Actionable insights straight to your inbox

Equities logo

The Fed is Still in the Driver’s Seat

The market gained a little ground today, but that small gain resulted in yet another lifetime high. I have a very good friend of mine that firmly believes that all markets revert to their mean. As

The market gained a little ground today, but that small gain resulted in yet another lifetime high.

I have a very good friend of mine that firmly believes that all markets revert to their mean. As such, this professional trader has been betting on a massive correction for what seems to be, forever. I don't dare ask him how much he has lost by ignoring the charts and betting on his 'reversion-to-the-mean' strategy. I don't want to know and I don't think he'd take too kindly to me asking him. I suppose, if his money holds out and his margin call never comes that someday, he will be right. But, think about all the money he has lost by ignoring so many strong indications of why this market is in a bull trend that may last a long, long time.

Quote worth Quoting Again

"I've missed more than 9000 shots in my career. I've lost almost 300 games. 26 times, I've been trusted to take the game winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed."…

Michael Jordan

Having just made the "long, long time" comment, I am sure he is snickering at my comments and grumbling to himself, "Poor Mike… he's going to be so wrong one of these days soon!!"

And that's why I am a long-time investor, one-week-at-a-time. The market 'could' reverse this week and head lower for the next 3 years… but, I doubt it. The market 'could' crash 30% lower at any moment… but, I doubt it. The market could continue to move higher in a straight line for the next several years, too… but, I doubt it.

You see… I am long in the market until it is no longer smart to be long the market. Then, I'll be short in the market (via inverse ETFs) until it is no longer prudent or smart to be short the market.

The key, of course, is to know when to change direction. Fortunately, I don't depend on my good friend's sage advice and I don't depend on any special insight or genius. No… I depend on my computer programs that don't care what anyone thinks about what the market will do. When the market rolls over, as it surely will some day in the future (could be tomorrow), my analysis algorithms will show me the new trend and that it is time to switch from bullish to bearish. I suspect this change will not occur overnight (or tomorrow, for that matter).

Near-Term Market Outlook…

The theme remains the same… 'The market is more likely to move higher than lower until the Fed changes its monetary policy… period.'

The number of inverse ETFs jumped higher this past week from about 12% of the total number of inverse ETFs to about 21%. The bulk of these equities are concentrated in the VIX and hard commodities (gold and silver). There are no broad market inverse ETFs with a buy rating at this time.

I like to keep an eye on the number and type of buy-rated inverse ETFs to try to detect any early warning signs of a market roll-over. At this point, as stated at the top of this section, I believe the market is firmly entrenched in Fed-Speak and Fed-Action.

I do believe the market pays 'some' attention to real fundamentals, but until the Fed and other global central banks exit the dramatic influx of a faux money supply into financial institutions, the markets will continue to look for ways to move higher… not lower.

It is important to not get lulled into a false sense of security, though. I am a long-term investor, one-week-at-a-time. This means I never trust the market to continue doing what it has been doing. I always hope for the best but am ready to switch horses as soon as I see confirmation of a change in market trend. Right now, the market wants to be bullish and the Fed is supporting that desire. But, a 2008 or worse event is becoming more and more likely with every passing day of the out-of-control growth of federal debt. Even though this bull market could continue for years, the Sabinal One portfolio utilizes a long/short strategy. This means we will be doing our best to capitalize on a Fed-rigged upward inflationary spiral in the stock market… always with an eye on the exit where we shift from holding mostly long-only, bullish trades to long-only, bearish trades via inverse ETFs.

Closing Thoughts…

I heard a pitch the other day where the gentleman promoting his 'system' said, "Making money in the stock market is easy!" Unfortunately, the opposite is even more true, "Losing money in the stock market is easy!"

What all of us want is really pretty simple…

  • We want more winning trades than losing trades, and
  • We want our winning trades to be much larger than our losing trades.

Of course, these two simple desires (yes, I realize there are many far more important goals we all should want in our lives, but I'm strictly speaking about the stock market in this case) are the true definition of a successful stock market trader.

I could add nuances that include levels of risk and rates of return and time-value-of-money and a dozen or more other esoteric and not-so-esoteric components of a truly successful trader. But, if you don't achieve the two simple components noted above, the rest is just so much hot air.

In my Signal Investor portfolio so far this year, we have +64.37% winning trades and the average winning trade is more than twice the size of the average losing trade. The S&P 500 is up a very nice +26.80% so far this year. The Signal Investor portfolio is up +40.26%… 50% better than the market!

Making that kind of return has not been "easy", but it has been quite straightforward. I have rules for every market condition and those rules have made the trades that have generated a return of 50% better than the market.

It is important to have a well thought out trading strategy and a rule for all market conditions. Having robust analysis tools is a critical component to that kind of success, as well.

Any change significant enough to matter draws vigorous opposition from those who depend on the status quo.
Equities short logo
Equities short logo