Louis’ Look (08-10-2020)

Studying technical analysis, I always heard that an underperforming Financial sector is a bad sign for the overall market. As shown below, the relative performance from Financials has been underwhelming.

Click on the chart to enlarge view.

So when the sector began rolling over on a relative basis in June, earlier this year, I was advising my friends and family to leverage up, start aggressively shorting stocks, and prepare for a repeat of 2008 (joking, of course). But in all seriousness, looking back, it reinforced a message JC mentioned in his new Charting School; we should assign our tools different weightings in our process depending on the market environment we’re in.

It dawned on me perhaps in an environment where Bonds, Gold, and Stocks are hitting all time highs, maybe Financials aren't the best indicator to gauge risk appetite in equities. I even brought it up in the weekly team meeting how we don’t need Banks to be leading us higher, we just need them to not be crashing on an absolute basis.

So what’s the lesson?

My Finance textbooks would have me believe that the market is static and unchanging. Reality says otherwise. Correlations and conventions are always changing, and you best recognize when they do before the market catches you with your pants down.

Before moving to university, I got a part time job and saved some money, not for the living costs or the tuition, but for my first brokerage account. I thought I was gonna make a killing, flicking Tech stocks like no tomorrow as if I was the next PTJ.

After a few months, while the market gained 20%, my account was down 20%. Not the dream I had envisioned, to say the least. This week, I asked myself where I went wrong, and there seemed to be one common denominator.

Impatience.

The guys here always preach that there are “No Called Strikes on Wall Street” - that is, if the market is going to guarantee us one thing, we’re always going to have future opportunities. In many cases, if I had previously got stopped out on a particular stock, I would be reluctant to enter back in and I would be off betting on some other new stock I found.

At some point, there is an inverse relationship between the time put in and the success you reap. As basic as this sounds, I’ve learned that you have to wait for the market to do its thing, and sometimes it’s best to turn off your computer, spend some time with your family, or go walk your dog - it will be good for your headspace and your portfolio.

Thanks for reading, feel free to drop me a line at louis@allstarcharts.com to share with me all the lessons you learnt this week too.

Louis