Chipotle in a Stall

In 51 trading days, starting on December 6, 2016 and ending on February 21, 2017, Chipotle (CMG) went from $366.37 to $432.36. That's an 18% increase in relatively short order.

Using multiple moving averages on both price and volume to indicate changes in momentum as they occur, there's good evidence that volume has been exhausted on this up-move and the stock has a good chance of falling back below $400 per share.

Using eight moving averages that gives 28 relationships between each pairing of the averages, the price momentum was very weak on December 6th with only 4 of the relationships showing a shorter moving average exceeding a longer moving average. That 4 of 28 increased to 21 of 28 by February 21st, and since then has fallen to 20 of 28 on this first week of March. The price has subsequently fallen from $432.36 to $416.09. At the same time the volume momentum was very strong in December showing the selloff was happening on strong volume with 20 of 28 shorter moving averages exceeding their longer term pairings. However as the price increased into February the volume relationships fell to 8 of 28. Into the first week of March there are now only 5 positive pairings of the volume moving averages. 

This indicates that buying enthusiasm has run its course and the price has started showing weakness amidst a very strong market rally; however the relative weakness is just an anecdotal observation.

Short positions that could be constructed at this point range from shorting the stock directly, or selling an option pair strangle with a 420-Call and a 390-Put that will net $16.55. The near-the-money call would contribute $12 of the $16.55, and gives a generous break-even to the downside of $375.


Dow - Geometrically Speaking

How long does it take to double your money in the market? The number of ways to calculate that answer is dependent on the complexity involved. Which index is valid? Do you add dividend yield? Do you discount it by relevant risk-free rates to calculate a real return?

The numbers are revealing enough without any complexity factored in, so this analysis is going to use the nominal values of a market index. In this case the venerable Dow Jones Industrial Average (DJIA) will be used and it doesn't take long to do some spreadsheet analysis and determine the answer to the "how long does it take to double your money" question is an average of 10 years. That's a Compounded Annual Growth Rate (CAGR) of 7.2%.

It's the segmentation over history that makes this analysis interesting, and it's also a great way to come to an opinion of where we are today.

Working strictly with milestones of even 1,000's on the DJIA index, it will become apparent that the doubling effect every 10 years is an average that has had significant variance.

First segment of interest was the time it took for the DJIA to travel from 500 to 1000.

500-1000) Mar 1956 to Nov 1972, or 16.7 years. CAGR = 4.2%

This first segment spanned Eisenhower's first term with the re-elected Nixon. This analysis is not assigning performance to presidents, but it's a convenient way to think of eras.

The poor performance could be attributed to the market crest in 1966. The market hit 989 in February of 1966, but it took another 6-plus years to see a week close over 1000 on the DJIA. Had the market reached that milestone in February 1966, then the average of doubling every ten years would have been achieved, almost exactly.

Next doubling:

1000-2000) Nov 1972 to Jan 1987, or 14.2 years. CAGR = 5.0%

This segment ran from Nixon to Reagan. The 1966-1982 bear market played a major role in each of these first two segments, but together they represent a lot of time where investors were suffering over long ranges of time. Recall that we could have nearly had a Dow 1000 in 1966, which would have made this period 21 years, instead of 14.

Next doubling:

2000-4000) Jan 1987 to Feb 1995, or 8.1 years. CAGR = 8.9%

This segment ran from Reagan to Clinton and the investor would had to endure the crash of 1987, but eventually they would have been rewarded with an above average return.

Next doubling:

4000-8000) Feb 1995 to Jul 1997, or 2.4 years. CAGR = 33.6%

This segment was one for the history books. This Clinton era bull market was similar to Barry Bonds hitting 73 home runs. It's not likely going to happen again. Apply your own analogy to the Greenspan-put and steroids.

Next doubling:

8000-16000) Jul 1997 to Nov 2013, or 16.4 years. CAGR = 4.3%

This segment has come full circle to the 1956-1972 period. From Clinton to Obama this period saw the end of the Tech Boom, then the recession of 2001-2002, and the near depression of 2008-2009; with each pause followed by a strong recovery. To return to a sports analogy, this was a Barry Sanders run where he got tackled eventually near the line of scrimmage - after darting sideline to sideline.

So does 2013 look like 1972 after taking its sweet time to produce a double? Another, more recent segmentation would make it appear that we aren't past the molasses stage yet.

9000-18000) Apr 1998 to Dec 2014, or 16.7 years. CAGR = 4.2%

Now the comparison to 1972 is spot-on arriving at the same duration and CAGR. That takes us through 2014 - what about now? The Dow got within a whisker of 20000 on the President-elect Trump rally at the end of 2016.

10000-19934) Apr 1999 to Dec 2016, or 17.7 years. CAGR = 3.9%

Now to those that believe we are in another extended market, one could respond that they just waited for their 1999 investments to double, do they have to wait even longer in the near-future? It is possible since the sluggish period of 1956-1972 was followed by another similar sluggish period from 1972-1987. That was 31 years in duration to achieve a quadruple, or a 4.5% CAGR performance.

 The post-Tech Boom period has every good reason to be followed with a long period of under-performance. That boom was a massive bubble that rivaled the great bubbles in history. That was a boom in the stock market and it cannot be ignored that a bigger bubble in the housing market popped in 2008. Along with that came a bubble and popping in the commodity and energy markets. The Housing and Commodity bubble do not necessarily depress stocks but they both robbed the investor of liquidity to reinvest in stocks.

A future segmentation could look like this:

8000-32000) Jul 1997 to June 2028, or 31 years. CAGR = 4.6%

It has been demonstrated that long periods of 4.5% returns have their own intra-period variance (Barry Sanders runs). Yields and discounting were left out of the analysis - but in a broad-stroke analysis they would have made the variances even greater. The low returns of the 1970s and early 1980s were compounded by high interest rates. The investor broke even from 1966 to 1981 nominally, but lost purchasing power to inflation and missed a risk-free alternative of double digit returns. The high-return period in the Clinton area were even better, considering a low interest-rate environment.

The bad news is that "Dow 32000" could be in the face of risk-free returns that double the market returns. What could provide a quicker double looking forward?

Short Bond positions (TLT is an ETF that tracks with long-dated treasuries).