Stocks Vs. Stock Market–What’s Easier To Predict?

 Random Thoughts

Housekeeping: Thanks again to all who attended the webinar on Saturday. Based on the feedback, it looks like we had a great show. The recordings have been processed and uploaded. These will be going out later today. If you would like to get them earlier, send me an email and I’ll reply with the link.

The market continued to stabilize from its recent slide.

The Ps ended in flatsville. Net net, they haven’t made much progress since late October. So far, they have found support right at their prior breakout, circa 1775. It also looks like the 50-day moving average will soon be there too. Often multiple technicals can come together at the same point. It’s like the Cajun joke about the Thermos. It keeps the hot things hot and the cold things cold. “How do it know?”

The Quack started strong but ended weak. It still managed to close in the plus column nonetheless. This action has it a minor support, circa 4,000. The next would be the top of its prior range, circa 3,950. The 50-day moving average is also nearing this support.

Speaking of da fidy, the Rusty is sitting right on its 50-day moving average. It was the big winner on the day, tacking on 1/3 %–better than a poke in the eye I suppose.

When markets correct, you’re faced with a dilemma. Is it the start of something bigger? Is the sky falling? They do slide faster than they glide, right?

So, you have to anticipate. Correct?

True, you do have to be on your toes because what starts as what appears to be only a correction could always turn into something much bigger. Ideally though, you want to wait for some additional clues.

There’s nothing magical about the aforementioned 50-day moving average but it can help to keep you on the right side of the market. As mentioned in the Stock Selection webinar over the weekend, years ago while developing systems for a client, if they didn’t work, we’d “throw a moving average in”–take long trades only when above and short trades only when below. This, in and of itself, often made a non-working system work. Err on the side of the moving average/longer-term trend.

Speaking of moving averages, the Bowtie Moving averages (email me if you need the pattern) have turned down. They could signal soon. Bowties off of all-time highs can signify a major top. The good news is, a few big up days would negate this. And, futures are up fairly big pre-market.

So, why am I talking so much about moving averages? Well, my point is to make sure that you see the forest for the trees. Until we start getting sell signals, I wouldn’t rush out and sell the farm. As long as da fidy holds, I wouldn’t get crazy bearish. Back your charts WAY out and draw your big arrows. So far, the selloff only looks like a blip.

Now, with all the above said, keep in mind that getting the market direction right is often much more difficult than getting the direction right in individual stocks. Markets overall tend to be more efficient. And, efficient markets tend to chop around. Everything (or most everything) is often priced in. Inefficient markets-the next hot biotech, solar stock, or Burrito maker etc… have the potential to make a large inefficient moves. This might be possible in spite of the overall market.

So what do we do? As usual, I let the database tell me what to do. And, right now it is producing a few interesting longs. These longs are higher in volatility (which some call and measure with beta). These more speculative issues have the potential to make large moves in spite of the market. Therefore, even though the market has gone a little flat, these inefficient issues might still have potential. As I preach, listen to the database and let it control the portfolio ebb & flow. We got into a few shorts on the last downturn and now the database is producing a few interesting longs. In an ideal world both the shorts and longs make money—see the last 2 weeks of my Week In Charts (those 2 are free, see my website). This can happen but “results not typical” often applies. Hopefully, if the market takes off, at worse, the shorts stop out at modest losses and the longs pick up the slack and then some. And, if the market does roll over, the shorts help to mitigate the losses. The bottom line is the longer-term uptrend in the market remains intact. Err on the side of the longer-term trend but again, listen to the database. When the overall market is a little flat, make sure you only take the best of the best setups. Be willing to walk away unless you think you have an opportunity you simply can’t pass up.

Best of luck with your trading today!

Dave