I got to thinking the other day about the parallels of cycling (my beloved sport) and investing. Both of these ventures involve a degree of risk. The risk of investing is loss of capital. The risk of cycling is injury or even loss of life.
In both cases, we can take precautions to make sure we reduce the risk. These precautions start from the small things we can do, right up to the big decisions.
As a cyclist, some of the small safety decisions are to:
- Carry a saddlebag filled with an inner tube, a C02 cartridge (or pump), and a multi-tool. Any cyclist who doesn’t carry this basic kit foolishly assumes they will never get a flat or have any mechanical problems. Not a smart move given that we can ride 30 km in each hour of riding. That’s a long walk if you flat after an hour!
- Wear or carry some ID. If you do crash, and are alone—you are just a body with no identity. I wear something called “Road ID” that paramedics are trained to look for on fallen cyclists.
- Stay “tight and to the right”, obey traffic laws (right of way, stop signs, etc). Not doing so can get you killed, or start a fight if a driver gets annoyed.
- If possible, wear bright colors (below is a photo after my Florida race this year- note the bright colors!) and/or ride with a friend. I use a flashing rear radar unit on my bike that warns me of approaching cars, and alerts them to me.
- Avoid high traffic areas.
- Ride a mechanically safe bike. Wear a helmet.
With investing, you can:
- Use a decision making tool as simple as moving average trading, or as complex as my Bear-o-meter, to determine the market risk characteristics
- Assess company fundamentals to help assure that you are not buying into overblown hype
- Have an exit plan based on technical support resistance levels, trendline, or fundamental valuation metrics
- Avoid high risk stocks or sectors for anything other than very short termed trading. Avoid overbought stocks and sectors (pay attention to weekly chart momentum readings)
- Utilize a set of structural rules such as size positioning for individual stocks or sectors, and rules surrounding cash allocation decisions, etc.
- Avoid crowd driven hype (Bitcoin, anyone?) – akin to avoiding high traffic areas for cyclists.
All of the above factors, and more, are discussed in my book Sideways (if I may humbly suggest to read it).
Taking the above into consideration, lets apply some common sense safety rules to the FANG’s. Like the cycling comparative, you don’t want to be ill prepared for a flat – or worse – should these high flyers decide to send you over the handlebars. I’d like to post charts of the FAANG’s (FB, AMZN, APPL, NFLX, GOOGL) and check to see that the tires aren’t worn, etc.
What a difference a month makes. From market love-on to market hate-on. Broken trend, broken 200 day SMA. Avoid this stock right now. Like a broken bike, there is some repair work to do before getting back onboard.
Remember my rule of thumb that states a stock is overbought and probably parabolic when it is more than 10% over its 200 day SMA? The most extreme example of this indicator was Bitcoin at its peak, which I correctly called a top on here.
Amazon recently reached 38%+ over its 200 day SMA. Again, this is a very high reading, indicating a parabolic move on the stock. You can see the “hockey stick” shape on the chart – it arched off of its trendline and 200 day SMA in parabolic shape from last October to January. The long termed trend is fine for AMZN, as are the fundamentals. But it’s likely going to retrace somewhere in the neighborhood of the 200 day SMA, which might suggest an $1100-$1200 neartermed target. After that, I’d think the stock would be a strong buy.
This chart looks fine. Apple never got to the overbought state that the other “A” in FAANG’s (Amazon) reached. Its back to a long held trendline and toying with its 200 day SMA. I’m willing to bet that any breach of the 200 day SMA will be short lived. But, we shall see. More than a few days below that average would change my stance on the stock.
Like Amazon, NFLX went way above its 200 day SMA. 37% over that indicator, in fact. Like Amazon, it moved parabolic – although its hockey stick formation began in December. I’d suggest a price target of the low $200’s to bring this stock back in line with its longer termed trendline and 200 day SMA.
Oh-oh!! Google has all of the signs of a double-top. Two peaks, with the second peak being slightly lower. A broken neckline. A parabolic move to the first peak of 15% over its 200 day SMA. This ride was fun, but investors just crashed. Time to get off the bike, wash off the wounds, and look for a new ride until this vehicle proves the damage is complete. The break of the neckline is a sell signal.
Keith on BNN
I’m on the afternoon (1:00pm) MarketCall show next Monday April 2nd. If you have questions you would like addressed on the show regarding specific stocks, email them in NOW to [email protected]. Or you can phone in with your questions during the show.
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Thank you so much Keith. I appreciate that you are pumping out guidance during this rocky time.
I have two questions.
1. This seems like a dumb question but should we apply this FANG research to the whole sector until the FANGS heal?
2. For those of us who are new and want to start with a real simple decision making tool, is the 50 day moving average adequate or do you prefer another number?
Vallie–not sure what you mean by apply FANG research to the whole sector..do you mean should we judge the stock market by how the FANG’s are doing? I do look at a rotation in leadership (ie the demise of the FANGs) as a sign of a bear to come…
As far as moving averages–for a long termed investor, your go-to is the 200 day SMA
At the risk of sounding promotional, I strongly, strongly suggest you read my book Sideways–this book was written for retail investors – it will give you some guidelines on how to set up a logical system for setting up your investment process.
Are the US financials looking like they are broken?
Dave – we own ZUB (BMO currency hedged US banks large cap index) – it is right back to the breakout point where we bought it near $29.50. So long as that level holds I consider the sector and that ETF to be bullish. KRE is holding out as well (we don’t own it) –I am not adding to that sector play because the seasonal period of strength tends to end in a month or two. But we are holding what we have in ZUB in anticipation of a broad market rally into May –thereafter we expect to sell higher beta more market sensitive sectors like the US banks.
Nice biking outfit, Keith!
Easily be seen! Good protection measure!
Thanks–its actually my kit I got for winning last years Florida Gran Fondo National Championships –a win that I was particularly proud of.
What is free cash flow or the definition of it? Thanks.
John–that is a fundamental question, but in the quick and easy form, its more or less what a compnay has after paying operating expenses. A much more thorough and better explanation than that is:
INVESTING WITH A $VIX AT 10 (LIKE IN 2017) IS ONE THING, BUT NOW IT IS MORE LIKE 20+ RANGE. VOLATILITY IS THE NAME OF THE GAME… IF TECH STOCKS REPRESENTS 27% OF $SPX, WHAT WILL HAPPEN TO THIS BELLWETHER IF TECH BEST DAYS ARE GONE?
eventually a new sector takes leadership (energy, materials, etc) so the VIX numbers over time normalize to their mean range
I didn’t realize Amzn and Netflix were still both so overvalued. I am tempted to buy some long dated put options on both those though I don’t normally buy too many options. But in this case seems like a decent play
Sometimes people get confused as to how a “good, profitable, growing company” like AMZN, NFLX, GOOGL etc can be a sell candidate despite their winning business model. Overbought conditions do NOT result in crashes (like Valeant or GE)-instead, with a good business that has become overdone price wise you get more of a return to reality. This usually just means a return to the longer termed trend (regression to the mean). And that usually means either a decline to the trendline (or 200 day SMA) or just a period of consolidation. So yes, a put might not be a bad idea on these stocks. Or sell calls if you own the stock.
Question about your SMA on AMAZON. I use Yahoo Finance and for 200 SMA and I get the value of ~ 701 on March 29, 2018.
Now the value you have in the chart is 1167, you say it is 200 SMA but the legend on your chart says (MA 40) and when I compare to Yahoo Finance’s 40 SMA it matches that…am I missing something? Do you use 40 day SMA or 200 day one?
40 week SMA = roughly 200 day SMA
great thanks, for the 200 day SMA indicator..do you prefer looking at the 5 year time period or 1 year typically?
Adam–you NEED to read my book Sideways-based on your questions I think you would benefit from the structure the book provides-start with the big picture (5-10 years, weekly or even monthly chart) and work down to the daily 1 yr.
Your safety instructions are very timely with cycling season getting underway (our season never ends out here on the Wet Coast. We’ve lost a few days to rain and snow but have been cycling all year).
In addition to your suggestion for fixing a flat, I carry a $5 bill. Should a tire be cut, the plasticized bill, folded in three, will cover the cut. It’s a short term solution but should at least get you home (then you get your $5 back).
I carry my cell phone. If I press the on\off button on my Samsung/Android phone, it sends an emergency signal with my lat/lon location to my son (also a cyclist).
Plus the $5 bill can buy butter tarts at the coffee stop (a must-do!)
Just finished your book, Sideways, and found it extremely instructive at giving me an understandable and actionable approach to investing based on technical analysis. I noticed in the above blog, you used 5-year charts to do your analyses. Do you prefer 5 -year charts when analyzing individual stocks? Do you rely on shorter charts? Are momentum indicators like RSI and MACD best looked at on a 5-year or a 1-year chart, or less?
Thanks Andrew–funny–I just suggested another blog reader read Sideways based on his questions. When I look at a stock I often start with a monthly chart then work down–but it depends on how long I anticipate the trade. Eg–seasonal trades are strictly medium termed so I use weekly charts then drill to daily. 5 years is fine for the weekly. Only if the general trend on the weekly peaks my interest do I bother with momentum and moneyflow etc. Per the structure outlined in sideways…the most important thing is the trend–which means identify the phase, then the formation (trending or consolidating) and if you might have a potential for a trade. then look at the fundamentals, and the last step is fine tune the trade via momentum indicators.
Good Morning Keith,
When you are on BNN I always watch it. Normally by this time, in the past years, you always recommend to start accumulating cash in your top picks because mid-spring and summer months are not you favorite months to be all-in. This year you have not made this a top pick. WHY?
I will be moving out of the market as this month closes. I typically like to start accumulating cash any time between march and late april–the market volatility has not provided much opportunity to sell into strength and raise cash, so I am patiently waiting . Seasonal experts like Brooke Thackray and Don/Jon Vialoux will point out that the “official” spring sell point is the first week of May so I tend to look for opportunity to sell any time as we approach that date.
Given that we are entering earnings period in a choppy phase 3 topping market, and if earnings are strong, it seems that if other fund managers do the same as you (increasing cash by selling into strength) the result could be a net S&P loss rather than gain. Is this possible?
Thanks for this Sally–my thoughts are that the markets are made up of many different managers and retail investors and institutions–all have their own agenda (institutions like pensions differ vastly from a trader like me for example). Also, amongst each group are very differing approaches (technical, fundamental, value, growth, small cap , large cap, momentum, trend…..the list goes on!). And on that note, there are huge discrepancies of opinions (bullish, bearish, neutral) or philosophy (buy n’ hold, trade, only do index trades, only do individual stocks…etc, etc).
So despite that you might read a few people with my views, there are equal numbers of “don’t time the market” types who discount the potential of a correction – or that you can do anything about it, and then there are some who feel differently even within the more active traders (ie the timing of the correction, etc). So many variables of approach and opinion!
So, yes there can be some self-fulfilling prophesy if too many are on board the same train – but thats where sentiment indicators can help–being the contrarian indicators they are.And yes, I do wath those- and use them in my model.
Hope that helps.
Thank you. I guess it’s the holding at/above 60ish for the S&P (SPY) remains the main thing.