INVESTMENT EDGE
There should be no question as to why people need to invest. The cost of everything you need continues to rise and your savings need to keep pace. In the chart of US Price and wage changes below, I wonder if the #2 biggest riser, college tuition, includes the cost of paying bribes, proctor assistance, photoshop training and crew lessons? If not, can you imagine how much further ahead of hospital services it will be in the next update?
Curious minds want to know.
Whether working with longer-term investors or traders honing their skills, one of the most important things is to insure they have a set of rules. The good news is the rules below are appropriate regardless of your timeframe, strategy or approach. I have to give thanks to Pension Partners director of research, Charlie Bilello, for putting the original list together. I keep it taped to my monitor as it is invaluable in helping to keep the focus. Please note they are in no specific order and level of importance will vary depending upon the individual reader/investor.
1) 1) Ego is your biggest enemy. Humility is your best friend. (Ego is concerned with who is right while humility is concerned with what is right.)
2) There is no reward without risk. You can’t have one without the other as such if it seems too good to be true, it is.
3) The longer your holding period, the higher the odds of your success
4) Every time is different. You haven’t seen this movie before. No one has.
5) Price targets are pointless. Forecasts are foolish.
6) Plans > Prophecies. Evidence > Opinions.
7) Cycles and Trends exist. That does not mean they are easy to predict or navigate but they provide an edge for those that know how to use them.
8) Focus = fastest way to build wealth (when you have it) and the fastest way to destroy it (when you don’t)
9) The only certainty is uncertainty. Expect the unexpected. Suspend the disbelief
10) Time is infinitely more valuable than money. No amount of money can buy the past.
11) Saving is more important than investing. No savings = no investing.
12) Simplicity beats complexity on average.
13) Lower fee beats higher fee on average.
14) Doing nothing (low frequency) beats doing something (high frequency) on average.
15) Don’t be afraid to say “I don’t know”. Stay within your circle of competence.
16) Volatility and sentiment are mean-reverting at extremes.
17) No one rings a bell at the top or the bottom but many ring it in hindsight.
18) The strategy you can stick with is the best strategy.
19) Diversification & asset allocation protect us from our inability to predict the future but also from not having a plan.
20) Controlling your emotions (fear and greed) is the hardest and most important thing.
A quick 3 minute video on where we are with respect to the US stock market.
I haven’t written about the Millennial savior, bitcoin, in well, it seems like forever. Not because I don’t like it but rather its was in a horrendous long-term downtrend, losing more than 90% of its value in 15 short months. What’s there to talk about? But, of late its price has taken a much more constructive look as it has been trading sideways (instead of falling further) and looks as it may have found a short-term bottom while trying to clear out the remaining sellers. This, of course, is an ideal setup for a bullish trading opportunity. While it may turn out to be a long-term investment (not my belief), until it proves itself it must be viewed only as a trade.
As you can see, price has been contained within the rectangular box, is now above a rising 50-day moving average while volume (bottom pane) has been shifting from large red candles (selling) to green (buyers). In spite of its potential short-term holding period, the first upside target is ~25% above the upper boundary of the rectangle. Two ways to trade this setup using this pink sheet bitcoin proxy, GBTC, is to buy the breakout of the rectangle, with a stop placed 3% below the breakout level after purchase. The second, which has a much higher upside target (>50%) but has less chance of getting filled, is to place a limit order down at the bottom of the rectangle. If the order gets filled, your stop would be placed 3% below the bottom of the rectangle. In either case, the risk is well contained (likely less than 5% depending upon the price of GBTC gets filled at) and provides either a 25% or 50% potential pattern target reward. A minimum 5:1 or best 10:1 reward to risk is a setup any investor/trader would love to have as they don’t come along that often.
A bearish engulfing candlestick pattern is a reversal pattern, occurring at the top of an uptrend. The pattern consists of two candlesticks: 1) a smaller bullish candle (Day 1) followed by a 2) larger bearish candle (Day 2). The bullish candle real body of Day 1 is contained within the real body of the bearish candle of Day 2. On day 2, the market gaps up (typically interpreted as a bullish sign) however, the bulls run out of gas and do not push price very far before the bears take over reversing price down, not only filling in the gap from the morning’s open but also below the previous day’s open. A completed pattern warns of a high probability (at least for the short term) the uptrend is over. The larger the candle body and volume on day 2, the higher the probability of a reversal.
Taking a look at the weekly chart of the Dow Jones Transportation stocks you can see last week closed with that same bearish engulfing candle. Unfortunately for the bears, while last week’s candle did engulf the prior week, it was not overly large. In addition, the weekly selling volume was just slightly above average, nothing out of the norm. If you look to the immediate left at the most recent prior peak in November of last year, it too formed a bearish engulfing pattern where the gulfing candle was not only huge but was confirmed with excessive selling volume. Notice what happened immediately following. This is why you need to take notice when these patterns appear
I have been saying for a couple of weeks the market looks tired but was not yet telling us we had reached the end of this reversion to the mean bounce from last Christmas eve. With last week’s close though, the transports have thrown out the yellow caution flag warning long-term investors to likely expect further selling pressure and short-term traders to cash in their chips or at least tighten stops.
