There isn’t much to report on for the broader market or bonds this past week (pretty flat) so let’s get to the opportunity I see. Well, there’s one thing…the Fed raised the discount rate by 25 basis points on Wednesday and no one blinked. The bond market shrugged it off and equities barely noticed. Oh, one other thing, Tesla (TSLA) got crushed after the SEC announced it was suing Musk for fraud concerning his comments to investors about taking the company private. Sounds like bull shit to me. In fact, Elon rejected the settlement fine and basically told the SEC to pound sand. Go Elon! Then on Saturday Elon agreed to a deal and a fine. Still sounds like BS.
The Anatomy of a Trade
Intel Corp (INTC) monthly
I highlighted Intel Corp (INTC) last Monday morning after price was bid up exactly at support the prior week. Friday, price surged and closed above short term resistance. It’s time for rinse and repeat. I think this is a good risk/reward opportunity and I am putting this on the buy list…again. The last INTC trade was +25% and closed July 2nd. After correcting over 20% from the high in June it looks like INTC is starting another leg higher. I am not surprised at the 20+% correction considering price is working through a lot of supply from the dot.com highs. See monthly chart. There are a lot of people who haven’t even got back to breaking even yet from 2000. That’s 18 years ago! They have been praying for 18 years to get back to even. They can’t wait to sell into this next leg up. Please God if only I could break even…that’s their mantra…over and over. And, you know what happens…they break even, at best.
We, on the other hand, lie in wait for precious opportunities. Be a hunter not the hunted.
Intel Corp (INTC) daily
This next leg up has a good chance to take out the June high. The risk is closing below rising support. The upside potential clearly outweighs the downside risk.
I like this trade for the following reasons:
- Price was bid up exactly at support; good structure.
- Price has just closed above short term resistance with a powerful move on Friday.
- Price has recently corrected 20+%.
- Asymmetrical risk/reward.
- No one is talking about it…yet
Simply Knowing When You are Wrong
I will admit I’m picky about entries. It’s what I do. The better you buy the more you make and the less you lose. Pretty simple stuff really. If you didn’t believe in selling I guess it wouldn’t matter at what price you buy. And, if you didn’t believe in selling what do you do with the likes of a General Electric Co? Down over 80% from its high. Or a stock market, for that matter, that can correct 40+% in a bear market. What do you do when you are clearly wrong if you don’t believe in selling? I believe in selling and don’t understand the reasoning people use who don’t. If you don’t have a sell strategy are you just hoping things turn out well? Is hope your strategy?
Buy and Hope…Wow…Just F…ing Wow. Is that the best you’ve got Wall Street?
Their reasoning is “stock markets generally go up and you can’t time the market”. I call bullshit. Timing has nothing to do with buying or selling. It’s price action that’s important. That’s like saying you’re trying to time the weather when it’s raining and you grab your umbrella.
Japan is still raining…it’s at the same price it was in 1987. That is 31 years ago. Germany, Europe’s largest economy, is the same price it was 18 years ago. Just look at indexes from around the world and you will see the fallacy in their argument. The US has been the best performer for decades and has risen steadily albeit with massive corrections and years long periods of non performance but this does not mean the US is immune from a decline that lasts decades. Hell, I don’t even like the ones that last 2 years.
Even Wall Street really knows the importance of selling. Why else would they periodically drop companies from the Dow or S&P 500 indexes and replace them with another company? Because they are performing badly, for a long time. Hello?
Remember, the older you get the less time you have to recover. Your investment time horizon is directly related to your age. Selling becomes more important as you age. The shorter one’s time horizon the more important selling becomes. This is easily proven by the 98% of futures and Forex traders that lose money.
Is the INTC entry perfect? No. No entry is perfect. We could have had a buy order at support (44.20) waiting on September 12th at 7:40am PDT. By the way the low was 44.06 (14 cents from support) and…drum roll…support was established in August 2017! I hate exclamation points but this is important to understand. The problem with buying exactly when price tags support is increased directional risk. There is little confirmation that support will hold and if it doesn’t hold it is likely to fall fast and furious on that day. I prefer to wait for confirmation that support is still valid. Confirmation is simply a day or a week or any time frame bounce off support that is consistent with the time frame one is trading in.
Below is the 15 minute chart showing the intraday bounce off support on September 12th.
Intel Corp (INTC) 15min
Like any entry this one does have its flaws. Look closely and you will see a little resistance just above Friday’s close. It’s the brown horizontal line at 47.57. Do you see that price was rejected there (47.75) on Friday? Price could easily suck back to 46.50 from here but I don’t think much lower. Remember, this is just my opinion and understand anything can happen. That brings us back to the reason for the sell strategy. To know when we are wrong because anything can happen.
Below is the daily chart showing resistance above Friday’s close.
Intel Corp (INTC) daily
Think about that…”To know when we are wrong”. How beautiful is that? What’s even better? To do something about it. In the case of investing that would be selling. You’ve got to love selling. You’ve got to have a sell strategy.
I think I covered that subject. But, let’s keep pulling on the loose thread.
It’s obvious that at any given time there are stocks that are trending up and there are stocks that are trending down. I’m talking long term trends. So, as a trend follower, I should be long stocks, ETF’s and countries that are in uptrends and short stocks, ETF’s and countries that are in downtrends.
You can take this logic and apply it to any index like the Dow or S&P 500 index. Instead of being long every stock in the S&P 500 index, which happens when you buy an ETF like SPY, you would be long stocks that are in uptrends and short stocks that are in downtrends. As an individual investor this would be cumbersome to monitor 500 stocks and whether to be long or short. But, as a product of some kind (active ETF, hedge fund, whatever form) it could most certainly be built.
Think about it. A long/short strategy would organically shift to net long in uptrends and net short in downtrends as individual components are shifted to either long or short. It could have a smoothing effect on volatility. Or, instead of short selling downtrending stocks you could just sell them and move those funds to an income producing asset. This way you don’t have as much risk associated with short selling and you would still have less exposure in market downtrends and would still be organically reducing exposure in long term bear markets. Who wouldn’t want this? Everyone wants to avoid bear markets and therefore outperform the S&P 500 index. That’s the measuring stick, right or wrong.
It’s not like there aren’t long/short funds or products. Most hedge funds are long/short. There just aren’t any like I would build yet. I have my tool bag packed if anyone out there knows someone at Wisdom Tree, Global X or any Wall Street product sponsor that is in the business of creating cutting edge products. Feel free to forward this email to anyone you might know that would be interested in creating a new product. Or, feel free to forward this email to anyone that you feel might benefit from my research.
Think of the comfort you have knowing you have a sell strategy. You’re not relying on hope. You know it is highly likely if there is a protracted bear market you will avoid much of it by selling effectively. Of course, if you don’t believe in selling you must believe in hope. And, if you believe in hope you better fasten your seatbelt. By the way, hope is not a strategy.
Effective selling is a strategy. Selling limits losses. Selling avoids protracted bear markets. Selling protects you. Selling is at the foundation of risk management. Without selling it really doesn’t matter when you buy because you will never know when you are wrong. Just ask Bill Ackman or Michael Novogratz, the famous hedge fund managers. They fell in love with their positions in Herbalife, Chipotle and Brazil and rode them into the ground blowing up their funds. They were blind to the possibility they would be wrong with their thesis. They never knew when they were wrong except when it was too late. They didn’t have a sell strategy. Whoops.
I think you get the point by now. (sorry I was a bit long on this weeks writing but this is really important stuff)
Now go talk about it, forward this to anyone you think would benefit from reading it and have a wonderful week.
Don’t forget about Intel.
It’s Saturday morning and I have been writing for about eight hours since the market closed yesterday afternoon. I’m going to go surfing now.
Trade Smart,
Don