Winning the Trade Range Game
“Train yourself to let go of everything you fear to lose.” – Yoda
Have you ever experienced that feeling when you’re close to the edge of a high place – and the sickly feeling that accompanies it?
That’s the current condition for most investors as stocks continue their trek upwards through record-breaking territories.
Given the rallies and previous lows, sell-offs, panics, and disasters, and of course the regular summer swoons, the human mind is well aware of "how far back we can fall..."
Hence, the higher we go the more nervous the crowd gets.
Twitch rates on sell buttons increase dramatically in order to avoid being the boneheaded guy who’s last to sell - and needs to turn the lights out as he leaves.
The Doldrums Help
As the summer dawned, we warned of this season’s habit of getting our attention like no other, and how the noise simply gets turned up louder.
This summer has not disappointed.
All the puzzle pieces that historically make up important lows once again lay shattered on the ground:
- Sentiment stinks
- The AAII is heavily bearish
- Technicals are in the tank
- Internal chop is at ‘Strong Yawn - Level 7’
- Equity flows can't get out of the door fast enough on red ink days
- Bond flows have seen folks stand in line for weeks to buy bonds, seemingly at any price, and
- Bond expectations are only that they will give me some of my money back at a later stage.
Previous pieces have since been proven wrong:
- Earnings were up
- Cash Flows were up
- GDP’s up
- Employment levels are up, and
- Hourly pay rates are up.
Now, we’re all human. And as such we have the power of choice. But please seriously consider that these are really good lists to have in place as we prepare to leave yet another summer fog.
Sure, it stinks. It’s supposed to.
That’s what summer markets are for.
Back to Reality...
Check the series of charts below. They show the major indices since January 2018 across the Dow Jones, Nasdaq, S&P 500, Russell 2000, and Russell 3000:
What Do You See?
Bad joke, Mike, right?
No joke, folks. Those are all different charts showing all 5 major indices. And the cold, hard fact of the matter is that, with the exception of tech, they’ve all meandered, chopped, sold off, rallied, gone silent, and then in the end accomplished almost nothing.
That’s called a trade range, my friends. It involves a lot of crowd confusion mistaking activity with accomplishment.
And it’s a very good thing for long-term investors because it shakes the weak hands from the trees and gives us lower prices to take advantage of.
In January 2018 we wrote: "If this perspective is correct, then what we will find in the later stages is rampant fear, huge equity outflows as the remaining fuel tank of patience is spent - and a lengthy period of seemingly going nowhere fast as both sides (bulls and bears) will be left miffed."
Those charts (above) all start on 1st January 2018, and end with the 20th August 2019 close.
On 31st December 2017, one day prior to this period, the S&P 500 had just ended an earnings year adding up to roughly $137 a share.
As of today we’re on track for about $171 this year, targeting about $178-$182 next year with a likely "Truce Dividend" in the offing - if the two gentlemen at the trade table can get back to what they should be doing.
Heck, even JP Morgan chimed in about the levels for next year already…I thought you might get a chuckle at the headline and the "Tariff Cost Adjustment" to earnings:
Note the "hurt" required a reduction in earnings from their $178 a share expected to the lower - uh - $177 a share.
I wonder how many man-hours in the analyst department that took to figure out?
Trade ranges do good things for long-term investors:
- They create doubt, concern, fear, and angst. They cloud the future. They hide the horizon. They squeeze your mental view. They release the ghosts in your mind.
- They create a coiled-spring effect.
Patience, my friends. The summer haze is nearing its end.