My strategy is based upon the principles discussed in my previous blog, “Market Analysis,” but the execution of it has been developed and tested over time. There is no wrong or right way to trade the market. There are only techniques. This is the one that has worked for me.
I do not have to determine the exact market top or bottom, but I’ve gotten pretty close anyway. On Wednesday, November 19, 2008, the market experienced a brutal sell off after roughly 2-3 months of decline. At the end of that day I wrote down the values of major market indicators. I thought that was the bottom. I was wrong.
From late November until early March, the market basically traded sideways. I was buying the entire time. When it launched a new rally in March, I was already almost 100% invested. I began to buy on margin.
I mention this because it illustrates a real world example that proves you don’t have to pick the bottom. You just need to be ready when the market begins a new rally. My strategy achieves this objective.
So what did I buy? I did make one mistake and that was to trust my own ability to time the bottom, within a specific time frame. I believed that the new rally would begin within 3 months. Again I was incorrect. Instead of launching a new rally in early February, it did not occur until early March. By purchasing options that expired too early, I missed out on some potential gains.
That mistake aside, I made a lot of positive moves. Focusing on Asia, I purchased Chinese ADRs that were poised to move higher. This strategy worked to my advantage. Purchases of commodity ETFs did not prove to be as profitable, but served a diversification purpose and allowed for inflation protection.
Which brings me to my final and most important topic: protection. Gains from stock and option purchases have proven the merits of this investment strategy, but only because the market has continued to rally. But what if the market rally had failed or some catastrophic event had occurred? How does one protect against the unknown?
The answer is two-fold: put options and stop loss orders. In order for this strategy to work, an investor has to protect against catastrophic loss. No gains can offset a drastic and immediate loss caused by an unpredictable event. An asset could plummet and it may not even be provoked by such an event. My personal preference is to use put options for large positions with long term potential. Stop loss orders are best used for short term trades. Sometimes a combination of the two is required. It depends on the asset.
The most important thing to remember when investing is that avoiding loss is more important than creating gains. Think about it—if you outperform the market by protecting against loss during the down periods and underperform the market during rallies, you will still come out ahead. This strategy not only seeks to outperform in bull markets, but will also lead to substantial gains in bear markets. If you can get even close to timing market bottoms and market tops, you can benefit from either scenario.
As I write in early August 2009, the market is still in rally mode and has yet to show signs of breaking down. I fully anticipate that the rally will continue for 1 – 2 more months. By October, the rally should end. Even if I am incorrect, I will still profit. If the rally ends early, my put options will protect against loss. If it continues to rally beyond October, I may miss out on the end of the rally. I would rather sell on the way up than the way down. I would rather buy before the rally begins than after. I would rather be early than late in all situations. That is my personal preference and the strategy that I believe will work best in the long run.
In addition to protecting against loss, the best strategies also seek to profit from bear markets. Taking short positions, buying short ETFs, and purchasing put options are all strategies worth employing in preparation for a bear market. Protection should be put in place in the opposite manner by purchasing puts, calls and continuing to use stop loss orders. An additional technique of purchasing foreign currencies could prove to be an added source of protection. The Japanese Yen and Swiss Franc are good examples of hard currencies worth owning in bear markets. Gold is almost always a good investment and useful protection against rising inflation rates.
Thursday, August 6, 2009
Market Analysis
Market timing is a mysterious art that many have attempted to master and most have failed. So why do I believe it is possible? Because most “experts” who attempt to master this difficult task go about it the wrong way. They tend to equate market timing with predicting the future. That is not what market timing is all about. Market timing is a discipline that requires patience, attention to detail, and flexibility, but not clairvoyance.
There are a few basic market truths that one has to recognize before attempting to time the market. One is that the big money is slow. Mutual funds, hedge funds, and all other types of large institutional investors control the direction of the market, but they always “tip their hands” because it takes them so long to get in and out of a position. The second truth is that the majority is always wrong. When mutual fund purchases are peaking, that is the time to jump ship. When redemptions are high, it is time to buy.
These are not novel concepts. Investor’s Business Daily founder William O’Neil talks about them in all of his books. Being able to read the signs is just part of the overall equation. The trick is how to take advantage.
The first step is to stop listening to “experts” and to do one’s own analysis. If the majority is always wrong, then that includes the majority of financial magazines, analysts, talking heads on television, etc. Economists are the worst people to listen to. Some of them even admit that they are horrible at market timing. Don’t confuse successful economists with successful investors. Most are one or the other, but not both.
The second step is to use your emotions to your advantage. Typically, the scariest moments in the stock market represent the best opportunities. When you feel happiest about the performance of your investments it is usually time to sell.
Finally, one has to realize that market timing is not about picking the very top or the very bottom of the market. It’s not necessary. The market peaked in October of 2007. You could have sold at Christmas and still missed most of the bear market sitting in cash. The market bottomed in March 2009. You could have bought everything in sight over the Christmas break, 1 year after you sold, and you would be in great shape right now. You don’t have to be exact. You just have to be in the ballpark.
Easy enough, right? Not exactly. Now we must address the greatest obstacle one has to overcome in order to be a successful investor in the years to come. We have to recognize and accept the fact that the United States is not the best place in the world to invest anymore. This is a difficult thing for people to accept for many reasons. One is patriotism. We feel good about investing in our own country. As citizens of the United States we are proud of our country, so why should we send our money overseas when it is needed here? Even if we recognize the need to be global investors, how do we do that? Most financial advisors based in the U.S. concentrate their efforts on analyzing U.S. companies. So we have to find another country and figure out which companies to invest in?
Now comes the easy part. Picking the right country to invest in is easy. Investing in that country’s economy is also very easy. You simply have to make the decision to become a global investor and not be a buy and hold investor. The rest will take care of itself. Here’s why:
1) The growth is in Asia. We know that, we hear that on the news, we’ve seen that for the past 10 years. Any talk of Asia being a bubble like the 1990s internet scenario is inaccurate. Asia’s growth is real and its investment gains are backed by fundamentals. In fact, most companies in Asia are undervalued when you look at their current stock prices. We’ve already narrowed it down to one part of the world to focus our investing.
2) Investing in another part of the world is easier now than it has ever been before. We have ETFs, ADRs, and mutual funds to choose from. I prefer to avoid mutual funds, but ETFs and ADRs are fantastic vehicles worth taking advantage of.
3) It is generally accepted that 50 – 70% of a stock’s movement is related to the overall market environment. If the overall market is going up, there’s a much better chance that your stock is going up.
So I’ve already answered most questions. One could buy an ETF that represents the growing Asian economy and not even worry about trying to be a stock picker. Or one could buy ADRs that represent stock in Asian companies, and concentrate on the fastest growing companies. Either strategy could work.
Obviously, that’s not the only way to invest and there are other areas worth looking into. Israel, Brazil, South Africa, Switzerland and many other countries are worthy of investment consideration. But, for the sake of simplifying investment decision-making, I have used Asia as the example. Hong Kong, China, Taiwan, South Korea, Singapore—take your pick.
One final note on market timing—it is not to be confused with technical analysis. Technical analysis using Fibonacci analytics or chart patterns may be useful for stock trading, but not for overall market timing purposes. What we are focusing on is volume accumulation & distribution, market sentiment, and actual market performance. Technical analysis is useful for choosing individual stocks to buy and determining entry and exit points. The Nicolas Darvas box theory and O’Neil’s IBD technical pattern strategies are very useful when it comes to buying and selling stock in market leading companies. For overall market timing, in my estimation, they are not applicable.
There are a few basic market truths that one has to recognize before attempting to time the market. One is that the big money is slow. Mutual funds, hedge funds, and all other types of large institutional investors control the direction of the market, but they always “tip their hands” because it takes them so long to get in and out of a position. The second truth is that the majority is always wrong. When mutual fund purchases are peaking, that is the time to jump ship. When redemptions are high, it is time to buy.
These are not novel concepts. Investor’s Business Daily founder William O’Neil talks about them in all of his books. Being able to read the signs is just part of the overall equation. The trick is how to take advantage.
The first step is to stop listening to “experts” and to do one’s own analysis. If the majority is always wrong, then that includes the majority of financial magazines, analysts, talking heads on television, etc. Economists are the worst people to listen to. Some of them even admit that they are horrible at market timing. Don’t confuse successful economists with successful investors. Most are one or the other, but not both.
The second step is to use your emotions to your advantage. Typically, the scariest moments in the stock market represent the best opportunities. When you feel happiest about the performance of your investments it is usually time to sell.
Finally, one has to realize that market timing is not about picking the very top or the very bottom of the market. It’s not necessary. The market peaked in October of 2007. You could have sold at Christmas and still missed most of the bear market sitting in cash. The market bottomed in March 2009. You could have bought everything in sight over the Christmas break, 1 year after you sold, and you would be in great shape right now. You don’t have to be exact. You just have to be in the ballpark.
Easy enough, right? Not exactly. Now we must address the greatest obstacle one has to overcome in order to be a successful investor in the years to come. We have to recognize and accept the fact that the United States is not the best place in the world to invest anymore. This is a difficult thing for people to accept for many reasons. One is patriotism. We feel good about investing in our own country. As citizens of the United States we are proud of our country, so why should we send our money overseas when it is needed here? Even if we recognize the need to be global investors, how do we do that? Most financial advisors based in the U.S. concentrate their efforts on analyzing U.S. companies. So we have to find another country and figure out which companies to invest in?
Now comes the easy part. Picking the right country to invest in is easy. Investing in that country’s economy is also very easy. You simply have to make the decision to become a global investor and not be a buy and hold investor. The rest will take care of itself. Here’s why:
1) The growth is in Asia. We know that, we hear that on the news, we’ve seen that for the past 10 years. Any talk of Asia being a bubble like the 1990s internet scenario is inaccurate. Asia’s growth is real and its investment gains are backed by fundamentals. In fact, most companies in Asia are undervalued when you look at their current stock prices. We’ve already narrowed it down to one part of the world to focus our investing.
2) Investing in another part of the world is easier now than it has ever been before. We have ETFs, ADRs, and mutual funds to choose from. I prefer to avoid mutual funds, but ETFs and ADRs are fantastic vehicles worth taking advantage of.
3) It is generally accepted that 50 – 70% of a stock’s movement is related to the overall market environment. If the overall market is going up, there’s a much better chance that your stock is going up.
So I’ve already answered most questions. One could buy an ETF that represents the growing Asian economy and not even worry about trying to be a stock picker. Or one could buy ADRs that represent stock in Asian companies, and concentrate on the fastest growing companies. Either strategy could work.
Obviously, that’s not the only way to invest and there are other areas worth looking into. Israel, Brazil, South Africa, Switzerland and many other countries are worthy of investment consideration. But, for the sake of simplifying investment decision-making, I have used Asia as the example. Hong Kong, China, Taiwan, South Korea, Singapore—take your pick.
One final note on market timing—it is not to be confused with technical analysis. Technical analysis using Fibonacci analytics or chart patterns may be useful for stock trading, but not for overall market timing purposes. What we are focusing on is volume accumulation & distribution, market sentiment, and actual market performance. Technical analysis is useful for choosing individual stocks to buy and determining entry and exit points. The Nicolas Darvas box theory and O’Neil’s IBD technical pattern strategies are very useful when it comes to buying and selling stock in market leading companies. For overall market timing, in my estimation, they are not applicable.
Saturday, August 1, 2009
Reasons to Buy
Why should you buy a stock? That's a question almost everyone tries to answer at one time or another. Jim Cramer will have you believe that you should buy because of undervaluation and fundamentals. I disagree.
One reason I love Nicolas Darvas' book How I Made $2,000,000 in the Stock Market is because it reads like a journal. He describes all the mistakes he made as an early trader and all of his frustrations. I can relate to that because I had similar problems when I began trading the market. How can this stock go down? It's already undervalued! The fundamentals say it should go up!
Darvas realized that this was an exercise in futility. To buy a stock purely for fundamental reasons is wrong. It won't make you money in the long run. There's only one Warren Buffett but there are hundreds, probably thousands, of stock traders who make money every year by trading the technicals, not the fundamentals. Yet every stock "expert" or advisor, like Jim Cramer, tells the amateur investor to buy the fundamentals. How strange.
The greatest advantage an individual has over an institutional investor is speed. You can get into and out of a stock much faster with only a little money invested than you can with millions. A mutual fund has millions; I have much less. I win the game of speed. I can jump in and out as much as I want. I can sell one day and buy back the next. It costs me the transaction fee. That's it. So why should I buy and hold only to lose sleep at night because the market is tanking? I'd rather sit on the sidelines or, better yet, short the market on the way down. ETFs make that very easy these days. Oh, and so do put options. There are so many possibilities for the individual investor. But to buy for the fundamentals is just plain wrong. Unless you're Warren Buffett, and I know I'm not.
One reason I love Nicolas Darvas' book How I Made $2,000,000 in the Stock Market is because it reads like a journal. He describes all the mistakes he made as an early trader and all of his frustrations. I can relate to that because I had similar problems when I began trading the market. How can this stock go down? It's already undervalued! The fundamentals say it should go up!
Darvas realized that this was an exercise in futility. To buy a stock purely for fundamental reasons is wrong. It won't make you money in the long run. There's only one Warren Buffett but there are hundreds, probably thousands, of stock traders who make money every year by trading the technicals, not the fundamentals. Yet every stock "expert" or advisor, like Jim Cramer, tells the amateur investor to buy the fundamentals. How strange.
The greatest advantage an individual has over an institutional investor is speed. You can get into and out of a stock much faster with only a little money invested than you can with millions. A mutual fund has millions; I have much less. I win the game of speed. I can jump in and out as much as I want. I can sell one day and buy back the next. It costs me the transaction fee. That's it. So why should I buy and hold only to lose sleep at night because the market is tanking? I'd rather sit on the sidelines or, better yet, short the market on the way down. ETFs make that very easy these days. Oh, and so do put options. There are so many possibilities for the individual investor. But to buy for the fundamentals is just plain wrong. Unless you're Warren Buffett, and I know I'm not.
Monday, July 20, 2009
Buy and Hold
I should probably clarify my position on the "Buy and Hold" strategy. I don't like it as the best way to make money in the stock market. Buy, hold, and diversify is the mutual fund industry's catch phrase. They want you to put your money in their funds and forget about it. That's a bad idea.
On the other hand, a lot of people work very hard at their jobs and pay good money to have a professional handle their investments. Unfortunately, professionals these days aren't always so professional (ie. Madoff and Stanford). So what do you do?
I say that you have to know where your money is. I think I heard Derek Jeter say that was the piece of advice he was given by Warren Buffet. It doesn't matter if you paid a professional to invest your money for you or not. You have to be involved, even if it means giving up your own time. It will be time well spent.
Not to say that everyone has to be an investing expert. I'm not, but I strive to be. I like being in control of my own investments. Not everyone does. But it's your money. Nobody cares more about your money than you. Not because you're necessarily greedy or selfish, but because it represents what you want to do in the future. When you can retire, where you can go on vacation, etc. That mutual fund manager you invested with has a different set of priorities. Did I do better than the other mutual funds in my category? Did I attract more money to the fund? But, unfortunately not, did I make money for my investors?
I think you have to get involved. You don't have to trade for a living or even for a hobby. But you have to know what you own and why you own it. I think it'll be worth the time you spend on it.
On the other hand, a lot of people work very hard at their jobs and pay good money to have a professional handle their investments. Unfortunately, professionals these days aren't always so professional (ie. Madoff and Stanford). So what do you do?
I say that you have to know where your money is. I think I heard Derek Jeter say that was the piece of advice he was given by Warren Buffet. It doesn't matter if you paid a professional to invest your money for you or not. You have to be involved, even if it means giving up your own time. It will be time well spent.
Not to say that everyone has to be an investing expert. I'm not, but I strive to be. I like being in control of my own investments. Not everyone does. But it's your money. Nobody cares more about your money than you. Not because you're necessarily greedy or selfish, but because it represents what you want to do in the future. When you can retire, where you can go on vacation, etc. That mutual fund manager you invested with has a different set of priorities. Did I do better than the other mutual funds in my category? Did I attract more money to the fund? But, unfortunately not, did I make money for my investors?
I think you have to get involved. You don't have to trade for a living or even for a hobby. But you have to know what you own and why you own it. I think it'll be worth the time you spend on it.
Saturday, July 18, 2009
Market Timing
People have it in their heads that market timing is impossible and they shouldn't try it. If you've read, and believe, Investors Business Daily founder William O'Neil, then you know he does not subscribe to that view. Obviously, the mutual fund industry wants you to believe that buy, hold, and diversify is the right strategy, even though it won't make you any money.
I've been struggling with market timing for years. It is definitely difficult to learn but worth studying, I believe. Not to say that I have it figured out, but having broken even over the last 12 months, I'm a lot better off than the S&P 500. I was off in my prediction of a market rally by about a month. By my calculations, it should have commenced in early February but it held off until early March. Trying to figure out a top to this rally is a bit more challenging, but I think that the Nasdaq's close above 1880 this week was a great sign.
I'm no fortune teller, but from reading the charts I think that the Nasdaq is going to run into serious resistance at about 2200, which means we could still see a significant rally from here. Keep in mind that the rally is already 20 weeks old, however, and could end at any time. I think 12 weeks is the maximum length of the rally from here and that by October it will be dead, if not before then.
How the U.S. dollar performs and the inflation trade plays out is also difficult to say. Will the dollar rally again when the market starts heading south? Will oil prices collapse again or hold up? I don't know the answers to these questions, but I would keep my inflation protection in place. Any questions on inflation protection, see Jim Rogers or Peter Schiff.
I've been struggling with market timing for years. It is definitely difficult to learn but worth studying, I believe. Not to say that I have it figured out, but having broken even over the last 12 months, I'm a lot better off than the S&P 500. I was off in my prediction of a market rally by about a month. By my calculations, it should have commenced in early February but it held off until early March. Trying to figure out a top to this rally is a bit more challenging, but I think that the Nasdaq's close above 1880 this week was a great sign.
I'm no fortune teller, but from reading the charts I think that the Nasdaq is going to run into serious resistance at about 2200, which means we could still see a significant rally from here. Keep in mind that the rally is already 20 weeks old, however, and could end at any time. I think 12 weeks is the maximum length of the rally from here and that by October it will be dead, if not before then.
How the U.S. dollar performs and the inflation trade plays out is also difficult to say. Will the dollar rally again when the market starts heading south? Will oil prices collapse again or hold up? I don't know the answers to these questions, but I would keep my inflation protection in place. Any questions on inflation protection, see Jim Rogers or Peter Schiff.
Tuesday, July 14, 2009
FDR or MVB
As a former history teacher, I love it when media types make comparisons between today and some event or person from history. Like the Obama = FDR comparisons. Or I've even heard Obama = Lincoln. Pretty high praise for someone who has been in office for six months. The Civil War era or Great Depression era this is not, despite what the talking heads will have you believe.
History is an excellent learning tool. If that were not the case, there would be no reason to study history. History is not necessarily important just because things happened in the past and we need to know about them. History allows us to draw from periods of human history and see how people dealt with issues, problems, and crises in the past. That's why I think history is important, at least.
We've been told so many times, by the talking heads, the story of how the stock market collapsed while Herbert Hoover was in office in 1929, leading to the Great Depression, and then Franklin D. Roosevelt came riding in on his white horse to save the country (10 - 12 years later anyway.)
Roosevelt was a popular president, no doubt. He would not have been elected president four times if he weren't (breaking the long-standing precedent set by George Washington of only serving 2 terms). I won't argue the merits of the New Deal--entire books have been dedicated to the subject. But I will point out that FDR wasn't the first U.S. president to ever have to deal with economic crisis, even though the talking heads will have you believe that. He wasn't even the last president to have to deal with economic problems. Almost all presidents, if they serve long enough, have economic problems to face. One of the most difficult periods in history occurred soon after the presidency of Andrew Jackson ended. His former vice president and successor, Martin Van Buren, was left holding the bag when the Panic of 1837 hit. It basically ruined the Van Buren administration and legacy. Chalk it up to bad timing, chalk it up to a lack of presidential power, chalk it up to Van Buren's incompetence--whatever you want to blame it on. In any case, the moral of the story is that FDR is a national hero and MVB has been basically forgotten, despite the many achievements throughout his lifetime.
I hate comparisons anyway. How can you compare today with the Jacksonian, Civil War, Great Depression, or any other era? You can draw some lessons, but so many things have changed since then. That's why I hate these direct comparisons with the 1930s. In this era of overcomplicating everything on television, the 1930s v. 2009 comparison has the opposite problem: it actually oversimplifies it. How wonderful.
Monday, July 13, 2009
Inflation Revisited
As if the economy didn't have enough problems, we now have to worry about massive inflation or even hyperinflation. Not that this is a new problem--it has been a problem for years. Peter Schiff talks about it all the time. But the question in my mind is: why? Why does the government support an inflationary policy?
I know that Schiff has a chapter in Crash Proof that discusses the government's rationale for supporting an inflationary policy. But for the average American trying to understand this and to put it into context, it doesn't make any sense. Why would our own government try to hurt its people? Why risk destroying the confidence of the entire American population, leading to outrage and possible uprisings if hyperinflation becomes a reality? I'm not an eternal optimist, but I'm not a conspiracy theorist either. So, in my mind, there must be some rationality behind the insanity.
The government's fiscal and monetary policies are outright reckless. I don't think anyone can justify them, other than the PhD economists who have no practical experience but sit around coming up with "brilliant" economic theories all day. Having a PhD economist in charge of government economic policy is equivalent to having a PhD military historian replace General Petreus to run the war in Iraq. Lots of academic experience; zero practical experience. How about putting someone in charge who built a business; deals with employees, stockholders, and customers? How does a PhD give you the experience and expertise to run anything? But I'm getting off track.
The problem is arrogance. These "brilliant" minds all think they've solved the problem of economic recessions/depressions forever. It's actually a simple fix: just print more money! That was the problem during the Great Depression right? If the U.S. had just printed more money in the 1930s (or "created liquidity" as the great minds would prefer to phrase it), then the Great Depression would not have been nearly as bad as it was. Or am I oversimplifying it? I tend to have that problem.
What about the 1970s? How come nobody refers to that decade when talking about the possible dangers that exist and potential consequences of our actions? So the 1930s can be used as an example, but what about all the other examples throughout history? 1920s Germany? Present day Zimbabwe? Do these examples just not apply because we're the big bad United States?
I'm not an economist, but I have a pretty good understanding of history. I also believe that it doesn't take a PhD in economics to see the dangers that loom. Like Ron Paul said, it doesn't take a genius to figure out that if you print more money it loses its value. The "brilliant" minds in Washington will have you believe that this is much too complicated a situation for the average American to comprehend. Let the PhDs, the politicians, and the talking heads handle it while drowning the taxpayer in debt and devaluing the currency we have to use to feed our families. Having a PhD means you spent a lot of time in school. It doesn't make you automatically right.
I know that Schiff has a chapter in Crash Proof that discusses the government's rationale for supporting an inflationary policy. But for the average American trying to understand this and to put it into context, it doesn't make any sense. Why would our own government try to hurt its people? Why risk destroying the confidence of the entire American population, leading to outrage and possible uprisings if hyperinflation becomes a reality? I'm not an eternal optimist, but I'm not a conspiracy theorist either. So, in my mind, there must be some rationality behind the insanity.
The government's fiscal and monetary policies are outright reckless. I don't think anyone can justify them, other than the PhD economists who have no practical experience but sit around coming up with "brilliant" economic theories all day. Having a PhD economist in charge of government economic policy is equivalent to having a PhD military historian replace General Petreus to run the war in Iraq. Lots of academic experience; zero practical experience. How about putting someone in charge who built a business; deals with employees, stockholders, and customers? How does a PhD give you the experience and expertise to run anything? But I'm getting off track.
The problem is arrogance. These "brilliant" minds all think they've solved the problem of economic recessions/depressions forever. It's actually a simple fix: just print more money! That was the problem during the Great Depression right? If the U.S. had just printed more money in the 1930s (or "created liquidity" as the great minds would prefer to phrase it), then the Great Depression would not have been nearly as bad as it was. Or am I oversimplifying it? I tend to have that problem.
What about the 1970s? How come nobody refers to that decade when talking about the possible dangers that exist and potential consequences of our actions? So the 1930s can be used as an example, but what about all the other examples throughout history? 1920s Germany? Present day Zimbabwe? Do these examples just not apply because we're the big bad United States?
I'm not an economist, but I have a pretty good understanding of history. I also believe that it doesn't take a PhD in economics to see the dangers that loom. Like Ron Paul said, it doesn't take a genius to figure out that if you print more money it loses its value. The "brilliant" minds in Washington will have you believe that this is much too complicated a situation for the average American to comprehend. Let the PhDs, the politicians, and the talking heads handle it while drowning the taxpayer in debt and devaluing the currency we have to use to feed our families. Having a PhD means you spent a lot of time in school. It doesn't make you automatically right.
Sunday, July 12, 2009
The Return
Finally back, after months of neglect from this investor. I have returned to my roots, I guess you could say, and concentrated on the technical analysis. Nicolas Darvas said he always made his most money when he was so far away from Wall Street that he couldn't listen to the "news" and rumors. Funny, I've done much better myself since I stopped watching CNBC and all the other financial television channels and just focused on the charts.
Hard to say where the market goes from here. It's hard to say where the market goes from anywhere, but the signals have been mixed lately. 4 weeks of declines, but on below average volume. Many stocks and indices breaking through their 50 day moving averages, but the 200s are holding up and some stocks still have promising charts. The Nasdaq has held true to the 1937 Dow pattern, unbelievably, so that points to a decline back to the lows sometime in the near future. The question is whether or not we have one more leg up before that happens. I prefer to have positions that will benefit either direction, for the time being. A good time for some type of hedging strategy.
From a fundamental perspective, it obviously still looks bad. The inflation trade will have to kick in at some point, but I have no idea when. Could be weeks, months, or years. The recent news about a surge in demand from China was interesting. Is their increase in consumer spending a benefit to their economy in the long run or will they get overextended like everyone else? My bet is on the former. They can certainly afford to spend money that they actually have. Meanwhile, the U.S. government continues to spend money that it doesn't have or, even worse, money that does not yet even exist.
Hard to say where the market goes from here. It's hard to say where the market goes from anywhere, but the signals have been mixed lately. 4 weeks of declines, but on below average volume. Many stocks and indices breaking through their 50 day moving averages, but the 200s are holding up and some stocks still have promising charts. The Nasdaq has held true to the 1937 Dow pattern, unbelievably, so that points to a decline back to the lows sometime in the near future. The question is whether or not we have one more leg up before that happens. I prefer to have positions that will benefit either direction, for the time being. A good time for some type of hedging strategy.
From a fundamental perspective, it obviously still looks bad. The inflation trade will have to kick in at some point, but I have no idea when. Could be weeks, months, or years. The recent news about a surge in demand from China was interesting. Is their increase in consumer spending a benefit to their economy in the long run or will they get overextended like everyone else? My bet is on the former. They can certainly afford to spend money that they actually have. Meanwhile, the U.S. government continues to spend money that it doesn't have or, even worse, money that does not yet even exist.
Saturday, February 7, 2009
1937, not 1929
I love all of these comparisons to the Great Depression. A very easy comparison for those of us who didn't live through it. Most of the idiots on television who so readily invoke that comparison have no understanding of history.
The real reason for this post is to actually make the comparison between present day and the Great Depression...in terms of stock market charts. That's probably the only true comparison worth using. From 1929 until 1938, a chart of the Dow Jones industrial average looks remarkably similar to a chart of the Nasdaq from 2000 to the present. From peak to trough, in 1937 and 1938, the sell-off in the Dow lasted the exact same length of time as the same movement from October 2007 through November 2008 (36 weeks, I believe). A new rally began exactly 12 weeks later (in 1938). It has now been exactly 12 weeks since we made new lows in November. For this astounding trend to continue, we would have to see a rally here very soon. Only time will tell.
One last note. I listened to a speech given by Congressman Ron Paul in Houston recently and he make a couple of interesting points. One was that he appreciated all the compliments he'd received for his intelligent insight into the economy and the weakness in the U.S. dollar. His response was that he didn't think it took a genius to figure out that if you print a lot of money, you get a decline in its value (that got a few laughs from the audience.) The other thing he said that I thought was worth remembering was that economists (in this case Austrian economists) are not very good at market timing. Mr. Paul remembered that a distinguished Austrian economist noticed problems with Fannie Mae and Freddie Mac's debt levels back in the late 1990s. It took another decade for those companies to collapse under that mountain of debt. Obviously, the massive increase in current government debt levels and the printing of money as a "solution" to our financial problems will lead to problems, including a heavy dose of inflation. Timing and reacting to that inflation is the difficult part. We know the what, we just don't know the when.
The real reason for this post is to actually make the comparison between present day and the Great Depression...in terms of stock market charts. That's probably the only true comparison worth using. From 1929 until 1938, a chart of the Dow Jones industrial average looks remarkably similar to a chart of the Nasdaq from 2000 to the present. From peak to trough, in 1937 and 1938, the sell-off in the Dow lasted the exact same length of time as the same movement from October 2007 through November 2008 (36 weeks, I believe). A new rally began exactly 12 weeks later (in 1938). It has now been exactly 12 weeks since we made new lows in November. For this astounding trend to continue, we would have to see a rally here very soon. Only time will tell.
One last note. I listened to a speech given by Congressman Ron Paul in Houston recently and he make a couple of interesting points. One was that he appreciated all the compliments he'd received for his intelligent insight into the economy and the weakness in the U.S. dollar. His response was that he didn't think it took a genius to figure out that if you print a lot of money, you get a decline in its value (that got a few laughs from the audience.) The other thing he said that I thought was worth remembering was that economists (in this case Austrian economists) are not very good at market timing. Mr. Paul remembered that a distinguished Austrian economist noticed problems with Fannie Mae and Freddie Mac's debt levels back in the late 1990s. It took another decade for those companies to collapse under that mountain of debt. Obviously, the massive increase in current government debt levels and the printing of money as a "solution" to our financial problems will lead to problems, including a heavy dose of inflation. Timing and reacting to that inflation is the difficult part. We know the what, we just don't know the when.
Sunday, January 18, 2009
Journalists & Markets
I love how the business news writers always have a reason for a stock market movement. They can't stand to admit that something happens for either no reason at all, or for a reason they might not know about. For example, I saw a headline that said the stock market recovered on Thursday because of hopes regarding the bailout. That makes no sense whatsoever. The bailout is 4 months old. It's not news and how could anyone hypothesize that its prospects led to a stock market recovery on a Thursday afternoon? They don't know why the market moves the way it does, so why do they always have to try and rationalize it?
Markets don't care about the past, they care about the future. A revision of the jobs report for December is not going to have the slightest impact on the market, yet that's what the business journalists use as a headline. Another example is when they use a single company to explain the entire movement of the global market. Like when "they" said that a poor earnings report from Chevron led to a market sell-off. I read that headline and went straight to the Chevron quote: it was down less than 1% while the rest of the market was down over 2%. There's an explanation for you!
Having no connection to Wall Street or its ridiculous journalists has its advantages. William O'Neil recognized this and made a fortune. Before him, Nicolas Darvas had a similar strategy. He wanted nothing to do with market news or rumors. He just wanted the quotes. You can learn a lot by refusing to listen to any advice or news and simply watching the price and volume action for a stock or an index. Never believe that a journalist's explanation for the way a market moves is accurate. A journalist is a journalist (and not a professional trader or investor) for a reason.
Markets don't care about the past, they care about the future. A revision of the jobs report for December is not going to have the slightest impact on the market, yet that's what the business journalists use as a headline. Another example is when they use a single company to explain the entire movement of the global market. Like when "they" said that a poor earnings report from Chevron led to a market sell-off. I read that headline and went straight to the Chevron quote: it was down less than 1% while the rest of the market was down over 2%. There's an explanation for you!
Having no connection to Wall Street or its ridiculous journalists has its advantages. William O'Neil recognized this and made a fortune. Before him, Nicolas Darvas had a similar strategy. He wanted nothing to do with market news or rumors. He just wanted the quotes. You can learn a lot by refusing to listen to any advice or news and simply watching the price and volume action for a stock or an index. Never believe that a journalist's explanation for the way a market moves is accurate. A journalist is a journalist (and not a professional trader or investor) for a reason.
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