Flow State #36
Weekly & Daily Roadmap
Welcome back everyone!
Before jumping into this newsletter I want to point out that the name has changed from the Weekly Outlook to Flow State.
There is plenty to dive into this week and I am happy to say that Flow State series will only be adding more and more as times goes on. The goal is to fill in the readers with everything I have on my radar and give a detailed overview of why I am watching it and how this affects my thoughts for the week. Thoughts like Annual change on inflation will drop significantly as long as CPI remains cool. Here we are at 3% inflation and the markets have rallied nonstop. Focusing solely on the levels is fine and all but seeing the themes of the market prepares you for macro moves. What I mean by this is you can be on the right side of market while focusing on the main movers. For instance the Gold long that was called at 1800 or simply when news came out for JOBY 0.00%↑ and the stock nearly tripled. levels alone will not be able to call large moves like this but they will give you the best execution. Another example is simply following the trend and using the levels to know what the trend is invalidated. If I had to pick one other methodology for the market, it by far would be trend following. Personally sticking with long only is best for me and remember what goes down can bring something else up. One of the prime tools used not just in trend following is a correlation matrix.
Correlation matrices play a crucial role in trading, especially for trend-following systems. In finance, a correlation matrix is a table that displays the pairwise correlations between different assets or financial instruments in a portfolio. Each cell in the matrix represents the correlation coefficient between two assets, indicating how closely their price movements are related over a specific period.
For trend-following trading systems, correlation matrices are used for the following purposes:
Diversification: A correlation matrix helps traders identify relationships between assets in their portfolio. Diversification is a risk management strategy that aims to reduce overall portfolio risk by investing in assets that are not highly correlated. In trend following, diversification can be beneficial as it allows traders to balance the risks associated with individual assets, potentially leading to a more stable and robust trading strategy.Asset Selection: By analyzing the correlation matrix, traders can identify assets that have low correlations with one another. These low or negatively correlated assets may provide better opportunities for diversification within the portfolio. When selecting assets for a trend-following strategy, traders often seek assets that demonstrate low correlation with the primary asset they are trading.Portfolio Construction: Trend-following systems typically involve creating a portfolio of assets that exhibit strong upward or downward price trends. A correlation matrix assists in selecting assets that complement each other well in terms of their trends. The aim is to combine assets that have relatively independent price movements, so the overall portfolio performance benefits from multiple trending opportunities.
Utilizing the correlation matrix for constructing a long-only portfolio in a trend-following system involves these steps:
Identify Primary Trending Asset: Choose the asset that will serve as the main driver of the portfolio's performance. This could be a stock, ETF, commodity, or any other asset that exhibits significant trending behavior.Calculate Correlations: Compute the correlation matrix between the primary asset and other potential assets that can be included in the portfolio. Also, calculate the correlations among these secondary assets to ensure they are not highly correlated with each other.Select Low Correlation Assets: Identify assets that have low or negative correlations with the primary asset. These are the assets that are likely to provide diversification benefits.
Here is an example (do not use this):
Source: numxlAs we begin to get into portfolio management for the investors, this is a great tool to study and build your own. If you would like a post just for building a matrix make sure to leave a comment!
Events
Earnings
Source: Earnings WhispersJust about everyone is reporting earnings this week so we will be updating each stock on a daily basis just before their due to report. One that i have on radar to start the week is DPZ 0.00%↑ and the reasoning is quite simple. Clearly inflation has settled but prices have yet to go down and I do not think they will! That being said when folks are struggling they turn to drinking and eating to pull through. Obviously this is not all but this is true for many. I think going into earnings the stock is cheap at 380 and can see a spike up to 433 after release.
Previous Week Winners and Losers
Sirius XM is currently encountering significant resistance, which resulted in a sell-off at the beginning of 2023. This development has sparked interest in the possibility of the stock surpassing the 7 resistance level and potentially reaching a target of 12.
Western Alliance Bancorporation has displayed a robust recovery from its lows, indicating the potential for further upside towards regaining its 2022 prices. The stock has been rejected twice at the lows around 10, but it has now climbed to 48, suggesting there are further positive developments ahead. The key focus will be to ensure the stock stays above 30, as this could lead to a push back up to the 70s range.
Zions Bancorporation nearly the same setup that caught headwinds when SVB and other banks began to crash. Further upside potential on this as long as interest rates are not causing any problems this can see a rally up to 50. As long as price can remain above 24 this favors upside.