Risk management has to be our number one focus right now. This is no time to be lazy, hoping, or praying.
Yes, if you're willing to wade in carefully, there can be some great opportunities for premium selling. But even then, we still have to be extra vigilant in protecting our capital.
I bring this up because I received an email from someone recently who didn't follow his rules, and now finds himself severely underwater and wondering what to do next. We've all been there. Something unexpected happens, and now we're like a deer in the headlights too frozen with indecision and unwilling to make any move whatsoever because we're afraid we are going to compound the situation for the worse. It sucks.
Here's the situation my friend finds himself in. Let's learn from this.
We got a lower low in equities, followed by continued weakness rather than stabilization. Heavy cash positions and a defensive posture remains best in this historically volatile environment.
Given how quickly things are moving, there are three charts on our screen that will help identify when a shift in the market is occuring.
Mike Hurley has been an inspiration to me for many years. When it comes to market breadth, this is the guy. He'll tell you he learned it from his predecessors and how he's standing on the shoulders of giants and all those things he discusses in this episode, but for me personally, he's been a great influence for sure. Many of you know how seriously I take my breadth work and how valuable it has been to so many of us for many years. It's people like Mike and others who have helped my process evolve to where it is today.
We had a few buyers but most of you were selling at this logical level of interest or exercising patience to see how prices react here. A few responses also pointed out that this likely isn't the best time to enter on the long side but are anticipating an eventual breakout and would be buyers if and when we get it.
This is the same camp we'd fall into and we provide details why in the original Mystery Chart post. With that as our backdrop, let's look at the chart.
The market goes through periods of volatility. We've seen it before and we'll see it again. For me, it's all about learning from this experience and coming out of it a better and wiser investor. Notice how you're behaving and acting during this period.
I know the way I'm feeling during this volatility is much different than my emotions and behavior in 2008 and 2011 and 2015 and 2018. I learned. And I will learn from this one as well to prepare me better for the next go around. I encourage you to do the same.
Today I want to talk about how, "Bottom fishing can be hazardous to your wealth". The goal is not to try and catch a falling knife (see here why), but to buy on the way back up.
We look at a variety of intermarket ratios that span just about every asset class in order to get a read on interest rates. Here is one that we don't discuss too often, but its relationship with the 10-Year Yield is obvious from looking at the chart below.
The S&P High Beta/S&P Low Volatility (SPHB/SPLV) ratio made significant lows around the same time and place as the 10-Year has several times over the past decade.
After another sharp move lower with dramatic blowups in Yes Bank and Crude Oil, let's revisit that thesis and discuss why patience remains the best course of action given current conditions.
For those new to the exercise, we take a chart of interest and remove the x/y-axes and any other labels that would help identify it. The chart can be any security in any asset class on any timeframe on an absolute or relative basis. Maybe it’s a custom index or inverted, who knows!
We do all this to put aside the biases we have associated with this specific security/the market and come to a conclusion based solely on price.
You can guess what it is if you must, but the real value comes from sharing what you would do right now. Buy, Sell, or Do Nothing?
Yesterday, $VIX printed the highest level we've seen since the financial crisis in 2008. That's a twelve year high.
It exceeded the "government shutdown" spike of 2011, the Chinese stock market scare of 2015, the 2016 election fear mongering, and the Brexit noise.
Editors note: The chart police (aka, JC) would like me to point out that this is a weekly chart and the last bar on this graph is not complete. The horror!
We can point to a couple big reasons why volatility is spiking (Coronavirus, oil crashing) and a few smaller ones (we're overdue, debt, whatever....). But none of that really matters. Only price pays, right @Alphatrends?
In this report, we cover our Coronavirus Custom Index which is comprised of stocks we believe benefit from the coronavirus as well as a playbook to profit from these strong performers.
To be clear, we didn’t find these stocks looking for coronavirus plays, we found these through our ordinary process of scanning for relative strength. We were simply looking for stocks that have been bucking the trend during the recent selloff. With that said, it was hard to ignore the results when we thought about what these companies do.
Here is our All Star Charts Coronavirus Custom Index making higher highs and higher lows recently while the broader market squanders near bear market territory.
There's been an ag-gravating pattern of behavior torturing bulls in the Agricultural Commodity space, so this educational piece will highlight the conditions that got us here and also outline a new trade idea.
