I'm glad that you guys are enjoying the weekly letters that I've been putting out since last month. Thanks again for all the great feedback you've been giving me via email or twitter and stocktwits.
This week I wanted to take this to another level and have us all jump on a free conference call to go over what I think are the 10 most important charts in the world. This includes US Stocks, International Markets, Commodities including Metals and Energy, Currencies and US Interest Rates. We will also leave plenty of time for specific questions and chart requests from attendees.
We have to trade and invest in the market that we have in front of us, not the one that we want. Therefore we have to be able to approach the market from a completely unbiased perspective. We don’t care if the market doubles in price or if it gets cut in half. We want to try to take advantage of moves in both directions. This is America after all.
I know it’s not sexy, but since October 23rd, we have wanted to approach the major U.S. stock market averages from a more neutral perspective. This is the day that both the S&P500 and the Dow Jones Industrial Average first got above what was then, and still is, a flat 200 day simple moving average. Securities in that sort of environment create headaches, for both the bulls and the bears. The reason is because
there is no trend. Sure enough, prices this week are exactly where they were on October 23rd. This should not be a surprise and in fact, should be expected. But what does stand out is the dramatic underperformance in
If you know anything about me you know that I can't stand when prices are near a flat 200 day simple moving average. It's not that I want to short stocks in those situations. I don't want anything to do with them at all. You're signing up for a headache, I'm telling you. Breakouts tend not to hold and breakdowns usually don't hold either. The reason is that there is no trend when prices are near a flat 200 day moving average. Markets trend by nature, but when they're in this particular situation, they don't. Why would you bother with the one scenario where you know markets are not trending?
I think the S&P500 is a great example of why we want to stay away when price is near a flat 200 day. Headline writers like to make a big deal when price breaks above or below this particular smoothing mechanism, but 99% of the time they fail to mention the direction in which that moving average is heading. Is it upward sloping, downward sloping or flat? This is the more important question to ask. Not that price got above an invisible line today.
For the past few weeks I’ve been writing a weekly open letter to readers about what I’m seeing across the stock market, bond market, commodities and currencies. The feedback I’ve received has been unlike any other time in the 5 year history of All Star Charts. I want to thank all of you for that. I think this is something that I will have to continue to do and make it a regular part of my routine. I’ve done this sort of thing in the past while managing money in order to keep our investors up to date on how we want to approach the marketplace. The format you’re seeing here is no different. Please feel free to keep emailing me and contacting me via Stocktwits or Twitter on how it can improve and what sort of things you guys want me to talk about.
Starting with the U.S. Stock Market, this as a group continues to be in no-man’s land. When price is near a flat 200 day simple moving average, the market is suggesting that there is
When you talk about some of the most valuable tools for market participants, there are very few out there better than the community that is Stocktwits. One of the most difficult things to do is consistently avoid the noise that surrounds the market and changes in the prices of stocks, commodities and currencies. There are too many commentators and headline writers that get paid to make noise and not to try to make money in the market. This increases noise levels and makes it difficult for the average investor to differentiate between what is real and what are click-bait, air-time filling exaggerations. What I love about the Stocktwits platform is that you can curate your own stream. You follow who want to follow and ignore who you need to avoid. If there are users just creating noise and not adding any real value, you don't have to worry. We have the advantage of only seeing information from the users we want to hear from. The noisemakers eventually get booted out anyway. It's a great community and today I wanted to share with you guys who some of my favorite follows are on the platform.
This has to be one of the more hilarious things that smart people say all the time: "The problem with technical analysis is that it only looks at information from the past". This, to me, is a classic case of nonconcious human mimicry. Some of that research in this area of psychology is fascinating to me as humans tend to mirror the behavior patterns of others. In this example, it's clearly just people repeating something that they once heard, and not something they've actually thought through. I mean, come on. The problem with technical analysis is that it only looks at information from the past? As opposed to what? Information from the future?
Last week I published an open letter about the current market environment and went over a lot of the things that I’m seeing out there in stocks, commodities, currencies and interest rate sensitive markets. I have to tell you that I’ve never received so much positive feedback from anything I’ve ever written. All Star Charts first launched 5 years ago and I’ve been writing and sharing ideas on the platform pretty much every single day since. I’ve written thousands of posts and shared 10’s of thousands of charts, but you guys came back to me last week more than you ever have in the past. I want to thank you for that.
It seems more appropriate now than ever to follow up with some of the things that I’m seeing today.
I look at stock markets and asset classes all over the world to approach the marketplace from more of a weight-of-the-evidence, top/down perspective. This way I can formulate a thesis, confirm that by what I’m seeing elsewhere, and then put together a plan that presents the best risk vs reward scenario in order to best execute going forward.
We talk a lot about the S&P500 and Dow Jones Industrial Average. Lately it's been the Nasdaq100 leading the charge and actually the only index that hit new highs this month. Each of these are popular due to their large-cap components. In other words, these indexes consist of some of the biggest companies in America and most are household names like Apple or Microsoft, Exxon Mobil and McDonalds. These indexes are either cap-weighted, where the largest companies represent the largest percentage of the index or price-weighted, as in the Dow Industrials, where the highest priced stocks represent the largest holdings in the index. Today I want to focus on a broader equally-weighted index to get a better idea of what the market as a whole looks like.
Guys, let's just get something straight: we do not live in an average world. We never have lived in an average world. We most likely will never live in an average world. That's just math, or science, or both I don't know. But it is a fact. Think about how funny it is to hear someone say, "Well, on average XYZ goes up 2% after earnings". Really? What the hell does that have to do with anything? So you mean a few times it lost over 10% overnight, a few times it rallied over 10% overnight, sometimes it fell somewhere in between.....so "on average" it goes up 2%? Are you kidding me? Are we trying to make money and manage risk or fill airtime with irrelevant facts so we can sell more ads?
Today I want to bring up something that I discuss often, but I'm not sure that I ever explained clearly in a blog post. Long-time readers know that I only use a handful of tools as a supplement to price action. I want to reiterate "supplement", because price is the most important indicator we have, it's the only one that we can actually trust, and the rest are there simply to add confirmation or help dissuade us away from our thesis.
The 200 day moving average is one that is mentioned a ton throughout the financial media and twitterspheres of the world, but is often misinterpreted for whatever the reason. Usually the 200 day is referring to
