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Random ThoughtsWhen you make a trade you’re not agreeing on book value or cash flow. You’re not even agreeing on the biggest “fundamental” indicator of them all, the P/E. Well, at least not the denominator-think about that. You agree on price.* To understand the price of things you only need to understand two things: supply and demand. That’s it.
If there is supply, prices will drop. If there is demand, prices will rise. And, if supply meets demand then prices will stay the same. So, the next time you find yourself plotting that 15th oscillator or pondering if the wave count is a 5th of a 3rd or 3rd of a 5th, ask yourself, does it appear that there is supply? Or, demand?
Speaking of indicators, indicators don’t indicate. They Illustrate. They tell you what has happened in price. And, since they are a derivative of price, there will be some lag. I’m not a fan of them. In fact, other than the occasional moving averages, I don’t use any.
So what are the moving averages saying?
At the moment, they appear to be illustrating that there is more supply than demand. My favorite moving averages are those that I use in my Bowtie setup. They are the 10-day simple, the 20-day exponential, and the 30-day exponential. Like any other indicator they do have lag but they can help to illustrate what’s happening.
I also like to look at the well watched 50-day and 200-day simple moving averages, especially when the market starts looking iffy. Like the Bowties, these can also help to keep you on the right side of the market.
What About The News?
Did you hear the latest on Greece? No, and I don’t care. Of course, I wish them the best but as far as markets are concerned, it’s irrelevant. But wait Big Dave, how could you not care? Isn’t the market going down because of Greece? No, the market is going down because there is supply. If you start trying to connect the dots as the media would suggest, you’re going to end up in a lot trouble. If it were that easy, then the journalist wouldn’t be journalist. They’d be off running hedge funds. You mark my words, they’ll be something else to blame price movements on in the not-so-distant future.
Price is price. Unless you’re Bill Clinton, what is, is.
Back To The Moving Averages
The Ps (S&P 500) have recently thrusted lower and have subsequently pulled back a bit. Although “sloppy”, the Bowtie moving averages are crossing over and they are now below the 50-day simple. The index itself is nearing its 200-day moving average. There’s nothing magical about the 200 but it can help to keep you on the right side of the market. It’s not a line in the sand but at this moment it also corresponds with the bottom of the more recent trading range, circa 2050. If the market does break below this range, the prior range becomes overhead supply. It’s human nature. Those who bought during the range will be looking to get out at break even.
The Quack (Nasdaq) is looking a little ominous too. The Bowtie moving averages are on the cusp of making a “clean” crossing. Usually, this is not a good thing when it happens just after new highs and when it is on a sharp angle against the 50. It’ll be important for the recent lows, circa 4950 to hold.
In the sectors, quite a few are in bona fide downtrends and approaching marginal and not so marginal new lows. A non-exhaustive list includes the Transports, Metals & Mining, the Energies, and Real Estate.
Many other areas appear to be on the cusp of heading lower after their recent rollovers. Examples here include Chemicals, Software, Hardware, Manufacturing, and Wholesale. If you get a chance, plot your moving averages and notice the rollovers, crossovers, and daylight in these and many other areas.
Will Rogers once said to “Never miss a good opportunity to keep your mouth shut.” On a similar vein, now might be a good time to “never miss a good opportunity to sit on your hands.” Let things shake out. We might just be entering the summer doldrums.
As I’ve said before (e.g. in Layman’s), Tom Petty got it right, “The waiting IS the hardest part.” Most can’t. They crave action. As I’ve also said before, I really don’t lose clients when I recommend a bunch of crappy trades in crappy markets. I do lose clients when I tell people to sit tight. That’s okay. I’d rather do the right thing.
I don’t have all the answers. If I did, you’d never see my fat ass again. I do know that sometimes the best new action is no new action.
So What Do We Do?
Again, now might be a good time to wait. Don’t rush out and sell all of your leftover longs. Do honor your stops just in case.
Best of luck with your trading today!
Dave
*Credit: I’m borrowing this “agree on price” not fundamentals argument from Greg Morris. He often points out that the biggest fundamental indicator of them all, price to earnings (P/E) has “price” as the numerator.
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