Stock Market Update|Prepare for the next leg down in stocks, and one ‘shiny’ spot in the markets

After the tariff shocks that started a couple of weeks ago the markets have rallied this week, but looking at the charts below I don’t see a lot of cause for long side traders to get excited.  

The current rally is looking weak and it has already rolled over on the S&P500. Any negative news this coming week and I would expect a rapid decline to new lows, especially in US stocks. 

The Australian and Canadian indices have been materially stronger than US stock late this week with the Canadian market ending the week just above it’s 200 day EMA. Despite this strength relative to the US market, Canadian stocks are still looking weak and further declines are certainly possible depending on what happens in US politics this week.

The table below shows a similar story across markets globally in the last week. Almost all markets were up for the week following the initial tariff induced shock, but relative to 4 weeks ago, all markets other than India are down. Most of these markets are exhibiting lower highs and lower lows on their charts (not shown), plus most are also below their 200EMA, indicating a down trend is in place. If the markets roll over and resume the decline this week we could see some significant new lows. 

Remember that this decline was accelerated by US political changes, and there is nothing to prevent another unexpected change impacting the markets in either direction, so for me this bearish outlook is “a strong opinion, loosely held”. Meaning I expect to see further lows, but that could change quickly if the political environment changes.

Something that caught my eye this week was the shifts in global currencies. I don’t trade FX, but I do have accounts and balances in multiple currencies in my trading, my business and my personal life. 

The swings in these this week particularly caught my attention and got me thinking (again) about adding a currency overlay to my portfolio… this is a project I have dabbled in a few times but never taken through to completion. US Dollars are really not a happy place to be at the moment. The lesson here is to be mindful of where your balances are sitting. It is possible to experience significant losses just by sitting in cash in the wrong currency!

Sometimes being in currency at all is the wrong currency… In case you have missed it, have a look what has been happening to the gold price below! This trend is extraordinary. Not quite exponential, but it is really driving upwards. 

Gold is not a great hedge because it has not always provided the gains when needed, but it does have good diversification benefits when included systematically in a systematic stock portfolio. It is also super easy to trade though ETFs both in Australia, the US and other markets.

I have a ultra simple trend following system in gold that has been capturing this move nicely (and sidestepped the many years of malaise that gold bugs have suffered through). As you can see from the equity curve below, this system spends a lot of time on the sidelines, and doesn’t catch the entire move, but it performs pretty well considering it has a single entry rule and a single exit rule and only a single parameter!

As a systematic trader my aim is to build portfolios of good systems. I don’t aim for amazing systems because they are both hard to find and typically fragile. Instead I prefer to find good systems that have some diversification benefit and allocate a small portion of capital to them.

This is a perfect illustration of a ‘good’ system – ultra simple, stable over time, sidesteps bad market conditions, adds diversity to the portfolio. I am not going to release the rules here because I will be giving it to my members of The Trader Success System Mentoring program in the next couple of weeks.

Although if you want to look into this yourself, consider that it is about the simplest trend following system you could imagine, has a single parameter and enters very slowly. Reply to this email with your guesses about the entry and exit rules and I’ll tell you how close you are and give you some more hints.

Trading Tip: Generate Huge Value Exploring Trading System Ideas

Consistently exploring new trading system ideas is crucial for building a diversified portfolio with low correlation between systems.

Here’s a tip: maintain a dedicated “idea bank” where you jot down every trading concept or hypothesis you think of or come across, even if you don’t have time to test it immediately. This could include ideas from books, blogs, forums, or even observing market behaviour. The key is to capture the idea while it’s fresh and revisit it later when you’re ready to test.

When evaluating new systems, focus on their behaviour relative to your existing portfolio. Look for systems that perform well in different market conditions or trade different instruments. For example, if you already have a trend-following system, consider testing a mean-reversion, a short side system, or a system for gold ETFs like the equity curve above. The goal is to find systems that complement each other, reducing overall portfolio drawdowns and smoothing the equity curve.

Finally, don’t get caught up in finding “perfect” systems. Good systems that are robust, simple, and uncorrelated are far more valuable than chasing perfection, which often leads to overfitting. Test thoroughly, and if a system doesn’t work, learn from it and move on. It’s all about building a portfolio of “good” systems that work together.

Quote of the Week

To me this means as traders we should be focusing on learning about the markets, designing strategies and building portfolios rather than obsessing over which stock to buy or sell.

Learn about the markets > Generate Hypotheses > Test Systems > Follow them

This is a much more consistent way to trade than obsessing over the charts to make discretionary trading decisions.

Do you have trading ideas you would like to have tested? Reply to this email and let me know and I’ll backtest them for you and include them in the Enlightened Stock Trading newsletter.

Enjoy the Easter long weekend, I hope the easter bunny is good to you  . Though writing this I must admit I am confused as to why an easter bunny brings chocolate eggs to kids at easter. Rabbits don’t lay eggs and even if they did, chocolate is not exactly a practical material to make them from. I asked ChatGPT how this tradition originated and I got a long answer that boils down to:

Ancient fertility symbols + Christian resurrection themes + German folklore + clever confectionery marketing = Easter Bunny with chocolate eggs.

AI’s view: It’s nonsensical, charming, and commercial. Just how we like our holidays.

Happy Easter

Remember – You are only one trading system away!

Adrian Reid
Founder – Enlightened Stock Trading

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