Here are 10 lessons I learned in 2015. Some are new, some I had to relearn:
1. I am most creative and work better after a workout – after a run or some other aerobic exercise.
2. My best swing trade ideas are usually profitable almost immediately after I enter them. Those stocks that don’t follow through and go sideways, end up costing me money on average. Such realization helps me to cut my losers quickly and to add to my winners.
3. No market approach works all the time. I knew that before, but 2015 cemented it in my mind. I even wrote a whole chapter on it in my book “The 5 Secrets to Highly Profitable swing trading.
4. Drawdowns are inevitable, but their size could be managed.
5. Market timing is even more important than equity selection in a range-bound choppy market like 2015. There are times to be extremely aggressive and leveraged in the market. There are times to play defense and stay mostly on the sidelines.
6. Money is always going somewhere.There are always trends, but not all of them are easy to ride.
7. Revenge trading usually does not work. It is better to take some break from the market.
8. Never say never. Never turn a trade into an investment.
9. One good trade a day could allow you a comfortable life, but you might need to have 2-3 small losses before you get to that trade. Be prepared. Have a list of stocks in play.
10. Being aware of where the general market is in its price cycle is extremely important.
What are your market lessons for 2015?
For most people, their house is their biggest investment. Some have done a lot better than others depending on the price they paid and the region they chose to live in. What very few realize is that investing in home improvement stores would have been a lot more lucrative. In fact, the best performing stock for the past 34 years is a home improvement store.
Today, Home Depot closed at new all-time highs near $126 per share. $5000 invested in its stock on its IPO day in 1981 is worth about $25 Million today. Very few stocks have managed to average 28% annual returns over the course of so many years.
Of course, I write this with the benefit of hindsight. Finding stocks with great potential is a lot easier than holding them through the inevitable drawdowns they go through. For example, Home Depot had a 71% pullback during the bear market of early 2000s. Then, it had another 50% correction in 2007-2008. It takes a lot of conviction to hold a stock through such big setbacks. I would venture to say that the total number of individuals who bought Home Depot on its IPO day and are still holding it, is probably very close to zero.
Don’t forget that for each Home Depot that recovers from a 70% drawdown, there are 20 other story stocks that either never come back to new highs or they take decades to do so. A simple trend following system that would sell Home Depot every time it closes below its 20-month moving average and buys it back when it makes new 52-week highs would have achieved three results:
- Catch all of the upside.
- Eliminate most of the scary corrections and limit drawdowns.
- Allow to invest your capital in other stocks during periods when HD was not trending up.
Major U.S. equity indexes are back to clear technical resistance. As a result, tail risk is near all-time highs. People are frantically pointing out to a record levels of put buying in the midst of a rise in the S & P 500. If everyone expects the possibility of a near-term correction and all are hedging against it, what are the odds that it will happen? Usually, very slim. The market rarely does what the majority of people expect.
In the mean-time, semiconductors ($SMH) continue to outperform and are back against their declining 200-day moving average. Some say that they are the new Dr. Copper – the real leading indicator in markets. Remember how semis were among the first leading sectors to break down in late June? After that, they kept declining below their 50dma and foreshadowed weakness in the general market several weeks in advance. Now, all of a sudden semis are starting to outperform. Maybe, this time they are foreshadowing a market recovery? They need to clear their 200dma first, of course.
The chart below shows the ratio of Semis to S & P 500 – a great way to spot relative strength or weakness.
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U.S. equities had a 5-day rally and as expected by many are encountering some selling pressure today. Counter-trend rallies below 50 and 200dmas are typically guilty until proven innocent, but here are a few things that are different about this pullback compared to two weeks ago when Russell 2000 tested its Aug 24th lows:
- Japanese Yen is not rallying this time. The Yen rallying is a typical risk-off move that usually leads to a selloff in equities around the globe.
- The U.S. Dollar is fading, which is giving a boost to lagging sectors as energy, some basic materials and emerging markets.
- Earnings season is knocking on the door and market expectations are relatively low, which is usually a good foundation for upside surprises.
- Seasonality on the side of bulls this time.
- Many investors did not participate in the last 5-day rally and are waiting for a pullback to enter. It seems everyone was on the bandwagon two weeks ago and got burned as SPY, QQQ and IWM were slammed near their declining 50dmas. “A cat who sits on a hot stove will never sit on a hot stove again. But he won’t sit on a cold stove either”. May investors are the same way and highly impacted by recency bias. It takes time to go from a state of “fear of losing” to “fear of missing out”.
- The biotech sector is leading the selloff again, but this time correlations among biotech stocks are much smaller than 2 weeks ago. For example, look at $JUNO up 9% today.
What has remained the same today compared to two weeks ago is that there is still not a very high number of decent long setups among high-growth leaders. Mostly laggards are leading this counter-trend rally. Some say that this is normal for early stages of market recoveries, but the truth is that growth leaders lead in healthy markets and without them any rally isn’t likely to sustain for too long.