Bull, Bear, Bottom and Bounce: How to profit in volatile markets

October 22, 2021No Comments


Well, hello there and welcome to a special edition of the Smart money – Dumb money video series. Today is going to be a little bit longer than my normal videos that I put out every week that are maybe 10 minutes long. This video is a presentation that I recently did for the individual investor division of the Canadian Society of Technical Analysts CSTA. And I’ve actually added one slide that I didn’t show to them. I probably should have built that into the presentation when I did it for them, but it just occurred to me today. So, I’m building it in. The presentation was originally created in the year 2010. And the reason I created that presentation was because in 2010 we had just for those of you who are invested in the market in the late to 2007, eight, nine period we’ll remember, we had just finished going through a pretty significant bear market, and I’ve written a few books.

Some of you may have read my books, the original one was Smart Bounce. And I wrote a book called Sideways. And recently I book wrote a book called Smart money, Dumb money. And in those books, I talk about how the technology bubble of 2001 and two taught me some valuable lessons because in 2001 and 2002, I was a no, I’m not going to say a new investment advisor at the time. I was a retail investment advisor because I started in the industry in 1990, but of course the 1990’s were nothing but up markets except for the odd correction. So along came the bear market in 2001, and there was the terrorist act you know, the twin towers and all that combined with a technology bubble that absolutely shocked me and I really wasn’t prepared for a bear market. I had just begun studying technical analysis.

I had been studying it for a few years prior, but I really was, I must admit very shell shocked at what had happened. And some of it was fairly untradeable when the twin towers were hit by the terrorists. The markets reacted instantly. There was no way you could have possibly prepared for that kind of a washout, but nevertheless, I didn’t really have a proper plan in place to deal with what was happening at that time. So, I vowed to never allow that happen again. And I created a program if you will, to get me out. Now, you know, another eight years or so went by. And I was very much involved in the art of technical analysis. I got my CMT designation and became more and more adept at those skills. And that certainly helped me prepare for what became the 2008, 2009 crash.

I had developed some rules and I had also developed an understanding of things like sentiment trading. And I understood certain things such as how to read candlesticks, that kind of thing. So, I put together a strategy and then when it actually happened, because, you don’t know when a bear market is going to hit, but along came 2008. And I was actually prepared as prepared as someone who is really facing at any given time during a bear market and an unknowable situation. So that’s always going to be the case. You just don’t know, but you have some tools. And I followed a strategy in 2008, 2009 and it actually allowed Valuetrend to come out looking pretty good. During the drawdown, which the market drew down, both on the S&P and the TSX and other world markets, the S&P and TSX both drew down over 50%.

They literally had peak to trough draw downs. They were cut in half. Pretty scary. We at ValueTrend in our equity platforms, saw just a little over half of that. So, we definitely drew down, but instead of 50% we had, I think it was around high twenties, call it 30% at the most, but it was something like 27%. I don’t have the figure in front of me. Whatever the case we drew down quite a bit less than the stock market during those years. And the way we did it, I’m going to explain in this presentation, because this presentation was put together in 2010, after we had realized that success. And in fact, we invested as the market began to form a bottom and come out, and we actually ended up kind of achieving a little bit of hero status at that period because most other portfolio managers were caught in that.

And we were well, definitely affected negatively by that bear market, as we will be by any future bear market, by the way, because the only way you cannot be affected by a bear market is to be clairvoyant enough, to know it’s absolutely going to happen and then go a hundred percent cash. And we just won’t do that. So, we were affected, but we were affected much less, and we recovered much, much more quickly. I actually have the statistics from that era, I have my performance records and we were 100%, whole, like 100% whole by March of 2010, we were within a few percentage points of being entirely whole by the end of 2009. And this is after a 50% drawdown. So how did we do it? Well, that’s what this seminar is all about because we’re going to talk about bull, bear, bottom and bounce.

That’s the cycles of the phases that I talked about in my book sideways. So, we don’t want to be presuming that a bear market or a market correction that is a substantial correction, not a little 5% or 10% is pending. We are not in the business of being Swami guru, fortune tellers. We are in the business of having a trading plan. So, this seminar is going to help us formulate rules to trade. When the markets in a bull market towards the bullish side of the spectrum, it’s going to provide us with some tools that gives us heads up on when markets may be rounding over. And then when they officially have entered into a probable not absolute, but probable situation where there is very likely a bear market starting, then we have a systematic approach of how to identify that and plan on how to reduce our volatility as ValueTrend did in 2008 and 2009.

So that’s the essence of this program is having a plan. And then as the market forms a bottom, we need a plan to identify that the bear market or correction as it were maybe ending. And then how do we take advantage of that with the strategies that we just invoked during the bear market phase? So, this seminar is about formulating a plan. It is not a predictive seminar on saying the market is going to enter in a bear market as of September of 2022. And it will last for this long, and it will be this deep. That is not what I am about to do today. I am going to present an argument that the market is setting up for some probable volatility that we haven’t seen for a few years, not necessarily a bear market, and I can’t put a date on it, but I’m going to give you a plan on how to deal with it.

So, let’s get started. This is a PowerPoint presentation. So, you’re going to really be looking at some charts over the next, say, 20 to 30 minutes. And you won’t see much of me except for the little picture in the corner. So, it’s really charts are ‘where it’s at in’ my world. So, let’s get started and we’re going to go to the PowerPoint presentation, which is “Bull, Bear, Bottom and Bounce – How to profit in a volatile market”. So, this is our disclaimer, as we always have been, basically the opinions that I’m going to express are those of my own, and they’re not investment advice. I’m not making any claims that I can advise you as to, like I said, when, and if a bear market is going to occur and exactly what to do, this is just a plan that I personally did and do follow-up during market corrections.

So, the premise that we’re going to start off with is that the market is going to enter into a volatile cycle probably sometime in the next year or so. Notice I didn’t put a date on that, but I’m going to give you some evidence as to why I think that might be a reasonably valid statement, but maybe a month. That’s always the end of the day with analysis is that you don’t know what’s going to happen. You can’t predict, but you can prepare. And that’s a quote from Howard Marks, the great investor. So, let’s say we want to work on the prepared side of the equation because the prediction side is pretty tough to do. We want to be able to beat the bear when the market is trending down, we want to identify the probable bottom, and then we want to seize the opportunities that bottom might bring.

So, let’s take a look at that. The first thing is, that we wanted to determine when the market is breaking down. It’s one thing to have an opinion. “I think the market’s overvalued and therefore it’s going to fall”, and I see this a lot. Doesn’t matter what you think. Really, it doesn’t matter what I think. It doesn’t matter what the newspaper guy thinks. What matters is that when it’s actually breaking down, because all the rest is just theory. So, when it’s breaking down, we need to know some signs of that actually happening. So, some quantitative measurements we can make, we want to be able to limit our risk if the market does in fact, continue on into a bear market. And then as I said, during the bottoming phase, you want to take some opportunities to buy cheap stocks.

And then hopefully it enters into another multi-year bull market and off to the races. So, to start with, I want to talk about, there are some growing evidence of change, and if anybody knows anything about me, you’ll know that I’m a real believer in sentiment indicators, and I’m a contrarian investor. So, when everybody likes something or everybody’s excited about the market or a sector or a stock. I get worried. And you know, when I grew up was born in the early sixties, I grew up reading mad magazine and of course, Alfred E Newman, his famous expression was what me worry. And I’m believing that right now, we’re seeing some signs that the market is kind of in that “What? Me worry?” phase of existence. It’s maybe the market is ignoring some possible signs of risk. So, a really admirable technical analyst, Jay Kaepell, he’s a guy that has is an amazing quantitative analyst from a technical perspective.

He’s a known creating guru and beyond being just this brilliant mind, he also is a philosopher and I, and he has these rules and they’re called like Jay’s rules or something to that effect. And you can Google it. It’s really hard to get the whole list of rules, because I think it’s about 30 or 40 or 50 different rules. But one of the rules, I read some research of his and one of the rules. He was just quoted recently, and I just loved this. He says, “If you’re walking down the street and you trip and fall, that’s one thing let’s say, if you’re five foot 10, like I am, you trip and fall well you effectively, the highest point of view is going to fall by feet, 10 inches, bump your head, probably hurt yourself, get some bruises, bumps, maybe even a concussion.

But if you’re standing on a mountaintop and you trip and fall, that’s an entirely different thing. Carrying that analogy further, Jay says that you stand on a mountaintop, but you don’t even know you’re standing on a mountain top and you’re reaching for the sky on standing on the tips of your toes. So, you’re as tall and high as you could possibly be. And you’re completely unaware. You’re unaware that you’re even on this, about the top, and then you fall, well, that’s a whole new ball of wax, and I’m not suggesting that we are on that mountain top and unaware right now. But I think that there is some lack of awareness of where we are in the investment cycle. And there seems to be a fair amount of irrational exuberance. And we just got to watch that we don’t trip and fall because we may not just be tripping and falling on a sidewalk.

We may be tripping and falling on in fact, some sort of a hill or mountain that is to be seen, but I love that quote anyways. So, let’s start looking at some contrarian signs that the market may in fact, be a little bit complacent. Now this chart is a couple of weeks old, so I didn’t update it, but I want to give you sort of an overall view of what’s known as the VIX is the volatility index. It’s really just a measurement of option premiums. What you can see is that when markets get scared as they did in the COVID crash at the beginning of 2020, the premiums on options go very, very high. When markets get complacent as they did during Trump’s first year in the election cycle when there was literally no volatility on the stock market the VIX gets very low because option traders say, well, it’s the same thing every day.

The market goes up a little bit, very, very rarely goes down. And therefore, we don’t need a lot of premiums for our options when you, when we write an option. So that’s how the VIX works. Now you can look at the VIX in two different ways. You can look at it from an absolute level, point of view. In other words, where is the VIX right now? What’s the number? And you can also look at it from a trend perspective because it can be a non-confirming trend. A diverging trend is it’s called in tactical analysis against the stock market. And that can give us some heads up though. It’s a very, very long-term signal in that way. The absolute levels give us pretty immediate signals, particularly at market bottoms when fear is very high. So, I’ve drawn the levels, but the two biggies are around 32 on the VIX for a buy signal when people are capitulating, investors are capitulating at around 12 and a half or so on the bottom, when investors are too complacent.

Now you can see markets can remain complacent for a while. You’ll notice though that they don’t capitulate from very long, or they tend to, you know, the big spikes and then it’s, it’s one and done. So very, very good buy signals coming out of the VIX. Very long-term signals on the low end of the scale, like when complacencies in place. So, I like looking at the VIX from an absolute point of view, but I also like looking at a trend. So, if we kind of look at this trend over 2016 and 17, you can see that, you know, there was a market correction in the summer of 2015. Some of you might remember it. It was about a 22% correction and the VIX spiked, everybody got fearful too, but you know about 40, well, you can see that peak, you know, laid into a series of lower peaks, lower highs.

That’s a trend like all the way from basically 2015 to the end of 2017. And you can see the market was going up. So, the market was getting more and more complacent. It didn’t reach its absolute level of complacency below 12 until well into 2017, but it had a trend towards complacency for a good couple of three years. And that led us into the corrections that were 2018. You can see the beginning of 2018; we had a correction. Okay. And then, you know, you’ve got your spike in the VIX and then sure enough, the trend over another year moved into that complacency area. But the trend was diverging against the market. And at the end of 2018, December, October through December, the market corrected pretty hard actually. And it corrected much harder than at the beginning of 2018. And the VIX spiked again.

Well, what happened? The VIX started trending down again, people got more and more complacent in the market, went up more and more until COVID came along. Now, COVID was an extraordinary event, but having said that the market was already primed for something to send it off the cliff. Okay. The VIX was giving us that signal, probably if COVID, hadn’t broken out in early 2020 in North America and the panic had not ensued, then that correction might’ve taken three months, six months longer to occur a year longer. I don’t know, but it happened quickly because of COVID. It just needed. I always say to the market, when it gets complacent, when the VIX is low and whatnot, it’s like a balloon that’s been overinflated. The balloon by itself, doesn’t pop, but then you can see I’m wearing cufflinks. And if my cuff link hits the balloon, just as I’m walking by then it pops the balloon and everybody blames it on the, like me walking by with my cuff link.

But it wasn’t me walking by with the cuff link. It was an overinflated balloon. And in this case, it was an overinflated market. The VIX was telling us that. Okay. So once again, high spike, you know, very high spike. In fact, which was the quickest correction I’ve ever seen. The VIX said 82, which is just unreal. And high capitulation buy signal. And then it began trending down again. Okay. So, you can see we’re in that trend right now. Now has it hit 12? No, but it certainly, by the way, it did hit 12 just before the VIX corrected. So, the S&P corrected with COVID. So, we’re in the trend. We’re not in the absolute level, but we’re most definitely trending towards an attitude of complacency that you can see on this chart. Okay. And that is diverging against the movement of the S&P 500.

All right. So yes, we’ve had a correction of late, but is it enough? And that’s maybe a question I have in this seminar. So, let’s take a look at a closeup of the S&P since that period, when 2017, as I said, Trump’s first year, everybody was excited. He was doing all kinds of good things for business and the economy, and the market didn’t really want to sell off. It was, you know, stimulated, the fed was keeping their monetary policies, very accommodative. In other words, low interest rates. And the business environment was very, very positive from a government perspective. So very little volatility in the market. And you remember that the VIX was trending lower. And then we went into, after that period of very low volatility, where that year there was not one correction, that was much more than 3%.

Okay. In fact, I think there wasn’t anything over 3% if I am correct. It went a little parabolic at the end, as you can see here. And then there’s that first correction 2018 in the bigger correction at the end of 2018, which was not quite 20%. I think it was about 17 %or 18% that of volatility really didn’t end until well into 2019. Okay, and then we go into another parabolic move, which as you’ll remember, the VIX got below 12 and was trending lower during this entire time along came COVID. So, another bull market, more traditional volatility, as you can see after the COVID crash you know, as an uptrend with some pullbacks, but we then entered into another one of these periods, very, very similar to 2017 since the beginning of 2017, particularly since May of, sorry, since the beginning of 2021.

And particularly since the beginning of May of 2021, the volatility had been very, very contained. In fact, again, it was one of those situations, like 2017, where we only saw 3% volatility on any given corrective period. Well, that had to end, and it did recently in the correction over September. Now, I’m, I’m not showing you the chart that brings us through the most recent period in October where the market’s rebounded a bit retraced about half of that correction. But you get the picture., That volatility, even with this 5% correction is, is not too extreme. So, the other factor that I was concerned about beyond the VIX and beyond the lack of volatility on the markets is that the PE multiple, now this is, you know, part of fundamental analysis. And us technical people like to say that the fundamental analysis is the F word.

And we don’t like to use the F word in public too often, but the markets from a fundamental perspective, at least from the price to earnings ratio, got kind of expensive. Recently. Now it’s come down with the market correcting recently, but at one point it was like 37 times earnings. And you can see, historically there’s not been many times where you get that kind of spike without some sort of a pullback on the multiple, which usually means a pullback in price. Right. And the higher it gets like it did in 2009, as you can see here, then the worst it’s going to be as David Wilcox once said the longer it takes the worst that’s going to taste. So, I view the market’s very much like that. So that’s a factor. Markets are still cheap, even though they’ve come down a bit in price to earnings ratio stock traders, Almanac points out that bear market bottoms often occur in the second year of the presidential cycle.

And even if there’s not a bear market during the second year of the market the presidential cycle more often than not in the second year, you get some volatility. You saw that the Trump presidency, after his first year, 2017 and 2018, you saw two pretty sizable corrections. And you can see, you know, that kind of started in son of a gun the fourth quarter of the year, huh?

That’s kind of where we are now and led into well into the end of the third quarter of the following year. So approximately one year starting in and around the fall of the first year and leading into the fall of the second year of the presidential cycle, you can get some volatility. So that certainly happened in the Trump cycle. And it’s actually a fairly consistent trend that’s happened. It doesn’t happen every year, like all cycles by the way that, you know, your three and your four could be very good for markets.

So that’s a factor that we should keep in mind. The party is starting to end after the first year of excitement of the new president and you know, things they have to start doing the ugly stuff. Like maybe for example, reducing some of the stimulation that we’ve been getting after the COVID crash. Well, the fed in fact has been stimulating the markets since 2009 through various programs, the subprime mortgage crisis, i.e., the 2008, 2009 crash resulted in a number of monetary policies, such as quantitative easing and lower interest rates and twisting. In other words, in manipulating the bonds, they buy the bonds, and they sell one into the bond curve and buy another. And this all created liquidity in the market, and it did help the market revived from the 2009 crash. As you can see on this chart, I’ve marked in green, whenever one of these programs started.

And in fact, it did begin in 2008, I should correct myself. And whenever the ended I’ve marked it in red, and you can see that it’s like magic. Whenever these programs ended, the market pulled back reasonably strongly at times. And so, at the very best the market would move sideways or correct, as you can see in multiple times here, it happened many, many times whether they raise rates. So, they ended a QE program or a twist program, whatever. So, the other thing that the fed is not involved with is fiscal stimulation. A fiscal policy basically means helicoptering money you know, handing out COVID checks spending money on infrastructure, that kind of thing. So that kind of thing was brought in pretty, pretty massively since the COVID crash. And so now you’ve got monetary policy by the fed and fiscal policy by the governments in power.

And if, and when these programs end, and I suspect tying into that second year of the presidential cycle, I suspect that maybe some of these programs will be reeled in, well, you can see historically what happened every single time. Like literally we don’t have a large data sample, because it’s only been since 08, but every single time that these programs ended the market, doesn’t like it much. So, we need to keep that in mind, because this is probably the trigger that we should be watching. We’re set up with the presidential cycle, we’re set up with a low volatility market that needs to have volatility come back volatility, come back, we’re set up with a falling VIX that indicates more and more complacency as time goes on, but really what the trigger is going to be probably as the fed. So, keep your eye on the fed.

All right. We’re not there yet. The fed hasn’t they’ve said, well, maybe they’ll very gently pull back in November. That may not really be the trigger. But for now, the markets in a bull trend it’s above the 200-day moving average is our highest higher, lowest, despite the recent correction. And on this chart, I have included the recent correction. All we can do is stay long until it ends. So that’s how we play a bull market. I do want to point out though that sometimes leading into correction, you’d get diversities by MacD such as here. You had higher high, higher, low on the S&P 500, but falling highs and lows in the MacD and that led into, you know, some negative variance. And it seems to be happening again. It’s not a hundred percent accurate predictor of anything.

It’s just an interesting observation, all this aside with the potential for volatility increasing with the presidential citation presidential rhythms that we see in year two and with the VIX and with the fed, maybe stepping into reduce their stimulations and the government may be reducing some of their stimulations. Maybe we have to keep in mind that bull markets do tend to last pretty long time periods. The discharge is of the Dow, and it goes right back to 1900. And you can see various bull markets before the crashes or corrective periods or sideways periods, consolidations like we had in the sixties and seventies. But each one of these were, you know, 15 to 30 years. I’m going to suggest that probably a 15-to-20-year period might be realistic for a bull market. We’re about 10 years into this one.

So, I don’t know if we’re going to get a bear market right off the bat or, or anything because the history is for a longer period before bear markets tend to show their ugly heads. However, we do get lots and lots and lots of opportunities such as in here for corrective periods. Okay. so, we’ve talked about staying in during a bull market, and we’ve talked about, identifying the possibilities of a period of volatility approaching us, but what happens if it does start to move into a bear market or a very highly significant correction? So, we need, we need to plan. So, let’s talk about that plan. The plan is we want to leg out of the market if the technicals break. Now we will define what that means in a second, but to make an all or none call on the market saying, okay, that’s it, I’m out.

I would hesitate to do that because you can get whipsawed on technical signals. And if you don’t know what that means, then you’ll want to attend my course, that will be coming out next year on technical analysis. So, we want to have a program, a strategy where we do things in stages. And that’s what I mean by leg out. We want to increase cash. As markets, show signs, they are continuing to break levels of support. We want to rotate into lower volatility sectors, such as utilities, bonds, that kind of thing. We want to create, you know, by bonds I’m, talking short term bonds and we want to possibly even hedge. All right? And there’s lots of different hedge instruments such as you can buy VIX ETFs, which tend to spike. Cause we saw you can buy inverse ETFs, single inverse. You can buy actual short-term ETFs.

Like HTG, I’m not making recommendations here. I’m just saying these are hedges. And we’ll talk a little bit about that later. So, here’s what we’re looking at. If the market breaks its uptrend that can be identified by the lack of higher highs and higher lows. You know, the definition of an uptrend is, are highs or lows. Generally, the market stays above the 200-day moving average. It’s just this blue line here. Now people get all tied up with the moving average the 200 day or the 40 week. It doesn’t if the market crosses the 200 day as it does a lot, it doesn’t mean that the bear market is suddenly upon us, but it’s a confirmation. So, the most important thing we looked for is where are the lows? And if they are starting to break down into lower lows, that’s our very first sign.

So, what happened, his is this is a look at the 2003 to 2007 bull market followed by the 2008 to nine bear market, what happened in early 08 is that we got a lower low. All right. We confirm if that’s the real McCoy by watching it rise. And in this case, it rose as, you know, whenever you go to watch it and you typically get a rebound, but that high obviously started around over before reaching its old highs, let alone even crossing its old lows. At the same time, it was struggling at the 200-day moving average. So, in 2008, we sold a little bit of equity. As we saw this happen, did we sell it all? Heck no. What we did was we sold on our first observation of the potential of a new downtrend. Did we know, do we have a crystal ball that the market was going to do what it did?

No. So did we go a hundred percent cash? No, in fact we went about 10% cash or so at that point, 10, 12% cash. We legged out, well, what happens is – market went down. We go, man, wish we could have raised more cash. We should have been smarter. Well, this time the market does another pullback because every time you’ll notice, whenever markets pull back in an extreme level RSI and all the momentum indicators get oversold and they tend to rebound a little bit. The markets worry about sharing off. They rebounded after another leg down, which happened to have a lower low than the last one. The next high was much lower than both the previous high. And the previous though, it was still well below the moving average. Guess what we did. We sold this time. We sold the whole month, and we came to around 30% cash.

Now hindsight is great. Isn’t it? Because knowing what I know now, so you’re going a hundred percent cash, but you can’t do that. You don’t know. Right? We went to about 30% cash. We didn’t have a chance of legging out anymore because the market just went to hell in a hand basket and fell out of bed very quickly after that. We were stuck with a 30% cash, but that’s better than nothing. And what happened was the market began to form a bottom. And we’re going to talk about that in a minute, but this is exactly how we conducted ourselves in the years, 2008, 2009, we didn’t know, as Howard Marks says, you can’t predict, you can prepare. Our plan was, hey, we’re going to look at the trend. And by the way, the sentiment at that time was suggesting that things were over bought, in 2007.

In fact, in 2007 there was a bit of an oil bubble going on and I sold most of my oil. Now, the second part of the oil that we sold, the last position we held, we sold it in early 2009. But sorry, I should say early 2008, but we did recognize there was a bubble of some sorts when everybody was talking about around, I’m going to $200. At that time, it was about 140 bucks a barrel and interesting from a human psychology point of view. By the way, we, I actually had a client phone me and say, I’m leaving you because you’re, you’re selling oil and you’re missing the boat because I was doing nothing. You’re going up. And it turned out and I was quite right. Although I did sell a bit early, I was selling oil at 80, 90 bucks.

It went on to 140 and then the crash to 30. And by the way, I re bought in the thirties. So that was purely from a sentiment point of view. I was looking at some big sentiment indicators, but there was, there were some signs from a center perspective that markets were over bought breadth was a little thin because everybody was focused on a few groups like, well, but more important was the chart itself. So just what we talked about, the trend was breaking down. So now that we’re in a bear market, we’ve got some cash hopefully. We anticipate the bottom. We look at the peak and trough patterns when it stops making lower highs and lower lows. That’s your obvious sign. Okay. Sentiment will tend to trough. The VIX will like we saw a bit ago the VIX will go over 30 other factors, such as seasonality and momentum.

Maybe we’ll come in, momentum may be oversold. The factors that I use in my barometer are pretty good at telling us when things are become oversold. And so, at that point, we, when we start to see these signs are there, we’re not absolutely convinced that the bear markets over, we definitely, if we have hedges such as an inverse ETF, if you decide to do that you want to remove them, okay? You can possibly make one leg into the market if you’re anticipating bottom. And I’m going to give you some little tidbits on how we might make that assertation that maybe the market’s putting in a buck, but you don’t know for sure. You don’t commit too much capital. I know everybody wants to take their full 30% or whatever, the 40% cash that they’ve saved after recognizing the bear market and then buy right at the bottom and make a fortune because that’s what I heard some guy up the street did.

And he might have, you know, but that doesn’t happen to most of us. Most of us don’t buy at the bottom. So, we have a strategy. Maybe we can leg in. If we see a sign that the market might be bottom bottoming, as John Templeton said to buy when others are despondently selling requires a good as fortitude but pays the greatest returns. So, if you want to know more about some of these signals, sentiment signals, that type of thing, like the VIX I’ve written that book, smart money, dumb money. That’s what the book’s all about. I literally present 15 or 20 different types of indicators that can tell you when, when various markets are making a bottom, okay. Or a top. One of the things we can look for is a MacD crossover. You can see sometimes it’s a little bit lagging, but when the market makes a bottom, you’ll see a positive crossover.

If you just hear and hear no more at the very bottom, you’ll see things like the VIX, put the call, stuff like that, that make market that tend to peak during market bottoms. Like we talked about before. Okay. Pessimism is extremely high that can give us a signal, but even more importantly, we can look at well, not more importantly, but certainly significantly. We can look at reversal signs.

Now I’m a lover of candlesticks. You can look at the bar charts and they have similar formations as this, but the candlesticks are wonderful because they’re very colorful and they have cute names. And they’re very obvious when you look at a candlestick that is reversal, there are many, many candlesticks out there. And if you read my book sideways, I give a description of the main ones I use. But as far as reversal candles, these on this page are the kings.

And if you, if you learn nothing else about candlesticks, just know this, big wicks with small bodies usually means a turn around. Okay, the body can be in the middle or the bottom and the top, but a big wick means that the market moved. So, in this case, the market opened here because the body represents the open and close, okay. The market opened here, and it closed there. But in the time period of the day, it flushed out big time, and you can see the bigger, the wick, the more significant that flush was. So that’s considered bullish. Now, by the way, bearish reversed, inverse candles or shooting stars as they call them, but I call them inverse hammers. They’re equally good at identifying bottoms because the market is, you know, flushed and, you know, opened open here, close there, had this big spike and then ended up closing down.

That can be a negative. It’s often at a top. It’s funny enough. They happen in bottoms too. And I don’t know why that is. I can’t, I don’t know the psychology, but the observation I have made with spinning tops as well, or Doja candles where there’s almost nobody, it’s just a whole bunch of action with not much happening by the end of the day. And so that’s what you want to keep an eye on, because that usually means into indecision. All of these candles on his page are where the market reacted strongly, you know, get out, get out or get in and get in. And then at the end of the day, or maybe not, you know, and, and everybody kind of acted with indecision by the end of the day. And that almost always leads into a turnaround. Okay. So, I’m going to show you.

Examples. Son of a gun, the 2008, 2009 bear market. This is a daily chart. Guess what happened? Both a hammer and an inverted hammer. I, we just said, hey, those things are supposed to be bearish. Well, in this case it was bullish. So that’s why I don’t necessarily trust that the hammers have to be only with the body of the top. Doja spinning top call it what you want, a big indicator of a turnaround because boy did it ever move up a lot and down a lot in the end of the day, it settled right close to the middle. All right. Very good sign and turn around. You can look at these. There’s a Doja, there’s an inverted hammer. Boom – market went down. You’ll see this all the time. All right, happened here. Market went up. But I’m looking at it from a wash out point of view.

If you’ve got all these other signals, such as the VIX at a spike and all these other things, then you see a candle like this. You’ve just got some pretty good confirmation that the market is bottoming. Look at this. This is a candle stick. Now, by the way, the candle sticks you’re best to look at on a daily chart. You just don’t get the same kind of signals on a weekly. So again, you’ll notice that a lot of these formations where there’s the big wicks, small bodies happen at turning points all the time. Okay? It’s not just a bear market bottoms and bull market tops. It’s all the time. You can use it in whatever perspective you want. I really like to look for candles when the market’s been washing out. All right? So, let’s say you put one leg into the market because you saw a candle.

You saw the VIX, you saw all the other sentiment indicators. You look at it and boom, I’m willing to put a third. In my example, 30% cash you held. So, let’s say maybe take 10%. And you put it in the market rate of the bottom because you don’t know that that’s actually the bottom just cause there’s a candle and all these other things that say, so. You can get wave number two of bad news come through and you just get proven wrong. There’s an old saying that bulls make money and bears make money, but pigs get slaughtered. If you make an all or none decisions, when you’re selling into a bear market or buying into a bull market, you can just take everything out or everything in you are a fool who is about to get slaughtered. Okay? So, bulls make money, bears make money, but pigs get slaughtered.

So don’t catch the falling knife, have a strategy. So, okay, you’ve done your first initial purchase. You’re hoping that you actually are right about it being the bottom, but you’ve only committed a third of your cash. Now you see a breakout from that base, right? People like to give all these formations interesting names like head and shoulders and double bottoms. That’s interesting, but the bottom line is highs and lows. A base is indicated when you’re not making any lower lows and lower highs, but you’re not making any higher highs and higher lows either. You’re kind of going sideways of some sort. Well, when you break out of that base, you cross the neckline, that’s a crossover, that’s a base breakout. And then you get a breakout over the moving average. That’s a signal that you should be getting it. So now you’ve already done one leg.

Let’s say, because you hopefully predicted the bottom, but you’re not a hundred percent sure. Then you move in in a couple of more stages, all right, you fully invested, and you increase your beta. You move out of your utilities for those stocks. You do hold. Then you move into, you know, Microsoft or something, high, high, higher beta stock. This is not the market. This is a stock, but this is a good example because it’s been a pretty interesting trader, higher highs, higher lows, moving average, broken boom sell, you know, you, you sell on the brake. You don’t, then you wait for the rebound because things get oversold who doesn’t get over to the moving average. Doesn’t take out the last lows and highs, which it didn’t. Then you sell, okay, you start legging out. Maybe you’d like one here, like two there, like three there or something like that.

You can do it in two stages. Now you’ve sold, now you’re looking for the bottom. Well, this is not a candlestick chart, but let’s say sentiment on Bombardier because you can look at different sentiment indicators on find individual stocks as well. If you’re subscribed to sentiment trader.com and I’m not associated with them, I’m just noting that they have all the indicators. Then maybe you notice that things are getting washed out from Bombardier. And then you see a candlestick down here. One of those Doja’s or something then maybe you make your first move, and then you start to notice oh, there’s a high, there’s a low there’s a high that took out that high in that high, and the neckline, got that high, kick out that old neckline. Maybe I ought to try to enter.

Sometimes I like to wait for a retest of the neckline there was, and then I want to confirm it bounces through the neckline. You buy. Okay, you buy maybe up here, a little higher and off you go 1, 2, 3 legs. And you know, hopefully Bombardier goes up in the meantime, there’s a 200-day moving average. So that is kind of the strategy that we used on the market. You can see there are our sell signals, here’s our buy. Let’s call it a head and shoulders spot because actually it’s kind of was shoulder, shoulder, head Washout. This is a weekly chart. So, you’re not seeing that nice little spinning top and an inverted hammer. But you saw on the last slide, a couple of slides ago, that that is in fact what happened. So, then you get a, so you did your first increment of purchasing there and market starts moving up.

Oh my gosh, it’s moved above the 200-day moving average, which in this case is a 40 week. Same thing. There’s your neckline. It’s clear. That’s the neckline. You can see there when it breaks above that neckline. Yeah. By your second thing, you maybe wait to see if the test, the neckline, in this case, it didn’t give it in a couple of bars and it doesn’t retest. Well, yeah, you do your second line, the end of the market and so on. So that’s literally what we did. All right. It’s not rocket science. This is, this is something that, and it’s not absolute as well. I want to point out that this is a strategy. So that’s why we work with the legs because things can go sideways and back down very quickly. So, you’re doing things in stages. So, you’re during the bear market, you lay out in a few stages, you lower your beta and you maybe hedge depending on how confident you are.

I never had fully, but you know, you can maybe offset another 10% by buying 10% of a single inverse or something. When you anticipate the bottom through using sentiment and whatnot you remove your hedges. You watch for a breakout and you leg back in the safer way to do it is to not predict the bottom with those candlesticks incentive and indicators just wait for the breakout. But if you want, you can make your first leg, right, right. At what you anticipate the bottom is. And then as you see that neckline broken, you live in a couple more times to get fully invested, right? So that is the basic program. As you can see it, ain’t rocket science, it’s something you can do. And it’s a plan. So, you now have the tools, watch this video twice. If you have to write down the general rules and have a plan.

So, if, and when the market begins to correct, you can follow the plan and maybe you get whip side. Maybe the market breaks the 200 day in a low and whatever. And then it goes right back up again. That can happen. But if you don’t have a plan and you do nothing, then I guarantee you you’re going to go down. Like everybody else did in 2009 in the next bear market. If the market goes down 50%, you’re going to go down 50%. If you have a plan, you won’t go down that much. We didn’t. So, this is my suggestion is to create a plan. You can get a little bit more detailed by reading my books, Sideways and Smart Money – Dumb money will help you out in this way and be prepared. You can’t predict, but you can prepare. Thanks for watching.

 

Never miss another video!

Get Smart Money Dumb Money videos delivered directly to your inbox.

Recent Posts

compq

NASDAQ Outlook

enb to

Picking the Right Dividend Aristocrat Stock

gold

Time to be bold about Gold

xly

Consumer Discretionary – an opportunity with risk

1

Market Musings

bbd

Bull, Bear, Bottom and Bounce: How to profit in volatile markets

cta-bg

Never Miss an Opportunity

Sign up for our newsletter to receive valuable insights that are available only to subscribers.   Beyond the blog – beyond the videos – get the inside scoop.

Scroll to Top