Tag Archives: trading

7-Difficult Trading Rules To Follow In Bull Markets

As we wrap up the last two-trading days of the decade, I am wrapping up the recent series on “investing rules” (see here and here). The purpose of this series is to remind investors of the importance of having an investment discipline to protect investment capital when market volatility eventually comes.

I know…I know…volatility seems to be a thing of the past, particularly given the amount of exuberance currently embedded in the markets. This was a point I made in the most recent newsletter:

I have written many articles previously on investing, portfolio and risk management, and the fallacy of long-term “average” rates of returns. Unfortunately, few heed these warnings until it is generally far too late.

The biggest problems facing investors over the long-term are falling prey to the various psychological behaviors which impede our investing success. From herding to recency bias, to the “gambler’s fallacy,” these behaviors create critical errors in our portfolio management process, which ultimately leads to the destruction of our investment capital.

As I have addressed many times previously, the major problem is the loss of “time” to achieve your investment goals. When a major correction occurs in the financial markets, which occur quite frequently, getting back to even is NOT the real problem. While capital can be recovered following a destructive event, the time to reach your investment goals is permanently lost. 

The problem is that most mainstream commentators continue to suggest that “you can not manage” your money. If you sell, then you are going to “miss out” on some level of the bull market advance. The problem is they fail to tell you what happens when you lose a large chunk of your capital by chasing the bull market to its inevitable conclusion. (See “Math Of Loss”)

While investing money is easy, it is the management of the inherent “risks” that are critical to your long-term success. This is why every great investor in history is defined by the methods which dictate both the “buy”, but most importantly, “the sell” process.

The difference between a successful long term investor, and an unsuccessful one, comes down to following very simple rules. Yes, I said simple rules, and they are; but they are incredibly difficult to follow in the midst of a bull market. Why? Because of the simple fact that they require you to do the exact OPPOSITE of what your basic human emotions tell you to do:

  • Buy stuff when it is being liquidated by everyone else, and;
  • Sell stuff when it is going to the moon.


The 7 Impossible Trading Rules To Follow:

Here are the rules – they are not unique or new. They are time tested, and successful investor, approved. If you follow them you succeed – if you don’t, you won’t.

1) Sell Losers Short: Let Winners Run:

It seems like a simple thing to do, but when it comes down to it the average investor sells their winners and keeps their losers hoping they will come back to even.

2) Buy Cheap And Sell Expensive: 

You haggle, negotiate, and shop extensively for the best deals on cars and flat-screen televisions. However, you will pay any price for a stock because someone on TV told you too. Insist on making investments when you are getting a “good deal” on it. If it isn’t – it isn’t, don’t try and come up with an excuse to justify overpaying for an investment. In the long run, overpaying will end in misery.

3) This Time Is Never Different:

As much as our emotions, and psychological makeup, want to always hope for the best; this time is never different than the past. History may not repeat exactly, but it often rhymes extremely well.

4) Be Patient:

As with item number 2; there is never a rush to make an investment, and there is NOTHING WRONG with sitting on cash until a good deal, a real bargain, comes along. Being patient is not only a virtue, it is a good way to keep yourself out of trouble.

5) Turn Off The Television: 

Any good investment is NEVER dictated by day to day movements of the market, which are nothing more than noise. If you have done your homework, made a good investment at a good price, and have confirmed your analysis to be correct; then the day to day market actions will have little, if any, bearing on the longer-term success of your investment. The only thing you achieve by watching the television is increasing your blood pressure.

6) Risk Is Not Equal To Your Return: 

Taking RISK in an investment, or strategy, is not equivalent to how much money you will make. It only equates to the permanent loss of capital which will be incurred when you are wrong. Invest conservatively, and grow your money over time with the LEAST amount of risk possible.

7) Go Against The Herd: 

The populous is generally “right” in the middle of a move up in the markets, but they are seldom correct at major turning points. When everyone agrees on the direction of the market due to any given set of reasons, generally something else happens. However, this also cedes to points 2) and 4); in order to buy something cheap or sell something at the best price, you are generally buying when everyone is selling, and selling when everyone else is buying.

These are the rules. They are simple and impossible to follow for most. However, if you can incorporate them you will succeed in your investment goals over the long run. You most likely WILL NOT outperform the markets on the way up, but you will not lose as much on the way down. This is important because it is much easier to replace a lost opportunity in investing. It is impossible to replace lost “time.”

As an investor, it is simply your job to step away from your “emotions” for a moment, and look objectively at the market around you. Is it currently dominated by “greed” or “fear?” Your long-term returns will depend greatly not only on how you answer that question, but how you manage the inherent risk.

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham

Market And Investing Wisdoms For 2020

Last week, I posted our 2020 Outlook, which focused on the futility of trying to predict the future and the understanding of the current market risks headed into the next decade:

“The reality is that we can’t control outcomes. The most we can do is influence the probability of certain outcomes through the management of risks, and investing based on probabilities, rather than possibilities, which is important to capital preservation and investment success over time.

So, as we head into 2020, here is a short-list of the things we are either currently hedging portfolios against, or will potentially need to:

  1. China fails to comply with the terms of the “Phase One” trade deal, which reignites the trade war.
  2. Earnings growth fails to recover, and valuations finally become a concern for the markets.
  3. Corporate profits, which have been essentially flat since 2014, deteriorate due to slower economic growth both domestically and globally.
  4. Excessively high consumer confidence converges with low levels of CEO Confidence as employment begins to weaken.
  5. Interest rates rise, which trips up heavily leveraged consumers and corporations.
  6. Investors become concerned about excess valuations.
  7. A credit-related event causes a market liquidity crunch. (Convent-Lite, Leveraged Loans, BBB-rated downgrades all pose a potential threat)
  8. The Fed’s “repo-crisis” continues to grow and turns out to be something much more significant.
  9. Similar to 2016, a shocking election result.”

However, while the media looks to every headline as a reason to buy stocks, the reality is investing is about both the buying and the selling.

As an investor, advisor, or portfolio manager, it is important to become divorced from day-to-day headlines, and focus on the investment process and risk management of portfolios. A good place to start is by looking at the wisdom of other successful investors and learning from their experience.

These wisdoms were born out of years of mistakes, miscalculations and trial-and-error. Of course, what made them all successful was the ability to learn from their mistakes and capitalize on that knowledge in the future. Experience is an expensive commodity to acquire which is why it is always cheaper to learn from the mistakes of others. 


12 Market Wisdoms From Gerald Loeb

1. The most important single factor in shaping security markets is public psychology.

2. To make money in the stock market you either have to be ahead of the crowd or very sure they are going in the same direction for some time to come.

3. Accepting losses is the most important single investment device to insure safety of capital.

4. The difference between the investor who year in and year out procures for himself a final net profit, and the one who is usually in the red, is not entirely a question of superior selection of stocks or superior timing. Rather, it is also a case of knowing how to capitalize successes and curtail failures.

5. One useful fact to remember is that the most important indications are made in the early stages of a broad market move. Nine times out of ten the leaders of an advance are the stocks that make new highs ahead of the averages.

6. There is a saying, “A picture is worth a thousand words.” One might paraphrase this by saying a profit is worth more than endless alibis or explanations. . . prices and trends are really the best and simplest “indicators” you can find.

7. Profits can be made safely only when the opportunity is available and not just because they happen to be desired or needed.

8. Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.-

9. In addition to many other contributing factors of inflation or deflation, a very great factor is the psychological. The fact that people think prices are going to advance or decline very much contributes to their movement, and the very momentum of the trend itself tends to perpetuate itself.

10. Most people, especially investors, try to get a certain percentage return, and actually secure a minus yield when properly calculated over the years. Speculators risk less and have a better chance of getting something, in my opinion.

11. I feel all relevant factors, important and otherwise, are registered in the market’s behavior, and, in addition, the action of the market itself can be expected under most circumstances to stimulate buying or selling in a manner consistent enough to allow reasonably accurate forecasting of news in advance of its actual occurrence.

12. You don’t need analysts in a bull market, and you don’t want them in a bear market


Jesse Livermore’s Trading Rules Written in 1940

1. Nothing new ever occurs in the business of speculating or investing in securities and commodities.

2. Money cannot consistently be made trading every day or every week during the year.

3. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.

4. Markets are never wrong – opinions often are.

5. The real money made in speculating has been in commitments showing in profit right from the start.

6. At long as a stock is acting right, and the market is right, do not be in a hurry to take profits.

7. One should never permit speculative ventures to run into investments.

8. The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.

9. Never buy a stock because it has had a big decline from its previous high.

10. Never sell a stock because it seems high-priced.

11. I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction.

12. Never average losses.

13. The human side of every person is the greatest enemy of the average investor or speculator.

14. Wishful thinking must be banished.

15. Big movements take time to develop.

16. It is not good to be too curious about all the reasons behind price movements.

17. It is much easier to watch a few than many.

18. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.

19. The leaders of today may not be the leaders of two years from now.

20. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.

21. Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.


Bernard Baruch’s 10 Investing Rules

1. Don’t speculate unless you can make it a full-time job.

2. Beware of barbers, beauticians, waiters — of anyone — bringing gifts of “inside” information or “tips.”

3. Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.

4. Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.

5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.

6. Don’t buy too many different securities. Better have only a few investments which can be watched.

7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.

8. Study your tax position to know when you can sell to greatest advantage.

9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.

10. Don’t try to be a jack of all investments. Stick to the field you know best.


 James P. Arthur Huprich’s Market Truisms And Axioms

1. Commandment #1: “Thou Shall Not Trade Against the Trend.”

2. Portfolios heavy with underperforming stocks rarely outperform the stock market!

3. There is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again, mostly due to human nature.

4. Sell when you can, not when you have to.

5. Bulls make money, bears make money, and “pigs” get slaughtered.

6. We can’t control the stock market. The very best we can do is to try to understand what the stock market is trying to tell us.

7. Understanding mass psychology is just as important as understanding fundamentals and economics.

8. Learn to take losses quickly, don’t expect to be right all the time, and learn from your mistakes.

9. Don’t think you can consistently buy at the bottom or sell at the top. This can rarely be consistently done.

10. When trading, remain objective. Don’t have a preconceived idea or prejudice. Said another way, “the great names in Trading all have the same trait: An ability to shift on a dime when the shifting time comes.”

11. Any dead fish can go with the flow. Yet, it takes a strong fish to swim against the flow. In other words, what seems “hard” at the time is usually, over time, right.

12. Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations. Use volume as a confirming guidepost.

13. When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point.

14. As long as a stock is acting right and the market is “in-gear,” don’t be in a hurry to take a profit on the whole positions. Scale out instead.

15. Never let a profitable trade turn into a loss, and never let an initial trading position turn into a long-term one because it is at a loss.

16. Don’t buy a stock simply because it has had a big decline from its high and is now a “better value;” wait for the market to recognize “value” first.

17. Don’t average trading losses, meaning don’t put “good” money after “bad.” Adding to a losing position will lead to ruin. Ask the Nobel Laureates of Long-Term Capital Management.

18. Human emotion is a big enemy of the average investor and trader. Be patient and unemotional. There are periods where traders don’t need to trade.

19. Wishful thinking can be detrimental to your financial wealth.

20. Don’t make investment or trading decisions based on tips. Tips are something you leave for good service.

21. Where there is smoke, there is fire, or there is never just one cockroach: In other words, bad news is usually not a one-time event, more usually follows.

22. Realize that a loss in the stock market is part of the investment process. The key is not letting it turn into a big one as this could devastate a portfolio.

23. Said another way, “It’s not the ones that you sell that keep going up that matter. It’s the one that you don’t sell that keeps going down that does.”

24. Your odds of success improve when you buy stocks when the technical pattern confirms the fundamental opinion.

25. As many participants have come to realize from 1999 to 2010, during which the S&P 500 has made no upside progress, you can lose money even in the “best companies” if your timing is wrong. Yet, if the technical pattern dictates, you can make money on a short-term basis even in stocks that have a “mixed” fundamental opinion.

26. To the best of your ability, try to keep your priorities in line. Don’t let the “greed factor” that Wall Street can generate outweigh other just as important areas of your life. Balance the physical, mental, spiritual, relational, and financial needs of life.

27. Technical analysis is a windsock, not a crystal ball. It is a skill that improves with experience and study. Always be a student, there is always someone smarter than you!


James Montier’s 7 Immutable Laws Of Investing

1. Always insist on a margin of safety

2. This time is never different

3. Be patient and wait for the fat pitch

4. Be contrarian

5. Risk is the permanent loss of capital, never a number

6. Be leery of leverage

7. Never invest in something you don’t understand

An Investor’s Desktop Guide To Trading – Part II

Read Part-1 Here

Currently, it seems that nothing can derail the bull market. Trade wars, weakening economic growth, deteriorating earnings, and inverted yield curves have all been dismissed on “hopes” that a “trade deal” will come, and the Federal Reserve will cut rates. While the last two items may indeed extend the current cycle by a few months, they won’t change the dynamics of the former.

Eventually, this cycle ends. Of that, there is little argument. It is the “when,” that is tirelessly debated.

As I have often stated, I am not bullish or bearish. My job as a portfolio manager is simple; invest money in a manner that creates returns on a short-term basis, but reduces the possibility of catastrophic losses which wipe out years of growth.

In the end, it does not matter IF you are “bullish” or “bearish.” The reality is that the “broken clock” syndrome owns both “bulls” and “bears” during the full-market cycle. However, what is grossly important in achieving long-term investment success is not necessarily being “right” during the first half of the cycle, but by not being “wrong” during the second half.

The second half of the cycle IS coming.

This is why, in times like these that we have to follow our investment rules. Those rules allow us to grow capital but reduces the risk of massive drawdowns when the cycle turns. While there are many promoting “buy and hold” strategies, it is interesting that not one of the great investors throughout history have ever practiced such an investment discipline. In fact, they have all had very specific rules they followed which helped them not only to make investments, but also when to sell them.

So, in following up with part one of this series, here are some more rules from great investors which we can all learn from.


William O’Neil’s 23 Trading Rules

William J. O’Neil is one of the greatest stock traders of our time, achieving a return of 5000% over a 25-year period. He uses a trading strategy called CANSLIM, which combines fundamental analysis, technical analysis, risk management and timing. CANSLIM is an acronym and stands for:

C: Current quarterly earnings per share (up at least 25% vs. year-ago quarter).

A: Annual earnings increases at a compound rate of no less than 25%.

N: New products, new management and new highs.

S: Supply and demand. Stocks with small floats experience greater price rises, plus big volume demand.

L: Leaders and laggards. Keep stocks that outperform and get rid of the laggards.

I: Institutional ownership. Follow the leaders.

M: Market direction. Three out of four stocks follow the trend of the market. When the intermediate trend is bearish, don’t invest.

Here are the rules:

  1. Don’t buy cheap stocks. Avoid the junk pile.
  2. Buy growth stocks that show each of the last three years annual earnings per share up at least 25% and the next year’s consensus earnings estimate up 25% or more. Most growth stocks should also have annual cash flow of 20% or more above EPS.
  3. Make sure the last two or three-quarters earnings per share are up by a minimum of 25% to 30%. In bull markets, look for EPS up 40% to 500%.
  4. See that each of the last three-quarter’s sales is accelerating in their percentage increases, or the last quarter’s sales are up at least 25%.
  5. Buy stocks with a return on equity of 17% or more. The best companies will show a return on equity of 25% to 50%.
  6. Make sure the recent quarterly after-tax profit margins are improving and near the stock’s peak after-tax margins.
  7. Most stocks should be in the top five or six broad industry sectors..
  8. Don’t buy a stock because of its dividend or P/E ratio. Buy it because it’s the number one company in its particular field in terms of earnings and sales growth, ROE, profit margins, and product superiority.
  9. Buy stocks with a relative strength of 85 or higher.
  10. Any size capitalization will do, but the majority of your stocks should trade an average daily volume of several hundred thousand shares or more.
  11. Learn to read charts and recognize proper bases and exact buy points. Use daily and weekly charts to materially improve your stock selection and timing.
  12. Carefully average up, not down, and cut every single loss when it is 7% or 8% below your purchase price with absolutely no exception.
  13. Write out your sell rules that show when you will sell and nail down a profit in your stock.
  14. Make sure your stock has at least one or two better-performing mutual funds who have bought it in the last reporting period. You want your stocks to have increasing institutional sponsorship over the last several quarters.
  15. The company should have an excellent new product or service that is selling well. It should also have a big market for its product and the opportunity for repeat sales.
  16. The general market should be in an uptrend and either favor small or big cap companies.
  17. The stock should have ownership by top management.
  18. Look for a “new America” entrepreneurial company rather than laggard, “old America” companies.
  19. Forget your pride and ego; the market doesn’t know or care what you think.
  20. Watch for companies that have recently announced they are buying back 5% to 10% or more of their common stock. Find out if there is new management in the company and where it came from.
  21. Don’t try to buy a stock at the bottom or on the way down in price, and don’t average down
  22. If the news appears to be bad, but the market yawns, you can feel more positive. The tape is telling you the underlying market may be stronger than many believe. The opposite is also true.
  23. 37% of a stock’s price movement is directly tied to the performance of the industry group the stock is in. Another 12% is due to strength in its overall sector. Therefore, half of a stock’s move is due to the strength of its respective group.

Richard Rhodes 16 Investing Rules

  1. The first and most important rule is – in bull markets, one is supposed to be long. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position.
  2. Buy that which is showing strength – sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. The rule of survival is not to “buy low, sell high”, but to “buy higher and sell higher.”
  3. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don’t enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.
  4. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add. 
  5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
  6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
  7. Be patient. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
  8. Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they.
  9. Be impatient. As always, small loses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important.
  10. Never, ever under any condition, add to a losing trade, or “average” into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.
  11. Do more of what is working for you, and less of what’s not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. 
  12. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge “to get the money back” is extreme, and should not be given in to.
  13. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price.
  14. Think like a guerrilla warrior. We wish to fight on the side of the market that is winning. Our duty is to earn profits by fighting alongside the winning forces. If neither side is winning, then we don’t need to fight at all.
  15. Markets form their tops in violence; markets form their lows in quiet conditions.
  16. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%.

Ed Seykota’s 21-Investment Guidelines

  1. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading.
  2. If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.
  3. If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk
  4. I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn’t get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which helps calm my nerves. Losing a position is aggravating, whereas losing your nerve is devastating.
  5. Before I enter a trade, I set stops at a point at which the chart sours.
  6. The markets are the same now as they were five to ten years ago because they keep changing – just like they did then.
  7. Risk is the uncertain possibility of loss. If you could quantify risk exactly, it would no longer be risk.
  8. Speculate with less than 10% of your liquid net worth. Risk less than 1% of your speculative account on a trade. This tends to keep the fluctuations in the trading account small, relative to net worth.
  9. I usually ignore advice from other traders, especially the ones who believe they are on to a “sure thing”. The old timers, who talk about “maybe there is a chance of so and so,” are often right and early.
  10. Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top
  11. Trend systems do not intend to pick tops or bottoms. They ride sides.
  12. The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. There are old traders and there are bold traders, but there are very few old, bold traders.
  13. The manager has to decide how much risk to accept, which markets to play, and how aggressively to increase and decrease the trading base as a function of equity change. These decisions are quite important—often more important than trade timing.
  14. The profitability of trading systems seems to move in cycles. Periods during which trend-following systems are highly successful will lead to their increased popularity. As the number of system users increases, and the markets shift from trending to directionless price action, these systems become unprofitable, and under-capitalized, and inexperienced traders will get shaken out. Longevity is the key to success.
  15. Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.
  16. I don’t think traders can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is reached and the trader has to quit or change, or find a new set of rules he can follow. This seems to be part of the process of evolution and growth of a trader.
  17. Trading Systems don’t eliminate whipsaws. They just include them as part of the process.
  18. The trading rules I live by are:
    1. Cut losses.
    2. Ride winners.
    3. Keep bets small.
    4. Follow the rules without question.
    5. Know when to break the rules.
  19. The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.
  20. If you can’t take a small loss, sooner or later you will take the mother of all losses.
  21. One alternative is to keep bets small and then to systematically keep reducing risk during equity draw downs. That way you have a gentle financial and emotional touchdown.

But, did you spot what was missing?

Every day the media continues to push the narrative of passive investing, indexing and “buy and hold.” Yet while these methods are good for Wall Street, as it keeps your money invested at all times for a fee, it is not necessarily good for your future investment outcomes.

You will notice that not one of the investing greats in history ever had “buy and hold” as a rule.

So, the next time that someone tells you the “only way to invest” is to buy and index and just hold on for the long-term, you just might want to ask yourself what would a “great investor” actually do. More importantly, you should ask yourself, or the person telling you, “WHY?”

The ones listed here are not alone. There numerous investors and portfolio managers that are revered for the knowledge and success. While we idolize these individuals for their respective “genius,” we can also save ourselves time and money by learning from their wisdom and their experiences. Their wisdom was NOT inherited, but was birthed out of years of mistakes, miscalculations, and trial-and-error. Most importantly, what separates these individuals from all others was their ability to learn from those mistakes, adapt, and capitalize on that knowledge in the future.

Experience is an expensive commodity to acquire, which is why it is always cheaper to learn from the mistakes of others.

Importantly, you will notice that many of the same lessons are repeated throughout. This is because there are only a few basic “truths” of investing that all of the great investors have learned over time. I hope you will find the lessons as beneficial as I have over the years and incorporate them into your own practices.

An Investor’s Desktop Guide To Trading – Part I

Read Part-II Here

Throughout history, individuals have been drawn into the more speculative stages of the financial market under the assumption that “this time is different.” Of course, as we now know with the benefit of hindsight, 1929, 1972, 1999, 2007, and most likely 2019, were not different – they were just the peak of speculative investing frenzies. Of course, if you went through one of the more recent bear market drawdowns, there is an important distinction, as my colleague John Coumarianos recently penned, “You’re Different This Time.”

“Even if you sailed through the 2007-2009 market meltdown without undue worry or panic-selling, the next downturn could prove more visceral if retirement is closer at hand and starting to seem like a realistic possibility. It’s not fun to see your portfolio drop from $500,000 to $225,000 when you’re 45. But it’s way worse to see your $1 million portfolio drop to $450,000 when you’re 55 and beginning to think serious thoughts about the when and how of your retirement. The losses are the same (in percentage terms); the ages are different.” 

So, what can you do?

In the media, there is a select group of investors and portfolio managers that are revered for the knowledge and success. While we idolize these investors for their respective “genius,” we can also save ourselves time and money by learning from their wisdom and their experiences. That wisdom was NOT inherited, but was birthed out of years of mistakes, miscalculations and trial-and-error. Most importantly, what separates these individuals from all others was their ability to learn from those mistakes, adapt, and capitalize on that knowledge in the future.

Experience is an expensive commodity to acquire, which is why it is always cheaper to learn from the mistakes of others.

Importantly, you will notice that many of the same lessons are repeated throughout. This is because there are only a few basic “truths” of investing that all of the great investors have learned over time.

The next major down market cycle is coming, it is just a question of when? These rules can help you navigate those waters more safely, because “you’re different this time.”


10-Trading Rules From Todd Harrison

1. Respect price action but never defer to it.

2. Discipline always trumps conviction. Following a set discipline removes the emotional bias of conviction.

3. Opportunities are made up far easier than lost capital.

4. Emotion is the enemy of trading.

5. It’s far better to “zig” when others “zag.”

6. Be adaptive to the market. Failure to adapt leads to extinction.

7. Maximize reward relative to the risk taken.

8. Perception is reality in the marketplace.

9. When “unsure” – trade small or not at all.

10. Don’t let bad trades turn into investments.


21-Trading Rules From Paul Tudor Jones 

1. When you are trading size, you have to get out when the market lets you out, not when you want to get out.

2. Never play macho with the market and don’t over trade.

3. If I have positions going against me, I get out; if they are going for me, I keep them.

4. I will keep cutting my position size down as I have losing trades.

5. Don’t ever average losers.

6. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well.

7. Never trade in situations you don’t have control.

I don’t risk significant amounts of money in front of key reports since that is gambling, not trading.

8. If you have a losing position that is making you uncomfortable, get out. Because you can always get back in.

9. Don’t be too concerned about where you got into a position.

10. The most important rule of trading is to play great defense, not offense.

11. Don’t be a hero. Don’t have an ego.

12. I consider myself a premier market opportunist.

13. I believe the very best money is to be made at market turns.

14. Everything gets destroyed a hundred times faster than it is built up.

It takes one day to tear down something that might have taken ten years to build.

15. Markets move sharply when they move.

16. When I trade, I don’t just use a price stop, I also use a time stop.

17. Don’t focus on making money; focus on protecting what you have.

18. You always want to be with whatever the predominant trend is.

19. My metric for everything I look at is the 200-day moving average of closing prices.

20. At the end of the day, your job is to buy what goes up and to sell what goes down so really who gives a damn about PE’s?

21. I look for opportunities with tremendously skewed reward-risk opportunities.


25-Trading Rules From Jim Cramer

1. Bulls, Bears Make Money, Pigs Get Slaughtered

2. It’s OK to Pay the Taxes

3. Don’t Buy All at Once

4. Buy Damaged Stocks, Not Damaged Companies

5. Diversify to Control Risk

6. Do Your Stock Homework

7. No One Made a Dime by Panicking

8. Buy Best-of-Breed Companies

9. Defend Some Stocks, Not All

10. Bad Buys Won’t Become Takeovers

11. Don’t Own Too Many Names

12. Cash Is for Winners

13. No Woulda, Shoulda, Couldas

14. Expect, Don’t Fear Corrections

15. Don’t Forget Bonds

16. Never Subsidize Losers With Winners

17. Check Hope at the Door

18. Be Flexible

19. When the Chiefs Retreat, So Should You

20. Giving Up on Value Is a Sin

21. Be a TV Critic

22. Wait 30 Days After Preannouncements

23. Beware of Wall Street Hype

24. Explain Your Picks

25. There’s Always a Bull Market


Bernard Baruch’s 10 Investing Rules

1. Don’t speculate unless you can make it a full-time job.

2. Beware of barbers, beauticians, waiters — of anyone — bringing gifts of “inside” information or “tips.”

3. Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.

4. Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.

5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.

6. Don’t buy too many different securities. Better have only a few investments which can be watched.

7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.

8. Study your tax position to know when you can sell to the greatest advantage.

9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.

10. Don’t try to be a jack of all investments. Stick to the field you know best.


 James P. Arthur Huprich’s Market Truisms And Axioms

1. Commandment #1: “Thou Shall Not Trade Against the Trend.”

2. Portfolios heavy with under-performing stocks rarely outperform the stock market!

3. There is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again, mostly due to human nature.

4. Sell when you can, not when you have to.

5. Bulls make money, bears make money, and “pigs” get slaughtered.

6. We can’t control the stock market. The very best we can do is to try to understand what the stock market is trying to tell us.

7. Understanding mass psychology is just as important as understanding fundamentals and economics.

8. Learn to take losses quickly, don’t expect to be right all the time, and learn from your mistakes.

9. Don’t think you can consistently buy at the bottom or sell at the top. This can rarely be consistently done.

10. When trading, remain objective. Don’t have a preconceived idea or prejudice. Said another way, “the great names in Trading all have the same trait: An ability to shift on a dime when the shifting time comes.”

11. Any dead fish can go with the flow. Yet, it takes a strong fish to swim against the flow. In other words, what seems “hard” at the time is usually, over time, right.

12. Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations. Use volume as a confirming guidepost.

13. When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point.

14. As long as a stock is acting right and the market is “in-gear,” don’t be in a hurry to take a profit on the whole positions. Scale out instead.

15. Never let a profitable trade turn into a loss, and never let an initial trading position turn into a long-term one because it is at a loss.

16. Don’t buy a stock simply because it has had a big decline from its high and is now a “better value;” wait for the market to recognize “value” first.

17. Don’t average trading losses, meaning don’t put “good” money after “bad.” Adding to a losing position will lead to ruin. Ask the Nobel Laureates of Long-Term Capital Management.

18. Human emotion is a big enemy of the average investor and trader. Be patient and unemotional. There are periods where traders don’t need to trade.

19. Wishful thinking can be detrimental to your financial wealth.

20. Don’t make investment or trading decisions based on tips. Tips are something you leave for good service.

21. Where there is smoke, there is fire, or there is never just one cockroach: In other words, bad news is usually not a one-time event, more usually follows.

22. Realize that a loss in the stock market is part of the investment process. The key is not letting it turn into a big one as this could devastate a portfolio.

23. Said another way, “It’s not the ones that you sell that keep going up that matter. It’s the one that you don’t sell that keeps going down that does.”

24. Your odds of success improve when you buy stocks when the technical pattern confirms the fundamental opinion.

25. As many participants have come to realize from 1999 to 2010, during which the S&P 500 has made no upside progress, you can lose money even in the “best companies” if your timing is wrong. Yet, if the technical pattern dictates, you can make money on a short-term basis even in stocks that have a “mixed” fundamental opinion.

26. To the best of your ability, try to keep your priorities in line. Don’t let the “greed factor” that Wall Street can generate outweigh other just as important areas of your life. Balance the physical, mental, spiritual, relational, and financial needs of life.

27. Technical analysis is a windsock, not a crystal ball. It is a skill that improves with experience and study. Always be a student, there is always someone smarter than you!


James Montier’s 7 Immutable Laws Of Investing

1. Always insist on a margin of safety

2. This time is never different

3. Be patient and wait for the fat pitch

4. Be contrarian

5. Risk is the permanent loss of capital, never a number

6. Be leery of leverage

7. Never invest in something you don’t understand

Gamma Radiation, Gamma Reversals, and Gold

I grew up watching Bill Bixby playing The Incredible Hulk on TV.  Readers will be familiar with the general story – mild-mannered scientist Bruce Banner is exposed to gamma radiation, which transforms his molecular structure. The exposure causes Bruce Banner to turn into the radiation-green colored Hulk when he experiences extreme anger.

Bruce Banner has a “tell” for when his anger reached the point of no return and the Hulk would appear.  

His irises turn white. 

When Banner’s irises turn white, the Hulk is on his way to restore justice and create order. In this article, I discuss a market “tell” to alerts us as to when a market is likely to shift from chaos to order.

Gamma in the Financial Markets

Gamma not only defines the type of radiation that transformed Banner into the Hulk, but it is widely used in science and mathematics. In the financial world, gamma is one of the “option greeks,” which help to measure the price, risk, and time dimension of options. 

Gamma in the financial markets has had increasing attention lately. The Wall Street Journal and Bloomberg have recently published articles which discuss how this “obscure concept” has moved markets over the past year.  Bloomberg, for instance, claims that the rapid fall in oil prices in the 3rd quarter of 2018 was due to “gamma.” In other words, Bloomberg says that gamma was the “tell” that predicted a more than $35/bbl decline in oil prices. 

My analysis has demonstrated that gamma data has been a “tell” for many major price pivots over the past year, including the stock markets, energy markets, and grain markets.

First, let’s better define my “tell.”

Gamma Reversal

A Gamma Reversal denotes the occasion when a spike in Neutral Gamma coincides with a nearby monthly pivot level.  Over the past year, there have been six significant Gamma Reversals, which I highlight below.  

The most notable and memorable Gamma Reversal occurred in the S&P index last December 2018.  The chart below shows the price decline of the SPX from September through late December.  At the market troughs, in the days leading up to Christmas, Neutral Gamma (blue) spiked off the chart, corresponding with a major pivot level.

This Gamma Reversal was a strong signal that sellers exhausted their ammunition. The price quickly reversed higher after this event.

The natural gas market in late 2018 had a similar scenario.  In November and again in December, natural gas saw Neutral Gamma spike out of range. In both cases, the spikes corresponded with nearby reversal pivots.  Once again, we could say that the buyers became exhausted, and the price declined.

In June 2018, there were four cases of what I would call a Gamma Reversal – in corn, soybeans, wheat, and natural gas.  In each case, Neutral Gamma spiked out of range and a nearby price pivot occurred. 

Why Does This Happen?

Here is an explanation of why I believe that gamma signals can coincide with nearby price pivot(s).

Neutral Gamma is defined as the price level where market risk is neutral for the entire options market.  This is to say that market participants are well hedged, and the options market is in balance with the underlying market. In aggregate, traders are not exposed to meaningful risk.

When Neutral Gamma spikes “off the charts,” it means that the options market is out of synch with the underlying market.  Such spikes tell us that option buyers and sellers are experiencing extreme risk and emotions – an acute kind of fear and greed.  In such times, most active managers are feverishly working to mitigate risk.  Such events usually end up with greatly rewarding winners and punishing losers.  

When gamma spikes, the Bruce Banner in traders becomes agitated and their irises turn white.   

Gold Gamma Spike

On July 23rd, our data recorded an out-of-range spike in Neutral Gamma in the gold market.  With this spike in gamma, I am looking for two primary possibilities: 1) the potential for a short squeeze above $1,450, the peak of which could become an upside price pivot, or 2) the recent closing high for gold could be an upside pivot which marks the beginning of a pull-back or a reversal. 

The chart below shows the relationship between price, Neutral Gamma, and Neutral Delta since the beginning of 2019.  Option expiration in COMEX gold options was Thursday, July 25th.

Final Thoughts

I have outlined and defined a few terms here, all of which are worthy of further research and review.  I have shown several instances where Neutral Gamma spikes out of range and ultimately marks the top or bottom of trends. Since gamma is a measure of financial risk, it can also be viewed as an indicator of human emotion.  Spikes in gamma also result in spikes in human emotion, and the spikes in human emotion can lead to exhaustion, capitulation, and the creation of nearby tops and bottoms.

This market “tell” which is followed by so few investors can provide great entry and exit points. If nothing else they heighten our senses to the whites of traders’ irises and the growing possibility for a burst of volatility.

If you would like to learn more about these topics or my other research, please visit my website.

Disclaimer

This article is for information purposes only, and is not investment advice. 

INTERVIEW: Raoul Pal – The Coming Debt-Driven Crisis & Why The Fed Can’t Stop It.

I recently had the privilege to visit with Raoul Pal, the founder of Real Vision, to discuss a variety of topics including:

  • The risk of recession in the U.S.
  • What Trump’s nomination of Judy Shelton to the Fed means.
  • Can you have a gold standard AND zero interest rates.
  • The future of the ECB and monetary policy in Europe
  • The real value of gold.

After we stopped rolling tape on the interview Raoul and I kept going and discussed Facebook’s Libra, cypto currency, and how much you should own. The cameras kept rolling so we have a great bonus clip for you.

Check out the new FREE version of Real Vision at www.realvision.com/free

I hope you enjoy our interview with Raoul Pal.


RECESSION: Can The U.S. Have A Recession Without GDP Showing It?


The Future Of The Fed, Monetary Policy, Rates, Judy Shelton, IMF, and the ECB


The True Value Of Gold


BONUS TRACK: Crypto Currency, Facebook’s LIBRA, & How Much You Should Own.


Is The Stock Market As Confused As You Are About A Recession?

Last week, Barron’s ran an article entitled “The Stock Market Is Just As Confused About A Potential Recession As You Are?” To wit:

“Investors have long used where we are in the economic cycle to decide which stocks to buy and sell. New research from Nomura’s Joseph Mezrich flips that on its head by showing how investors can use stock performance to help determine where we are in the cycle. Too bad the market is sending mixed messages right now.”

But let’s be clear here; no one wants the party to end. So, despite a struggling stock market over the last year, slowing economic growth, and a collapsing yield curve, there are still plenty of articles suggesting you should just ignore it all and remain invested.

“Economist Ryan Sweet of Moody’s Analytics has a message for his fellow economists who are predicting a recession in the next year: ‘The Fed isn’t going to kill this expansion.'” – Ryan Sweet of Moody’s Analytics

But then he goes on to make an interesting statement:

“Recessions are typically caused by one of two things, he says: Imbalances develop in the economy or financial system (like a bubble in the stock market or in housing), or the Federal Reserve panics and raises interest rates too much in response to unexpected inflation caused by an overheating economy. Neither of those triggers is present.”

Uhm….okay…maybe Ryan just doesn’t get out of the house much but saying there isn’t a bubble in the stock market is like saying Mount Everest is just a mountain.

Also, with respect to his point that the Fed isn’t going to kill this expansion, well that too may also be a bit myopic. As shown, the Fed has been hiking rates to offset the specter of inflation which doesn’t exist to any great degree and have likely gone too far. We suspect this, because the recent reversal in policy is akin to what we have see repeatedly in the past. The Fed tends to stop hiking interest rates when they realize they have caused problems within the economy, like a sudden downward shift in housing, autos, and asset prices.

Sound familiar?

The problem with all of the mainstream claims that there is “no recession in sight” is those claims are based on analysis of unrevised and lagging economic data. 

This is an incredibly important point.

The problem with making an assessment about the state of the economy today, based on current data points, is that these numbers are “best guesses” about the economy. However, economic data is subject to substantial negative revisions in the future as actual data is collected and adjusted over the next 12-months and 3-years. Consider for a minute that in January 2008 Chairman Bernanke stated:

“The Federal Reserve is not currently forecasting a recession.”

In hindsight, the NBER, eleven months later, announced that the official recession began in December of 2007.

“But if the Federal Reserve can’t predict a recession, no one can.”

Well, that isn’t necessarily correct. For example, let’s take a look at the data below of real (inflation-adjusted) economic growth rates:

  • September 1957:     3.07%
  • May 1960:                 2.06%
  • January 1970:        0.32%
  • December 1973:     4.02%
  • January 1980:        1.42%
  • July 1981:                 4.33%
  • July 1990:                1.73%
  • March 2001:           2.31%
  • December 2007:    1.97%

Each of the dates above shows the growth rate of the economy immediately prior to the onset of a recession (this is historically revised data). If Ryan had been making his comments about the economy in 1957, it would have sounded much the same way.

“The recent decline from the peak in the market, is just that, a simple correction. With the economy growing at 3.07% on an inflation-adjusted basis, there is no recession in sight.” 

You will note in the table above that in 6 of the last 9 recessions, real GDP growth was running at 2% or above.

At those points in history, there was NO indication of a recession “anywhere in sight.” 

But the next month one began.

So, is the market really sending mixed messages?”

The Market Isn’t Confused

This is also likely a mistaken assumption. In reality, it may just be the unwillingness of “eternally optimistic” individuals to pay attention.

Take a look at the chart below. The green dots mark the peak of the market PRIOR to the onset of a recession. In 8 of 9 instances the S&P 500 peaked and turned lower prior to the recognition of a recession. 

In other words, the decline from the peak was “just a correction” as economic growth was still strong.

In reality, however, the market was signaling a coming recession in the months ahead. The economic data just didn’t reflect it as of yet. (The only exception was 1980 where they coincided in the same month.) The chart below shows the date of the market peak and real GDP versus the start of the recession and GDP growth at that time.

The problem is in the waiting for the data to catch up.

So, if you really can’t count on economic data to “alert” you to the onset of a recession, what can you use. 

Well, by looking at the chart above, it is clear the stock market leads economic downturns. Also, as we have written about previously, so do yield curve inversions. The chart below combines both which shows this is indeed the case. In every prior instance going back to 1980, the stock market began to peak as the yield curve began to invert.

Also, when the Fed Funds rate exceeds the 10-year Treasury, that too has been a pretty strong indication of both market problems and the onset of a recession. Currently, the spread between those two particular rates (at the time of this writing) is +0.0%.

But even this warning has been met with criticism. Just recently, Dallas Fed President Robert Kaplan stated, with respect to the potential for the Fed to lower interest rates:

“I’d need to see an inversion of some magnitude and/or some duration, and right now we don’t have either. If you see an inversion that goes on for several months…that’s a different kettle of fish, but we’re not there yet.”

The problem for the Fed is in the waiting. A look back at the charts above show there are only two occasions going back to the 1970’s where the yield curve inverted and it didn’t lead to a recession. The problem with “patience” is that by the time the Fed does act, it will likely be too late which has historically always been the Fed’s problem.

Furthermore, the “yield curve inversion” is NOT the illness of the market, rather it is the symptom of virus infecting the economic environment. David Rosenberg just recently penned a rather exhaustive list.

  1. The Fed turned TOO dovish, taking out not one, but both pledged rate hikes for this year and trimming its GDP forecasts.
  2. The stock market didn’t mind the futures market pricing out future tightening, but discounting rate cuts means the Fed DOES see something nefarious around the corner. Market-based odds of the next move being a policy easing have jumped to 58% from 30% a week ago and 5% a month ago! Remember, the best time to “buy” the market is on the last rate cut, not the first one.
  3. The 10-year/3-month yield curve finally inverted, albeit fractionally, for the first time since August 2007. This  is not an infallible indicator, but predicts recessions with 85% accuracy. 
  4. Not only has the yield curve inverted, but the composition of the drop in bond yields should be a worry sign to equity investors. While inflation expectations have receded to 1.9% (for 10-year break-evens,) fully 85% of the slide in Treasury yields has come from the “real rate,” which has collapsed to a mere 0.55%. The bond market is thus looking the stock market straight in the eye and saying “this rough patch in the economy and recession in corporate profits ain’t no one-quarter wonder.” 
  5. The President has sought to pick a fight with Jay Powell by nominating his long-time supporter Stephen Moore to the Fed as Governor. If this happens, one can expect dissension to rise at the Central Bank. Moore is such a hypocrite that he penned a paper in 2014 criticizing the Fed for its QE largesse and for not raising rates – and now he’s been openly insulting to Jay Powell (going so far as to call for his resignation) for doing what Moore was clamoring for a half-decade ago. One more step towards trying to politicize the institution. (A strong case here for gold.)
  6. In addition to the uncertainty now at the Fed – Neel Kashkari is not being shy that a policy misstep has been made as he second-guesses even his 2.5% estimate of the “neutral” funds rate. We have a fiscal situation in the USA that also is destabilizing and clearly crowding out private investment. In Feburary, the budget deficit hit a record $234 billion, which is pure insanity (up 9% from a year ago). In all of 2006, the gap was $248 billion. In 2007, the peak of growth in the last cycle, the annual deficit was $161 billion – lower than the past month. When I started in the business in 1987, the annual deficit that year was $150 billion. Now, we do more than that in just one month. And, this level of debt-laden government intervention in the economy is really worth of a forward P/E mulitple that up until recently was pressing against 16x?
  7. The flat-to-inverted yield curve is killing the banks. The S&P 500 Financials were crushed 5% last week; the regional banks were down 9.4%. The KBW Nasdaq Bank Index suffered its biggest one-week loss since 2016.
  8. The Atlanta Fed is down close to zero percent on Q1 growth and the NY Fed sees the first half of the year at 1.4%, or half of the 2018 pace.

He had multiple more points in his “must read” daily missive, but you get the idea.

Nonetheless, we are still told to disregard the warnings because this “time is different.”

To wit:

“‘Historically the inversion of the yield curve has been a good [sign] of economic downturns [but] this time it may not,’ because the normal market signals have been distorted by, ‘regulatory changes and quantitative easing in other jurisdictions…everything we see in terms of the near-term outlook for the economy is quite strong.’”Former U.S. Fed Chair Ben Bernanke, July 2018

“I think that there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed…the fact the term premium is so low and the yield curve is generally flatter is an important factor to consider.” Former U.S. Fed Chair Janet Yellen’s final press conference, December 2017

Of course, given the track record of the Fed, maybe you should think differently.

With valuations at 30x trailing 10-year earnings, the risk to capital is quite substantial. As Larry Berman recently discussed for BNN Bloomberg:

“The P\E in a recession trough is probably between 11-13 times earnings. Earnings tend to fall about 15-20 per cent in an average recession. This one is probably worse than average largely due to the massive increase in leverage over the cycle suggest the downturn would be longer and deeper. If earnings fall by 30 per cent and the multiple is 11x, the S&P trough value is around 1,300. The optimistic scenario is a 15 per cent decline in earnings and a 13X multiple puts the S&P 500 around 1850. As an FYI, earnings fell by about 50 per cent in 2008-09 recession. Bottom line is a BIG Bear market for equities is likely and passive ETF portfolios will tend to disappoint.”

He is right. During “average” recessions stocks reprice forward expectations by 30% on average. However, given the massive extensions in markets over the last decade, Larry’s targets above suggest a 50% decline is possible.

Don’t Ignore The Warning

During the entirety of 2007, the trend of the data was deteriorating and the market had begun to struggle to advance. The signs were all there that “something had broken” but the “always bullish” mainstream media encouraged investors to simply ignore it as it “was different this time.” Unfortunately, by the time the annual data revisions had been released by the Bureau of Economic Analysis (BEA), it was far too late to matter.

Today, we are once again seeing many of the same early warnings. If you have been paying attention to the trend of the economic data, the stock market, and the yield curve, the warnings are becoming more pronounced.

In 2007, the market warned of a recession 14-months in advance of the recognition. 

Today, you may not have as long as the economy is running at one-half the rate of growth.

However, there are three lessons to be learned from this analysis:

  1. The economic “number” reported today will not be the same when it is revised in the future.
  2. The trend and deviation of the data are far more important than the number itself.
  3. “Record” highs and lows are records for a reason as they denote historical turning points in the data.

We do know, with absolute certainty, this cycle will end.

“Economic cycles are only sustainable for as long as excesses are being built. The natural law of reversions, while they can be suspended by artificial interventions, cannot be repealed.” 

Being optimistic about the economy and the markets currently is far more entertaining than doom and gloom. However, it is the honest assessment of the data, along with the underlying trends, which are useful in protecting one’s wealth longer-term.

The market, and the yield curve, are trying to tell you something very important.

VLOG: Savvy Social Security Strategies For Maximizing Benefits

Are you closing in on retirement and have questions about social security?

When you begin to collect benefits, how you collect them, and what potentially can impact those payments can be very confusing. Danny Ratliff and Richard Rosso, both highly qualified CFP’s, delve into the many most commonly asked questions about social security and how to maximize the benefits in retirement.

Still have questions? 

No problem.

We at RIA Advisors, a registered investment advisory firm, specialize in preserving and growing investor wealth in times like these. If you are concerned about your financial future, click here to ask a question and find out more.

As Seen On Forbes: When The Buybacks Go Bye-Bye

As seen on Forbes by RealInvestmentAdvice.com’s Jesse Colombo: “When The Stock Buybacks Go Bye-Bye.”

Debt-funded stock buybacks have been one of the major drivers of the U.S. stock market boom since the Great Recession. Ironically, 2018 was the most active year on record for buyback activity, yet the stock market faltered and experienced its first annual loss since 2008. If the stock market performed as poorly as it did in 2018 with record amounts of buybacks to prop it up, just imagine how much worse it would be if buybacks were to slow down significantly or grind to a halt? Well, that is the risk that I’m going to address in this piece.

From the bear market low in March 2009 until the recent peak, the S&P 500 surged by approximately 300%:

S&P 500

Read the full article on Forbes.

INTERVIEW: Kevin Smith – Crescat Capital Management

I got a chance to sit down with the CIO of Crescat Capital Management, Kevin Smith, in a wide ranging interview about the economy, the markets, interest rates and the forward risks to investors in the months ahead.

Crescat is a global macro asset management firm which deploys value-driven models to develop tactical investment themes. Their mission is to protect and grow wealth by capitalizing on the most compelling macro themes of our time. Their aim for high absolute and risk-adjusted returns over the long term with low correlation to benchmarks has paid off as they were among the best performing hedgefunds this year.

Get more information on Crescat Capital


Why The US Can’t Decouple From The Rest Of The World


Why US Credit Issues Are Due To A Hamstrung Fed


Are Fed Rate Hikes The First Whiff Of A Financial Crisis


The Importance Of Being Tactical In A Downturn


INTERVIEW: Lawrence Lepard & The Lessons Of History

In a recent interview with Lawrence Lepard we dig down into the lessons of history to discern what will be the probable outcomes in the future for investors.

Lawrence Lepard has a long history as a private equity manager and making early bets on the technology before “it was thing.” He is currently the managing partner at Equity Management Associates (EMA) which is a private investment partnership which pursues investments in companies that have growth at a reasonable price (GARP) characteristics.

We have broken down the interview into “bite sized” pieces for easier consumption.


Why Lessons From The 1900’s Are Important To Today’s Markets


How To Invest With An Activist Fed


How We Got From The Housing Bubble To Here


How To Deal With Today’s Financial Terrorists


Why The Tide Is Going Out On Interest Rates

The October Market Breakdown Is Still Valid

After plunging for most of October, the U.S. stock market rebounded sharply in the last two weeks in anticipation of the U.S. mid-term elections. Though the market soared the day after the election, the rally petered out on Thursday and Friday. This means that the breakdown from the important three-year old uptrend line is still valid. The fact that the market was unable to close above this level on the weekly chart after testing it is quite concerning and may foreshadow further weakness ahead. 

S&P 500

We at Clarity Financial LLC, a registered investment advisory firm, specialize in preserving and growing investor wealth in times like these. If you are concerned about your financial future, click here to ask me a question and find out more. 

The S&P 500 Is Attempting To Negate Its October Breakdown

Market sentiment has shifted significantly now that the U.S. mid-term election is over and Congress is gridlocked. The S&P 500 jumped 2.12% and the Nasdaq Composite surged 2.64%. The S&P 500’s rally caused it to break back above a key three-year-old uptrend line that it broke below two weeks ago. If the index is able to close above this uptrend line on the weekly chart, it will have negated the bearish signal given when it broke the trendline. A close on the weekly chart is needed to confirm this move.

S&P 500

Please review our Chief Investment Strategist Lance Roberts’ most recent newsletter to learn how we are positioning in this market.

We at Clarity Financial LLC, a registered investment advisory firm, specialize in preserving and growing investor wealth in times like these. If you are concerned about your financial future, click here to ask me a question and find out more. 

Does Today’s Bounce Mean The Sell-Off Is Over?

The Dow was up 241 points today and the Bubble Heads already think it’s “back to the races again.” I’m still cautioning “not so fast!,” however. Nothing has changed technically since last week’s major technical breakdown that caused the bellwether S&P 500 to close below a very important uptrend line that started in early-2016. The “Godfather” of chart analysis Ralph Acampora feels the same way as me and said that the “damage done to the stock market is much, much worse” than anyone is talking about.

According to the chart below, the S&P 500 is still below its uptrend line, which means that the breakdown is still intact. The uptrend line is now an overhead resistance level. All of the movement that occurs between this line and the 2,550 to 2,600 support zone (the early-2018 lows) is basically randomness or “noise,” not “signal.” The S&P 500 would need to break back above its former uptrend line in a convincing manner in order to negate the breakdown. As I’ve been saying, the S&P 500 is likely to continue testing its 2,550 to 2,600 support zone before its able to stage a decent bounce. If the index closes below this zone, it would likely signal further declines ahead.

S&P 500 Chart

Despite the bounce of the past two days, the Nasdaq Composite index is still below its uptrend line that it broke last week, which means that the breakdown is still intact:

Nasdaq Chart

As I explained yesterday, I am watching if a bearish head and shoulders pattern is forming in the S&P 500 and other major U.S. stock indices. If we are actually following this pattern, the left shoulder was the late-2017 surge and early-2018 plunge, the head was the summer surge and October plunge, the S&P 500 would have further to drop in order to test its neckline, and a final “dead cat bounce” would be ahead as the right shoulder forms. Head And Shoulders

I am not predicting or guaranteeing that the market is forming a head and shoulders topping pattern. I am simply curious to see if we are forming this pattern, so I am taking a “wait and see” approach. Importantly, technical analysis is not a guarantee of future outcomes. It is the analysis of previous price trends in order to apply probabilities to our portfolio management. What this analysis clearly suggests is an environment of mounting risks in the markets which our entire portfolio management team at Real Investment Advice and Clarity Financial have been keenly focused on.

As portfolio managers, we are aware of the damage sudden and unexpected downdrafts in markets can have on invested capital. Our team produces commentary each week which discusses the near term trends of the market and how we are navigating the increasingly dangerous waters of an overvalued, late cycle, bull market. If you tired of being told to just “ride it out,” and are concerned about growing your wealth, and protecting your financial future, click here to ask me a question to find out more.

As Seen On Forbes: Is A Top Forming In The Market?

As seen on Forbes by RealInvestmentAdvice.com’s Jesse Colombo: “Is A Long-Term Top Forming In The Market“:

Back in February, during the last market correction, I wrote a blog post called “3 Ways This Market Correction May Play Out” in which I showed three technical chart patterns that I believed the market may have tried to follow after the sharp sell-off. I also showed historic examples of these patterns. In that piece, I was not making any definite predictions, but just showing these potential scenarios as a helpful framework to better anticipate and understand the next phase of market action.

After the summer surge to record highs and October’s plunge, the market pattern that it appears we are following most closely is “Scenario #2: A Topping Pattern Forms” (more specifically, a head and shoulders pattern). If we are indeed following this pattern, the left shoulder was the late-2017 surge and early-2018 plunge, the head was the summer surge and October plunge, and a final “dead cat bounce” would be ahead as the right shoulder forms. Since early-2016, the S&P 500 has followed an uptrend line higher until last week’s close below it, which represents a notable and worrisome change of trend. The neckline support level formed at the early-2018 lows and is the key price target that I believe the S&P 500 is going to gun for during the course of this sell-off.Head And Shoulders

Read the full article on Forbes.

Please review our Chief Investment Strategist Lance Roberts’ newsletter from this weekend to learn how we are positioning in this market.

We at Clarity Financial LLC, a registered investment advisory firm, specialize in preserving and growing investor wealth in times like these. If you are concerned about your financial future, click here to ask me a question and find out more. 

The Market Is Gunning For Its Early-2018 Lows

After last week’s powerful sell-off, the U.S. stock market opened much higher this morning, with the Dow up as much as 352 points. Mainstream investors and TV commentators were excited, as they usually are, that the sell-off may have created an excellent “dip-buying” opportunity. I wasn’t buying it one bit, however:

Last week, I wrote that “the market’s trend breakdown had been confirmed” because the U.S. market closed below its important uptrend line that began formed in early-2016. In my mind, this morning’s market pop was nothing to get excited about because the U.S. stock indices were still below their important trendlines (which are now resistance levels), which means that last week’s technical breakdown was/is still intact.

Shortly after my statement, the market erased its gains in one of the worst intraday reversals in years:

bounce chart

The sell-off of the last few weeks caused the S&P 500 to break below its uptrend line that began in early-2016. The next major technical support and price target to watch is the 2,550 to 2,600 support zone that formed at the lows earlier this year. I don’t expect to see much of a bounce until this zone is tested a bit more (the market may need to test the lows of this zone around 2,550).

S&P 500 Chart

At the close of trading last week, the Dow Jones Industrial Average still had not broken below its key uptrend line yet, unlike the S&P 500, Nasdaq Composite, and Russell 2000. As of today, however, the Dow closed below this uptrend line, which is a worrisome sign. I would like to see a close below this line on the weekly chart for further confirmation.

Dow Chart

The Nasdaq Composite index continues to fall hard after closing below its uptrend line that began in early-2016 last week. The index will likely gun for its next price target, which is the 6,600 to 6,800 support zone that formed earlier this year. I don’t foresee much of a bounce until the Nasdaq has tested this zone.

Nasdaq Chart

The small cap Russell 2000 index broke below its uptrend line three weeks ago and has been testing the 1,475 support level. If the index breaks below the 1,425 to 1,475 support zone, it would give yet another bearish signal.

Russell 2000 Chart

I don’t expect much of a bounce until the respective U.S. stock indices test their early-2018 lows, which means that the markets are likely to go even lower in the short-term. Even if/when we get a bounce, it’s not much to get excited about because it is likely to only be a short-term technical bounce or relief rally rather than a sustainable phase of the bull market. I have been warning that we are in a dangerous stock market bubble (please watch my presentation to learn more), so the breakdown of the past few weeks means that the stock market bubble is in the process of popping – a very scary prospect.

Please review our Chief Investment Strategist Lance Roberts’ newsletter from this weekend to learn how we are positioning in this market.

We at Clarity Financial LLC, a registered investment advisory firm, specialize in preserving and growing investor wealth in times like these. If you are concerned about your financial future, click here to ask me a question and find out more. 

The Market’s Trend Breakdown Has Been Confirmed

On Wednesday, after the Dow plunged 608.01 points, I wrote a piece called “The #MAGA Stock Market Trendline Is Broken” in which I showed how the U.S. stock market’s sharp decline caused several major stock indices to break below their important uptrend lines that have formed in early-2016. I described this breakdown as a “very important change of trend.” On Thursday, the Dow rose 399.95 points and the S&P 500 rose 49.46, but I said that the market bounce did not negate the bearish technical developments that took place on Wednesday. Sure enough, the Dow fell 296 points or 1.2% on Friday, while the S&P 500 fell 1.7%, which confirms the technical breakdown under the important trendline that formed in early-2016 (I was waiting for a solid close below this level on the weekly chart).

This week’s sell-off caused the S&P 500 to break below its uptrend line that began in early-2016. The next major technical support and price target to watch is the 2,550 to 2,600 support zone that formed at the lows earlier this year.

S&P 500 Chart

Unlike the S&P 500, the Dow Jones Industrial Average still has not broken below its key uptrend line. If the Dow closes below this uptrend line in a convincing manner on the weekly chart (possibly next week if the sell-off continues), the next important support level and price target to watch is the 23,250 to 23,500 zone that formed in early-2018.

Dow Chart

The Nasdaq Composite index closed below its uptrend line that began in early-2016. The index would need to close back above this trendline to negate the bearish technical signal. If the sell-off continues, the next price target to watch is the 6,600 to 6,800 support zone that formed earlier this year.

Nasdaq Chart

The small cap Russell 2000 index broke below its uptrend line two weeks ago and tested the 1,475 support level this week. If the index breaks below the 1,425 to 1,475 support zone, it would give yet another bearish signal.

Russell 2000 Chart

As someone who is warning about a dangerous stock market bubble (please watch my presentation to learn more), this week’s technical breakdown really concerns me. The U.S. stock indices discussed in this piece would need to close back above their trendlines to negate this week’s breakdown. There is a very good chance that the sell-off will continue until U.S. stock indices hit their support zones at the early-2018 lows, then they will bounce for a time, and attempt to break below their support zones. If and when the indices eventually close below their support zones, that would give yet another bearish signal that would likely foreshadow a decline to their 2015 highs (not that the bear market will stop there, but it’s the next step after a break below the early-2018 lows).

We at Clarity Financial LLC, a registered investment advisory firm, specialize in preserving and growing investor wealth in times like these. If you are concerned about your financial future, click here to ask me a question and find out more.

Did Today’s Market Bounce Negate Yesterday’s Breakdown?

Yesterday, I wrote a piece called “The #MAGA Stock Market Trendline Is Broken” in which I showed how the U.S. stock market’s sharp decline caused several major stock indices to break below their important uptrend lines that have formed in early-2016. I described this breakdown as a “very important change of trend.” I also explained that this breakdown was very concerning to me as someone who is warning about a dangerous stock market bubble (please watch my presentation to learn more). Today, the Dow rose 399.95 points and the S&P 500 rose 49.46 points, causing many traders to become excited that a big rebound is ahead. Unfortunately, today’s market bounce did not negate yesterday’s bearish technical developments.

Wednesday’s sell-off caused the S&P 500 to break below its uptrend line that began in early-2016. Today’s bounce did nothing to negate yesterday’s bearish breakdown because the index is still below its uptrend line, which is now a resistance level. For further confirmation, I want to see if the S&P 500 stays beneath this level by the close of trading on Friday. The next major technical support and price target to watch is the 2,550 to 2,600 support zone that formed at the lows earlier this year.

S&P 500 Chart

Unlike the S&P 500, the Dow Jones Industrial Average has not yet broken below its key uptrend line. On Wednesday, the Dow briefly touched its uptrend line, but rebounded off of it on Thursday. If the Dow closes below this uptrend line in a convincing manner on the weekly chart (possibly in the next couple days if the sell-off resumes), the next important support level and price target to watch is the 23,250 to 23,500 zone that formed in early-2018.

Dow Chart

The Nasdaq Composite index broke below its key trendline for the first time on Wednesday, but today’s rebound caused the index to close almost exactly at this key level. Amazon and Alphabet’s earnings misses have caused a sell-off in afterhours that is not reflected on the chart below, but will be reflected in Friday’s chart. If the Nasdaq closes 1 to 2 percent lower on Friday, it will close below this uptrend line on the weekly chart, which would give a bearish confirmation signal. The next price target to watch is the 6,600 to 6,800 support zone that formed earlier this year.

Nasdaq Chart

The small cap Russell 2000 index broke below its uptrend line two weeks ago and tested the 1,475 support level on Wednesday. If the index breaks below the 1,425 to 1,475 support zone, it would give yet another bearish signal.

Russell 2000 Chart

Today’s market bounce does not change my views or make me any less concerned than I was yesterday. After sharp bearish moves like we experienced yesterday, it is normal to have a brief technical bounce. It’s important to keep in mind that these types of bounces are typically just noise, not signal. I caution against reading too deeply into them. If the bounce doesn’t negate the recent trendline breakdowns, it means very little to me. Please stay tuned for tomorrow’s update.

We at Clarity Financial LLC, a registered investment advisory firm, specialize in preserving and growing investor wealth in times like these. If you are concerned about your financial future, click here to ask me a question and find out more.

Is The Market Predicting A Recession?

There has been lot’s of analysis lately on what message the recent gyrations in the market are sending.

Is this just a correction in an ongoing, and seemingly never-ending, bull market?

Maybe. Anything is possible.

Or, is the financial market starting to pick up on what we have been warning about for the last several months which is simply higher rates, slowing global growth, and trade wars are going to impact the economy?

The consensus is that with the current spat of strong economic growth, unemployment and jobless claims at record lows, and confidence near record highs, there is simply no way the economy is even close to starting a recession. Furthermore, with economic growth slated to come in at 3.4% for the 3rd-quarter, this is further evidence a recession is “nowhere in sight.” 

“Finally, it’s here. The bad news the financial media has been searching for, doggedly, for the last six months. As stocks plunge across the planet, fears of a recession are resurfacing.

We can say this with some confidence: The stock market panic is overblown. And a US recession is not imminent.” Gwynn Guilford, Quartz

And what is the basis for Gwynn’s vote of confidence?

American growth is indeed strong. Last quarter, the US economy expanded a whopping 4.2%, in real annualized terms. Unemployment is at 48-year lows. Inflation is in check. Consumer confidence is strong. Wages are rising (if only grudgingly). Investment could be better, for sure. But the fact of the matter is, overall, things are looking pretty good right now.”

See, nothing to worry about? Obviously, the recent spasms of the market this year are really nothing more than just one of the normal market corrections which happen every now and then. The chart shows the S&P 500 going back to 1960 with some “interesting green dots.”  (Cheap trick to get you to keep reading.)

Before we get to those “interesting green dots,” we need to make a point about Gwynn’s assessment of the current economic outlook.

While Gwynn is absolutely correct about the current state of economic growth, the view is also wrong.

The problem with making an assessment about the state of the economy today, based on current data points, is that these numbers are “best guesses” about the economy currently. However, economic data is subject to substantive negative revisions in the future as actual data is collected and adjusted over the next 12-months and 3-years. Consider for a minute that in January 2008 Chairman Bernanke stated:

“The Federal Reserve is not currently forecasting a recession.”

In hindsight, the NBER called an official recession that began in December of 2007.

But Gwynn goes on to state:

“And when the next recession does hit, chances are good that economic conditions will already feel quite different from the present moment.”

If Ben Bernanke did even know that we were in a recession will we?

Well, that isn’t necessarily correct. For example, let’s take a look at the data below of real (inflation-adjusted) economic growth rates:

  • September 1957:     3.07%
  • May 1960:                 2.06%
  • January 1970:        0.32%
  • December 1973:     4.02%
  • January 1980:        1.42%
  • July 1981:                 4.33%
  • July 1990:                1.73%
  • March 2001:           2.31%
  • December 2007:    1.97%

Each of the dates above shows the growth rate of the economy immediately prior to the onset of a recession. If Gwynn had been writing an article about the markets and the economy in 1957, it would have read much the same way.

“The recent decline from the peak in the market, is just that, a simple correction. With the economy growing at 3.07% on an inflation-adjusted basis, there is no recession in sight.” 

You will note in the table above that in 6 of the last 9 recessions, real GDP growth was running at 2% or above.

At those points in history, there was NO indication of a recession “anywhere in sight.” 

But the next month one began.

Let’s go back to those “interesting green dots” in the S&P 500 chart above. 

Each of those dots are the peak of the market PRIOR to the onset of a recession. In 8 of 9 instances the S&P 500 peaked and turned lower prior to the recognition of a recession. 

In other words, the decline from the peak was “just a correction” as economic growth was still strong.

In reality, however, the market was signaling a coming recession in the months ahead. The economic data just didn’t reflect it as of yet. (The only exception was 1980 where they coincided in the same month.) The chart below shows the date of the market peak and real GDP versus the start of the recession and GDP growth at that time.

The problem is in the waiting for the data to catch up.

Let’s take the chart of the S&P 500 index above, and add official recessions as dated by the National Bureau of Economic Research (NBER) and the dates at which those proclamations were made.

Prior to 1980, the NBER did not officially date recession starting and ending points.

The table below breaks down the data. For example:

  • In July 1956, the market peaked at 48.78 and started to decline. 
  • Economic growth was increasing from 0.9% and heading to 3.07% in 1957. (No sign of recession)
  • In September 1957 the economy fell into recession and the market had already fallen by almost 10%.
  • From peak to trough, the market fell 17.38%
  • Importantly, the market had warned of a recession 14-months in advance. 

You will also remember that during the entirety of 2007, the majority of the media, analyst, and economic community were proclaiming continued economic growth into the foreseeable future as there was “no sign of recession.”

At that time the trend of the data was obvious and the market was already suggesting that “something had broken.” Of course, it wasn’t until a full year later, after the annual data revisions had been released by the Bureau of Economic Analysis, that the recession officially revealed. Unfortunately, by then, it was far too late to matter.

Today, we are once again seeing many of the same early warnings. If you have been paying attention to the trend of the economic data, the stock market, and the yield curve, the warnings are becoming more pronounced. In 2007, the market warned of a recession 14-months in advance of the recognition. 

So, therein lies THE question:

Is the market currently signaling a “recession warning?”

Everybody wants a specific answer. “Yes” or “No.

Unfortunately, making absolute predictions can be extremely costly when it comes to portfolio management.

Note: In the table above, the time span between the market signal and the recession onset has been greatly compressed since 1973 when the NBER started dating recessions. This is due to the fact that when the NBER looks back they are seeing data after “revisions” by the BEA. Therefore, the data aligns more closely with what the market was signaling PRIOR TO the economic revisions.

There are three lessons to be learned from this analysis:

  1. The economic “number” reported today will not be the same when it is revised in the future.
  2. The trend and deviation of the data are far more important than the number itself.
  3. “Record” highs and lows are records for a reason as they denote historical turning points in the data.

We do know, with absolute certainty, when this cycle will end.

“Economic cycles are only sustainable for as long as excesses are being built. The natural law of reversions, while they can be suspended by artificial interventions, cannot be repealed.” 

While there may currently be “no sign of recession,” there are plenty of signs of “economic stress” such as:

Being optimistic about the economy and the markets currently is far more entertaining than doom and gloom. However, it is the honest assessment of the data, along with the underlying trends, which are useful in protecting one’s wealth longer-term.

The best advice I have is the same as a recent quote from John Stepek:

“Be defensive when everyone else is being aggressive. 

Why? So that when the time comes when there are lots of opportunities but hardly any money around (and it will come, because markets are cyclical and winter eventually arrives again), you’ll be in a position to take advantage.

And keep an eye on corporate debt. That’s where we’ll see the strains first.”

While the call of a “recession” may seem far-fetched based on today’s economic data points, no one was calling for a recession in early 2000, or 2007, either. By the time the data is adjusted, and the eventual recession is revealed, it won’t matter as the damage will have already been done.

The market may already be trying to tell you something.

Here Are The Key Levels To Watch In U.S. Stocks

After a pause last week, volatility reared its ugly head again with the Dow falling as much as 548.62 points on Tuesday before recovering most of the losses by the close of trading. Though I am warning that stocks are currently experiencing a bubble that will end in tears (see my presentation about that), I believe in using technical or chart analysis to make sure that I am on the right side of the market’s trend in the shorter-term. In this piece, I will show the key levels in U.S. stock indices that I believe are important to watch.

During this week’s sell-off, the bellwether S&P 500 broke below its uptrend line that began in early-2016, which is a bearish sign if the index closes below this line by the end of this week. If it does, the next major technical support and price target to watch is the 2,550 to 2,600 support zone that formed at the lows earlier this year.

S&P 500 Chart

Unlike the S&P 500, the Dow Jones Industrial Average has not broken below its uptrend line that began in early-2016. If the Dow closes below this uptrend line in a convincing manner on the weekly chart, the next important support level and price target to watch is the 23,250 to 23,500 zone that formed in early-2018.

Dow chart

Like the Dow, the tech-oriented Nasdaq Composite index has not broken its uptrend line yet and actually bounced off this key level on Tuesday. If the Nasdaq eventually breaks below its uptrend line in a convincing manner, the next price target to watch is the 6,600 to 6,800 support zone that formed earlier this year.

Nasdaq chart

The small cap Russell 2000 index broke below its uptrend line two weeks ago, which is a concerning development. The next major support to watch is the 1,425 to 1,475 support zone that formed in late-2017 and early-2018.

Russell 2000 chart

Though the market sell-off of the past two weeks is definitely concerning, more confirmation is needed to determine if a more extensive correction or bear market is imminent. For more information, please read our Chief Investment Strategist Lance Roberts’ technical market update as well.

We at Clarity Financial LLC, a registered investment advisory firm, specialize in preserving and growing investor wealth in times like these. If you are concerned about your financial future, click here to ask me a question and find out more.

VLOG: Why The Stock Market Is Heading For Disaster

In this presentation, Clarity Financial’s economic analyst Jesse Colombo explains why the U.S. stock market is experiencing a dangerous bubble that is going to burst violently and cause serious damage to the underlying economy.

Jesse and Clarity Financial have been very wary of following the overcrowded “buy and hold” strategy when the market is so overvalued (because reversion to the mean is inevitable), which is why we have always employed a very disciplined strategy which follows the trend of the market while it is rising, but protects capital from eventual and inevitable downturns. After having successfully navigated out of the markets in 2008 and identifying the “buying” opportunity in 2009, we continue to understand the importance of proper asset allocation, sector rotation, value and momentum based investing, and a strong, rule based, “buy/sell” investment discipline.

As Seen On Forbes: Volatility Is Surging

As seen on Forbes by RealInvestmentAdvice.com’s Jesse Colombo: “Volatility Is Surging.”

After a calm spring and summer, volatility has come back with a vengeance in October. The CBOE Volatility Index or VIX has surged from the 13s at the start of the month to nearly 23 right now, which is the largest volatility spike since the stock market correction in February. As volatility spiked, the Dow fell nearly 2,000 points since the start of October as rising interest rates spooked investors out of the frothy stock market.

Here’s what the VIX looks like right now:

VIX

While many traders and market participants were caught off-guard by the volatility spike, I specifically warned about it on October 2nd in a Forbes piece called “Why Another Market Volatility Surge Is Likely Ahead.”

Read the full article on Forbes.

As Seen On Forbes: Higher Volatility Is Likely Ahead

As seen on Forbes by RealInvestmentAdvice.com’s Jesse Colombo: “Why Another Market Volatility Surge Is Likely Ahead“:

The U.S. stock market is climbing to record highs once again and volatility has calmed down dramatically from its panic-induced levels reached earlier this year. Traders have become complacent as they passively ride the stock market higher and bet on lower volatility again. While it may seem like all is well, several reliable indicators are warning that another powerful volatility surge is likely ahead.

The first indicator is the 10-year/2-year Treasury spread that is calculated by subtracting the 2-year Treasury note yield from the 10-year Treasury note yield. The 10-year/2-year Treasury spread is helpful for estimating when the next recession is likely to occur, as I explained in a recent Forbes piece. The chart below (which I recreated from a chart made by BofA’s Savita Subramanian) shows that the inverted 10-year/2-year Treasury spread leads the CBOE Volatility Index or VIX by approximately three years. If this historic relationship holds true, we are about to experience a whole lot more volatility over the next few years.

Yield Curve vs. Volatility Index
Read the full article on Forbes.

The Smart Money Are Bullish On Volatility – RIAPro

As the U.S. stock market climbs to record highs, volatility has calmed down quite a bit from its panic-induced levels earlier this year. Complacency is back as traders passively ride the stock market higher and sell volatility short once again. While it may seem as if the coast is finally clear, the “smart money” or commercial futures hedgers (who tend to be right at major market turning points) are building up another bullish position in VIX volatility futures, just like they did one year ago ahead of the market correction and volatility spike.

At the same time, the “dumb money” or large traders (who tend to be wrong at major turning points) have built up a large short position, like they did before the volatility spike. Though these positions are not quite as large as they were one year ago, they should be monitored in case they grow. The positioning of these groups of traders implies that another volatility spike is likely ahead in the not-too-distant future.

VIX

In addition, the volatility of volatility is currently at ultra-low levels, which implies that another volatility spike is likely ahead soon. The chart below shows the Bollinger Band width of the Volatility Index or VIX (in red) vs. the S&P 500 (in blue). Bollinger Band width is a way of measuring volatility of a market or financial instrument. Every time the Bollinger Band width drops to approximately 10, it foreshadows a sharp upward move in the not-too-distant future – it’s similar to a “calm before the storm.”

Bollinger Band Width

The fact that the “smart money” is bullish on volatility and that the volatility of volatility is so low is always a worrisome prospect with a stock market as bubbly as ours.

As Seen On Forbes: The Market Bubble Helped Goldman Fix Its Image

As seen on Forbes by RIA’s Jesse Colombo: “Goldman Has Rehabbed Its Reputation And All It Took Was This Huge Bubble“:

During the Global Financial Crisis and a few years after it, investment bank Goldman Sachs became Public Enemy #1 for its role in the mid-2000s housing bubble, mortgage crisis, and related scandals. The bank took on a reputation as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

In the past couple years, however, Goldman appears to have greatly improved its public image, according to a new report by research firm YouGov’s Plan & Track:

New data shows that slightly more US adults would be proud to work for the firm than embarrassed

General impression of Goldman Sachs during the financial crisis and subsequent recession was not good. Public perception of the investment bank as a potential employer plunged as its share price sank.

Now that 10 years have passed, however, and the firm is getting a fresh start with incoming CEO David Solomon, who begins his new role on October 1, things are looking much better.

Indeed, new data from YouGov Plan & Track shows that slightly more American adults would now feel proud to work for Goldman Sachs, as opposed to embarrassed. This comes after the firm’s Reputation score — which gauges how open US consumers aged 18+ are to being employed at a particular brand — spent years emerging from negative territory following the crash. Even when the bank’s Reputation score returned to neutral in the latter half of 2015, disparaging comments made during the 2016 presidential campaign seem to have pushed it back down again.

Workplace Reputation: Investment Banks
Read the full article on Forbes.

Watch This Key Level In Tesla Stock – RIA Pro

Elon Musk’s erratic behavior and the price of Tesla stock and bonds have been a constant source of news headlines in recent months. The incessant gyrations have been extremely confusing to investors who are caught between excitement about the company and the sector’s potential prospects and the risks that come from the stock’s lofty valuation, increasing competition, and the CEO’s mental state. In this brief piece, I will show key technical levels in Tesla stock that should help traders put the noise into perspective a bit more.

For the past year and a half, Tesla stock has been trading in a range between its $240 – $250 support zone and its $380 – $390 resistance zone. After failing to break above the $380 – $390 resistance zone in June and July, the stock plunged to the $240 – $250 support zone, where it now sits above. After such a sharp decline, there is a high probability of a technical bounce off this support. If the stock eventually closes below this support zone in a convincing manner, it would be a concerning sign that would likely signal even further declines ahead.

Tesla Chart