There are just a few days left in 2018 and it's tempting to make some last minute moves to improve your annual results in the old portfolio. But is it a good idea?
This is obviously not my first 'last few days of the year' experience as an active market participant. I know the feeling, trust me. I've made the mistakes. I've gotten cute. I've overextended myself in late December for absolutely no reason. It's those scars that I keep with me after all these years that remind me not to do it. It's like a kid with a hot stove. After he gets burned once, he won't ever make that mistake again!
The financial media loves to make you feel stupid for missing out on certain moves. Your friends and neighbors like to remind you about how well their portfolio is doing and all of their brilliant investments. It's easy to get caught up in this nonsense.
From a public markets perspective the Marijuana Industry is small, so small that it could go to zero tomorrow and nobody would notice. In late August we started covering the space after receiving a lot of reader requests, so as we close out 2018 I wanted to share one chart that perfectly summarizes the boom and bust it's witnessed over the last two quarters.
In this post I want to share two charts from the weekend update of our Market Internals workbook, both of which confirm the continued deterioration in breadth as US Stocks make new lows.
Somewhere along the way, a large majority of U.S. citizens convinced themselves that the market owes them something. They think that if they "invest" in the stock market, that they've somehow earned the right to make money over time. I'm not sure if it's the financial advisors feeding them self-serving garbage based on their tiny sample sizes. It could possibly be the financial media constantly making their viewers feel stupid for missing out on a trade or a long-term trend. These vultures use headlines like, "If you had invested $10,000 in X on this specific date you would have easily earned Y in that short period of time". They're proving to us how worthless they are. It's poison.
At what point do investors hold themselves accountable? It's never their fault for losing money. It's the Fed's fault, it's the Trump's fault, it's my neighbors fault who "made" me buy bitcoin.
It's YOUR fault if you lose money. We have no one to blame but ourselves if our "investment" account loses 10%, 20%, 50% or even much worse in the case of things like crypto currencies, precious metals or recent IPOs like Snapchat.
The market is a beautiful thing, particularly the analysis of supply and demand behavior. I'm incredibly fortunate to be a practicing Technician for almost a decade and a half and have become good friends with some of the best that ever did it. I will never take that for granted.
Bonds funds did a good job of getting everyone on the boat leaning one way, only to reverse and slam them in the other direction. The whole world seems to think interest rates have no where to go but up. However, those of us who follow the price of bonds know that reality has been sending us a different message.
The recent failed breakdown in $TLT (the 20-year bonds ETF) is a perfect example
Having Trading Psychologist Dr. Brett Steenbarger on the podcast was a huge treat for me. He works with the best traders on planet earth on a daily basis. Needless to say, when Dr. Brett is telling me something, I want to listen. In this episode, he let me ask him all the questions I was curious about and he happily answered them all with solid advice and relevant anecdotes. We make a lot of mistakes as investors because of our many flaws as humans. When our stress levels are elevated we start acting emotionally, instead of rationally. Taking losses is a difficult task for us, even though we all know that losses are part of the deal. I really enjoyed this conversation and it could have gone on forever if I didn't end it. I hope you get as much value from this chat as I did.
Bonds Funds are breaking out to new 3-month highs. This comes after consensus this September was for higher US rates, and therefore, lower prices for bonds. When the market is leaning too much in any one direction, the unwind of that extreme positioning can be intense. That's what I believe has been happening throughout the 4th quarter.
Here are two charts that show rates could continue lower for some time. The first is a long-term chart of the US 10-year Yield failing to break out above the downtrend in place since 1981:
This week I'm thrilled to have David Keller on the podcast. He is a former President of the CMT Association and spent a long time at Fidelity, and Bloomberg before that. In this episode, the current Chief Strategist at Sierra Alpha walks us through why is approaching the U.S. stock market from a more neutral perspective. We discuss US Treasury Bonds, Rates, Gold, Crude Oil and other assets that are making new highs like Palladium. I really enjoyed this conversation, especially how David compares trading to risk management as a pilot. He likes to fly planes when he's not looking at charts. This was a fun chat.
So far in the early stages of this market correction (dare I say Bear Market? Too Soon?), I've been aggressively deploying Bear Call Spreads to attack bearish trading opportunities.
Bear Call Spreads are a version of a vertical spread that consist of a short call at or slightly out-of-the-money and a long call further out-of-the-money. The profit profile of bear call spreads typically maps out like this:
There is a reason we look at the stock market from a global perspective. It's because we invest in a global market. Stocks in America weren't going up the past couple of years because of what was happening in DC or New York. Stocks in the U.S. were going up because stocks all over the world were going up.
That changed earlier this year. While U.S. stocks keep making new highs through the Summer, global markets were not participating.
The question was simple: Were we going to get rotation back into Emerging Markets, Europe and other under performing areas around the world? Or was the U.S. just the last man standing and would catch down to the rest of the world. It's clearly been the latter as stocks have come off significantly this Fall.
For clues about what we should expect in U.S. stocks, I think it's important to continue to value the data coming in from global indexes.
