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Typical bottom

January 14, 2019 / / No Comments

People love picking tops and bottoms. I understand where this comes from, some just have the urge to prove they know more, they know better. While this might be a viable strategy, one needs to know where the market is currently and if a low has a chance of becoming the bottom. Are we in a 8-12% consolidation phase, a 20-30% cyclical correction or a 35+% secular bear market?

We’re seeing a good 10% bounce from the Xmas lows and it’s easy to feel stupid if you dumped your stocks then but now watching the market go up without you. It’s also as easy to feel victorious if you didn’t sell then, but what if we get a retest, or worse, what if it’s not over yet? Can you withstand that?

I prepared a chart pack of 16 bottoms that occurred since 1962. They might help you navigate through the cycles and picking the bottoms. One very common characteristic in bear markets is that we often see a multiple double digit counter trend rallies, the same goes for rallies near market bottoms.

I bet you’ve heard the old saying that tops are a process and bottoms an event. The following charts prove that bottoms are a process too, even though sometimes shorter in length! There are no V type bottoms really, a much more common bottom is the one that fakes people in believing it’s not over yet, like a double bottom or a low undercut bottom or a bear trap bottom. Let’s go through them one by one.

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Dollar breaking down

January 10, 2019 / / No Comments

I bet you found yourself being a bit early on the market on a few occasions. This can be very risky, because there’s a thin line between being early and being wrong. Having a sound risk management one can prevent losing (too much) money, however one must remember that there are two dimensions of a good trade, time and direction. If either of them is wrong, you risk losing money! Thus I don’t trade on my macro views until the tape confirms them.

I wrote a post Euro to repeat 2017 move? three months ago. Clearly I was early, but now it looks US dollar is finally breaking down, thus confirming euro and other currencies could appreciate versus the dollar.

Let me start with a monthly chart of Trade Weighted US Dollar Index of major currencies by FRED. The broad index looks more bullish too be fair, but it does not offer that much history, so below I will show you an equally weighted index against emerging market currencies too.

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Is it over?

January 7, 2019 / / No Comments

I’m not one of the guys who like to scare others with a repeat of 2008 or 1929 crisis. I don’t think that’s very useful. In my mind this is one of the reasons why the working class stay under invested throughout the bull runs and usually buy the top. They’re too scared to buy until the peak euphoria comes when is already too late.

However, one must not be complacent. We need to respect risk, we need to respect the market, we need to use stop losses. This is why they were invented. And this is why in Q4 I was warning you we could see a correction in the market. If you didn’t pay attention you could be down as much as 40% if you were invested in Apple or even more, if you were invested in some of the other stocks.

Could we see a 2008/1929 style crisis? Absolutely, but I don’t think this is the highest likelihood event. I still believe we’re in a secular bull market and that this is a cyclical correction only, but I’m staying open minded to any outcome. Like I’m opened to a scenario that the worst is over and that the market will start a process of forming higher highs and higher lows.

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Commit to a process and stick to it

January 3, 2019 / / No Comments

The start of a new year can mean a new beginning for some. Hope, resolutions, more hope. But a few are willing to do the right thing, this mostly means ditching hope and replacing it with work, solutions and processes.

The market doesn’t care what we hope for, a retirement plan, a new house, or a hot stock tip. The market is a redistribution machine. It transfers the money from many to a few. Trading and investing is not that much about stock picking than it is about risk management. 2018 was nothing like 2017. In 2017 most forgot about risk management, many didn’t use it, and they were handsomely rewarded for their complacency. But then 2018 came. It was the total opposite year. It was a tough year, especially for those who forgot what the term stop loss means.

I’m not mocking anyone. The same day I think I know more than others the market smacks me straight in the face. And I get humbled down. What I’m trying to achieve is to make you a bit more aware of the current situation. Have we seen the bottom yet? If not, are you ready for another leg lower? Can you take it? Will you handle it? Most complacent people who answered yes to the questions above will most likely sell the bottom.

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