Today I wanted to talk about something that I’ve never really written about here before but I think is a really important point that I want to make sure I get across. I’m lucky that I get to chat with investors all over the world on a daily basis. Whether you are a professional investor with 30 years of experience, or a student in Hong Kong who just made his/her first trade, I am always willing to chat. Not only does this help me learn about different strategies, objectives and cultures, but also helps give me perspective from all sorts of different angles.
A common theme that I get a lot is regarding chart patterns and pattern recognition: “JC how did you know that consolidation would resolve higher?”. Other times I get, “JC how did you know that was a failed breakout and how come this example $XYZ is one you don’t consider to be a failed breakout?” The explanations you guys give me make plenty of sense, “But momentum is diverging with prices making new highs!” And in most cases you’re probably right. But to me, it’s bigger than that. The analysis is not just about one pattern or one divergence or even just one chart. It’s about taking these patterns and divergences within the context of a much larger, more macro thesis.
One of the investors in my hedge fund a few years ago is the one who first pointed this out to me. I didn’t even realize I was doing it. He coined it, “The JC Breadth Indicator”. I added the ‘stock market’ part between JC and Breadth, otherwise people would think my mouth smells stank. Nobody wants that. So “JC Stock Market Breadth Indicator” it is. And what this means is that since I go through every single stock market index in the world, every single Sector and Sub-sector in the U.S., every single stock in the S&P500 and every ADR on the NYSE, among many more charts, I have the ability to take a weight-of-the-evidence approach to the marketplace. Without taking the time to do the work, there is no way I would be able to gain this perspective.
So when you hear me say that I like Technology, which I have since July, it’s a decision based on many factors. In this specific example since last Summer, these factors included the S&P500 and DJ Industrial Averages breaking out to new all-time highs, European Banks and Japanese stocks stabilizing. This included US Interest Rates Bottoming and a flow of money into equities as it fled the bond market. The long Technology call had less to do with the specific patterns in the Technology ETF $XLK and more to do with a much broader global macro bullish theme. It was just that Tech was coming out of a 2-year sideways range within a monster uptrend and on a relative basis was breaking out of a 16-year basis vs the S&P500. The leading indicator for Technology, Seminconductors, has been the leader thus far and I see little reason to think this doesn’t continue. To take things even further, within Semi’s I prefer the Integrated Circuit stocks. So what starts with a global perspective on all stocks around the world, ends with a long Skywords $SWKS trade or a long Analog Devices $ADI trade, for example. But it’s much less about the individual stock’s behavior and more about the context with which it is surrounded.
Let’s review. First we start with with developing a bigger picture thesis based on the weight-of-the-evidence. This is where the JC Market Breadth Indicator comes into play. Simply put, Are there more good ones than bad ones? While this might seem over simplified, you’d be surprised at how many people refuse to put in the work and won’t actually look through all of the data to come to a weight-of-the-evidence conclusion. See, I’m lucky. I love this shit. I can rip through charts all day and have a grand ol’ time doing it. I’ll throw on some good tunes and just rip through hundreds, if not thousands of charts without flinching. I promise, if you look at enough stocks in enough sectors in enough countries, you’ll start to recognize themes. In fact, it becomes almost impossible not to. Sometimes these themes are large tops with breakdowns left and right. Other times, the themes are breakouts to the upside after huge bases. The latter is basically what we saw outside of the U.S. since last Summer.
I’ve thought many times about trying to quantify this data. In other words, what makes a chart a good one vs a bad one? What constitutes a bottom vs a top? How can I quantify this indicator? The beautiful conclusion that I’ve come to is that it is impossible. Every single market environment throughout history is different. Correlations between asset classes change from one environment to another. There is no way to quantify this indicator. The only solution is to put in the work and go through them all. It’s not even about trying to include the unknown factors. It’s the unknown unknowns that mess everything up. So I don’t even bother.
This is why it’s a JC Stock Market Breadth Indicator and not something that can be recreated. I
welcome challenge you to come up with your own list of stocks to rip through once a week. My list is up towards 3000 charts. I have found filters to be mostly useless in this regard. Me putting in the work is exponentially more valuable than a tool that by definition, is designed to fail. Remember, you’re basing your filters on information you got from past environments. You’re asking the market to give you what you want instead of taking the time to listen to the market itself. Don’t force the markets hand. Let the market guide you. That’s how I see it.
I hope this sheds some light on how I approach the marketplace. It’s not about one specific chart pattern. It’s how that particular chart pattern fits within a much broader context. This is a process that has taken me a decade and a half to develop and it continues to evolve just like the market does. I’m not one of those, “this is how i’ve always done it”, kind of people. I would rather acknowledge that I know nothing and continue to tailor my process with what the market is giving me. Play the cards I’m dealt, not the cards I want. Remember, I’m not here to be right, I’m only here trying to make money. There’s a difference.
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