Above the 40 (September 29, 2017) – Stock Market Powers Up for A Potential Overbought Rally

4 thoughts on “Above the 40 (September 29, 2017) – Stock Market Powers Up for A Potential Overbought Rally”

1. With your previous reply, there is no turnover yet of leading indicators and no sign at all of US recession. However, I do wonder whether PMI’s have formed a short term peak at 60 a few months ago in the US. I don’t think it is likely to get better than that and a pullback to 55 would not be unusual. They with the recent weak inflation numbers might bring back recession fears.

   The fed funds rate, if they raise in December would be more than the 10 year rate at the lowest period in the cycle. Historically recessions have occurred 6-30 months after this. This time could be different or it may take the longer end of the range. Given what the growth momentum was before the hiking cycle started, on this side monistic basis, one would tend to think the lag to recession would be lower.

   SPX is strong still but I am really tempted to go long volatility next week. It feels like there is nothing on the horizon but everything is too good. The pricing in oarticular is great for volatility here. So I will be looking for signs of a short term topping process in the next 2 weeks in SPX. I may gut even enter a starter in VIX next week.

   A guy I spoke to about 10 years ago told me that it takes about 7 years once you start seriously thinking about retiring. I didn’t understand what he was talking about at the time but I do now. I think it is good to have a clear goal. He also told me that he thought small cap 10 baggers are the way to go. That was not something that cohered with me but he was right that you need to look out for 10 baggers and they will move you there.

2. I might join you with the long coffee. Have been watching that.

   Back to the 10 baggers, I expressed it incorrectly above. What didn’t cohere for me was the idea of buying small and mid caps for10 baggers returns in normal conditions. The fellow I spoke to was able to do this well but I don’t have this ability. What I have found works for me is buying when there is wholesale institutional liquidation. The risky stuff, small caps and stuff emerging from bankruptcy can do at least 10x. That is my goal this cycle. To be able to buy that sort of stuff in scale with capitulation selling. DD, we have both been in markets for long enough that we should be able to do this by now. I think the next step is to very carefully plan how that occurs and be patient.

   I was listening to an audiobook of Ben Grahams securities analysis last week. Something I hadn’t noticed is the way he described the 1929 market very well. He wrote the book in the late 30’s or early 40’s. The 1929-1932 market was diabolical in that after falling 50%, it bounced, then proceeded to fall another 80%, destroying most investors. I think the only advantage of learning how to trade is to have the skills to play that sort of market. I think my goal is still to buy distressed junk at a low level with a wide stop and to be able to absorb that if it isn’t the bottom. However a moderate allocation e.g 400k, deployed at that juncture has a good chance of being 4M a few years later.

   I think you really have to plan for that and visualise what you will do and how it could go wrong. I think it is very possible to have a significant allocation in 10 baggers. I have down it myself with 500k. I then blew about 1M shorting SPX a few years ago thinking the China scare was the next GFC. Hopefully I learnt a valuable lesson there. That loss taught me more than anything has to date. Sometimes you have to win big and lose big to learn. What it taught me is that you can make 10x taking the other side of wholesale liquidation but you’re not likely to be able to make even 2X shorting. Unless it is in a movie or something. I have met a few people who have said they made a large return buying distressed junk or real estate during a crisis but I haven’t met anyone who has made a lot shorting the market or picking a top. So I’m not sure what I was smoking when I took on the large SPX trade.

   The other thing is position sizing. There are 2 ways to get leverage during a crisis. You can either buy distressed junk which may go out of business if things don’t recover or you can buy normal stuff with leverage. I am not sure which is riskier. Technically you should be able to see it through if the dividends or cash flows are more than the cost of the leverage but you may well be margined out before then. I think leverage works better with distressed real estate because you can’t or are very unlikely to be margin called.

   I read a book by Phil Town and listened to a YouTube video where he described what you are supposed to during a bear market. What he says is precisely right. But he says people can do this by reading 15 minutes of finance per week (or per au or something very minimal) and subscribing to some service (like his). But there is so little chance the average investor can do this. If you can do this during a bear market – deploy capital effectively at the bottom, then you will be in the top .1% of investors and you will be likely to have very significant outsized returns. It is so simple but so insanely hard to do because there are so many ways to get distracted and stuff up.

3. With Phil Town and Benjamin Graham, I read all this stuff 15 years ago but I only just grasp it now fully (or so I think, but maybe I haven’t ?). I am trying to find out if there are other angles that can trip me up. I can imagine things melting up for another 3 years and I’m prepared for that. I can imagine things dipping and then powering on. I can imagine things falling apart and topping out in the next 6 months. Something else diabolical may happen. I guess that is where watching the charts can be useful. But make sure you have a plan about how to play the next bear market.

   As an aside, I live in Australia which has had the most insanely long period between recessions (now about 26 years). So things can definately go for longer…

4. Whew. That was a lot! 🙂

   I agree with everything you say. I will just say two main things…

   One: During the financial crisis, I thought I had learned well from the dotcom bust that I needed to buy the panic and hold on no matter what. So I was a buyer when things first imploded in late 2008. But I went in too deep and couldn’t hold through the next wave of selling. Even worse, in February 2009, I attended a seminar hosted by ETrade featuring a very famous investor/trader (I can’t remember his name). One thing I distinctly remember from that seminar: he said “things are never coming back.” At that point I felt very smart for being bearish the market. You can imagine what happened next. When the bottom came in March, I expected even more profits. Within a blink, those shorts were blown out! It took me until 2010/2011 to finally screw my head back on right and realize that what was happening was not just another relief rally.

   Now after these two experiences, you would think I will be ready to do as you say during the next panic, right? I sure hope so! My deep interest in formally developing my AT40 (T2108) analysis is to get me much more disciplined at respecting the extremes of the market. So I THINK I will be very ready for the next go-round.

   TWO: I can’t honestly I say I know how to recognize and stick with the 10-baggers. It is a great skill. A friend of mine over at SwingTradeBot.com has nurtured this kind of discipline.

   Regarding profits shorting versus going long, going long is definitely the higher reward/risk approach. The attraction of being short is that the money can come quickly when you get it right. But gosh timing is *everything*!

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