Dark Days Ahead?

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CHERRY PICKS RIPE & JUICY TRADE IDEAS

Seeking Diversity

Rather than seeking to predict the next big thing, consider buying any of these 20 tickers to diversify a portfolio in the new year

By Michael Rechenthin

W

hen all of the stocks and exchange-traded funds (ETFs) on a portfolio page are colored either green for profit or red for loss, those holdings aren’t diversified.

But diversification is worth pursuing because it generally strengthens a portfolio by combining a variety of companies, components and strategies. It often reduces risk without reducing returns.

While simply adding stocks generally helps diversify a portfolio, it doesn’t if they all come from the same sector—such as technology, for example.

That’s where data science can come into play. Traders can easily scan the most liquid stocks and ETFs to diversify a portfolio that’s heavy in the S&P 500 Index.

The table tracks 20 tickers and ETFs that have been trading without correlation to the overall market, as measured by their six-month historical relationship with the S&P 500.

For many traders, the easiest way to diversify is by purchasing shares. But another method calls for buying 100 shares of the underlying and then selling a covered call against the shares held. That has the advantage of increasing “cash flow” because the money received for selling the call acts as an extra dividend to the portfolio.

On their own

Buying these equities, which have not been moving in sync with the markets, could diversify a portfolio.

Symbol Name

BDX Becton, Dickinson and Co.

BIO Bio-Rad Laboratories Inc. Class A

Industry IV Rank Expected volatility 3-month price change 12-month price change

Surgical & medical instruments & apparatus 28% Medium -5% 1%

Laboratory analytical instruments 35% Medium -9% 32%

CPB Campbell Soup Co. Food & kindred products CHD Church & Dwight Co. Inc. Soap detergents, cleaning preparations, perfumes, cosmetics CLX Clorox Co. Specialty cleaning, polishing & sanitation preparations 28% Medium 0% -9%

18% Medium 15% 11%

18% Medium -1% -17%

CMS CMS Energy Corp. Electric & other services combined 16% Medium -2% 5% CAG Conagra Brands Inc. Food & kindred products 25% Medium -3% -9%

DG Dollar General Corp. ED Consolidated Edison Inc Retail trade 30% Medium 2% 8%

Electric & other services combined 36% Low 11% 13%

ES Eversource Energy Electric Services HOLX Hologic Inc. X-Ray apparatus & tubes & related irradiation apparatus 57% High -1% 2% 36% High -7% 1%

SJM JM Smucker Co. Canned fruits, vegetables, preserves, jams & jellies 27% High 10% 15%

K Kellogg Co. Grain mill products 23% Medium 0% 1%

KMB Kimberly-Clark Corp.

Converted paper & paperboard products (No containers/boxes) MRNA Moderna Inc. Biological products 24% Medium -1% 0%

30% High -43% 63%

NEM Newmont Corp. Gold & silver ores

18% High -2% -5% PKI PerkinElmer Inc. Laboratory analytical instruments 22% High 0% 28% PFE Pfizer Inc. Pharmaceutical preparations 60% High 16% 28% GLD SPDR Gold TR Gold SHS ETF 16% Low 0% -3%

KR The Kroger Co. Retail grocery stores 40% High 4% 42%

Michael Rechenthin, Ph.D., aka “Dr. Data,” is the head of research and development at tastytrade. @mrechenthin

For more information on this quantitative way of trading, subscribe to cherry picks and market insights at info.tastytrade.com/cherry-picks

THE TECHNICIAN A VETERAN TRADER TACKLES TECHNICALS

Dark Days Ahead?

Technical analysis of stock prices indicates the markets’ “everything bubble” may burst in 2022

By Tim Knight

U

nhelpful pundits often make technical analysis seem terribly complicated. But the basic tenets of good charting focus on supply, demand, support, resistance and trend lines. Using a limited palette of tools, a skilled chartist can glean great insight from long-term charts about possible directions and their likelihood.

One interesting twist to the world of charting is using those tools and techniques on ratio charts instead of standard charts. Traders can distinguish between a standard chart and a ratio chart by the number symbols used to construct it.

If a single symbol is used (such as AAPL for Apple or MSFT for Microsoft), then it’s a standard chart. If more than one symbol is used—sometimes dividing one by another—then it’s a ratio chart. In other words, it displays the ratio of the first symbol compared with the second.

Any given financial instrument can be divided by another. The resulting chart might be interesting, but it might not be useful. For example, one could divide the price history of Apple on a daily basis for the past 40 years by the price data for wheat over the same timespan. But as unrelated as those two things are, the resulting chart would likely be pointless.

There are, however, ample opportunities to create ratio charts from instruments that have powerful, long-term relationships. Let’s examine a variety of such charts and determine what they suggest for the year ahead.

A down period

A long-term view shows prices stayed relatively low during the 1970s.

1959 1969 1979 1989 1999 2009

The money supply

The S&P 500 did not ascend in a financial vacuum. Instead, stocks increased in price in recent years thanks to a tidal wave of liquidity provided by an endlessly accommodating Federal Reserve. Thus, traders could create an honest picture of the performance of the S&P 500 by simply dividing the value of the daily data of the S&P 500 cash by the level of the M2 money supply, as reported by the Federal Reserve. The resulting chart is called “Mostly upward. ”

The second chart accompanying this article, “A down period,” above, goes back farther in time than the first. The second chart begins in the 1950s and breaks down into some broad component parts: Phase One: This is the steady descent of equity markets through the 1960s and 1970s. Even though the nominal value of the S&P didn’t take on the appearance of a quarter-century bear market, in reality, that’s what was happening beneath the surface—if one measures the stock market through the lens of the money supply. This relentless grind lower ended in the middle of 1982.

Phase Two: This was when the last long-term organic bull market took place, and it was gargantuan. From 1982 until early 2000, the stock market roared higher. The fact that the M2 money supply was changing through this period is taken into account by virtue of the fact this is

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Classic charting techniques suggest that stock prices could be in for serious trouble in 2022.

a ratio chart, and the M2’s growth didn’t hinder the genuine strength of stocks. The green basing pattern that straddles these first two phases illustrates the clarity, longevity and cleanness of the bullish base that formed and launched stocks into their greatest bull market of the century.

Phase Three: Here we have the reversal pattern that preceded the 2000-2002 bear market.

Phase Four: From 2002 through 2007, the market recovered, but take note of how weak the recovery was when the M2 money supply is taken into account. Although the nominal indexes were making new highs, the truth beneath the surface is that this was a flimsy rally propped up by growth in the money supply, and the facade all came crashing down with the great financial crisis.

Phase Five: Finally there was the steady lift in equities from 2009 to date. What’s remarkable about this phase is that even though stock indexes are much higher than ever before (the Nasdaq, for example, soaring well over 200% above its year 2000 high), the M2-normalized data shows that the true strength of the stock market is well shy of the glory days of the 2000 top. In addition, the COVID-19 crash pushed this line chart beneath its ascending trend line, and the strength that followed (based on more trillions from the Fed in 2020) served only to push the line back up to the now-broken uptrend.

In a sense, this ratio chart illustrates how phony the market’s nominal highs have been for the past couple of decades. The true organic peak of the bull market occurred at the turn of the millennium.

Interest rates

Interest rates clearly have an enormous effect on the economy, influencing different sectors of the

30 YEARS OF THE S&P 500

The S&P 500 cash index identifies three distinct market phases during the past few decades:

1992-2002

Back when the equity markets were still relatively organic and the Federal Reserve more or less left them alone, a large boom-and-bust cycle occurred, as some might expect from natural market conditions. High tech led a strong bull run from 1992 through early 2000, followed by a bear market of about 18 months when the Nasdaq in particular was dealt a devastating blow.

2002-2009

Another boom-and-bust cycle occurred, permitted by the relatively organic conditions of the day. The equity markets remained strong from 2002 through 2007, led by the housing bubble. A financial crisis followed that was far stronger than the bear market of 2000-2002. The crisis wrought extraordinary damage that ushered in the virtual nationalization of the equity markets that continues even now.

2009-Present

In sharp contrast with the ascent, rounded top and subsequent descent of the previous two phases, this 12-year period has been a relatively uninterrupted ascending channel. The most severe interruption came with the COVID-19 crash, which lasted a mere three weeks but sliced a staggering sum from the value of the market. But all of that loss was recovered with the Federal Reserve’s deployment of trillions of dollars in cash. Since then, markets have ascended to unthinkable levels, and companies such as Rivian (RIVN)—with literally $0 in revenue—have attained market caps approaching a fifth of a trillion dollars.

Mostly upward

With the help of the Federal Reserve, the S&P 500 has been on the ascent most of the time since 1994.

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