Some of you know that I am an amateur competitive masters-class (old guy) cyclist. My coach, Ed Veal asked me on the first day I started dealing with him a couple of questions.
Question One—Was I willing to stick with a tough, disciplined program?
Question Two—Do I consider myself a patient person?
The answer I gave to him was YES to both questions. You see, I often have to stand against the crowd and stick to my investment program – even when it feels tough. The patience and discipline learned from a a long history of technically trading the markets was ideally suited to following a physical discipline.
Let’s talk about disciplined trading (not unlike disciplined training!) for a moment. It’s always tough to watch your neighbour make money during frothy silly market melt-ups while you stay the course and hold cash. It’s been tough to hold cash and hedge during the past couple of months as the market moved up to its former highs. But my disciplined approach showed me that the probability was greater for a selloff. Markets just needed a reason.
I liken the market to that of a balloon. The Brexit vote is being blamed for the current market selloff. Nope—the balloon was already too stretched. Quantitative factors told me this 4 months ago. I hedged our stock portfolio and held cash – here’s the blog noting this bearish stance from April 7th
The market – to carry on the balloon analogy- needed a sharp object to pop the balloon. The media and investors always blame the sharp object—in this case, Brexit. But the market was stretched—and I knew it was according to proven indicators (read the blog noted above). The sharp object may not be sharp enough to pop the balloon, unless the balloon is stretched enough. If the market is stretched enough, you get a strong selloff. Don’t blame the sharp object—it was just an event that tipped the scales to what was an inevitable outcome. Brexit, Greece, an earthquake, terrorism, Trump. Something would have caused this selloff. Technical macro indicators (and fundamental ratios) told us this months ago.
Where to from here?
Below is a chart suggesting potential support levels for the S&P500. I’ve noted these on the chart as possible buy points. Note the divergence of momentum indicators leading into the selloff. This was one of MANY things that had me holding cash and hedging.
Here is a table of various one-day crises points on the market (S&P IQ) and the number of days for the washout to complete itself. I would remove Lehman’s collapse from this list, which skews the data. Further, Lehman was part of a bigger picture problem during the sub-prime crises in 2008/9. It was not a one-off event like a Tsunami or the Nixon impeachment. Removing Lehman from the table brings into low-single digit bottoms – on average. Brooke Thackray and Cramer (I don’t usually like to quote that guy, but in this case I will) both note its usually 2-3 days for the bottom to appear after a market shock.
The takeaway—review my chart above for potential support points. Watch for a buying point at or near a support level really, really soon.
Carry on, my fellow trading athletes. You have exercised discipline patience. You held your cash and hedges alongside me. Now–You have your new mission. Seek, and deploy at least some of that cash. Your coach is proud.
Keith’s new video—spotting fallen angel candidates: Courtesy MoneySaver Magazine
Click here to watch the video.
I must admit I was starting to doubt you. When the SP500 went above 2100 and the 50 & 200 dma where looking good, I thought you missed the boat. You might have, but it made sense to wait for a close above 2130, which never happened.
A lesson in patience.
Thankfully I held 8% cash, 5% in REITs, 2.5% in royalties, and positions in US dollars.
I feel we could easily touch 1850, considering there is still 3 days on average to see the bottom. What do you think Keith?
We are using the support zones noted on the S&P chart on this blog as entry points–we did one leg today as it successfully tested 2000 (briefly hit 1990 then bounced) –we also removed our hedges (inverse, short ETFs). We still hold almost 25% cash.
Could you advise us on getting your video? I cannot open the link. Thanks.
Let me look into it
Fixed the video~!
You are right, it was hard to sit tight and wait patiently in the past two months.
Questions (kind of related)
I did hang in there and held onto HUV.TO.
In light of the past two days, it seems it was a good decision. How far up you think it may go?
And the other side of the story, how far the markets will go down? Based on what I’m reading, my impression was that we may have a major correction, potentially going below the recent (Jan-Feb) lows. Am I too bearish? Thanks.
We removed our hedges–sold HIU and HDGE yesterday. We sold HUV a couple of weeks ago. We actually stepped in and bought about 10% new exposure to stocks yesterday. We are still 25% cash.
Typically, there can be a near termed (and short) rally at the end of June – especially given the sharp selloff and end of day strengthening yesterday, I look for a near termed upside move that I’d like to try to profit on.
BREXIT: HEDGERS WERE CAUTIOUSLY POSITIONED TO AVOID PANIC SELLING ON WORLD MARKET
DEFENSIVE SECTORS: GETTING CROWDED, RISK OF SHARP REVERSE, IT SEEMS.
MARKET AWAITING INTERVENTION OF CENTRAL BANKERS (WHICH ONE?) FOR A SHORT TERM POP.
WILL 1975 HOLD ON $SPX
Excuse me for being forward. What sectors are you are buying with the new 10 %?
We bought some new stocks–we don’t tend to disclose our exact trades (lest I be giving my business away for free–we are fee-based PM’s)–but suffice to say they are technically attractive with good valuations.
I’ll probably put 1-2 of them on BNN for my top picks in July
I hope you don’t fall out of you chair reading what I write but could we see SPX 2190? There are January gaps on the Nasdaq that need to be filled. That would imply about a 6% upside. The catalyst would be a decline in the yen providing liquidity and short covering.
Actually Bert–i was just speaking with a client who I told we are looking to trade the S&P back up to high 2000’s to a max of 2130 before pulling out again
Not sure where you see 2190–that level has not been reached yet, and I doubt there are fundamental factors to drive the markets to new highs. Did you mean 2090?
But yes–we are expecting – and in fact playing – a rally. We sold our hedges intra-day at market lows Monday (I get to brag here–not often, but sometimes ya just NAIL it!!) and bought 3 stocks.
I May hedge again as 2100-ish is reached, but that is to be seen. I do not have confidence in the rally – beyond a week or two which I am playing for fun and profit!
The markets reaction late last week were inversely correlated to what the yen was doing. The carry trade is one of the most leveraged. The market fundamentals would be liquidity not valuation.
Yes–that was certainly what drove things up prior to Brexit (the “meltup”).
Now that we have had the highest weekly close on the SPX, and a large proportion of stocks are aboe the 200 dma, it seems we could finally break-out. However, the price is at 2129, not above the highest daily close. If I have learned your teachings correclty, from here, you will not put your ~25% cash back to work until we have 2 closes above 2135?
Thanks and have a good week!
Actually–I want 3 closes above that level, but yes Matt, you get the idea.
Part of my discipline, though, is to keep a certain level of cash handy through the entire “worst six months” period (May-October). As such, I have created a rule–you can adjust this to your own needs as you wish–but that rule forces me to hold a minimum of 15% cash until October.
So I can buy 10% more equity upon a break of the highs that lasts at least 3 days-I can wait if i feel its gone too far too fast–and I would only do so in legs (3-5% at a time).