Investors HATE RandomessStephen Aust
MarketCycle’s GOAL: To always hold the strongest globally diversified assets in client accounts; this can be done via six methods:
- Relative Strength Analysis (mathematically calculates the strongest assets)
- Following the 4 stages of the market cycle: early, middle, late and recession
- Determining asset positions based on the trend of interest rate movement, either higher or lower
- Determining asset positions based on the trend of inflation levels moving either higher or lower
- Determining asset positions based on the trend of currency strength direction
- Determining asset positions based on being in either a bull market or in an (mathematically calculated) economic recession
MarketCycle uses all six and as far as we know, no one else is doing this. Strong assets drop a little more during corrections but they go up a lot more during the good periods of bull markets, so long-term they can really pay off. Strong stock assets should be balanced in the portfolio with low volatility stock assets such as high momentum consumer-staples stocks or even floating-rate REITs.
CORRECTIONS… Just before the recent (first) 800 point Dow drop, MarketCycle sent a rare private email to clients saying that the market was about to drop, that it would be like a falling knife, fast and “V” shaped and impossible to hedge or to catch the falling knife at the bottom without being hurt. This was like scenario #1 below. So, our plan was to do nothing except to patiently stay invested in the strongest assets because the most likely future outcome was a continuation of the bull market.
THREE different CORRECTION SCENARIOS:
- When MarketCycle’s (proprietary) Indicators are saying “high risk” but the market internals are strong and there is no chance of a near-term recession (this is when one should patiently wait for the correction to resolve… no matter how extreme one’s sense of panic is).
- When our Indicators are saying “high risk” and market internals are weak but there is no chance of a near-term recession (this is when one should hedge accounts, with a small portion of the portfolio, so that losses are reduced).
- When our Indicators are saying “high risk” and market internals are weak and recession is now so close that stocks will automatically move into a prolonged and severe downdraft months ahead of the actual recession (this is when one should switch asset positions to benefit off of the drop, as in 2008).
INVESTORS HATE RANDOMNESS… The human mind hates randomness so when it sees dots, either in the sky or on a sheet of paper or on a computer screen, it wants to connect the dots in order to create something meaningful. There is an entire branch of investing that revolves around Technical Analysis and it has literally millions of adherents. They, in unison and trading with millions and millions of dollars, literally connect dots in order to turn a random chart pattern into something that gives meaning to their brain and then they trade in the financial markets using that new pattern. When these millions of traders move in unison, they create a “self-fulfilling prophecy” that comes true because millions moving in unison, at the same time, MAKE it come true.
These traders first see this:
And then they connect the dots and turn it into the chart below (shows as of October 25, 2018 during early afternoon EST as I write this blog). Then, drawing a line from the market lows in February and April and extending the line out into the future caused them to buy in unison when the market touched the red-dashed line for the third time (on Wednesday). That’s it. That’s all there is to it. A self-fulfilling prophecy that literally moves the market. Notice how the day after the market touched the red-dashed line for the third time, they bought and moved the market higher again? This doesn’t mean that the line will hold since actual market movement depends on entirely different factors than people drawing lines on a chart. Even though the market is up today (Thursday), I actually expect the market to go lower before recovering since the weak hands have not been shaken out and no sense of panic has yet ensued (causing people to sell in order to escape their pain) and there has been no capitulation. We are close but not yet there… and, in my opinion, we are still in a bull market and this will eventually be behind us!
Professionals need to be aware of what the ‘technical’ traders are likely to do and they need to know this ahead of time since it controls much of the short-term movement of the market.
So, the S&P-500 at noon (EST) on October 25, 2018 with DOTS CONNECTED and LINES DRAWN:
Thanks for reading!
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Article by Stephen Aust, MarketCycle Wealth Management