Some Thoughts for Trading in a Bear Market (March 18, 2020)
SPY T2108 T2107 VIX--X SP-500 MRNA BNTX PTON ZM WORK BA TSLA GSX ZTO LLY SP-500
Here’s the deal; We are in a bear market now so I thought we would talk about some bear facts, so to speak, and try to keep everybody on the same page. This is a diagram, or whatever, that I stole off of somebody on the Internet, Robert Shiller, it’s fairly old.
What I want to show you, you have got to highlight this; these little red spikes down are the bear markets over the last century. They are little teeny ting ones, you can barely see that one. This one is a little more, that was a nasty one, I don’t remember that one but Larry Kudlow probably does. That one is teeny tiny, a little bit bigger, another teeny tiny. What I am saying is, these bear markets in the eternal scope of things, are really, really brief. They are brief and a lot of times they are steep, they are steep and deep, we’ll put it that way. They can happen so fast and be over so fast that if you are not careful you are going to sit here and go, what the heck happened?
Also, this steepness of them and the fairly rapid recovery, all things considered, can be a real advantage but it can also hurt you really bad and this is why: Because of the human emotions involved. The market involves emotions, that’s all it is. Forget about now when everything has been imploding, we all know why, but just kind of in general market terms, why would a company one day be worth $158.00 a share and then the next day because it is a holding in the Dow Jones Industrial Average ( INDEXDJX: .DJI ) and three other companies implode for various reasons, taking this company down 8 percent. Why is that company worth 8 percent that next day? Nothing happened. The reason it is worth 8 percent is because that’s what everybody thinks it’s worth, everybody thinks it’s worth that.
And so this is a great chart of psychology, frankly. This is an awesome chart of human psychology. As markets go down, as stocks go down, you get buy the dip and you get a little uneasy, and then you get concerned, then you get more concerned. And then you get depressed and then you start freaking out and finally it is like, I have got to get out of here and that marks the bottom.
Now, a little while ago just as I was prepping my slides here Scott Wapner, he’s a nice guy, this was not his finest hour. He let Bill Ackman talk about his feelings for quite a while, while the market was still trading. And what this guy was saying literally helped take the market down through the circuit breakers and shut off the market. This is really the last guy you want to have on in times like this because, first of all, he’s very well known for being wrong. I don’t really know how the guy got his money, I think but I am totally not sure, I think it might have been started with daddy’s money, there’s a lot of that going around. But this guy was wrong big time on Herbalife ( NYSE: HLF ) even more wrong, like supremely wrong on Valeant Pharmaceuticals ( NYSE: BHC ). This guy will ride stuff into the ground like you can’t believe. And it is all because he has supreme confidence in being right. That’s all fine and dandy but this isn’t the time for that.
This guy is on CNBC basically saying, “You’ve got to lockdown America. We all have to take a Spring Break. This is so bad that I am not going to kill my father.” This guy was going totally off. And by the way, I am not disagreeing with the things that he says, I don’t know. All I am saying is this guy was a flipping moron and they have got him in there shedding a tear. We are all having a tender moment with Bill Ackman, and his big bushy black eyebrows, while he panics and tells us all these things that, oh, the government has to do this. Just SHUT UP! I don’t care what you think. I don’t want to listen to you. The only reason I kept the TV on, frankly, was because it was actually kind of amusing. And my wife, who does not trade, was watching it with me and she was cracking up going, “Where did they find this guy?”
And so in a way, although you have got to look at the charts, which is what I am going to tell you here in a second, in a way I almost have to wonder if this is the bottom. If this is the bottom it’s kind of like Happy Days. The top on Happy Days was when Fonzie jumped the shark. When you have got Bill Ackman crying on TV pleading with the President to shut the country down and all that. You have got to wonder how much worse can it get? I know I am kind of vamping a little bit here but I have to vent somewhere and you are the lucky one who gets to hear it, this is the time
Just so you know, I am not saying this guy is panicking the market. Whatever. I am just saying it is embarrassing to hear somebody who knows NOTHING about pandemics or anything else; fine you know about finances, great you’ve lost billions, good for you, you’re not the only one. This guy knows nothing about the stuff that is relevant other than, hopefully, God willing and the creek don’t rise we will rise from the ashes and be a good country again at some point. It’s just the stuff this guy was saying, it was laughable and I am embarrassed for him and his family and any of his friends, who respected him, after they watched this clip, The guy looked like a moron. If you want to really know what I think just look at my Twitter feed, Dan Fitzpatrick.
Back on track here. These bear markets seem really intense at the time but if you look at what I have been talking about lately for the last couple of weeks anyway. The y-axis and the x-axis; if you look at the x-axis these are little tiny blips on the axis. Most of the time we are in this situation but here’s the thing that you have to guard against: You have to guard against panicking and selling everything at the bottom, and then during the recovery phase. It’s like a bear market just doesn’t suddenly become a bull market, we will get to that in a bit. A bear market just doesn’t suddenly become a bull market, there’s a bottom.
And then think about the Composite Man, once the bottom starts forming we are still in a bear market because prices are more than 20 percent down from the last high. But then at some point things start ticking up and you don’t have to be, let’s say this was the high of the market right here, then you get this big implosion, and then we start trickling along, the Composite Man starts to buy stocks, we start going up here. You don’t have to stay out of the market until this gets all the way back up here and you say I’ll buy again. No. You want to be in when it’s right to be in. Just like you want to be out when it’s right to be out. That sounds really hard but it’s actually not if you have a process.
What I am saying is, strictly from a financial standpoint, I am not going to be crying and talking about I don’t want to kill my dad, I am not talking about that, I am literally talking about you and your money. We will let somebody else figure out alt the other stuff that is way above my pay grade. It’s way above my pay grade and I don’t purport to be someone that I am not. So this is the bare facts of things, it’s not a big deal if you are looking at the x-axis.
But here is what you have got to understand: 70 percent of economic activities are driven by the consumer. The issue that we are dealing with right now, it’s not psychological; it is psychological but the real critical component right now is just, literally, mechanical, like practical. I went to the store yesterday and it looked a little bit like socialism light. There was rationing, one milk container to a person so we got one. But I am thinking that a lot of people are shopping with their wives or their husbands they would try to wire the deal and say, “Well, Honey, you get another line and you get some mild too.” We don’t do that because we don’t drink a lot of milk, it makes phlegm in my throat.
The point is, we couldn’t buy some of the stuff that we wanted to buy. That’s economic activity that didn’t take place and it is not demand driven so much, it’s supply-driven, there wasn’t any. But as people lose their jobs and I don’t know or care what the estimates are as far as, there could be 25 percent unemployment or 20 percent. Sure, there could be 50, nobody knows. And so if you tend to be an eternal optimist, you always want to be optimistic, the glass is half full, then go for the low estimates on stuff like that, that’s what you believe.
On the other hand, if you are Eeyore, if your glass in not just half empty but it’s absolutely bone dry and cracked, then go for the big estimate. Go for the, we’re all going to die, we’re all going to die hungry and sick. Nobody knows. Nobody knows. But we do have this economic activity that prompts and drives what the market does. And at some point the economic activity is going to pick up.
Again, nobody knows when that is going to be. I have HEARD it will be in a month or in 6 weeks, or something like that. And I do want to believe the medical experts, don’t tell me about a PE Dr. Fauci or whatever his name is. But this kind of stuff I am all ears buddy, tell me what I need to know. I want to listen to the right people for the right things but listen to me, and you can apply this to me as well, I also want to be mindful of the fact that on some things people just don’t know, nobody knows.
So if somebody is telling you something that is literally unknowable you have to be able to understand that. That what you are telling me, saying it with a period at the end of the sentence, but it actually probably should be a question mark or dot, dot, dot, dot. But you are saying it with a period at the end. Or if you are really arrogant and you think, I’m really stupid, you’re saying it with an exclamation point at the end of it to drive home the fact that you know what you are talking about, but you really don’t.
And so as a listener, as a consumer of information offered by other people, and again, put me in this category too, I am telling what I believe I know and what I absolutely don’t know. You have to understand that in times of uncertainty everybody is looking for certainty. The market hates uncertainty. So what’s the market looking for? Certainty. But here’s the other thing, when you don’t know what certainty looks like anything will do. Anything will do. Anybody who says something with an exclamation point, that’s the certainty because you and me, all we have are question marks. That’s it, we just have question marks.
And so be sucked in, and I don’t mean that in a bad way, but don’t be sucked in by the information that other people are giving you because it might be the wrong information. What that would ultimately do is get you to be selling right at the low. And the time to be really, really on top of all this stuff was actually before it got really bad. We will talk about this in a little while.
Let’s get back on track here. Bear markets lose 30 percent of their value, typically that’s the case. Well, we are down there now. We are down 30 percent from the highs; 31 percent but who’s counting? The bottom line is, this is kind of like the average loss in a bear market. The average recovery time is 22 months. That doesn’t mean you have to be out of the market for 2 years. It means that that’s the average time that it takes for the market to get back to it’s an all-time high, to print a new high. But it’s in the middle, it’s the money that you make in between when the actual low hit, when we got the actual low.
It’s the time after that and before the time when you see the market hit an all-time high. That’s when a tremendous amount of money can be made. It seems like I tacked on a career in between the low in, I think it was 2002, I think 2003 was the ultimate low but first big low after the Internet bubble was 2002. Between that time when we hit the ultimate low and when the index, like the Nasdaq ( INDEXNASDAQ: .IXIC ) and stuff like that went up to a new high.
It was years and during that period of time between the low and that new all-time high. I learned so much during that part of trading. I made so much money and I also lost a lot of money too, depending on what the market was doing because I was still learning. I am still learning and I will always be that way. I will tell you no matter how much I know there is going to be a heck of a lot more that I don’t know that I wish I did than I actually do know. That is always going to be the case. Anybody who would say otherwise is a fool or they believe you are a fool, one of the two, possibly both. I learned a lot of things and I made a lot of money during the recovery time.
I guess maybe the best way to say it is, and you have got to stop and think about this and, try to put Bill Ackman’s tears out of your mind, this is not the end of the bull market. We are close to the beginning of the recovery. We can’t go back and do anything about what has happened before. All we can do is put our feet firmly planted on the ground underneath us and look forward and say, “Okay, what am I doing now? What am I doing to improve things tomorrow? What am I doing to set myself up so I can make more money and improve my financial fortunes in the future?”
Here are some things I just want to say to you. I was taking some notes earlier and just thinking about things; because there is a time to be making money and really pounding it out and really getting aggressive in the market. And then there is a time not to. If you are listening to this you are a hard worker. By definition you are a hard worker because this stuff is hard, trading is hard and you are not just here for the entertainment. You are here because you are working really hard. And so when there is not a lot of money to be made trading you are going to work hard at giving your money away just because you are kind of working on the wrong thing. So we need to take a step back and think about things on a little more of a global scale or a satellite view.
Think about this, trading is hard, it’s really hard. It does actually get easier. It gets easier when you start narrowing your focus to not just “trading” but trading a particular way. Once you get all the rules attendant to a particular method of trading, a particular style of trading. Once you get those rules ingrained then everything is going to be perfect. Wrong. No, it’s not. You are going to have a good start.
But I will tell you this, I have mentioned this before, I don’t make it a secret, Mark Minervini really did change the way that I trade. A lot of the things that I do are taken from Mark’s teaching. Now I am happy to say he is a friend of mine; we’ve gone shooting before, not each other. He’s a good guy. He’s a really, really smart guy, a very smart guy. He has a lot of experience, way more experience in the market than I do. I think he was trading for something like 12 years while I was doing something else. He really has changed the way I trade. Just read his books; read the stuff that I am writing. Watch my videos and stuff like that because it’s the same stuff. It literally is the same stuff just in a little bit different way.
The thing is, it’s not what you know it’s your ability to implement what you know that is going to be the difference between profit and loss for you. And that requires patterns and it takes patterns quite a while to form. I am finding this out, frankly, in my personal life. I’ve been single forever and suddenly, over the last few years, I’m married with a couple of step-kids. When somebody would say, “Dan, it’s really not all about you,” I could literally say in all honestly, actually it is. Sorry but it really is all about me in my world. Well, it’s not anymore, not even close. I get that intellectually, I get that emotionally, I get that on every practical level. But I have got to tell you, it takes time to break the old pattern and develop a new pattern so that it’s really not all about me; I’m a family guy now.
But here’s the thing: A lot of the folks that are listening to this and it might be you, hopefully, it is, you have families. You probably can’t even relate to what I am telling you because it’s never really been about you. You are a family person, you have got your kids, you’ve got your husband, you’ve got your wife. You’ve got your partner, you’ve got your dog, whatever the case may be; you can’t relate to that. But I am just telling you, it’s tough to develop new patterns. But if those patterns are rewarding to you ultimately you are going to get there. And that is what I am talking about with respect to trading. It takes a while after you have learned new stuff, good stuff. It takes a while before you can actually take that learning and apply it consistently to trading, consistently. Sporadically, sure, you do that during your process of learning the pattern and stuff like that. But to do it consistently what’s going to happen is you are going to slip into your old ways. My calendar was my calendar, now it’s not it’s our calendar.
The point is, you go, I am going to trade in a certain way. I don’t buy stocks that are going down. I don’t do this, I don’t do that. And then lo and behold, something happens and you go, well, yes I guess I do because that is what I am doing right now. So it takes a while for you to get these patterns ingrained in yourself. And I will just tell you this: Don’t lose faith in yourself. You can’t lose faith in yourself. And I will tell you this too: The only time you fail is that little teeny tiny moment after you quit. As long as you haven’t quit you haven’t failed you are just learning.
And so I want you to keep something in mind, this is a long-term thing, which is totally against virtually everything we have in society. We look at character140 character tweets, we have ADD, we cannot watch TV without the remote control in our hand, at least I hope I’m not the only one that has that issue. We are reading a book while we are watching TV, probably talking to your wife too. Again, I hope I am not the only one that is doing that. You have to stop and focus and really think for a minute. Just stop and think, what’s really important here? What is really important as it relates to you and me right now is just money. Make sure your money is right. Make sure your account is tight. Don’t be doing stupid stuff. I know it’s easy for me to say that but for crying out loud I have been talking about it for the last 14-15 years and none of this stuff is new. It might be new to you but it’s not new.
And so what you want to be doing is adjusting your focus and adjusting your thoughts. Think about the stuff that matters. So you’re home, you don’t get to go to work, whatever the case may be, fine. There’s not a whole lot of money to be made in trading. You think there is but there really isn’t. So focus on something else that matters. Go for a walk, go work out, learn to do push-ups. Get an airsoft gun and learn to shoot stuff; you can do that at home with a laser and nobody dies. Do stuff like that and learn. Focus on learning, that’s one of the things that I am going to talk about in just a couple of minutes. You want to be taking this time and say, all right, what I am working on right now is going to make me money. It is going to make me huge money, it’s just not going to make me money right now because there is no huge money to be made right now. But I am going to learn what I need to learn in order to make huge money when there is huge money to be made. That is really what this gets down to. When there is huge money to be made are you ready to make it?
What I want you to be thinking about is this: Define your trading style and seriously, if you don’t know what it is it’s because you don’t have one. After you have defined it then you are no longer a trader. You trade volatility squeezes. You trade growth stocks in solid uptrends. You trade slam plays, the kind of things that we do when we do 59-minute trading first thing in the morning. You trade in a certain way; you don’t want to be a jack of all trades, they never make any money but man they are sure fun to talk to. You want to be a master of one. So during this time, I say you can earn, not that much. You can learn a lot. And then you also just have to pick your timeframe. You have got to decide what’s your timeframe? What are you trying to do? Are you trying to make money tomorrow? Do you need some kind of instant gratification? That type of thing. Is that what you need? Or can you delay your gratification and say, “You know I want to learn more. That’s how I am going to spend this time.”
I was talking to my step-son, he is kind of stuck, actually, over in Spain at Moron Air Force Base in close to Sevilla. He can’t get home because of the whole Coronavirus thing. They have kind of frozen everybody and he’s not happy about it, neither am I, neither are we. My advice to him was, first of all, I said I can’t really give you advice because I am not in your shoes. Everybody wears different shoes but this is what I would do if I were you: I would focus on not trying to wish that I had a better situation but instead, think about what my situation is right now. And then think how can I thrive in this situation that I am in right now? How can I prosper from it? But also this, think about the fact that whether it’s 6 months from now or a year from now or 5 years from now; I’m talking to you now, not my step-son. At some point in the future you are going to look back on the history of your life and what you are doing right now is definitely going to be one of those visuals.
I don’t remember everything about my life, the older I get the less I remember it seems like. But certain things I do remember and they were the things that really, really stood out for me, both good and bad. Somethings I am really proud of the way I behaved. And some things I am actually not and I am not going to tell you what they were. There have been some things that I have monumentally screwed up both on a personal level, a character level, a financial level, all of that stuff. That’s the process of learning. But then there have also been some things that I will look back on and I will think, I didn’t know it at the time but I think that was my finest hour. I really handled that really well and I am proud of it.
And so I just suggest to you that you think about what you are doing right now at this time. Think about how you are going to look back at this a year from now, 6 months from now, 2 years from now. I can’t speak to your personal stuff but financially, think about it, that’s what I will talk to you about real quickly here if there is anything about this video that is quick. How are you going to look at your behavior right now today, I can’t even talk about yesterday. Today, tomorrow, next week, 6 months from now or a year from now; are you going to look back at this time and say, well, I lost my ass, that’s for sure but I did learn a lot. Well, that’s one way to go.
Another way to go would be: Do you know what? I didn’t get out right at the top but I did put my money to work. I did put it on the sidelines like Dan had been coaching, cash is a position. I got a little bit eager and I started to try to kind of pick bottoms and get in here. I kind of gave some of it away but not too bad. But I have learned; it didn’t cost me that much but it did cost me money. I have learned that when the market got weird I got weird too. When the market got different I totally forgot about my trading plan; that stuff that worked really well for me when the market was trending higher and I tried to adapt. I tried to change my plan at the worst possible time to change my plan because the market was really volatile and I didn’t have much experience and that meant that I was literally shooting with an empty weapon. But I did okay because I did get out at the right time and I did keep most of my money. That’s an outcome.
Another outcome would be: Do you know what? I listened to what Dan said, and I wasn’t the only one talking about this, I am not a market timer. A lot of people are saying get out of cash the market is going down. So whoever you listen to, I got out of cash, I avoided being in at the bottom, I have avoided trying to find it. And then I waited and I waited and I started to gradually scale into my positions and I did okay. If I had gotten more aggressive right at the bottom then I could have made more money but if I was that guy that got more aggressive at the bottom I was probably that guy, the second guy that I just described here, the one that kept trying to pick bottoms all the way down until I finally got the right one. Don’t be that guy. You want to be the person who’s out. You are thinking clearly. Read Rudyard Kipling’s “If”. That is such a great sonnet, poem, whatever you want to call it. It really does apply in this market. I kind of wish that Bill Ackman had read that before he went on CNBC. If you can keep your head while those about you are losing there’s and blaming it on you. The bottom line is this: Decide right now how you want to view yourself in 6 months. Make that decision right now and then just apply your activity to what you need to do in order to fulfill that decision.
Let’s talk about where we are right now. Smart/Dumb Money, this is Jason Gephart’s chart here from SentimenTrader.com. A lot of you guys know this, the blue line is the smart money. The red line, or rust line, is the dumb money. These are proprietary indicators that are based on RIDEX cash funds and I thing even newsletters, hopefully, I’m not in there. A lot of different things where the indicators tend to be wrong; one tends to be wrong at turning points, the other tends to be right at turning points. And whichever one is right at turning points, that’s the smart money. You will see, though, that when the smart money, that’s the blue line, when it is above this line here, it typically correlates to lows in the market, the top line here is the S&P ( NDEXSP: .INX ). This correlates to lows, and so what is the confidence here on the smart money? When the market is low the smart money says, hey, I think we are in for a rally. And then, sure enough, the market does rally nicely. And so this isn’t like a timing indicator it is a conditions indicator. It tells you that the smart money feels like a rally is impending. They’re bullish, they’re confident in the market, they’re bullish.
And then when the market is rallying here, think about this for a minute, this is really important for you to see. When the market is rallying this is when the money is to be made. During that time the smart money gets less and less confident; until finally, the smart money thinks, I think there is going to be a pullback. Well, during this interim here it was smart to be bullish. And as this ran up more and more the smart money actually got more and more bearish. Until finally though, they were correct and the market reversed.
Here’s what you need to know: This is really only relevant during the times where the smart and dumb money are at extremes. So when one indicator is really, really steep, when it is really, really low like it is here, like .13. The other indicator is really, really high, like .83, that’s a difference of .7, 70 percent. What really needs to happen in order for these readings to be “extreme” is, they just need to be outside of this square here. These are WAY outside of what is perceived to be the normal range. Again, when one is one way, the other is another way, that’s the extreme and that is when you start looking for the reversal.
So if you look at this here, for the last several days, the last week and a half or so or more, these have been at extremes. And the smart money gets more and more confident that we are going to see a rally. And the dumb money gets more and more confident that we are just going to keep going low. Well, at some point, at some point these things are going to flip, they’re going to reverse and that reversal is going to come as the market starts to turn up. Remember I said that this is a condition indicator, not a timing indicator. If you just use this as your timing you are out a lot of money because the market has just kept going lower and lower and lower.
And so I would say that it is actually kind of broken. That’s really the way I look at it right now. Everything is broken. Frankly, that is one of the reasons, in my view, why the market probably went down when Ackman was talking. Trust me, it’s not because Bill Ackman is the ax, meaning the guy who controls the market. It is not because big traders really care what Bill Ackman thinks because they don’t. It is probably because of the algorithms; because the algos get the text from TV, they get the headlines from Bloomberg and probably every other source. It’s the “artificial intelligence” stuff so it was probably the algos that kept kicking this market lower and lower and lower. Things can get extreme and they just keep getting worse and worse and worse, that’s the way the market is.
But I will tell you, like the proverbial phoenix rising from the ashes, at some point you are going to get this kind of move. I PROMISE you, I don’t know where it will start, whether it’s here or here or here, but I promise you at some point you are going to get this kind of move. I just want you to have more money down here so you will have a heck of a lot more money up here. Because if you have lost all of your money by the time you are down here you don’t have much to capitalize on. I would rather compound a million dollars than 5 thousand, I make more money. So I want you to have more down here; but I’ll just say we are getting close here, we’re getting close.
Now, let me pull out a couple of other charts here. The percent of stocks above their 40-day moving average; we hit the low back here (T2108). Above their 200 should be better (T2107), yes., yes hit the low back here as well. I think this was Monday before then it was Thursday. So we are still really sucking the tailpipe ( INDEXCBOE: VIX ), that’s the best way that I can think of the say it. It is just a bad, bad situation. Here we are really, really spiking here here on the VIX ( INDEXCBOE: VIX ). So all of this stuff that we are looking at, this is a timing indicator. We can look at this in the context of timing, look at this relative to the S&P ( INDEXSP: .INX ). The last time it was up here at 30.00 this was a big spike, this was a big spike higher in the S&P 500 ( INDEXSP: .INX ).
Similarly here, in early 2018 it was up above 30.00, this was a big, big tradeable low in the market. Well, this thing is up at 82.00. You can’t tell me that that is normal. This is not normal trading and that is why I say this is a busted market. You have to understand that and once you understand that it’s a busted market you just simply say, okay but then I’m not going to play. Think Tom Brady, by the way, I hope he does well with Tampa Bay. That guy is the greatest of all time, right? This guy is a smart dude, he is not going to go out on the football field and play when the officials are saying, you know all those rules that we play in football? Well, we’re not enforcing any of them. Have fun, enjoy. No.
You go out in the environment that is controlled. You go out in the environment where you understand what the rules are. And I am here to tell you, right now, we don’t know what the rules are. The only thing I know for sure is I am actually making pretty good money on my Tesla ( NASDAQ: TSLA ) short. But we don’t know what the rules are. We just know that the market is going lower and lower, that’s really important. But here’s the thing, you don’t have to be in the market. You can trade, I’m trading a little bit, I am, I am trading a little bit. And to be perfectly honest with you, I am kind of treading water. My stops are getting hit. Frankly, you can’t put stops in a volatile market, you are just going to get hit. You might as well just write a check to somebody.
The thing is, you can, though, time the market and this is how you do it, I will tell you. Your process times the market. Here, we will do it that way because it is that important. Your process times the market. If you have a process then here’s the thing: (1) Your entry; you have a specific entry that you look for and you have a lot of setups that you are seeing, where you are exchanging cash for stock. You are paying money for stock because you see these setups, they are setups that work. And then you are in the trade; you are not timing the market you are in a trend a nice trade. And then at some point in your trade, any individual trade, the potential exhausts itself. Where you are looking at the stock, maybe you stop was hit but that’s for another day. The trend is really mature, you got good money, maybe you have taken some profits, whatever, I am not talking about that. I am just talking about the general process. And then you are saying, wow, I have a risk of more downside here than I have in a while, this is a really, really good trade and from where the stock sits right now I just don’t get the sense that it is going to go up that much more.
So balancing the potential for me to make money versus the potential for me to lose money, I think the weight is on a greater potential to lose money so I am going to sell. I am going to exchange my stock for cash and then I am going to look again. I am going to look for the next entry, I am going to go right back to (1). If I can’t find more entries I am actually timing the market because I am staying with my process. So I have bought stock (1), I have sold it (2) at a profit. So I have got this cash and I am looking to put it back to work. I can’t find anything so as my trades on (2) here, my Exits, as they play out and I don’t have new trades to put them in, to put that money in, that is called forced displacement. Where just by virtue of your process you are not owning a bunch of stocks. You’ve timed the market a heck of a lot better than some dude looking at oscillators and put call ratios and all of that other stuff. If you want to do all that stuff you can go ahead and be a market timer but they don’t make as much money as the people that are market traders.
This is what we need to do, this is what I want you to be keeping in mind: This is, condescendingly enough, a chart right out of Investors Business Daily from an article today, March 18, 2020. It is an old chart, but they dust this off every time this thing happens. What they are talking about here is how to know when a bear market, when the bottom is in and it is ripe to go higher. And this is what it is, we will just go through it. I could magnify this but it’s not really important.
We are starting with Day 1, it could be any day. You know what it requires? A higher close. Let’s look at the chart. We look at yesterday, yesterday was a higher close so that would be Day 1, yesterday was Day 1. Now, what about Day 2? Day 2 and Day 3, it doesn’t even matter as long as the Day 1 low is not undercut. What we’re actually looking for here, spoiler alert, is Day 4. We want to see a big upward move, a continuation day, a follow-through day on the 4th day of the higher close OR beyond. It can be 5th, 6th, 7th,it can be 5 weeks later, whatever the case may be, as long as these conditions are met, the Day 1 load is not undercut, it’s not undercut. For Day 2, for Day 3, for Day 4 and then a big upward move on high volume, that’s Day 4, beautiful. Oh no, it didn’t happen but the low was not undercut. Day 5, the second week, third week, fourth week. The low is not undercut.
The longer this goes on the x-axis, do you know what that’s called? A base. So we have THE low, the low, the day where the actual low is the lowest low and then we get a higher close. So we are marking that day, that’s the low. And then you have got to go into Day 4, no lower low so the count remains. And then anytime on Day 4 or later when there is a big move higher on volume that is your follow-through day and literally no bull market has started without this type of thing. Is it a perfect indicator or a perfect timing indicator? No. But it is more than just looking at the put/call ratio, the VIX, the smart/dumb money and various breadth indicators. This is the kind of stuff that you need to know so let’s just keep an eye on this.
You could say, well yesterday this was the low. Well, actually it wasn’t; 2380.00, we’ll call it 2381.00 was yesterday’s low. So today it is 2367.00, so yesterday doesn’t even matter anymore. This could have been Day 1, crap, it’s not. Now we’re waiting; that is definitely not Day 1 there. Okay, now this could be Day 1, a higher close, this could be Day 1, this was the low the prior day. Now we’re out again. Okay now, I was hoping that this would be the low, this would be Day 1. Now that’s not Day 1 so we start again.
By the way, remember what we are talking about, Day 4. We are not talking about buying on Day 1, Day 2, or Day 3. We are talking about waiting for confirmation and we don’t have it now. We don’t have anywhere close to confirmation. We are still looking for Day1 and in order for it to be Day 1 there has to be a Day 2 and a Day 3 and a Day4 where the Day 1 low is not undercut, we’re not having that. We are not seeing that right now. So we have to just sit here and wait and we are not timing the market by the way. We are waiting for setups. I will show you a couple of things that I am watching, I will show you those in a minute. We are still waiting for Day 1, we are just not seeing it yet.
So while we are waiting I want to mention one other thing. This is kind of a random thing; it is totally random but this is my video and I get to do whatever I want to do with it. A total break in the action here. Be nice to everybody, be nice to everybody. Be nice to yourself. My wife and I go to Saddleback Church, Pastor Rick Warren who is the guy who wrote A Purpose Driven Life. This is under the moral of stick to your own knitting, mind your own business here.
We are Southern California, Orange County, so we have got a lot of influx of people from south of the border, some legal, some illegal. One of the things he was saying just a few weeks ago was, be nice to everybody. And he said, “Look, whether somebody is here legally or illegally, unless it is your job to be policing the border, it is really none of your business. You be nice to everybody. It doesn’t matter who they are. It doesn’t matter where they are from. It doesn’t matter what political ideology they have or anything else, you be nice to everybody. So just stop looking at other people out of the side of your face, just be nice to everybody.”
And that really kind of resonated with me, not because of the whole border thing but because it is like the guy gave you permission to say, half of the crap that you are seeing in the news media really seriously shouldn’t even apply to you. The only reason it is applying to you is because you are letting it apply to you. I am just telling you, I am just suggesting, don’t let stuff apply to you that doesn’t apply to you. You will be amazed at how much happier you are. It is literally very, very fulfilling when you start focusing on being more self-aware and less aware of what other people around you are doing. It is actually kind of liberating. With that said, I hope I haven’t ticked anybody off with that.
Let’s look at a couple of stocks here. These are just some random stocks I was looking at. Moderna ( NASDAQ: MRNA ). This is a potential Coronavirus thing. It is very, very volatile, it is up 11 percent today. But from top to bottom it was down 20 percent and then back up. So this is one that is not for the faint of heart. I own a small position in this stock and it still drives me crazy because I don’t care if it is $1.00 or $100,000.00, I don’t like to lose money and so I watch all of my trades. This is a pretty small one and I would just say this; because the stock is so volatile the shares that you own should be the kind that if the dang thing goes down $20.00 you’re really okay. If it goes up to $40.00 or more you are happy but you are not out buying a new BMW. It’s literally kind of a lottery ticket, that’s the way I look at it.
If you look at BioNTech ( NASDAQ: BNTX ). this is another one, this is the gappy stock. It is interesting how the stock gaps up here but then the open and close tend to be the same or close to it. So if you are looking first thing in the morning and you are saying, wow, this thing is up big time; 65 percent, up $25.00, $26.00 and you are buying it at the open. You kind of had to be a day trader. But this is a stock that you definitely want to watch. So Moderna ( NASDAQ: MRNA ) and BioNTech ( NASDAQ: BNTX ), fine.
This one is, to me, this is just like stupid. Peloton ( NASDAQ: PTON ), you know what that is all about. This stock is up because somehow the market thinks that people are going to go out and buy stationary bikes to put their butt on while they are sitting at home. It’s not going to happen, at least I don’t think it’s going to happen. I could be wrong, I will say that right up front. The stock could be up at $50.00 in 3 months making me look like an idiot. Only I won’t look like an idiot because I am just telling you, I don’t know, but man, this is a pattern that I sure wouldn’t want to trade and I do not understand the underlying thesis.
And then we will look at Zoom Video ( NASDAQ: ZM ), this is the whole video conferencing thing that seems like it should be doing really well. And it is but this is a stock that is still in consolidation and I want you to think about it. This is very well known as the stock of a company that should do well in a Coronavirus situation and the stock is not just screaming. That train left the station and here; if you think about it, right at the stock started to roll over and the COVID-19 became the thing. This stock has already made this big move from 80.00 to $120.00 so it’s up 50 percent. Now it is just digesting here. This is, in my view, a dangerous stock to hold. I don’t own any of it. I did own it and then I just kind of decided this is a sideways consolidation and if something is in sideways consolidation it’s going to be cash for me.
And then Slack Technologies ( NYSE: WORK ). I had a position in that. I was short 21 calls and short $19.00 puts, and I closed those out this morning and now I am looking like a champ for having done that because the stock has just continued to move lower. When a stock is not working for you then don’t insist that it work. Don’t say, oh well, the market is wrong. It may very well be wrong and the stock could be at $60.00 in 3 months but that is not helping you right now. So when a stock hits your stop, get out.
Now, Boeing ( NYSE: BA ). Who knows when the bottom is? Maybe the government will bail it out. Maybe the government will buy some of Boeing ( NYSE: BA ) like they bought General Motors. Okay, that’s a stupid reason to buy a stock. This stock is not cheap, it’s the most expensive stock in the universe because nobody knows what it’s worth. And there is so much stuff that is unknown, like how much is Boeing ( NYSE: BA ) worth? One thing, they have a debt that is like gross, it’s obscene and that is not on Boeing ( NYSE: BA ) that’s on any airline or any aircraft manufacturer, any defense contractor. They make big stuff and it costs a lot of money so they borrow stuff. I think you remember they took out, basically, their entire revolver loan just to have the cash. So their debt-to-equity, do you know what the number is? NA, you can’t even calculate what their debt-to-equity is. It is just massive.
Other companies that have really, really high debt are Tesla ( NASDAQ: TSLA ) for example. I think it is probably even worse now because I just looked at it earlier today. My stuff this morning said it was 176.00 debt-to-equity, so I guess it doesn’t change during the day. This is a very, very heavily debt laden company. I think the stock could even go lower. I am only short the stock by short calls up here. I just don’t see the company getting back to 500.00. So this is one of the trades that I am in right now and I don’t know how low this is going to go. I would never suggest that you short Tesla ( NASDAQ: TSLA ) or that you follow me on a trade like this because it is a very, very risky stock.
But as I see it the company missed their window to raise equity by issuing a secondary. I think they did a very, very small amount as I recall correctly. But that will be seen as a historically bad blunder. Where when your stock is so grossly overvalued but you are literally the only person who thinks it is worth $1000.00, I’m talking about the CEO. You should sell some stock to the idiots who think that it’s worth at least 800.00; because then you will get their dough. Then when the stock has taken like a 50 percent haircut, you still have their dough and they have your crappy shares. I could see this stock even going lower. My target and I am just showing how I arrived at it literally right there with the mouse, $300.00. When the stock hits 300.00, that’s when I will go ahead and cover.
Other stocks, just a couple more here that I am looking at, just watching them. GSX ( NYSE: GSX ). online education is starting to form what could turn out to be a base, starting to. Also, ZTO Express ( NYSE: ZTO ). This is still in a trend, it is really super volatile and it needs to tighten up quite a bit but it is still in a trend and I like that. I like that the stock is still in a trend. So those are two stocks that I am looking at.
I am looking at Eli Lilly ( NYSE: LLY ) and will probably continue to look at it for quite a while; because this is a stock that definitely needs to tighten up some more. But the fact that it is hanging in above the 50-day moving average and it is still well above the 200-day moving average, that’s kind of a big deal to me. If you just kind of look at it longer-term like on this type of thing, nice move like that. I wouldn’t say this is a cup and handle but it is sure exhibiting some of those characteristics. If it does that then we get a move up like that, that’s what I am looking at. This isn’t happening tomorrow. It may not happen at all.
We are still waiting for Day 4 before we see anything.
And this is what I want you to do and then I am out of here. What I am doing, I talked to Gary about this yesterday, I am going to do what I call a mentor ground work project. What we are going to be doing is a series of classes or courses for people who are interested in taking it. It will be a methodical review of trading concepts. Different things whether it’s chaos to patterns, patterns to profits, ADX and various other things that I have done in the past.
If you want to do this you can do this series of courses with me over the next several weeks. With the idea being as we go through the x-axis we are getting more and more knowledge. And we are getting more and more better equipped, to where when to market starts to do this you’re ready to go. The thing is, if you are able to get out here or here or anywhere along here where we ultimately did, then you have got plenty of cash on the sidelines,
That does not benefit you if you don’t make money as this runs up. If you just keep your cash on the sidelines until it gets back to here then certainty you have avoided this nasty sell-off but you have also avoided all of these wonderful opportunities here. So what I want to do is, I want to put you in a position to succeed when it is possible to succeed because right now it really isn’t.
Free Chart