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.
A conversation with Arun Chopra is one that makes you smarter. That's how I see it. Arun has formal training as both a CFA Charterholder and a CMT. He has helped produce award winning films at the Sundance Film Festival and he's on the same journey as us: to make money in the market. He uses a combination of global macro, technical and sentiment indicators that he is working on putting into a more quantitative model. Picking his brain about the process and his experiences in this endeavor was really enlightening. In this episode we discuss current markets, sector rotation, credit spreads widening and the possibilities for the US Stock Market Indexes to break to new lows. I really enjoyed this discussion with Arun. I always do.
Whenever in doubt, zoom out. Monthly charts are a great way to do that. On November 30th we got new daily, weekly and monthly candles. This is a lot of new data that we have to work with.
When we want to see what the market is doing on a given day, we all have our list of the ticker symbols we punch in: $DJIA or $SPY or $QQQ. Some people are more global and look at things like Gold, Crude Oil or Interest Rates and countries like Japanese or German Indexes. I talk to guys and gals who tell me the Russell2000 is the market for them. We're all different. The point is to be true to who you are and act accordingly.
I get asked a lot what that list is for me. The way I interpret this question is, “What are the 15 ticker symbols I punch into my charting software to see what the market did or is doing at any point during the day or night?”.
Small-caps have been lagging for most of the year with that trend really accelerating in May, posing a major headwind for the broader market. One thing we were looking for before putting cash to work on the long side was a sign(s) of risk appetite for stocks, which we're seeing for the first time in a while. The question now is will it last and how does it affect our portfolios?
As you guys know, we've been rooting for a stock market crash for most of October. When we're shorting stocks, we want the market to drop as fast as possible so we can make a profit. You may not like the repercussions of a severe market correction, but since there is nothing we can do to prevent it, all we can do is try and profit from it. Innocent people's portfolios will get slashed under those circumstances, companies will shut down and people will likely lose their jobs. An economic recession may even follow. We have no idea and no say in the matter anyway. So we've had two options in October: Close our eyes and ignore it? Or prepare and profit? We've chosen the latter.
In case you're wondering, we're still rooting for a complete collapse in U.S. Stocks. The only thing that would make us more neutral is the Russell2000 Index Fund $IWM holding above 151. Under those circumstances and more neutral approach towards equities is best. In the meantime, we'll keep pressing shorts and hoping for the worst.
The thing about the market is that there is no holy grail. No matter how hard you try, you're not going to find it. The holy grail does not exist. We have to weigh the evidence knowing full well that we're working with incomplete information. The idea is to accumulate all of the data and make a conclusion based on all of it, not just some of it.
Today, I want to go over a few of the divergences that have put the bulls in a precarious situation. There is a large crowd of permabull "passive" investors that are taught just to buy stocks and hope for the best. They are shown all of these sexy equity curves and told again and again how much they would have made had they invested in the S&P500 in 1950 or 1982 or whatever cherry-picked date is forced upon them.
Is this 2008 all over again? 1987? 1929? I doubt it.
We're not seeing any stress in credit, which is where the real problems start. In fact, some stocks and sectors are going up while others are going down. We've seen relative strength in Energy, Utilities and Consumer Staples. Remember, the Dow Jones Industrial Average closed at a new all-time high just last week. It's easy to forget right?
So what's the problem? The problem is that we have failed breakouts in all of the major U.S. Indexes, and at the very least, it is going to take some time to resolve. The questions are: How long? and How low could we go?
There are a lot of interesting developments working through the markets these days. Whether it's the relentless sector rotation underneath the surface or the divergences between small and large-cap stocks, there is no shortage of topics to discuss about the current environment. I have been in the camp that a breakdown in Bonds to new multi-year lows would likely be accompanied by a lower yen and higher stock and commodities prices. Through last week that strategy has worked really well.
Moving forward, however, how does this face-ripper in rates impact U.S. stocks? Is the relative strength in financials this week a positive sign for equities? Or are they just getting a sympathy bid because of rates? Are Semiconductors finally going to break out above their epic 2000 highs, which they've been flirting with all year? What about Gold and Crude Oil? How do they fit in?
This morning I was on the Benzinga Premarket Prep Show discussing what I felt are the most important topics in the markets right now. Here is the interview in full:
