What's wrong with taking the loss, learning to live with it, and then moving on?
In October, Dr. Brett Steenbarger shared some of his thoughts with us on visualizing yourself taking the loss, before even entering into an investment. Already going through that "pain" in your head makes the loss easier to accept in the future if/when we are wrong.
If the worst is over for the stock market, then definitely one of the areas we want to be getting long is the medical devices sector. There are a lot of stocks here that have shown relative strength and are at or near all-time highs. If US stocks go higher from here, this sector will definitely lead the way.
You know what is not a characteristic of a downtrend? All-time highs!
Friday afternoon, the Medical Equipment Index went out at new all-time weekly closing highs relative to the S&P500. We look to relative strength as a leading or coincident indicator for stocks. This sector's behavior is no different.
There is a reason why Medical Equipment stocks look like Tech stocks and not the rest of Healthcare. They're essentially tech stocks trapped in the body of a healthcare stock. Although they are indeed in the Healthcare space, we need to recognize how they behave, the relative strength vs their peers and then treat them as their own group.
In case you missed it, Medical Equipment stocks went out yesterday at their highest weekly close relative to the S&P500 EVER. This is not evidence of a downtrend or any kind of weakness. Quite the opposite in fact:
We're about five weeks out from the start of Carnival in Rio de Janeiro, but the Brazilian stock market ETF $EWZ looks like it wants to get a head start on the party. And its one of the few places in the Western hemisphere pricing in muted volatility. This sets up a nice opportunity.
Tuesday I posted a mystery chart and asked you all to let me know what you would do. Buy, sell, or do nothing. Many said that it looked like the long-term downtrend was intact, but that you would wait for a downside resolution from this range before acting. I agreed.
So today, I want to reveal the full chart and share why I feel it's relevant.
When you hear people talking about Dow Theory, it usually revolves around what the Dow Industrials and Transports are doing and whether they are diverging or confirming one another. I want to be perfectly clear that while this is certainly one of Charles Dow's tenets from the late 1800s, this is just one of many, and not even in the top 5, as far as I'm concerned. I encourage you to check out my post: Everything About Dow Theory.
Today, we are indeed going to focus on the behavior of the Dow Jones Industrial Average and Dow Jones Transportation Average. Earlier this week we discussed the Dow Jones Composite, which includes the 15 stocks in the Dow Utility Index as well. For this conversation we're analyzing just the Industrials and Transports.
Tuesday I posted a mystery chart and asked you all to let me know what you would do. Buy, sell, or do nothing. Most of you said you'd be short or doing nothing until the range resolves lower, while only one or two of you said you'd be long with a tight stop or were waiting for an upside break.
Given how closely this chart resembles the S&P 500 or other major US Indexes, I wasn't surprised by those responses. It still feels like many people have a short bias, so continued churn at current levels or a slow grind higher could leave a lot of people left behind.
Anyway, here's the actual chart and why I feel it's relevant.
Tuesday was only one day but it felt like it may have offered us a clue. The major indices — S&P 500, NASDAQ, Dow, Russell 2000 — all experienced notable pullbacks. Perhaps the first notable pullbacks we’ve seen in at least two weeks.
Now does this mean we picked the top and we’re about to run back down towards the bottom? Of course not. What this likely signals is that we are about to set into a little choppy-churn range for the next month or two.
There are many ways to gauge the strength or weakness of the U.S. Stock Market. For us, there isn't a single "best way" to do it. The advantage we have is that we just analyze all of them. There are over 50 charts in my U.S. Stock Market Indexes workbook alone.
But today I want to focus on an interesting chart that I don't think gets the credit it deserves: The Dow Jones Composite Index. I really like how it represents all of the stocks in the 3 major Dow Jones Indexes: Industrials, Transportation and Utilities. If you want a broad measure of the most important stocks in America, I think this is it.
We’ve had quite a bounce in US equities since the beginning of the year. And the longer this bounce holds, the more appealing the long side gets. However, it still doesn’t alleviate the very real risk that we might be in what could best be described as a classic bear market bounce. And if that is true, the downside from here on any newly initiated long positions could be severe.
