10/26 Daily Market Note: Pessimism starts gripping investor psychology. Will Bears be right about a Market Crash?
10/26 Premium Strategy Note: Shared with public due to increasing Volatility
Note: Join over 19,700+ Readers in navigating the market with me. Stay positive. Share with your network. Today’s note is released for all due to increasing market volatility.
Folks-
As recently as this summer, the S&P 500 printed a 19.5% YTD return for passive investors. Today, that YTD return stands at 7.5%. Although YTD returns have next to no relevance regarding macro and fundamental analysis, I heavily look at this metric as a signal to understand Institutional playbooks. For instance, if everyone is watching the 10% correction line in sand, and we are at 9% drawdown, it is best to believe that the 10% correction level will be reached. Do not fight the herd, regardless of your perception of their correctness. Focus on what the herd is thinking. Find out at what level in the market they feel safe, and where they feel pain. That is the level where a reaction happens. Right now, inside company meetings at asset management companies, I can assure you that fund managers are finicky.
And if everyone now frets about losing the entire year-to-date S&P 500 remaining gain of 7.5%, then we should have the level 3826 remembered. Why? Because that’s the level that represents a return to the flatline for SPX should the remaining gains go away.
I used to make longer-term macro calls on where the market may be heading. Long-time readers may notice that I now greatly de-emphasize longer-term forecasts and I also minimize bearish language and focus on what my DCF model tells me. With intense journaling and increased personal transacting experience, I’ve come to conclude that being overly bearish is not the proper mindset to make money in the markets as it makes one too defensive.
I see a lot of bearish research/commentary being published, and to be quite honest, not only is that unproductive, it causes one to miss opportunities as time is taken away from finding profitable trading/investing ideas.
Given increased volatility, I want to share with my Community a way of personal transacting that has benefited me greatly. I use a method called multi-timeframe analysis in conjunction with my level-to-level transacting. This means I am simultaneously watching how markets are changing their price action behavior on the 15-min, 1-Hour, 4-Hour, Daily, and Weekly chart. This explains why in certain instances, I can keep a short-dated constructive view in the context of a declining market/stock. It also explains why in certain instances, I sometimes become cautious even when the market’s higher timeframes clearly point higher. For reference, 90% of my action is long-only transactions. I believe in “buying the bounce” rather than “shorting the rip”, even if the latter is working better in recent sessions.
Let me show you an example, using today’s context. For reference, I tend to share high-probability setups with our private community. If it’s a transaction I deem far too risky/volatile outside a typical investor’s risk tolerance, I take that risk purely on myself because I am trying to produce ideas that have capital preservation qualities for our members. Not all ideas I take on myself I share with folks as it may not be fully replicable. But all ideas I share with my members, I 100% take on myself.
For today, the context was clearly investor anxiety. This is reflected through broad based weakness across Semis, Tech, and Internet. But with the SPY ETF Daily Chart now showing a RSI of 30 which meant oversold, I dug into the 5-Minute chart to see when the market may have some type of intermittent bounce. Around noon time, I noticed consolidating structure, and I placed two heavy orders on SPY and QQQ.
Upon the two transactions being profitable after some good fortune, I immediately set what are called Stop-Loss orders above my entries so that in case there’s any retracement, I walk away with some type of profit. I set these levels subjectively based on levels that I deem have probable reactions.
SPY & QQQ stopped me out at ~$190 profits, and I thought I missed out on a meaningful jump with SPY and QQQ staging a decent intraday bounce well beyond my stop-loss. However, setting stop-loss orders above my entries are something that I must do if I take large intraday positions, regardless of whether I miss the next leg higher.
In the context of a declining market, this is an example where buying the bounce can be profitable. Long positions CAN make money in a falling market, depending on your timeframe. It also highlights how important setting limits and stops are. Without them, I am simply investing and holding.
Passive investing is powerful, and I know that for most people, it’s more suitable. I believe passive investing is one of the best ways to build wealth. That said, I think active management is sometimes under-appreciated and misunderstood. I hope to revive enthusiasm for thoughtful, careful, and well researched active management with my approach using Direct Shares and Options. Most importantly, I look forward to helping every single one of my readers succeed in this vicious market.
Have a good Friday tomorrow and a good weekend. I’m off to doing DCF modeling in the background as I don’t publish Fri-Sun. As the markets descend lower, I hope to share longer-term investment ideas to the Community once I see levels I think are appropriate.
Stay positive. At some point, the market will bounce. All I am focusing on now is when that will be and managing risk day by day rather than reading about the endless macro issues the market has to deal with.
-Larry
Forward-looking Conclusions of this note:
Macro: Institutional Investors are positioned poorly for this latest selloff, driving a “Doom Loop” of selling begetting selling. Finding the tradable bounce will require multi-timeframe analysis with close inspection of smaller timeframe charts to demonstrate a Recovery Candle and multiple attempts to enter.
Stock-Specific: AMZN claws back some of its weekly weakness (Tweet) with a decent earnings outcome. Longer term recovery will require more time.
Bonds: TLT is stabilizing and is in a region that is suitable for long-term retirement accounts in my opinion. Trading accounts should only look at TLT at near swing lows. ~85 is not a precise swing low.
China: Our top names TCOM PDD EDU continue to stay resilient. Stay the course.
I will do my best to keep you as updated on my research, ideas, and setups.
I cannot take any 1:1 questions related to individual positioning or guide on individual transactions.
My work here is solely an expression of my personal journaling, but must not be treated as formal financial advice.
Thank you again for a wonderful Community, and please encourage friends & family to join our group here.
Disclaimer: My investment community is not investment, financial, or trading advice, but for educational informational purposes only. I am happy to share my personal opinions which I provide as my personal journal. Trading of any kind of securities involves a lot of risk. No guarantee of any profit whatsoever is made. Investors may lose everything they have. Practice extreme caution. No profit is guaranteed whatsoever, You assume the entire cost and risk of any trading or investing activities you choose to undertake. You are solely responsible for making your own investment decisions. Owners/authors of this publication are NOT registered as securities broker-dealers or investment advisors either with the U.S. SEC, CFTC or with any other securities/regulatory authority. Make sure to consult with a registered investment advisor, broker-dealer, and/or financial advisor.