5 CHARTS REVEALING THE HOW AND WHY OF A RALLY TO NEW HIGHS INTO YEAR END
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SO THIS IS NOT THE BEGINNING OF A BEAR MARKET
With that said, the astute investor will be looking for points to put capital to work. There are two support areas ahead that will tell us the scale of malicious intent brought forth by this current correction. I outlined the support areas for both the Dow and Nasdaq 100 in this weekend's review, but thought that it needed to be articulated further. Let's look at Nasdaq 100 first. As I write this note, Dow futures are down over 100 points. If this trend down continues to the market open we should see a gap down below the red trajectory highlighted in the chart below. The ideal situation at that point would be for a steep reversal to take place, closing above the trajectory. Basically, stock market bulls don't want to see a close below 4,150 on the NDX. click chart to enlarge Should the NDX give way, the next obvious and absolutely critical point of support becomes Dow 16,000. And not simply because it's an attractive round number. It carries with it one of the key trajectory points for this bull market. The trajectory goes back all the way into the 1920s, carrying with it a great deal of weight. A touch of this trajectory, followed by a steep reversal back up would be as bullish an indicator for a fall rally as anything. A convincing thrust down below this trajectory sets the markets up for another 7-8 percent on the downside. So 16,000 on the Dow is a big deal. There are a ton of sentiment indicators out there that are flashing some pretty extreme readings. However, it should be noted that steep declines in the markets do occur on extreme bearish sentiment paired with oversold readings, as we have now. In fact, the August 2011 pullback caused by the Euro crisis occurred with extreme bearish sentiment paired with oversold conditions. That one didn't put in its final bottom until October. If catching market bottoms was as simple as buying whenever the put/call reached X number or AAII bullish sentiment went below X, then 95% of hedge funds wouldn't be underperforming their benchmark over the past few years. This is art, not science. ...
4 CHARTS DEMONSTRATING BOTH DESPONDENCY AND HOPE FOR THE WEEK AHEAD
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JULY CLIENT LETTER: BLURRED LINES, THE ART OF SAYING NO, THE MACRO
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Blurred Lines The line between trading and investing is an often debated element of successful methodology within a portfolio. There are some who consistently blur the line, which is perfectly acceptable as long as an investor realizes the “why” behind the action. It is only when a market participant cannot identify whether they are a trader or investor due to inconsistencies in their methodology that trouble follows. I have often said that not enough investors embrace simple trading methods that can enhance their performance. Likewise, not enough traders embrace investment philosophies that can also enhance performance over the long-term. Our unsuccessful investment in EMAN highlights the trading and investment hybrid philosophy that has been a key element in overall performance. That philosophy can be summed up as one of being an investor on the upside and being a trader on the downside. It is true that far too many value investors take their investment thesis to heart, which damages overall performance through a stubborn resilience that is based on adhering to fundamental data points that are lagging indicators of earnings or corporate performance. This causes excessive volatility within a portfolio and absolutely atrocious performance during cyclical or secular bear markets. Within a bear market scenario, as an example, your typical Ben Graham value investor will suffer drawdowns that are often times irrecoverable. Without a tangible exit or risk-control methodology the valuation proposition increases in attraction as price declines which leads to overexposure in an underperforming asset. This consequently will lead to two eventualities: 1) The investor must wait an inordinate amount of time to achieve profitability 2) The investor in the meanwhile suffers opportunity cost as capital achieves more substantial returns elsewhere. This all occurs because of a value methodology that has no counterbalance other than the intellect of the individual operating the strategy. That intellect, of course, is severely biased and utterly incapable of separating itself from the tenets of the philosophy that are rooted in deceptive fundamental data points. The only counterbalance that I know of to properly peel away often erroneous conclusions of the intellect from an individual is the study of price, which is rooted in trading. Thus, one must be a hybrid trader and investor. When the downside becomes excessive or misbehaves in certain predetermined forms, the trading methodology separates an individual from their intellect, essentially overriding all other considerations but price action. Otherwise, individuals become prone to all matters of erroneous decision making based on data points that we are ill-equipped to decipher during...