&l;p&g;&l;img class=&q;dam-image ap size-large wp-image-5c4cd317ae9443b7835b051ec3b5e4c8&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/5c4cd317ae9443b7835b051ec3b5e4c8/960×0.jpg?fit=scale&q; data-height=&q;626&q; data-width=&q;960&q;&g; The Eli Lilly and Co corporate headquarters in Indianapolis.
Those who knew that Robert Mueller would file his report on Friday must have thought it contained information that would be bad for the market. Since few people know what&s;s in the report, those who sold on Friday could be wrong. Wayne Himelsein, one of my managers, says the best stocks exhibit &q;tells&q; on volatile days as Eli Lilly (LLY) did on Friday.&l;/p&g;
&l;strong&g;Ken Kam&l;/strong&g;: Did any stocks stand out for you on Friday?
&l;strong&g;Wayne Himelsein&l;/strong&g;: On Friday, the S&a;amp;P dropped 1.9%, and LLY was down a whopping 0.01%. That is as strong of a &q;tell&q; as I&s;ve ever seen of stock about to break out.
&l;strong&g;Kam&l;/strong&g;: How can you be so sure?
&l;strong&g;Himelsein&l;/strong&g;: My confidence lies in my experience with such demonstrations of strength, and particularly, on the heels of a similar history.
To be fair, LLY spent three full years, from mid-2015 to mid-2018 going nowhere, so it has three years of consolidation to unleash on us. Moreover, if one looks at the October and December 2018 corrections in the S&a;amp;P, LLY was not bulletproof. It still got affected, albeit mildly, and quickly recovered to new highs.
Nonetheless, it is not perfect. It is, however, one of the most powerful and well acting trends I have seen in a very long time, with substantive evidence behind its force.
&l;strong&g;Kam&l;/strong&g;: Does the size of the market&s;s losses on Friday worry you at all?
&l;strong&g;Himelsein&l;/strong&g;: I have often seen much more dramatic news and media coverage when markets fall versus little to none when they rise literally the same amount. There is asymmetry of reaction to the same moves in opposing directions.
I think part of this has to do with the difference in magnitudes, markets may rise half or 1% in a day, and over the course of a few weeks, gain 2-3%, but they can often drop 2% in a single day, much like Friday&a;rsquo;s 1.9% decline. The concept is that there is an asymmetry in the amount of change relative to time passed. Markets climb stairs but fall down elevators.
It is this asymmetry of magnitude moves that, I believe, instigates the asymmetry of media and drama surrounding downs more than ups.
&l;strong&g;Kam&l;/strong&g;: I have always seen that to be the case, down moves are so much more dramatic than ups, causing fear, but as you suggest, the aggregated ups equate to the downs, just over different time spans.
&l;strong&g;Himelsein&l;/strong&g;: It&a;rsquo;s far more than that Ken. As you know, the aggregate ups are far more than the downs. If the markets made equal ups/downs, over long time spans, the S&a;amp;P would be at zero! So given an S&a;amp;P at 2800, by definition, the aggregate ups outweigh the heavy downs.
In the world of statistics, this is known as &a;ldquo;drift&a;rdquo;, the S&a;amp;P has had a long term positive drift (of about 8% a year), with zig and zags bouncing around that climbing line.
&l;strong&g;Kam&l;/strong&g;:&a;nbsp;What does this mean for LLY?
&l;strong&g;Himelsein&l;/strong&g;: Referring back to LLY, I want to infuse this same idea, except the drift is much higher than 8% a year, aka, a powerful trend not be reckoned with.
Starting all the way back at the close of the global financial crisis around March of 2009, LLY has been performing like a champion, just climbing and climbing. It paused for a little while in 2013, as it came up against the pre-2008 crash highs, and then in 2014 broke out to new heights and roared onward.
&l;strong&g;Kam&l;/strong&g;: That&a;rsquo;s a heck of a long time ago. How is that past history so relevant today?
&l;strong&g;Himelsein&l;/strong&g;: I was just about to get to that! It&a;rsquo;s soaring price came to a screeching halt around mid-2015. And for the next three years, it traded in a giant sideways range; making no new highs, but multiple unhappy looking lows; including one in March 2016, a deeper one in November 2016, and then a &a;ldquo;nicer&a;rdquo; one in March of 2018. Why &a;ldquo;nicer&a;rdquo; because unlike November 2016, it didn&a;rsquo;t proceed lower, but stopped higher than both of the priors in 2016. It was done making lows.
Then, around July of 2018, just a few months after its announcement to the world that it was done with new lows, it didn&a;rsquo;t just leap, it catapulted, sky-bound, into new territory — altogether confirming its announcement to the world. It was ready to rock. And rock it did.
&l;strong&g;Kam&l;/strong&g;: I see that it exploded like crazy and hasn&a;rsquo;t stopped since. It&a;rsquo;s literally vertical. Do you really think this continues?
&l;strong&g;Himelsein&l;/strong&g;: To answer this question, I go back to the earlier part of our discussion, on the asymmetry of ups and downs. LLY has done the opposite of the world; its asymmetry is the unusual kind; bigger ups and smaller downs.
To your point, a little pullback doesn&a;rsquo;t change much. To be a healthy market, it must include zigs and zags — nothing goes straight up.
But LLY almost does, except for a few zags that are, that&a;rsquo;s right, less than its upward zigs. It just can&a;rsquo;t go down. It certainly follows the natural path of dropping every few days, but in such small increments relative to its upside leaps. This is one of the strongest &q;tells&q; I have ever seen.
&l;strong&g;My Take&l;/strong&g;: I have found that volatile markets are often when the best managers make their best investments. I think it is because the best opportunities are created when stocks are moving down in spite of improving company fundamentals.
Wayne Himelsein&s;s Logica Focus Fund (LFF) has an 18+ year track record that extends through 2 market crashes, numerous corrections, and sector rotations. Over that period, Wayne&s;s model averaged 11.86% a year which compares well to the S&a;amp;P 500&s;s 5.74% return for the same period.
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