S I N E ~ WAV E ® O V E RV I E W
By Jason Bodner, Contributor to Navellier & Associates’ weekly Marketmail newsletter Co-authored by Louis Navellier, Chairman and CIO of Navellier & Associates, Inc. January 2016 Waves are found all throughout nature. The average temperature follows a sine wave pattern, as does the daily sunrise and sunset. The human heartbeat also follows a sine wave pattern. Then there are the beautiful crests and troughs of ocean waves. There are shock waves, and waves of prosperity and struggle. But can waves be found in financial markets? If so can they be used to reliably identify points at which to enter and exit the market? At Navellier & Associates we have been using an extremely effective overlay in our tactical investment process that allows us to exit the market at periods of excessive volatility. The Sine~Wave® overlay incorporates up to 9 moving averages which adapt to the market. They take into account wave heights, frequencies, and ranges of motion. We find them to be effective during fast-changing market conditions as they help indicate whether or not to exit the market. WAVES IN MARKETS? If we think of waves of varying length resulting in different outcomes, we can draw the comparison to financial instruments in the market. Low energy waves may be less volatile instruments, while higher energy may be more volatile. Yet they all trade on their appointed market during the same time frames. This begs the questions, “If waves are ubiquitous in nature, then do they exist in financial markets as well?” and, “Can waves be used to help us identify pivot points in market cycles?” It seems only logical, that as we are natural beings, humans are fundamentally tied to wave cycles of heartbeats, circadian rhythms, and even brainwaves. The answer to these questions may indeed be yes. After all, the stock market is an excellent representation of the sum-total of all human emotion and intellect that goes into it. Even the ever growing presence of algorhythmic trading by computers is ultimately created by a human being. If the algorhythms are actually employed in an automated fashion, someone wrote the mathematical conditional statements. MOVING AVERAGES AND WAVES There are many who believe in the efficient market hypothesis; that all available information is already priced into the market, therefore it is impossible to predict or more importantly beat the market. In order to refute this hypothesis, one needs only look at the existing verifiable track records of a handful of managers who have had successful track records over decades; therefore proving that predicting market cycles and timing is nothing new. Moving averages are constantly referenced in literature and the media, but let’s take a quick refresher course here. A Moving Average is defined as a widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random price fluctuations. A moving average (MA) is a trend-following or lagging indicator because it is based on past prices. There are three main types of moving averages; Simple, Linear Weighted (emphasis on most recent events), and Exponential (incorporating all past events in a series without roll off). There is also an Adaptive Moving Average which was designed to account for market volatility. For the purposes of this article, let’s construct a simple moving average. Let’s take a roughly 60 trading day history of closing prices on an instrument to create a 2 week simple moving average. For this example we will use the S&P 500 Index for the time period 9/1/201511/30/2015. To compute the simple moving average we simply (pun intended) divide the sum of the closing prices by the number of trading days in the period.
Investment in equity securities involves substantial risk and has the potential for partial or complete loss of funds invested. Please read important disclosures at the end of this report. NCD-16-139
Consider the following prices of the S&P 500 Index and associated 10 and 20 day Moving Averages:
Source: Yahoo Finance
When we plot this data on a line graph we see the moving averages result in a smoothing of prices. The moving averages help to reduce the noise introduced by daily price variance. This is especially true in highly volatile markets. There is one important distinction to make: moving averages are not predictive, rather they are lagging. They don’t predict market pivot points but aim to confirm when one has taken place.
Investment in equity securities involves substantial risk and has the potential for partial or complete loss of funds invested. Please read important disclosures at the end of this report.
For this illustration, a simple MA crossover system can be applied with the following rules: Buy when the 10 day MA crosses above the 20 day MA. Sell when the 10 day MA crosses below the 20 day MA. With this limited data set, we see that these rules would have performed with positive expectation. This is nice for illustrative purposes, but this system is very simplistic and potentially highly volatile. It’s good for a visual but perhaps impractical for use. In technical analysis, it is common to look at moving averages as an indication of possible direction change. The following is a 5 year chart of the S&P 500 Index with the 50 (blue), 100 (red), and 200 (green) day moving averages overlaid. In this case, notice that when they cross over each other, they can be indicative of changes in price direction. In the cases in which the longest duration moving average (200 day) inverts orientation from below, to above the two shorter durations moving averages (100 and 50 day) they signal potential bearish pivot points. When the 200 day moving average reverts to below the 100 and 50 day moving averages, it signals a potential bullish pivot point.
The same phenomena can be observed in the 5 year chart of XLE Energy Select Sector SPDR ETF below. The bearish pivot point which occurred in October 2014 was accompanied with above average volume. The downtrend still persists as I write this.
Investment in equity securities involves substantial risk and has the potential for partial or complete loss of funds invested. Please read important disclosures at the end of this report.
HOW IS SINE~WAVE® ANALYSIS BETTER? The real question is “How can the concept of using moving averages be improved upon to become a useful tool for identifying market pivot points?” In a simplification, if we add several (up to 9) moving averages, account for volatility, and incorporate the mathematics and physics of actual waves, we get Sine~Wave® Technology; it brings us three signals: “Buy”, “Neutral” or “Sell”. The “Buy” signal means we can be 100% invested in our respective equity market portfolios. The Long signal typically appears when our adaptive moving averages trend higher and volatility dissipates. This allows us to properly measure wave heights, frequencies, and ranges of motion. The “Neutral” signal means there is essentially too much “static” in the stock market to properly measure wave heights and frequencies. This tells to us to stay out of the market until a distinct bullish pattern emerges. The “Sell” signal tells us to remain out of the stock market based on our adaptive moving averages trending lower. We then look for three things: a trough to be formed, the range of motion to be exhausted, and the frequency propelling the wave to disappear.
Sine~Wave® Example May 1, 2012 to July 31, 2013
Data & Vizualization Source: Helix Technology® Ltd., Tradestation, & Reuters. Please see important disclosures at the end of this presentation.
The concepts of crossing moving averages are prominent in the financial markets, and especially in the financial media. The “Golden Cross” is a bullish indicator when the 50 day moving average crosses above the 200 day moving average. The reverse of this is the much dreaded “Death Cross”. But in the Sine~Wave® overlay when the multiple moving averages cross, it resembles a twisted Helix like DNA; think of it as a towel twisting and compressing. When it does, it signals a possible pivot point in the market. HOW WE USE SINE~WAVE® TECHNOLOGY How does Sine~Wave® Technology work? The system can use up to 9 waves or smart moving averages that are moving together. We constantly measure wave heights or the average true range of the market which incorporates volatility and overnight gaps. If we see a bullish helix twist at the low end of the range, this can potentially be a buy signal. We like to look for power behind the wave, so we look for high volume as confirmation of the change in direction.
Investment in equity securities involves substantial risk and has the potential for partial or complete loss of funds invested. Please read important disclosures at the end of this report.
The Sine~Wave® overlay system works on any asset that generates associated price and volume data, but works particularly well on very liquid instruments. These would be broad equity market indices like the S&P 500, or highly liquid index and equity sector ETFs. Sine~Wave® Technology also works on bonds, commodities, and currencies. It even works on single stocks. What we are looking at are adaptive moving averages that conform to the average true range of the market. Average True Ranges incorporate highs and lows from prior closes and intraday highs and lows. This gives a more accurate picture of realized volatility. As market volatility increases, the moving averages adapt to the increased volatility. This means bigger moves don’t give us as many false signals. Given the nature of heightened volatility, false signals will still occur, but the adaptation serves to reduce the likelihood of these. When we see the shorter moving averages cross over the longer moving averages, this signals a potential inflection point. This is the helix cross or towel twist that we look for. We do look for several confirmations of a potential pivot area. If an instrument sees an adaptive moving average cross indicating a bearish pivot near the peak of its range, the signal can be confirmed with heavy selling volume. If the instrument sees a bullish smart-moving average crossover near the bottom of the range confirmed by heavy buying volume, that is usually a bullish signal. What triggers us to get defensive and move out of portfolios? Simply put, a sell signal on a benchmark index would be a sell signal for the portfolio that tracks it. A buy signal on a benchmark index would be a buy signal for the portfolio that tracks it. The system can also issue a neutral signal as noted above. We do look at Sine~Wave® overlay data daily in order to monitor when we may be getting close to a defensive move. The 50+ years’ worth of data is licensed by Navellier & Associates from Helix Technology® Ltd. and is not in the public domain. This is not an automated system. We use Sine~Wave® Technology as an overlay and when a signal is generated, the information is delivered to the portfolio manager and CIO who follow them and direct trades accordingly. What time cycle is optimal for Sine~Wave® analysis? No length of cycles has been properly identified as optimal. While our tactical competitors have monthly, bi-monthly, and weekly signals, Navellier & Associates’ Sine~Waves® are “continuous” and can better react when there is a “seismic shock” that impacts the stock market and generates wave after wave that we believe only Sine~Waves® can properly measure until the frequency dissipates. Just like big earthquakes have aftershocks, major stock market corrections also often generate the equivalent of aftershocks that generate wave after wave that must be exhausted. If we think of times in the market that may present risk of a bearish inflection point around the corner, I would point to times when the market is quiet and volatility is low. Couple this with dwindling volume and you get a market susceptible to shock. Oftentimes, significant market corrections are preceded by these lulls. Future direction is not evident and perhaps the prior uptrend has exhausted itself. Typically all it can take is one bad news headline that turns out to be the “cough” that morphs into a worldwide flu. The current stock market environment has presented us with a sell signal. If you look at the chart below, you will see all of the SineWaves were moving higher into August at which point their heights compressed and ultimately twisted like the towel we spoke about. The range of motion stalled out, and we received a new bearish pattern followed by a neutral period and a resumed bearish pattern.
Investment in equity securities involves substantial risk and has the potential for partial or complete loss of funds invested. Please read important disclosures at the end of this report.
Data & Vizualization Source: Helix Technology® Ltd., Tradestation, & Reuters. Please see important disclosures at the end of this presentation.
Waves occur everywhere in nature. We contend they occur in markets as well. At Navellier & Associates we feel fortunate to have a Sine~Wave® overlay designed to protect some of our tactical portfolios and sub-advised mutual funds for when major market pivot points occur. Important Disclosures The preceding commentary is the opinion of Louis Navellier, Jason Bodner, and Navellier & Associates, Inc. This is not a recommendation to buy or sell the securities mentioned in this article. Investors should consult their financial advisor prior to making any decision to buy or sell the above mentioned securities. Jason Bodner does not currently hold a position in XLE; Louis Navellier does not currently hold a position in XLE. Navellier & Associates, Inc. does not currently hold a position in XLE for client portfolios. 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. 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.
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.
Sine~Wave® Technology Disclosures: Within the context of this report, Sine~Wave Technology® is providing technical analytics, theoretical modeling and investment security monitoring services in support of Navellier & Associates, an unrelated Third Party RIA management company which offers Registered Investment Advisory managed account programs and services at the institutional and retail level. Sine~Wave® is engaged in the business of acting solely in the capacity of a technical analytics, theoretical modeling and monitoring service provider to other Registered Investment Adviser “Third Parties” which directly manage client accounts. Sine~Wave Technology® does not directly manage any client assets or engage with or do business with any retail clients of the public. Our services are exclusively offered to licensed unaffiliated ‘’RIA’’ Registered Investment Advisers and Third Party financial industry professional asset management and distribution network entities such as broker-dealer firms, insurance, trust and mutual fund companies. Sine~Wave Technology® does not make a market in any security, maintain or have access to client funds, does not engage in any trading activities, does not provide introductions to custodians or engage in any custodial activities or functions, and does not engage in any principal or agency transactions within the retail or institutional marketplace. The timing and actionable implications of various “Change Points” which are expressed within this visualization series is limited to the management decision making strategies employed by Navellier & Associates to manage a series of Tactical Asset Management Portfolio offerings. The subject portfolios are operated within a construct of a proprietary process of defining “Long”, “Neutral” and “Sell Short” investment periods, and the corresponding actions which are taken within these accounts are the direct result of the timing and methods of decision making of the investment management strategies governing the accounts. The recent announcement and timing of the present S&P 500 market status of “Neutral” is not intended to be viewed as a universal “Sell” recommendation which applies to all market participants. As a clarification, within the construct of the strategies being employed, the market comment status of “Neutral” is not a prediction of future events. The change in status is intended to convey the opinion that the momentum of the previous long term up-trend has been broken; and that future actions to be taken will depend on the emergence of a newly defined trend in either a long or short direction which has yet to be established. Suitability standards and the details of your age, income, investment experience, liquidity, desired frequency of trading and investment risk profile ~ as well as the specific details of the method and strategy for investment decision which you employ, will form the reasoned basis of the timing and nature of the decisions that you ultimately choose to make. Please consult with qualified investment counsel and review the product discussion + detailed disclosure statements regarding risks which is contained within the product offering documents for investments you may be considering prior to making investment decisions. In the process of analyzing previous cycles, no direct cause and effect representations can be reliably applied to the present market circumstances. Stock market waveform patterns are not repeating waveforms and as they continuously evolve, no two patterns are the same. Calculations results and signal measurement applications which analyze and react in response to the unique characteristics and extremes of the data stream being characterized will vary accordingly with each use, and over time. The visualizations contained within this report illustrate various global indexes and primarily focus on the S&P 500 and are intended for information purposes only. From an actual trading standpoint, it is not possible to trade indexes [theoretical calculations of combinations of securities which make up an industry group or major markets such as the Standard and Poors 500] except to individually trade the underlying securities or to invest in Exchange Traded Funds [ETFs] which are synthetically created simulations of indexes which are designed to correlate to the performance of the index being tracked. The potential correlation of major market indexes with ETFs that track those indexes is not absolute and can diverge significantly on an intra-day and cumulative time-period basis. Depending on the methods and design of synthetic ETF construction, the specifics of daily volatility, the bid to ask spreads and the mechanics of market liquidity, the tracking divergence effect can be profoundly magnified on a case by case basis, especially with inverse and leveraged ETF index Product Offerings. This visualization summary is not an offer to purchase securities, and is not in and of itself a complete analysis of the investment scenarios which are described. For a detailed discussion of a product offering that you may have an interest in, please consult with qualified investment counsel, and review the product discussion and detailed disclosure statements regarding risks, which are contained within the product offering information documents that you may be considering. The illustrations contained are for discussion purposes only. The historical “Change Point” scenario results presented herein do not predict or indicate future performance, and do not guarantee a positive result for future transactions. Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested.
The historical scenario results as illustrated represent the hypothetical outcome of all of the back-tested “Long” to “Neutral” “Change Points” for the period of 1991~2012 for the proprietary Sine~Wave Technology® S&P 500 theoretical modeling market analysis program, which is owned by Helix Technology® Ltd. The illustrated scenario analysis from January 1, 2013 through to August 30, 2015 is based on the actual decision making “Change Point” results of the proprietary Sine~Wave® modeling program ~ as it is presently being operated by Sine~Wave® Technology and offered within the financial marketplace by Navellier & Associates. The graphic elements contained in this report are based upon data and visualization sources which include Helix Technology®, Tradestation, Reuters and Yahoo. While the information is based upon sources that Sine~Wave® Technology believes to be reliable, it may be incomplete or condensed information and Sine~Wave® does not guarantee its accuracy or completeness.
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