You can’t predict but you can prepare – Part II

May 21, 2021No Comments

You can’t predict but you can prepare


This is part two of the market prognosis that I began last week, called: You can’t predict but you can prepare.

Let’s begin talking about how the market is momentarily overbought and needing a correction.

Are we in a bubble and are we likely setting up for a bubble crash and, if we are, how do we protect ourselves?

I tracked something on my blog called the barometer and we value trained to use this barometer to determine how much cash and what level of beta our portfolio should have. For those who don’t know what beta means, it is the extent of the relationship of your portfolio or an individual stock to a comparative basis to the market, in other words, how much that stock or your portfolio will move up or down versus the market. If you have a portfolio with beta one, that means your portfolio will move exactly in line with the stock market.

In this case, we might be measuring it against the S&P 500. Simply put: if the S&P goes up 10% you will make 10%, if the S&P goes down 10% you will lose 10%. Now, if you’re in a beta 1.1, that would mean that you’ll make 110% of the movement up or down of the stock market. So if the market went up 10%, you would make 11% but if the market went down 10%, you’d lose 11%.If the barometer goes into a higher risk level we add value trend begin to reduce that beta through both raising cash and changing the sectors within our platforms to hold a more conservative beta level.Then, if you feel that the market is strong we might go beta 1.1 or 1.2, we might want all kinds of technology stocks, we might want growth stocks.

However, if we were bearish, we might want a whole bunch of cash and we might want consumer staples and utilities, dividend payers. Right now we’re at about 3%, and that means that we’re in a semi risky zone, although not overly risky.

Now the question is: Are we in a bubble now? If you see the factors posted on my blog and, you will probably agree with me, that every factor is signaling that the market is in a bubble. However, just because we have bubble conditions, it doesn’t mean that the market is about to implode.

Let me tell you a little lesson that I learned in 1999, where the market was showing bubble conditions but it went on for another year before it finally peaked. It’s a long time to wait if you sold out. Of course, no one wants to be caught in that situation where they miss out and what often happens is, if we sell before an actual market peak we watch the market go up as it did in 1999. Without a system, people get frustrated and go back in and then the bubble implodes.

My last book called “Sideways” describes the method we’re going to study right now. However, if you want to go deeper on this topic, I’m publishing a new book on: “Contrarian Investing” that combines the trend following technique with other factors, such as sentiment indicators.

What happens is when a genuine bear market comes along because people might have been fooled about this being the beginning of a bear market.

But look, this low did not take that last high. So we had a higher high and the low did not take out the previous low.This market was still a bull market even after this relatively larger crash in late 1998, that was the Asian contagion and Russian default or near defaults of their bonds, by the way, that year.

So here’s what happened: the market continue making higher highs and higher lows and then it rounded over but it reached a low and then it rallied, but it rallied considerably lower than the previous high of 2000.It rallied lower and it went lower still and that rallied again, once again a lower high in a lower low.

Meanwhile, the 200-day moving average moved below. You can see that the market moves below the 200 day plenty of times. So remember: you don’t just trade off the 200-day moving average but in combination with a weekly chart illustrating lower highs and lower lows and a break of the moving average.

Now, what do we do? We don’t just sell it all and run away. We must understand that sometimes you get head fakes. You could get whipped out on that kind of signal and then the market goes right back up again. March of 2020 is a great example of that case! We did sell into that sell-off, but we went right back in and only sold one-third of what we figured we would want to sell. Then, we ended up buying back as soon as the market crossed over the 200 days moving average.

This way you can follow a logical system and get back in if it turns out to be one of these head fakes.

We have the conditions set up for a bubble, but that does not mean you have to sell today. Preferably, you can wait until this type of chart formation begins to happen. Now that you have a system, I again encourage you to read my book “Sideways” because you’ll understand that even if it goes back above the moving average, you can go back in. All you did is miss out on a little bit of time and maybe a little bit of profit, but at least you played it safe.

Another example is the 2003 to 2007 bull market that led to the subprime mortgage crash and whatnot of 2008 and 2009. Higher highs and higher lows above the 200-day moving average.

This time, in the moving average there’s a peak, there’s a low, there’s another peak, and another low. We had all the conditions in place, we had evidence that you were no longer in a bull market, a trending market. So again, in 2008 I sold out. I didn’t sell at the top. That’s what some people want to prognosticate. That they can pick these tops because of their theory or their view and therefore we should sell now.

The market can remain wrong longer than you can remain solvent. So, this way you don’t get out of the top, but you do get out. Interestingly, the rules apply to getting back in because there we have lower highs, lower lows, and ultimate washout, and then a rally. We moved above the moving average and that didn’t crack the moving average here. So in early mid-2009, I began to lead back in. I did my one-third rule, I never bought it all at once.

I saved myself a lot of aggravation because of what I learned in 2001. And I learned to follow this system, which is why I wrote that original book “Sideways”.


What I am recommending is: don’t predict, just prepare.

Have a system that gets you out of the market that has something logical, that is non-emotional, systematic, and non-opinionated.

Opinions are meaningless because the market is made up of many factors: people’s emotions, fundamental factors, fed moves, etc. Your opinion doesn’t matter and mine doesn’t either. What matters is your system and your system will save you from yourself.

Remember: You can’t predict, but you can prepare.

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