Everyone’s a stock picker. And to be quite honest, everyone gets hold and everyone gets cold. Every trader has to find strategies that work for him/her and then hit the “rinse and repeat” button. Personally, I’ve found three keys that have helped me beat the major indices, particularly the S&P 500, over the years. They are:
Get the market direction rightFollow rotation and relative strengthStick with leaders
That might seem like a lot, but it’s really not.
Getting Market Direction Right
This one requires market experience, knowledge, and research, but there are several tried and true techniques to help us in this regard. (Hint: It’s not watching CNBC and Jim Cramer.). I always talk about perspective, because WAY too many folks, both Wall Street professionals and retail traders, get so caught up in the NOW that they can’t comprehend what’s happening in the Big Picture. Start with the FACT that the stock market goes up a whole lot more than it goes down, so get all the perma-bear influencers out of your life. Seriously, they’ll ruin your perspective. Surround yourself with realists, those who are primarily bullish, but remain objective when evaluating current technical, fundamental, and historical indications. You MUST understand the role that sentiment plays. When selling accelerates and pain grows, irrational selling and market behavior will ultimately mark critical bottoms. I have found sentiment to be my absolute best bottom indicator.
If you study history, you’ll also understand that capturing the most bullish advances are the best opportunities for a financially-secure future. Once those rallies have ended, so too has the investment opportunity.
There are plenty of signals that the stock market provides us BEFORE or during major rallies. Sector rotation, positive divergences, and extreme bearish sentiment are perhaps the three most reliable, in my opinion, and I have my own strategies on how to use those. Recently, however, was the breakout in transportation stocks ($TRAN) and that signal is UNMISTAKEABLE. There is only one reason why transportation stocks go higher – economic conditions are strengthening and more goods will be delivered (or Wall Street is anticipating economic strengthening). Don’t believe me, believe the charts. Here’s what happens to the S&P 500 when transports break out to new highs or above periods of consolidation/selling:
Listen, there is NEVER a guarantee that the stock market will go higher. If you’re looking for that, then stop investing in stocks. But do some research (or follow ours at EarningsBeats.com) and invest knowing that the odds are on your side. Many times, when I call market tops or market bottoms, I do so based on the shift in market risk vs. market reward. I don’t guarantee my calls. I can’t. But if you follow my work, then you know I’m convicted. I don’t waffle. My signals are my signals and I follow them. I don’t care what Jim Cramer says. I certainly don’t care what all the market influencers (ooops, meant to say market analysts) are saying on CNBC. It’s almost all a pile of garbage to consume our time so they can sell ads. And what occupies our mental space? Fear. If you don’t believe we’re all manipulated by the media, then we can’t be friends. (just kidding)
Follow Rotation and Relative Strength
Let’s look at the market top at the beginning of 2022:
I think the continuing weekly negative divergence was clear (pink lines). But the change in relative strength was eye-popping. There’s no problem with a pullback in these relative ratios IF the market is also pulling back. Profit taking will show up that way. But when you see final highs accompanied with massive rotation into more defensive areas, you need to take that very seriously, which I did.
Now let’s look at the exact same chart in mid-June 2022, when I called for a potential market bottom:
Price moved substantially lower from May 2022 to June 2022, but the pace of relative weakness began to slow, even turn higher in many growth ratios (IWF:IWD is the one I provided in this example, but there were others). I also wrote many times in mid-2022 about how manipulation was showing that Wall Street was accumulating heavily starting during the May 2022 to June 2022 period. Sentiment was beginning to “reset” as well. History now has proven me correct in calling for higher U.S. equity prices from that June 2022 low and making calls like that one is how you build wealth. But you have to be willing to “think differently” and not simply follow all the bearish talk on CNBC.
Stick with Leaders
When 2023 opened up with narrow leadership from the key, high-market-cap stocks on the NASDAQ 100, Wall Street eschewed that early surge. I love technical analysis and I believe it’s AWESOME to help us trade during uptrends and downtrends. But I believe intermarket relationships, sentiment, and good ole perspective are much better in helping us locate market tops and market bottoms. Throughout much of the current bull market move, the naysayers have been everywhere, saying the stock market couldn’t go higher, because of “this” or “that”. I said “stay the course, we’re going higher”. To this day, I still will never understand why those who follow market-cap weighted indices grow bearish when the highest market-cap leaders outperform and send our indices higher. What if “breadth” had been great, but these mega-cap leaders were left behind? Would everyone have grown bullish? I doubt it. Personally, I believe that once the majority of folks develop a bearish mindset, NOTHING MATTERS. They’re bearish no matter what the market is doing and what’s leading. That’s why at the beginning of 2022 I said that sentiment needed to “reset” and now I hope everyone can appreciate what’s necessary to make that happen.
The truth is that at nearly every bottom, the leaders are bought first. Semiconductors ($DJUSSC) are historical leaders and NVIDIA Corp (NVDA) has to be considered one of the best stocks in this space. Check out NVDA’s breakout in late 2022, followed by a quick retest, then an explosion higher:
Trading smarter and better and, ultimately, carving out a more secure financial future is about RESEARCH and EDUCATION. We are never satisfied at EarningsBeats.com. I feel like I need to learn something new about the stock market every day I wake up. We also have to deal with an evolving market. Economic changes, interest rate outlooks, profit projections, geopolitical concerns, management issues, political policies, and the like, all play a role in shaping and re-shaping our stock market landscape. We MUST change with it and be open-minded to the possibility that things will play out differently than the way we believe today. But just as important, we must always keep a healthy dose of perspective. While things do constantly change in the short- to intermediate-term, the Big Picture generally remains the same. It’s a balancing act and it’s up to us to get it right. No one cares more about your financial future than you. Always remember that.
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Happy trading!
Tom