The most important thing

February 22, 202217 Comments

With Russia moving towards a potential war, I thought I would quote Howard Marks in the title of this blog. As you know, I have been focusing your attention on two important things of late. One thing – which is the most important thing –  is to keep a disciplined strategy on how you will react if technical support of 4300 is cracked on the SPX. The other is to keep a reasonable level of commodities (energy metals etc.) and inflationary assets in your portfolio. In this way, you are prepared for what may or may not happen. I know I am.

As an aside- I’m a big fan of Howard Marks. Mr. Marks represents some of the smartest “Smart Money” out there. If you have not read his book “The most important thing“- I recommend you do so. Its also available as an audio book. If one were to encapsulate Mr. Marks’s philosophy in one phrase, it is this famous quote:

You can’t predict. You can prepare”

I have adapted this phrase as my own core philosophy in investing. Actually, I have adapted this philosophy in much of my life, as I suspect many of you reading this blog have attempted to do, even if you did it subconsciously. For example, you may have saved and invested  in preparation for your later years. You are attempting to utilize a structured investing processes towards trading. If you want help in creating such a process, visit this site to learn about my comprehensive Technical Analysis course.  In investing, just like in life, you cannot predict everything that will happen. But you can prepare for any outcome by having a plan.

One tendency for investor failure is to look towards the future with a myopic view of the current situation. We extrapolate the current news as some sort of new reality for the market. Witness the bear market pundits that come out at the very bottom of a crash – or even during the very beginning of the move up! It is this myopic view that creates the waves within an EWT (Elliott Wave Theory) cycle. Here is my recent blog outlining a potential market point within that cycle.

Below are historic examples of bear market calls and overtly ignoring overbought markets with horrible timing:

 Irving Fisher – American Economist- just before the 1929 crash:

“I do not feel there will be soon, if ever, a 50-60 point break from present levels,” he said, and in fact, he thought the market would go higher in the next few months.”

Cramer – March 2008 at the very peak before the Banking Bubble implosion:

“NO! NO! NO! Bear Sterns is fine. Don’t move your money from Bear, that’s just being silly.”

Bear market call May 2012 – The EFT Profit Strategy Newsletter:

Why The Bear Market is Back, With One Silver Lining (yahoo.com)

Harry Dent – Sept 12, 2011:

“Dow Could Crash to 3,000 in 2013″

Follow your rules

Ok, with those horribly wrong predictions in mind, we need to keep in mind that there will always be bull markets after market crashes. There will always be periods of consolidations OR market crashes after extended bull markets. It is not for us to predict the future. Instead, we follow a strategy to prepare for whatever might happen.

In the current potential Russian invasion situation,  my system forces me not to predict, but to only react upon a break of the 200 day (40 week SMA),and  a lower low (below 4300) by an absolute minimum of 3 days – up to 3 weeks. If that happens, I follow a structured plan of legging out in increments rather than all at once.  This allows me to reduce risk, yet not get too badly whipsawed if the market reverses and goes back up. Assuming the market does decline further, you can buy back in when markets form a base or reverse. This is best done with coinciding with bullish sentiment indicators (showing fear capitulation). At that point, you reverse the sell strategy of legging out, and you can begin legging in one step at a time. Again, refer to my TA Course and/or my Contrarian Investing book.

Note how my sell rules were enacted (lower low, break of the 200 day SMA) successfully in 2015 and 2018. ValueTrend executed sells and buys within our rules successfully in those years and our clients benefited from our discipline. As they did in the bigger 2008-2009 crash (not shown) – which saved our clients a lot of skin during the crash. We earned nice returns as we bought back in during the summer and fall of 2009.

Note how we are in another period of corrective volatility. Note how the 40 week SMA and 4300 was briefly cracked a few weeks ago BUT it did not remain below 4300 for the 3+ days I require before selling out. So you see – I follow my own rules.

 

 

Black Swans

Trading rules are not perfect. My rules work to save you most of the time, but not always. For example, during the COVID crash of 2020, the market meltdown & revival happened quickly enough that we at ValueTrend didn’t have time to sell efficiently (3 day + rule held us back). Violent black-swan type moves will not allow a structured approach to help you much. This is where a crystal ball comes in handy – something I have been looking for during my 30+ years in the business with no success.

The bottom line

You can’t predict. You can prepare. Structured trading  rules such as those I teach in my Technical Analysis Trading Course will benefit you most of the time, as they did ValueTrend in 2008, 2015, 2018, and this year (more on that below).  But they are not going to help you in extraordinary events.  There is no way to predict a black swan event – so why bother worrying about it? Follow your rules – like the ones presented in my course. Or, hire a firm like ValueTrend – enquire here if you wish to know more about our strategy .  Rules trump emotions every time.

Happy trading!

HOUSEKEEPING NOTES

  • For more information on the Technical Analysis Course, read this blog. On it you will find a discount coupon for blog readers. Note that the discount coupon expires on February 28th.
  • Each week I record a video presenting different topics than covered on this blog. For example, I covered international ETF’s 2 weeks ago, and I just recorded one on the recent Gold Breakout. Time to buy gold?  Subscribe to the videos here.
  • About once a month we send a newsletter called the “ValueTrend Update” to our clients. Even if you are not a client, you can receive a modified copy of the letter by clicking here. The only difference is the naming of specific stocks that we hold in our platforms. However, we do discuss the sectors and very neartermed strategies that ValueTrend is employing. This newsletter is as close as you will get to our “client-disclosure privilege” if you are not a client.
  • ValueTrend has a long history of outperforming more passive investors and managers during poor markets. Bad markets are our forte! While the month is not over yet, I can tell you that we are gapping market index performance by a significant degree (YTD positive returns in a negative market).   Here are last months numbers. The performance gap has increased even more dramatically since that date. 
  • IMPORTANT: Markets are likely entering into a more volatile year. If you feel your portfolio management strategy is not prepared, contact us. We’ll explain how we can manage your money as prudently and conservatively as we do for ValueTrend clients. Contact us here

17 Comments

  • Keith, regarding your approach to the S&P below 4300 for 3 days or more, is this the second day, if this holds?

    Reply
    • Gerald–I use the close of the day. Tuesdays close was above 4300 despite an intra day move below. Thus, this is day 1 of breaking 4300 IF and only IF it stays below 4300 by the close. Also, keep in mind that this is a round number for simplicity, so I am going to forgive the market for a few days. The rule is MINIMUM 3 days. If today stays below 4300, the earliest I will react is Monday if it remains below 4300 by then. At that point, if it is just 20 points below, I may not do anything. But if its 50 points+ below, I will pull 5% out of more vulnerable stocks- which we don’t hold many of (we are 3% cash now, and have a big, big chunk in oil and materials which are benefitting from everyone’s buddy, Vlad, in Russia). We would leg out going forward if it keeps below 4300.

      Reply
  • Keith: With the banking sector ready to announce qrtly earnings, under certain circumstances the sector may sell off after the announcements, and then in the future continue it’s upwards trajectory if interest rates rise.
    I have looked in Horizons for an inverse ETF for the banking sector and the only one I found covers the larger “financials sector”. My question is do you know of an ETF or fund that is an inverse on just the cdn banking sector?
    And do you share the same expectation that the sector could sell off a bit as a result of earnings announcements?

    Reply
    • I haven’t researched an inverse ETF for banks so I don’t know of any. I like the banks for a play on rates–despite an overbought pullback likely – I think the charts are great and the fundamentals are set up in a rising rate environment. So a pullback may not be worth trading – at least for us it isn’t.

      Reply
  • Keith – it seems we have met your criteria for legging out given SPY is below the 200DMA by more than 3 days? In fact we are near the Jan 24th lows. Thank you.

    Reply
  • Hi Keith,

    In regards to the 4300 support, once and if that is broken what is the next strong support level? And how is this support determined?

    I am thinking the next lower support is approx 3600? Am I on the right track?

    Thank you.

    Reply
  • Oil is up today. Energy initially rose then pulled back. Some of the stocks in fact are down. Is this a case of people panicking and liquidated their assets or are investors expecting oil strengths to be short lived?

    Reply
    • much of what has happened (Russia invasion) has been priced into the market in general and oil in particular. So when the event happens, people sell on the news (buy on rumor, sell on news)

      Reply
      • And who bought all the risky assets today? The smart or the dumb money?
        This rally was impressive…
        I would have expected the smart money to wait for even more panic before buying.

        Reply
        • Smart money flow takes longer to show- institutional flow and large orders get compiled by sentimentrader weekly I believe.

          Reply
  • Looks to me like the S&P has cracked the neckline with a downward target around 3800 or so. But as you say see if it stays below 4300 for a few days

    Reply

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