What Yesterday's Reversal Means
We saw a nice reversal for stocks yesterday. Interestingly, it came on the heels of the lowest consumer confidence number since February. If you remember, stocks sold off hard at the end of January. By mid-February, the S&P 500 was hitting 1,050.
A low consumer confidence number makes some sense when it's viewed in the context of a sharp decline for stock prices. But how do we account for yesterday's negative reading?
Basically, we don't. Just between you and me, the "consumer" is crazy. I don't know exactly what kind of questions are used to come up with the consumer confidence number, but there's pretty much zero correlation between what consumers think and the economy or stock market is doing.
In fact, there's little evidence that consumers spend less when they're not feeling confident. Briefing.com says the consumer confidence report rates a "B-" in terms of importance. I'd rate it a lot lower.
Anyway, yesterday's reversal is exactly the kind of action we want to see during a rally. Investors are shrugging off current bad news and anticipating better times ahead.
Let's also not forget we are in the last few days for the Third Quarter. This is the time when mutual funds resort to "window dressing" to make their performance look better. Window dressing refers to funds buying top performing stocks at the end of the quarter to make themselves look smart.
So, even though the funds performance may not be stellar, investors in the fund can see that it held Apple (Nasdaq:AAPL), Netflix (Nasdaq:NFLX) and Caterpillar (NYSE:CAT) and feel like they are in good hands.
Make no mistake, mutual fund managers can be just as fickle, and wrong, as individual investors and consumers. But unlike individual investors, fund managers will scramble to play catch-up because they know perception is important.
That's a dangerous game, and it's why mutual funds are considered successful if they outperform the S&P 500. Personally, I'd be embarrassed if I didn't absolutely trounce the S&P 500.
Yesterday, I suggested that "...taking a trader's mentality and buy the dips and sell the rips..." can be a good idea for individual investors.
Jerry H. wrote to ask "Please tell me what qualifies as a "dip" and a "rip." I need more definitive information for my small mind."
First of all, let me say that "trading" and "buy and hold" aren't mutually exclusive. The desire to "buy low and sell high" applies to both. And so individual investors need to look forward, just as the stock market does.
It's well known that individual investors tend to buy at exactly the wrong time. They (we) are skeptical when a rally starts, and once stocks have rallied, they warm to the idea that prices may go higher. By the time they overcome skepticism, they are buying high.
Now, I understand that sounds good in theory, but maybe not so easy to put into practice. So let's discuss some ways to put it into practice...
Keep your BS detector on at all times There's a lot of misinformation and deliberately misleading opinion in the financial markets. 15 minutes of CNBC should convince you of that.
I try to take in all opinions, both bullish and bearish, and then ask why they are wrong. This helps me hone my opinion and keep ahead of the major topics of the day.
Know Thyself The stock market will absolutely expose your personality flaws. You will lose money of you don't learn the lessons. For me, I have a tendency to be impatient. When I see an actionable idea, I jump. And I'm often early in a position and early out.
I've learned that important themes take a long time to work their way through the consciousness of investors. And so it's important to find the right entry point and have the confidence to hold to maximize profits.
Uncover your own personality flaws and create a plan to offset them and you will have more investment success.
Learn Fundamentals Stocks tend to move with the overall trend of the stock market. But the stocks with better fundamentals will outperform. Now, by better fundamentals, I don't necessarily mean the stocks with the lowest P/Es. You'll need to know about growth rates, too.
Also, you'll want to know what's going on in the sector. I like to use natural gas as an example here. The stocks are cheap, and, given relatively high oil prices, the upside for natural gas seems compelling.
But natural gas prices are stagnant, at best. And the difficulties of adopting natural gas in sensible ways as proposed by Boone Pickens in the Picken's Plan are simply overwhelming.
Learn Technical Analysis I know a lot of individual investors don't pay much attention to technical analysis. But they should. Because technical analysis is really just the study of buying and selling activity. And how will you know if you're buying low if you don't have an idea of what low is?
As much as we like to think that we, as investors, are individuals with our own opinions and unique insights, the fact is, we tend to act as a group. And you can see it clearly in stock prices.
Now, it's not necessary to be an expert in technical analysis. Getting familiar with concepts like support and resistance points, trend lines, and moving averages can help you get a better idea of what other investors are doing, and what the stock market is likely to do next.
Instead of running through some of these concepts in Daily Profit, I'm going to refer you to my colleague at Wyatt Investment Research, Jason Cimpl. Jason is a supremely talented analyst. He can dig through a balance sheet with the best of them. But he is also a gifted technical analyst.
Jason's called every major turning point for the last two years. He was buying the March 2009 lows. He was warning of a top in January 2010. He nailed tradable lows for the U.S. dollar, natural gas, the euro. Most recently, he nailed the early August sell-off and the following August rally.
If you don't know, Jason is the brains behind the TradeMaster Daily Stock Alerts advisory service. He keeps his subscribers on top of the stock markets every move with daily alerts and detailed videos.
I would also recommend sitting in on his instructional video series, TradeMaster Boot Camp.
In this 5-part video series, Jason will take you through the most important and useful concepts of technical analysis. It's free to attend and you can watch each installment at your leisure and I'm sure you'll find the Boot Camp helpful.
Click HERE to watch Jason's TradeMaster Boot Camp video series, and you'll also get his free e-letter on trading, TradeMaster Market Forecast.
Of course, I'd like to hear your thoughts here: dailyprofit@wyattresearch.com
