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
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
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
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
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
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
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
Uncover your own personality flaws and create a plan to
offset them and you will have more investment success.
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
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
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
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
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
If you don’t know, Jason is the brains behind the
Daily Stock Alerts advisory service. He keeps his
subscribers on top of the stock markets every move with daily alerts and
I would also recommend sitting in on his instructional video
series, TradeMaster Boot
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.
to watch Jason’s TradeMaster Boot Camp video series, and
you’ll also get his free e-letter on trading, TradeMaster Market
Of course, I’d like to hear your thoughts here: [email protected]