Stock markets finished higher last week with the Dow Jones Industrial Average up just over 100 points and the benchmark indexes climbing around 2% in what was a shortened week thanks to the public holiday. This was one of the best weekly performances since March. Read more »


trading systems failTrading systems fail all the time

I’d spent hours, days, weeks, months.

Testing, optimising, fine-tuning.

I’d read books, journals, blogs, studied the market, stared at quote screens and charts till my eyes were red and I could see them repeating in my sleep.

I ate, slept and breathed the markets.

I hated the weekends. Whenever Saturday came all I wanted was for Monday to come round again so that the markets would open.

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Today’s post was going to be about trading systems but half way through writing it my nine month old MacBook Pro decided to freeze and give up completely.

Hard disk failure seems to be the cause — and for the second time in a couple of months; which gives the impression that there’s something more serious going on. A 40 minute phone call to Apple Care later and I am advised to take the computer in for fixing. In the meantime, I will have to make do with a newly purchased (and hopefully reliable) Dell Inspiron.

Given these events and considering the fact Apple shares led declines in the main indices yesterday (falling by -4.22%) it seems apt to write up a little post about Apple stock $AAPL. Should you still be buying? Or is it time to sell?

Is it time to sell apple shares chart

Is it time to sell Apple shares?

Earlier this year I put forward a strong case on Seeking Alpha for going long Apple and since then the stock has advanced by around 30%.

Of course since then I have had two MacBook failures so you may understand if I am no longer as endeared to Apple products as I once was. I have also experienced several iPod battery failures and some issues with the desktop models.

Nevertheless, I can’t write off the company based on my own experience so let’s take a look at some other factors.

Recent events

Although I don’t pay too much attention to short term news and events, Apple shares did drop heavily yesterday and it seems there are at least a few reasons for this.

First, traders seem nervous to enter new long positions with the next iPhone unveiling scheduled for just a few days time. Second, there has been some negative publicity surrounding the security flaws of Apple products that led to the stealing of celebrity photos. And third, the unveiling of new Samsung smartphones at a trade show in Berlin.

Personally, I don’t think these events say much for the future direction of the share price but overall I do note some pressures that may indicate a slightly reduced rate of earnings. No-one knows how the next iPhone will be received and that uncertainty should keep the stock price under pressure over the next few days.

Technicals

On a technical outlook, Apple shares are at all-time highs having gained 26% year-to-date. But even so, they are not overbought and the RSI daily reads at a reasonable 49.25. The monthly chart could easily see a stronger correction but that is not particularly likely. In fact, so long as broad stock indices continue to climb, chances are that Apple shares will also climb. Overall, the technical picture is bullish but traders would prefer to enter on a more significant pullback.

Financials

For me, the most important piece of the investing puzzle are the company’s financials and in this regard Apple still looks in great shape. Price to earnings is just 16 and illustrates good value, as does the forward PE at 14. Price to sales and price to book are reasonable and so is the current ratio of 1.50, which takes account of the company’s healthy balance sheet. ROE is strong (31%) and profits equally so (net profit margin of 21.6%).

right time to sell apple shares financials

Looking at these numbers, the near 2% dividend, and the trend of improving earnings included, I just can’t make any case for selling Apple shares here. In fact for me, Apple remains one of the best stocks around for long term holders.

The only thing I will say is that at these prices I am not a buyer. I could be wrong but I don’t see Apple growing earnings at the same rate we’ve seen in the past and I wouldn’t disagree with current analyst predictions of around 12% a year. That would give a conservative DCF valuation that is not far away from where we are now.

Maybe I am nit-picking, and it might never happen, but I would prefer to wait for prices to come down a bit before making an entry. As well, I would like to see the PEG ratio come down a bit as a guide to cheapness.

So despite my recent experiences with Apple products I’m just about still a fan. If shares were to drop, to $80 say, I doubt I would have much hesitation in buying.

 



Ever since the release of Flash Boys by Michael Lewis, the interest in algorithmic trading has gone up another notch. But there is good reason for this because algorithms really are taking over the world and taking over Wall Street in particular.

algorithmic trading and traders on wall streetSrc: Perpetual Tourist

Most people talk of algorithmic trading and automatically think of HFT (High Frequency Trading), however, the two are not always the same and algorithmic trading can occur on much longer time frames if so desired.

How dominant is algorithmic trading?

One interesting fact about algorithmic trading and HFT especially is that not everyone is sure how prevalent it really is in today’s markets.

Some claim that only 50% of trading volume can be attributed to HFT, which would be 20% less than in 2009. Others claim the figure is closer to 75%.

But the really interesting fact is that while 50% – 75% of trading volume can be attributed to algorithmic trading, around 90-95% of all quotes on the market are from algorithms.

In other words, HFT orders are everywhere but those orders don’t always execute.

Why could this be?

The reason for this is that algorithms are constantly working out ways in which to profit from the markets. Some times the algorithms move in above or below the price in order to influence the direction of the market.

This is a game of speed where the quickest algorithm is able to jump in front of all the others and make the trade. If the algorithm gets in first it makes the trade and wins. If it doesn’t, it misses out and some other algo trade makes the profit.

The result of this is that algorithms constantly compete with each other on speed and the businesses in charge of setting the algos up invest heavily in getting lightning quick connections to the exchange, utilising underwater fibre optic cables and that kind of thing.

Understanding algorithms

I recommend taking 20 minutes to watch the following TEDx talk on algorithmic trading. Sean Gourley is a New Zealander who has spent a lot of time figuring out how algorithmic trading works and claims that we don’t really understand many of the things that these algorithms do.

Augmented Intelligence

Most interesting in this is Gourley’s discussion of augmented intelligence.

Sean talks about a chess tournament a few years ago where some of the most powerful computers in the world were pitted against some of the best human players.

While the computers were easily capable of beating the grand masters on their own, it was when humans teamed up with ordinary computers, that they were able to defeat the super computers consistently. Indeed, it seems that a reasonable group of players using an average desktop computer were able to defeat the super computers.

This gives rise to the notion that the future for us all is to work in conjunction with the machine in order to rise above the competition.

I suppose we knew this already.  But this is more evidence to get creative with the process.

 


 


US stock markets fell yesterday indicating a new stock market warning with the Dow Jones Industrial Average dropping -0.25% while the Nasdaq sank -0.28% and the S&P 500 fell -0.11%. The fall comes after four days of rallies took global markets to a record value of $63.8 trillion and saw the S&P 500 hit another new high at 1911.91.

The elevated position of most stock markets appears to be reaching new heights now and it would be no surprise to see a significant period of weakness come in over the next few days and weeks. Most notably, volatility levels and other market indicators are suggesting that a market top may be near. Volatile price action in the last hour of trading yesterday may also indicate a shift in trader sentiment.

VIX hits lowest since 2013

The CBOE Volatility Index, known as the VIX, dropped to the lowest level since March 2013 on Monday and has stayed under 15 for the last 16 of 28 trading days. The VIX now trades at a historically low level of just 11.68 and this has caused traders to load up on VIX call options according to research from Bloomberg. In fact, VIX calls have reached their highest levels since 2008 as traders anticipate a spring back in volatility over the next couple of weeks.

As you can see from the chart, the VIX does not usually stay at such low levels for long so volatility could well ramp up soon.

stock market warning vix index

Source: Yahoo! Finance

High levels of bullish sentiment and significant deviation from market average

As well as the significant drop in volatility levels, StreetTalkLive report that bullish sentiment among investors as reached high levels and such levels have been consistent with previous market peaks.

stock market warning investor sentiment

StreetTalkLive also show how the stock market has gotten ahead of itself and diverged from the 36 month average significantly. This has been another good indicator of market tops in the past as shown in the below chart.

stock market warning market deviation

Caution from John Hussman

Further indication of Hedge fund manager John Hussman reports that the fund’s measure of current market conditions present “overvalued, overbought, overbullish extremes [that] match only a handful of prior historical instances including 1929, 1972, 1987, 2000, and 2007”. Hussman goes on to suggest that the fund expects 10 year S&P 500 total returns of just 2.3% annually from current prices.

Conclusion

A number of important market indicators have reached extreme levels and this is likely a precursor to a rise in market volatility over the next couple of weeks that could lead to a significant market correction of 10-20% or more. Traders should use extra caution at this time and refrain from entering any new positions until the overbought condition has cleared.