Two Themes Have Defined Trading In Early 2017

The major stock market indexes continue to consolidate mostly through time. Small caps are underperforming large caps, which has made chasing breakouts challenging in many occasions. We haven’t seen any strong buying pressure so far in 2017. There has been a little uptick in selling pressure, but nothing major.

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Two major trading themes have defined 2017 so far. I don’t know if this will continue to be the case in the near future:

  1. Weak U.S. Dollar, strong emerging markets. The U.S. Dollar is down 2% year-to-date. For the same period, emerging markets (EEM) are up 5.5%, Brazil (EWZ) is up 13%, China (FXI) is up 5%, gold (GLD) is up 5.6%, gold miners (GDX) are up 14%.
  2. Large-cap tech stocks are significantly outperforming. The Nasdaq 100 (QQQ) is up 4% while Russell 2000 (IWM) is down 1% year-to-date.

We have just entered a new earnings season. Thousands of companies will provide new information about the state of their business. As a result, we will see the formation of many new trends, both up and down trends. New trends mean new opportunities.

Check out my latest book: Top 10 Trading Setups – How to find them, when to trade them, how to make money with them.

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15 Things I Learned from the Book Reinvent Yourself

This is the first book I read in 2017. I thoroughly enjoyed it. Here are my favorite takeaways:

  1. We are what we experience every day:

“You are not just the average of the five people around you. You’re the average of the five habits you do, the things you eat, the ideas you have, the content you consume, etc.”

2. Learning never stops.

“Many people die at 25 but are not put in the coffin until 75. The learning stopped for them early.”

3. Quantity might lead to quality:

“Try many things. One thing I realized is that quantity equals quality. People think it’s one or the other but it’s not. When you have a quantity of ideas and things you are trying, you will find quality.”

4. On mentoring:

“Believe it or not, sometimes it’s just as good (often better) to read all of their materials rather than be directly mentored.”

5. On how to be creative:

“People say, “Everything has already been written.” Everything has already been said. But that’s a lie. I think every outline has already been written. But each human has a unique fingerprint. Just putting that fingerprint on an outline makes it yours, different, unique. And through practice and vulnerability, you make that fingerprint something others want to see.”

6. On how to sell:

“If I want to sell an idea, if I want to convince, if I want someone to like to me, I have to figure out how to connect.”

7. On how to find your unique niche:

“It’s hard to be the greatest at any one endeavor, but by combining passions, it’s much easier to be the greatest in the world at the intersections of those passions (because there are billions of things that can intersect, you can find your own place in the “long tail of passion” to be the master of).”

8. Ideas are not enough. Turn them into a product or a service:

“But the only thing that gets results is action. Not a single ounce of greatness in history ended with thoughts. It happened with hands. With actions.”

9. On asking the right question:

“Money is a side effect of trying to help others: of trying to solve problems. So many people ask, “How do I get traffic?” That’s the wrong question. If you ask every day, “How did I help people today?” then you will have more traffic and money than you could have imagined.”

10. On how to diversify our life:

“When people associate the worth of their lives with any one activity, it’s deadly. We have to celebrate what we’re good at. But also celebrate other things in life the love of another person. Our friends. Something funny. I always have to tell myself to diversify my celebrations. Celebrate the small. Not always the big. “Meaning” is not just a victory. Meaning is a way of life.”

11. Practice doesn’t make perfect. Practice with the clear goal of getting better every day does. Some people say that they have 10 years of experience, but they have actually repeated their first year ten times.

“It’s not about 10,000 hours. It’s about 10,000 hours where you practice with intent.”

You have to constantly come up with new metrics to measure yourself, to compete against yourself, to reach beyond your last plateau.

12. A good story can open many doors:

“For 5,000 years or longer, humanity has driven forward with storytelling. Too many people forget that but the only way to really communicate effectively is through a story.”

13. On how to raise money for your startup:

Too many people say, “I have an idea. Now I need funding.” Don’t do that anymore. Stop it! Say instead, “I’m already doing this. Here are the 10 or 20 things I’ve done so far. Here are the results. Are you in?”

14. There are only two types of decisions in life. Fear of losing and fear of missing out are everywhere in life.

“There are only two types of decisions: decisions made out of fear and decisions made out of growth.”

15. Never let a good loss go to waste

“I still don’t like to lose. I hate it. It’s the worst feeling. But I never let a good loss go to waste. The only way to learn is to study something you never knew before. Losses are the maps that point you to what you never knew before.”

Source – Altucher, James (2017-01-05). Reinvent Yourself. Choose Yourself Media / James Altucher. Kindle Edition.

Do Moving Averages Matter?

Some say that moving averages don’t matter because they just represent the average price for a given period. If enough market participants and algos believe they matter, their actions will impact the market. It is not what you believe matter that matters. It is what the market believes. The market doesn’t consist of just you. It consists of many people, institutions, and algorithms. Time and time again, the market has shown that moving averages can play a pivotal role in a trend. Moving averages are not flawless. As it is with any other tool in the market, they only work well in certain markets. They are just one way to make sense out of a noisy market. They work better in trending markets and not at all during range-bound choppy markets.

Buying the Blood on the Street Is Easy Only in Hindsight

In his latest post, Frank Zorrilla makes an astute observation that the four best-performing ETFs year-to-date were all down several years in a row heading into 2016.

The best performing single ETF’S this year have been KOL (+108%), GDXJ (+107%), EWZ (+83%), and GDX (+72%).

Recent data by Dimson, Marsh, Staunton database, showed median country returns of 8.74% (all years) and 15.94% after three down years in a row, both suggest that you will double the median return of all years if you own a country ETF that is down three years in a row.  It’s a very rare occasion that only happens 3% of the time.

If you take a closer look at this year’s top ETF gainers, you will notice that they were not down three years in a row. They were down 4 or 5 years in a row in the midst of a powerful bull market. Anyone who thought they were a great bargain in early 2014 or early 2015, bought too early and saw another 40% to 60% decline before there was finally a more sustainable relief rally. It doesn’t matter if you just manage your own money or other people’s money. You cannot lose 50% on a position in a bull market and remain in business.

The best performing industries in any given year are usually the ones that surprise the most. What are the type of industries no one expects to substantially outperform? The ones that were down a lot several years in a row and the ones that were up the most several years in a row. In the first case, no one really cares about those industries. They are not simply hated, they are ignored. In the second case, no one believes that their upside run can continue any longer.

There is not one sure recipe for finding the best performing industries every single year. Sometimes, they come from the bottom of the pit. Other times, they come from the top. We have to be flexible and willing to continually adjust to ever-changing market cycles.

Take a look at the long-term charts of the above-mentioned sectors. Each candle represents one year of price action.

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Financial Markets Are Full of Surprises – for Some More than Others

Morgan Housel is out with an interesting post, basically claiming that if you study past history you will learn a lot about history, but very little about the future. The lessons from the past financial crisis are not going to help us with the next financial crises. Life is full of surprises. There is very little we can do to be fully prepared for them. As an ancient proverb goes “when men make plans, gods are laughing”.

He makes some good points. The events and processes that caused the last market correction or bubble are probably never going to repeat in their literal form. Does this mean that studying financial history is futile?

You can learn more relevant lessons that are more likely to pass the test of time if you dig deeper; if you go straight to the source of market corrections and booms – human psychology. When it comes to fear and greed, nothing ever changes. What caused fear of losing and fear of missing out 100 years ago causes the same emotions and reactions today and it’ll cause the same attitude 100 years from now.

The reasons for market corrections might change, the names of the winning and losing stocks might change, but human emotions and psychology are likely to remain the same. One of the best and the most unbiased reflection of human emotions is price action. Technical analysis continues to be an underappreciated tool for risk management, market timing, and equity selection.

What we know with almost 100% confidence is that there will be other big market corrections and bubbles in the future. They will probably be caused by events and processes no one can predict. Most people will react similarly to wild price gyrations. Some will view market crashes and booms as irrational exuberance, others will be prepared better and see in them incredible opportunities.