The Big Picture
Watch the Baltic Dry index. Baltic Dry Index Continues Leading The Stock Market (Babak.) This is not working during the Big Bubble since 2009. Financial assets have decoupled from the economy.
Visit the Fear/Greed Meter.
Are stocks cheap compared to commodities or dear? Compared to the GDP?
Seasonally, stocks make all their gains in the winter. This has to do with cash flow. Buy the first MACD buy signal in the fall (after when? Nov 1?). Sell the first MACD sell signal in the spring (after when? spending of tax rebates?) (Sy Harding) But…
Sell in May? 9 Trillion Reasons to Say NO: “History shows that ‘Sell in May and go away’ has applied when the Federal Reserve was in a tightening mode during the six-month span from May to November. … When we did the study we examined what the Fed did, not what it said.”
Check the previous year’s losers for which hold their ground best in January.
Old Wall Street advice about market selloffs – the ones that go down the least will bounce back the most. (Stephen Leeb’s Cash Cow. But on the other hand…)
Last year’s biggest losers often become this year’s biggest winners. … 1987, Werner De Bondt and Richard Thaler published … “Does the Stock Market Overreact?” … in The Journal of Finance … . They found (based on a huge set of data from 1933-1978) that portfolios of “loser” stocks consistently outperformed stocks that had previously been “winners.” … Investors who bought the 35 biggest losers of the previous year from 1933 to 1978 – and held them for five years (60 months) – would have beaten the market by roughly 30%. …
Larsen Kusick … decided to test the “loser portfolio” theory. … He created a set of 3,000-plus stocks with a market cap of over $100 million. He then separated the worst-performing stocks of 2012… so we could see how they did in 2013. In short, the data confirmed that buying a loser portfolio easily beat the overall market in 2013. …
Our research also revealed another trend… Many of these losers get crushed in the final months of the year. … These false selloffs create huge opportunities – especially in early January after most of the selling for tax purposes and window dressing is finished. (Small Stock Specialist, Curzio)
“Speculation is far too exciting. Most people who speculate hound the brokerage offices… the ticker is always on their minds. They are so engrossed with the minor ups and downs, they miss the big movements.” (Jesse Livermore)
And, “On the whole, individual stock selection doesn’t really matter. What really matters, over the long term, is asset-allocation decisions. It’s not what stocks you buy. It’s when you buy stocks versus when you buy bonds, gold, cash, real estate, etc. that matters.” (Porter Stansberry)
“Don’t take big positions before monthly nonfarm payroll figures, and … never listen to the ‘experts’.” (John Thomas)
Effective Risk Control is Critical
Stop Losses are essential (mental stop losses are ok). Don’t hold onto losers; let your winners run. Set stop losses based on the volatility of the asset being protected.
Porter Stansberry’s Rules
Rule No. 1: Avoid buying into any particular sector of the stock market – like housing, or gold stocks, or tech stocks – unless you’re buying after a 50% correction in the leading shares.
Rule No. 2: Simply learn how to value a security. …
Don’t pay more than 10 years’ worth of cash from operations for a company. You’ll find cash from operations on the cash-flow statement, as opposed to earnings, which are on the income statement. Rely on cash figures over earnings because the earnings figures are a fiction derived by accounting rules.
If you’re buying an asset-management business – like a commodity company or a financial firm – never pay more than book value.
If you’re not going to make at least 5% a year in the form of cash dividends or share buybacks, don’t buy the stock.
Stansberry Portfolio Solutions checks for four traits:
- Durable franchises. We want businesses with staying power that we are comfortable owning for the next decade.
- Above-market revenue growth. We want advantaged business models that will compound rapidly in a world otherwise starved for real growth.
- Talented management teams. We want world-class, ethical leaders to captain our investments… leaders whose incentives align with their shareholders’ interests.
- High returns on invested capital. We only want to own companies that generate attractive returns on their core businesses – this is crucial for compounding your money over the long term.
The Complete Investor relies on PEG, FCFY, and ESB. That’s Price/Earnings/Growth; Free Cash Flow / Yield; and a Environmental/Social/Good Management score. These are described in the December, 2019 issue.
The S&P 500 rarely trades at a price-to-sales ratio over 2. It has only traded above two times sales twice: at the peak of the dot-com bubble and the winter of 2019/20.
Two times sales is the “death zone” for future equity returns. According to economist and asset manager John Hussman, the index’s 10-year returns have been abysmal any time it has approached anywhere near this level in history. (Dan Ferris, with Stansberry Research)
The yield-curve inversion
The last seven times the 2-year/10-year Treasury yield curve inverted, a market peak, then recession has followed … on average since 1965 18 1/2 months and 19 months later, respectively. The 2-10 yield curve inverted in August 2019…
Strength following bad news (Jeff Clark):
“Well, Carson,” I said, “[Yesterday] you had one of the biggest financial publications in the world dump on the stock. And, you had the biggest investment house in the world dump on the stock. I’m actually surprised it didn’t open a lot lower.”
“Should I sell it?” Carson asked.
“No,” I answered. “What you need to do now is watch and see what happens by the end of the day. If the stock can somehow turn around and go positive on the day, then that’s probably the biggest ’BUY’ signal you’ll ever see.”
AAPL – Huge NAV requires a lot of input to stay up. If it turns, the market will turn.
XLY – consumer discretionary and retail sectors are the most economically sensitive in the market. The market won’t turn without it turning.
SKF – Inverse of banking industry. The market won’t turn without it turning.
CU – Dr. Copper. It’s price trend demonstrates what the world economy is doing.
UUP – U.S. dollar is normally inverse to stocks, especially in a botox QE economy.
IWM – Small stocks will turn before the narrower indexes (AAPL is the narrowest of all?).
DRYS – Proxy for the Baltic Dry index, which indicates what world trade is doing.
Cross Asset Class Analysis: FXA vs. EWA vs. CU vs. GLD vs. SLV vs. IEF vs. $SPX (and in Q1 2012, AAPL, which added $225 billion to market capitalization by itself)
Break and Retest of 50-Day Moving Avg – indicates a change in trend. Graham Summers
Sector Rotation (Ryan Puplava)
When utilities, healthcare, and staples outperform the market, portfolio managers are shifting their allocations into a defensive posture as the economy shows signs of weakening economic activity. When technology stocks and consumer retail stocks outperform, portfolio managers are shifting weightings in anticipation of a market bottom and a recovery in economic activity. Finally, when basic materials, energy, and industrials outperform it’s because investors are anticipating the economy is in full recovery and resource supply is getting tight relative to demand. Martin Pring and John Murphy have put together a diagram that depicts this relationship on stockcharts.com, shown below.
The more Insiders and less Institutions that own a stock, the better.
Insiders are likely to know best what is happening in their companies. During the summer of 2018 insiders were selling their company stocks while their companies were borrowing funds to buy back their stocks with shareholder money.
Track insider selling at Insider Tracking
The No. 1 strategy for retiring wealthy: Most people just want the quick fix. It’s not a quick fix. (Retirement Millionaire; 08/2011)
Secret No. 1: The Power of Compound Returns – compounding is different from a bond that pays 18% a year on a $10,000 investment. By plowing your earnings back into your portfolio, you can get your money working for itself and amass a fortune. But the real secret to creating wealth through compounding your profits is to keep adding money year after year
Secret No. 2: Start Younger and Get Even Richer – Because the compounding is much more powerful at the end than at the beginning.
Secret No. 3: – DRIPS let you tap the power of compounding returns and cut out Wall Street completely (no brokerage fees or commissions). You can start this with as little as $250. The technical name for these programs is Dividend Reinvestment Plans (DRIPs). Combining the effect of compounding returns with corporate DRIPs amplifies the compounding effect. DRIPs often allow shareholders to automatically reinvest their dividends. And we can super-charge this process if we pick companies that raise their dividends regularly and buy back shares. Dividends reinvested through a DRIP are taxable, though, so get a DRIP inside an IRA. Three blue-chip dividend growers that allow you to set up a DRIP inside your IRA: McDonald’s (NYSE: MCD) (800) 621-7825, Wal-Mart (NYSE: WMT) (800) 438-6278, Exxon Mobil (NYSE: XOM) (800) 564-6253. You can start with as little as $250 in Exxon and Wal-Mart. McDonald’s minimum is $500. Just call the listed phone numbers and ask about the IRA DRIP (not the regular DRIP plan).
The growing impatience of increasingly overconfident investors is bad for the thundering herd, but it’s great for you and me. It offers us a major source of competitive advantage over other investors, and at a much lower price today than others have had to pay for it in the past. But you don’t pay for it with money. You pay for it with time…
Thirty plus years ago, we had to wait more than five years to acquire and exploit the advantage of patience (due to the) five-year average holding periods of 30 years ago. … Today, the wait (holding period) has contracted to just six months (With computer algorithms totaling 75% of market volume as of year-end 2015, the holding period is probably less than 6 months.)
It’s a bigger advantage today, too. An extra year of waiting is a bigger advantage relative to a six-month average holding period than it is relative to the five-year average holding period (of yesteryear). When you waited an extra year back then, it was 20% longer. If you wait an extra year today, you’re waiting 200% longer than the average investor. So the advantage of waiting the same amount of time is 10 times greater today.
There’s virtually no competition for patient, long-term investors. Nobody is trying to outwait the other guy. The scrum for short-term profits is insane. It makes no sense to place a low-probability bet in a highly competitive market when it’s so easy to place a much higher-probability bet in a market virtually devoid of competition.
Long-term investing is more out of favor than ever. Patience today is as cheap as risk was in March 2009. So… how do you buy patience? Well, if the way to buy risk is to buy risky stocks, then the way you buy patience is to buy stocks you can hold for the long term without worrying about them losing their value. (Dan Ferris, 2010)
Pick two investments that are not directly correlated to each other (not UUP and UDN for example). Go long the one you think can not lose (it’s at a bottom), and go short the one you think absolutely will lose (at a top). If you’re wrong on one you still make money on the other. (John Thomas)
The Four Analyses (John Thomas)
- Fundamental economic analysis of the company or sector: Supply and demand trend.
- Technical Analysis: How is the market trading the asset right now? Overbought or oversold?
- Whale Watching: (Flow of funds) Where is big money moving, and why? Are the big hedge funds (50% of global liquidity), mutual funds, and banks moving in or out? Ride along or get run over.
- Big picture: How does the trend you want to use (See 1.) fit into the world economy and events? Markets are now global.
Click the above. They are separate from what is below.
Fundamental Economic Indicators
Short-to-Medium Term Economic Indicators (Karl Denninger of The Market Ticker)
1. Sales tax receipts.Personal consumption accounts for 70% of the US economy, (and) this is virtually the only economic “count” that isn’t subject to being gamed. This statistic is both timely reported (monthly) and reliable, as no business will report and remit taxes that weren’t collected on actual sales.
2. Consumer credit. It’s additive/subtractive to GDP beyond actual output (wages, bonuses, and other earnings.) Note that a zero rate is actually negative by about 1%
as this number is not normed to population growth (that is, it isn’t per-capita). It should expand at a roughly 1% rate per year simply to accommodate growth in the number of people in the United States.
3. Civilian Employment Ratio. This is the percentage of all working-age people that have a job. This is arguably the most important indicator of all in the intermediate-term (one to five years), as it provides the best view of the government’s revenue capacity on a forward basis (that is, the tax base upon which the government can levy to obtain revenue.)
ISM and Employment (Barry Ritholtz)
There is a correlation between the employment report and the ISM manufacturing index. Going back 40 years, the ISM index turns in a reading of 60 only about 10% of the time. The top in the year-over-year change in nonfarm payrolls tends to lag by about seven monthsin employment lags by about 7 months.
Watch the yield spreads between the corporate bond market vs. treasuries. Evidence is more readily apparent in junk bonds. (Corporate Bond Spreads Key To Continued S&P Rally) Rising BAA to 10-year treasury yield spreads starting August 2008 was a big warning sign. … Here is something that everyone can easily watch: HYG vs. $SPX or SPY (Mish Shedlock)
Good Economic Indicators
Ceridian Index – Real-Time Trucking fuel use: the comes out monthly around the 5th of the month.
Cumberland tracks the combined G4 central bank balance sheets, their assets, their liabilities, and their aggregate size.
Optionistics – find the options sweet spot for stocks.
Economagic.com has 1000s of economic data series and charts. Allows for fast and easy creation. FRED (Federal Reserve Economic Data) is another killer site that allows free access to different runs of economic numbers. Between the two of them, if you cannot find what you are looking for, you need to get a Bloomberg terminal.
Shadowstats -Trust your government (numbers).
Bad Economic Indicators
Same store (yr/yr)sales: This does not consider stores that went out of business sending their customers to the survivors; nor stores that went into business, robbing their rivals of customers. (Use sales-tax receipts instead. See above)
A few years ago high frequency trading (HFT), a type of programmed trading (PT), was less than half of traded stock volume, recent data indicates HFT now accounts for over 70% of US volume. … HFT/PT is now unquestionably dominating the markets. (Zero Hedge)
Trading by Technical Analysis
Technical analysis in general is not predictive (but finds) a trade with a stop loss relatively close by. (Mish Shedlock)
Fan Chart – It’s called a fan chart, and it looks like this…
A fan chart is formed by drawing multiple support and resistance lines from the most recent correction low.
In the chart above, every time the market broke below one of the fan lines, it formed a higher low and then bounced back up to test the line. The angle of the lines still allowed each bounce to generate a higher high. In the chart above, the next time this happens it will be a lower high. This begins a downtrend of lower highs and lower lows.
When stocks have 40% or more of their shares sold short, “it usually means the big-money shorts – the guys who are really good at sniffing out frauds – are short the stock. They’re almost always right.” (Jeff Clark)
When in doubt, it pays to take the opposite side of what Goldman Sachs publicly says. Goldman has a history of not only being wrong, but betting against its own recommendations (Mike “Mish” Shedlock).
Options Sweet Spot and Options Expiration
When Goldman Sachs and other option market makers sell call and put options, they are collecting insurance premiums against sharp market swings. These call and put options create an option sweet spot, where the most contracts will be worthless at expiration. The further prices are from this sweet spot at option expiration, the more Wall Street option market makers have to pay up. (So expect prices to approach the sweet spot as expiration looms.)
During the last 10 days before expiration option time premium decays rapidly. Don’t be long puts or calls during this time. It is a good time to be short puts or calls (weekly options work well for this).
See for your self. Below is a site which will calculate the option sweet spot for you (sweet spot = strike peg).
Options Maximum Pain
Elliot Waves and Fibonacci Series
Elliot Wave – Counting waves is “highly subjective” according to Jim Sinclair. When I did a search, this interesting connection came up: Fibonacci is key to counting waves. Fib levels, or fib time series, or maybe both.
Tony Caldaro (my chosen elliot wave expert) says the third leg will never be the shortest. His method is a modified elliot wave theory, which he has “been applying this technique, successfully, for nearly thirty years.” Read about it here.
After a high or a low, prices will often rebound into the “box” between the 50% and 62.8% (the next level). (Dennis Gartman) In general prices are more likely to turn at or near fibonacci levels than not.
NDX marks tops and bottoms.
NDX is comprised of many of the higher risk, higher beta names among the medium to large cap companies. When market participants have an appetite for risk, the NDX begins outperforming the S&P 500. We normally see this outperformance just before major bottoms are formed. Likewise, the NDX usually begins to underperform the S&P 500 just before tops are reached. So a quick review of the relative performance of the NDX vs. the S&P 500 can yield very important clues
Stocks that rally the most off of depressed levels are the same stocks that decline the most when the momentum shifts. (Jeff Clark, Short Report)
Follow the direct investment of big companies (John Thomas)
Once Mr. X stopped trading primarily on the fundamentals [like value], and started trading solely on when sentiment and price action diverge, that’s when he REALLY started making money. I want to buy what is “cheap, hated, and in the start of an uptrend. (Steve Sjuggerud referring to a mentor of his)
ETFs (John Thomas, the Mad Hedge Fund Trader)
If you plan on dabbling in the $1.4 trillion 1,400 issue ETF market, it may prove wise to check out the intrinsic value of any ETF before you buy it. You can do this easily by going to Yahoo Finance and adding .iv to any ticker symbol. So while the (TVIX) intrinsic value this second is at $7.51, the current market is at $7.96, a 6% premium. If you value your wealth, you might well get familiar with this exercise.
VIX (Thomas J. Bowley, Invested Central)
When traders are paying up to buy nearby VIX calls, yet the puts are at parity with the VIX itself or at a discount to intrinsic value (Note: VIX options will often trade at discounts to intrinsic value due to the European style settlement nature of the contracts) traders are expecting higher volatily. Combine that with the relative value of the VIX itself (at a new high or a new low, etc.) This is likely to lead to a large move lower.
Gold and Interest Rates
Whenever real interest rates (short-term Treasury rate minus the inflation rate) are zero or below, gold does well.
Banks are market makers. They sell options and futures contracts. When banks are heavily short gold, that means they are offsetting heavy buying of these contracts on the opposite side. When banks are short, heavy hitters are long.
“In volatile markets, I’m used to trading six or seven positions every day. But, in the low-volatility market we’ve seen lately, there are times where I’ll go several days without doing anything. It is remarkably difficult to stare at a computer screen for several hours every day, just waiting for something to come together. It’s like a guy who’s wandering through the desert in search of water. Eventually you start seeing things that aren’t really there. And you start making trades that don’t really fit within your discipline.
“Most of the time, those trades are going to be losers. [But] you’re going to be tempted to do something, anything, to justify your time in front of the computer. And that’s usually when you’ll make mistakes. If you can avoid doing that, and you can be patient and wait for trades to fall into your preferable setup, then you’ll be successful as a full-time trader. Jeff Clark
“Just sell everything,” I said.
“That was an expensive lesson to learn. But it’s one every options trader learns at some point. I was just fortunate it happened to me early in my career.
“You see, that experience changed how I looked at trading. Instead of using options as vehicles for speculation – a way to juice my returns and get more bang for my buck – I started using them the way they were intended to be used: as a way to reduce risk.
“Today, I still do my fair share of speculating. But I’m not focused on how much money I can make. I’m focused on how little I can lose.
“That’s a huge difference. It has allowed me to trade options successfully for nearly three decades. Jeff Clark