the White House’s “hit list” for the moment, having shown a willingness to work out a plan for narrowing their trade surplus and, more importantly, to work on the North Korean problem.

In the middle of this North Korean situation, the Chinese have quietly taken steps to appease the White House by tweaking the yuan fix so as to have the yuan not depreciate against the dollar so evidently. It is clear that in 2017 the yuan exchange rate behaved very differently than it did in 2015 or 2016. This, in no small part, is the result of Mr. Trump’s campaign-year verbal assaults on the Chinese authorities.

Chinese Yuan versus China Foreign Exchange Reserves Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

So far the Chinese have tinkered with the yen fix twice in the last five months – in December 2016 and May 2017-- which is highly unusual given how they historically approach the exchange rate. So far they have managed to plug the forex outflows out of China and stabilize the exchange rate.

MSCI Emerging Markets Free Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

There are indications, however, that this forex outflow stabilization may be temporary. There is a very peculiar weakness in commodity prices now – at a time when they are supposed to be seasonally strong (March to September). This is true not only of oil, but iron and other more cyclical commodities.

The weakness in oil is peculiar as it typically carries a rather strong correlation to the MSCI Emerging Markets Index, the main benchmark index for emerging markets. I have seen the price of oil and the MSCI Emerging Markets Index diverge before but not for long. Over time they follow each other quite closely.

Right now, the MSCI EM Index and the price of crude oil have notably diverged, so one of those two is likely sending the wrong signal. Since I believe that slowing demand in China caused the 18-month crash in the commodity markets that commenced in mid-2014, I think China is the biggest factor behind weakness in the price of crude oil – since China is the #1 global consumer of oil and many industrial commodities.

I think China is headed for a hard economic landing, so any trade pressure from Washington will only make it arrive faster than it otherwise would. I think Chinese leaders are fighting that hard landing with all the tools at their disposal, but I believe that they will ultimately fail as they are experiencing the effects of a busted credit bubble, which is a situation that tends to gather downside momentum – sooner or later.

Sector Spotlight:

*All content of "Sector Spotlight" represents the opinion of Jason Bodner*

The Stock Market is Not a Roulette Wheel

by Jason Bodner

In 2004, a man named Ashley Revell from London decided to stake his entire net worth of $135,300 on a single spin of the roulette wheel at the Plaza Hotel in Las Vegas. He bet on “red.” A pit boss proclaimed publicly that they would never condone such reckless gambling, but the croupier spun the wheel anyway.  All watched helplessly as the tiny ball spun round and round until it began to settle on a number: Red-7.

With this lucky spin, Ashley walked away with $270,600 on a 2:1 payout. He had a 47.3% chance of winning. I doubt that many of us would stake their full net worth on a 47.3% chance of doubling it, but in this story, the casino got to look like the good guys – first by warning off a bad bet and then by rewarding him with a huge chunk of cash. The gambler got his moment of glory and a rush that I can’t even begin to imagine, and the spinning roulette wheel got to momentarily be a ‘dream machine’ for the bystanders.

Roulette Wager Winner Image

The real story however, is that roulette is a game in which the odds are considerably against the players.  The house wins over the long term. In fact, in American Roulette, the house edge is a minimum of 5.26%. One has a decidedly negative chance of winning over the long term. Roulette, on the surface, seems like a fun game of chance, but the reality says that it’s a devilish game in which chance really has nothing to do with it. In fact, a myth grew that Francois Blanc – the single-0 Roulette innovator and operator of the Monte Carlo Casino in Monaco – bargained his soul with the devil in order to learn the game’s secrets.

It should then come as no surprise that the sum of all the numbers on a roulette wheel (0 to 36) totals 666, the dreaded “Number of the Beast” from the Book of Revelations:

Devilish Roulette Number Image

The Energy Sector is Crapping Out…Again

If we rewind the tape of history back to the summer of 2014, we will find a time in which the price of crude oil was collapsing from over $100 to (eventually) under $30. Energy as a whole was in a slide for the ages. Brent Crude, West Texas Crude, Gasoline, and Natural Gas all began to fall precipitously.

The contagion soon spread to equities and we witnessed a collapse in the price of energy-related equities; especially those tied to Oil & Gas Exploration and Pipelines. Declining energy prices torpedoed the margins of these companies and left many exposed, debt-ridden, highly-leveraged companies with little or no prospect for profit. This fear factor spawned by this sector-specific event took the whole market down with it. Other stories of the time were Ebola, Russia downing commercial airliners, and a host of other eye-catching news stories, but the underlying market story was the dire problems in the energy sector.

Why do I bring this up now? “The market is so different now,” you might say. Trump is in office and despite his political issues and scandals, it is widely viewed that his administration favors business. The stock market has reflected this view. But as we look at sector performance of late, we begin to see echoes of 2014. Energy as a sector is down over the last week, month, 3-, 6-, and 12 months. For those who are focused each day on the real underlying factors of the market like myself, the very thought of a 2014 similarity causes the hairs on the back of my neck to rise. But there is a distinct difference now.

The main difference this time is a healthier earnings cycle with lower volatility. That’s why this decline in energy concerns me less and – all things remaining equal – I don’t see energy taking the market out.

Another sector to watch is Telecommunications. Although this sector is the smallest of the 11 majors, with only 16 stocks in it, its performance has been dismal over the last three and six months. But the other nine (of 11) sectors are significantly higher than a year ago. The fact is, market-wide earnings are mostly a pleasure. Tech is still very strong, and the market remains healthy despite the negative headlines.

Standard and Poor's 500 Daily, Weekly, Monthly, Quarterly, Semi-annual, and Yearly Sector Indices Changes Tables

Sales and earnings for energy companies have shown a healthy bump and have largely worked this last quarter. The price of crude would seem wildly volatile to some. Let’s look at a 6-month chart of the OVX – the CBOE Crude Oil Volatility Index. While it trailed off a touch recently, a ‘30’ volatility indicates a move of roughly 2% per day. That’s a bumpy ride. If we compare that snapshot to a 5-year chart, we see that at the peak of volatility coinciding with that precipitous drop I described earlier, the index peaked at nearly 80, indicating a 5% daily move. That level of volatility could be stomach-turning for anybody.

CBOE Crude Oil Volatility Index Charts

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Energy is showing weakness, but nothing like the calamity of 2014. Overall, the environment is better for stocks this time – due to low rates and a generally bullish tape. Roulette, once linked with the devil, was a godsend to one lucky gambler. Orson Welles echoes this by saying “If you want a happy ending, that depends of course on when you stop your story.” But the story and the truth may not always agree.

Edison Quote Image

A Look Ahead:

*All content in this "A Look Ahead" section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

How I Measure Risk in Markets and Stocks

by Louis Navellier

The People’s Bank of China has raised key interest rates twice since February in an attempt to discourage leveraged bets in its capital markets.  Due to the recent gyrations associated with Chinese ADRs, I would like to explain how I calculate risk.  Specifically, I define risk as “dispersion from the mean” (i.e., Standard Deviation).  That means that we can think of “good” (up) volatility vs. “bad” (down) volatility,” similar to how doctors measure cholesterol, where HDL is the “good” cholesterol and LDL is its evil cousin.

In addition, “Beta” is the risk level tied to the overall stock market.  It is better known as “systematic risk.”  For a stock to score high in my quantitative rankings, it must typically have at least two the following three characteristics: (1) a low Standard Deviation, (2) a good up/down capture ratio, and/or (3) a low Beta.

My quantitative ranking is based on a ratio of Alpha to Standard Deviation, but is not as simple as that, since my management team calculates Beta against various stock market benchmarks, picking the benchmark with the highest reward/risk (R2) correlation.  In other words, my management team calculates the better Alphas (unsystematic return uncorrelated to a market benchmark) and Beta (systematic return uncorrelated to a market benchmark).  Alpha + Beta times the benchmark’s return = a stock’s total return.

Essentially, we identify low-correlating stocks that often “zig” when the stock market “zags.”  Essentially, my quantitative search for non-correlating stocks that exhibit relative strength on down days largely explains why my team is obsessed with finding fundamentally superior stocks as well as ‘hot’ ADR stocks.

We are obsessed with quarterly earnings announcements (which we call “judgment day” for our stocks).  I also look at flow of funds and seasonal events like (1) the annual Russell index rebalancing in June, (2) 90-day smart Beta & equally-weighted ETF rebalancing, and (3) institutional quarter-ending window dressing.  The primary reason why I expect the second half of June to be good is because I am expecting that our portfolios will benefit from persistent buying pressure from the annual Russell index rebalancing, 90-day smart Beta & equally-weighted ETF rebalancing, as well as the usual quarter-ending window dressing.

Good quantitative analysis is all about identifying quantitative and fundamental anomalies and then trading ahead of wave after wave of events that create persistent buying pressure.  In light of my own techniques, I’d like to discuss The Wall Street Journal’s article last week, entitled The Quants Run Wall Street Now.

Do “The Quants Run Wall Street Now”? – WSJ, May 22, 2017

On May 22, the Wall Street Journal revealed how the big hedge funds are controlled by quantitative engineers seeking and exploiting stock market anomalies via new adaptive algorithmic models.

I think what may be happening with the big hedge funds is that they are buying order flow intelligence from Wall Street firms to determine High Frequency Trading (HFT) order flows.  They grade the HFT order flow and decide if they want to step in, by providing liquidity for selected stocks by surfing the HFT order flow until a stock gets volatile enough.  Then, they decide when to reduce their position and/or exit the stock.

Essentially, when the NYSE switched to decimal pricing, it squeezed bid/ask spreads, replaced market makers and human specialists with computers, and started selling HFT order flow to the hedge funds.  Selling order flow is now a big business.

Puppy Dog Watching Image

Let me try to explain what is really going on.  Essentially, when you surf the Internet through popular website portals, you are being tracked by an artificial intelligence algorithmic model that is being built from your personal searches and shopping patterns.  That leads an Internet provider to make suggestions on items you search next.  This is no different than your dog watching you and trying to figure out if you are headed to the refrigerator to eat – or going outside for a walk.  So, just like your dog closely monitors your actions, the artificial intelligence algorithmic models are watching you closely for your preference signals.

To attract order flow, there is now a “commission war” on Wall Street.  Some major brokerage firms have admitted on CNBC that their firms would still make money if they did not charge commissions at all!  They make money by selling your order flow.

As I admitted above, I am also a quant, but I am not an “HFT quant.”  Instead, I am a fundamental quant striving to identify order flow and fundamental anomalies via my quantitative modeling in Dividend Grader, Portfolio Grader, and my management team’s continuous back testing & modeling.  I have to admit that I have become increasingly annoyed with restrictive trading platforms and pipes that force my firm’s orders into models that encourage “fill at any cost” orders.  Many firms are trying to force me into poor trading platforms and pipes, so my management company has been leaving what we decide are poor, uncompromising platforms and trading pipes.  To be a successful quant, you have to be a sneaky trader, never revealing how many shares you want to buy and be ready to “back off” and “walk away” if your buy and sell orders cannot be filled in an orderly manner.

In summary, the good news is that the financial markets are liquid.  The bad news is that the trading platforms, pipes, order management, and HFT systems may be selling our trades to the quants on Wall Street, who can take advantage of our order flow.  In other words, when your dog watches you and predicts your behavior, is your dog a friend or a foe?  Most of the time, your dog is your friend.  Fortunately, most of the time the NYSE’s HFT system adds liquidity, lowers trading costs, and has lately been helping many of our stocks “melt up.”  However, abuses and price anomalies can occur from time to time, especially in the ETF world, since they do not have to trade at NAV.  The jury is still deliberating on whether the quants are good or bad cholesterol, but I want to reassure you that I will always try to outsmart the quants, while never paying too much for a trade.


It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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