Hold the line

Today, I want to add to my arguments for a slower economy in a recent blog. In the recent ValueTrend update newsletter, we discussed this topic, including details on recent trades and specific moves we’ve made within the ValueTrend Equity Platform. If you don’t already subscribe to the newsletter, I strongly recommend you do. You’ll gain insights on specific opportunities that are NOT covered in this blog.

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In order to understand the economy and investment opportunities, we need to think independently

The psychology of crowds has always fascinated me. Its amazing how people are herd followers in all aspects of life, including investing. Typically its hard to recognize this trait within ourselves. Please read my book Smart Money Dumb Money to understand WHY your brain drives you to follow the crowd. Much of my work surrounds the study of “Behavioral Finance” –  understanding how crowds behave, and how to profit when a crowd is “too complacent” or “too fearful”. Behavioral Finance is often referred to as sentiment analysis. It recognizes relatively predictable mass-crowd investor behavior. Things change, people don’t, which is why sentiment analysis can provide an edge.

In fact, if you study this subject as much as I have (I have studied tools to quantitatively identify investor behavior patterns for 20 years), you can apply this thinking to all aspects of your life. You start to become more aware of crowd behavior. Wonderful examples of crowd behavior in recent times surround COVID beliefs, tattoos, popular use of certain words, auto and fashion patters, and others. Questions, possibly influenced by social patterns, long held beliefs, or the media:

  • Are EV’s definitely “green” technology?
  • Are Artificial Intelligence systems good or bad?
  • Is Tamara Lich a criminal?
  • Is the Chinese economy doomed?
  • Will there be a soft landing?
  • Is there life after death?
  • Are analytical people left-brain dominant, while creative and artistic types right-brain dominant?

Understand that the media can, and does, influence your beliefs of economic conditions, investment themes, and social issues. I very strongly suggest you read this blog to understand the challenges surrounding this issue. I also recommend the magazine Skeptic to keep training your brain to think independently, and shy away from potentially incorrect persuasion. Thinking for yourself,  examining unpopular evidence, and then accepting it, is harder to do than you think. Again, read my book Smart/Dumb Money for the full story.

Applying this to investment research:

Trust the Buy-Side, not the Sell-side

Sell side include firms that sell, issue, or trade in securities. These traders work in advisory firms, corporates, and investment banks. These folk are involved with selling investments. Investment bank divisions sell new issue to the public and institutions. Institutional sell side divisions sell research and trading services to their clients. Retail Investment Advisors sell securities or investment services. Research coming from a Sell side firm has an objective: keep clients buying or trading securities.

On the other hand, Buy side traders purchase securities. Examples: investment portfolios, hedge funds, and pension funds. They do their own research as well as use research from the Sell side people, but with a trained eye. Their research is entirely pragmatic. Make the right decisions. Full stop.

Which side do you think has a bias? Your bank Advisor, who wants to keep clients buying investments and or dealing with them? Or a pension management firm (who’s research you many never access) who’s only job is to make the correct trade? Its for this reason that ValueTrend has its own factor-based strategy, uses independent research that has NO connection to the sell side, and more importantly, eyes current investment themes with a very, very skeptical eye. That’s why I created my Online Trading Course – to teach you guys how to independently trade with an unbiased, systematic, less influenced, view.

OK, with all of that in mind, I am sure that you are now ready to review some new independent research I’ve come across adding to the argument for a slower economy. This, in an environment of persistent inflation as noted in my Stagflation blog. BTW–you needn’t take my views at face value. Think for yourself by tossing my thoughts, and others, around before believing anything. Be willing, as I am, to change your mind. And your trades.

The future ain’t what it used to be

Larry McDonald – BearTraps: 

The middle class wont be buying many new cars with rates at today’s level – a key economic driver:

“In autos, by some accounts, 50% of Americans are now priced out of the market (Fico scores less than 660 are paying 8% to 24% annually to finance a purchase, per Experian data). Over the last 20 years, buying a car has become ALL about financing”

David Chapman – Enriched Investing:

If you don’t know who David is, you can watch my video interview with him about a year ago. David is a bit of a market historian, and he’s always got something interesting to say. This quote from a research report he put out adds fuel to my recent observations of the middle-class discretionary market being pressured. This can lead into a soft economy. Keep in mind that David is pretty pessimistic. I am not so much, although I share some of his concerns regarding the changing landscape. My view is one of opportunities coming from these changes = per my Stagflation blog amongst others.

“The days of easy credit are over as central banks raise interest rates, money supply falls, delinquencies and bankruptcies rise, and banks tighten credit. What we just witnessed was a 5,000-year low in interest rates. The odds of seeing that again are probably nil. Central banks and governments are running out of bullets if another financial collapse occurs. Remember bail-ins, not bailouts. Add in an ongoing war between Russia/Ukraine that could expand, tension between the U.S. and China, polarizing tension, particularly in the U.S. with a potentially volatile election in 2024, rising oil prices, and COVID once again rising, along with extreme weather events and we have a witches’ brew that could boil over, deluging the global economy.
We’re tempted to say fasten your seatbelts; it’s going to be a bumpy night”

Technicals

The SPX is consolidating in a triangle. Its hitting the 50 day right now, trying to break through 4480. Note my arrows indicating how the 50 day SMA can often be temporarily points of resistance or support. A failure will indicate a potential lead to break the lower trendline (4400) and reach bigger technical support near 4200. I’m not buying until this plays to one side or the other (aka a break of the upper down-sloping line, or a retracement to around 4200-4300 zone). The economic picture discussed in my stagflation blog noted above suggests a benign environment, not suggesting any exciting reasons to make prejudgments with our cash at this time.

I’m holding the line. Until a line breaks.

One Comment

  • There’s a huge inverse H&S in the DJIA but also a large bearish H&S in the Russell 2000.

    Reply

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