October 29, 2020
The Stock Market is Not the Economy
Whatever happens to the economy – jobs, wages, the hardships so many are facing – the stock market seems to be in a world of its own. Why?
The primary answer is simple. Stock values roughly reflect profits, especially anticipated profits. When profits are expected to rise, stock prices trend upward.
But that only raises a deeper question: How can profits be trending upward when jobs and wages are doing so badly?
Because of a disconnect in the American economy that began way before the pandemic – about 30 years ago.
Before the 1980s, the main driver of profits and the stock market was economic growth. When the economy grew, profits and the stock market rose in tandem. It was a virtuous cycle: Demand for goods and services generated more jobs and higher wages, which in turn stoked demand for more goods and services.
But since the late 1980s, the main way corporations get profits and stock prices up has been to keep payrolls down. Corporations have done whatever they can to increase profits by cutting jobs and wages. They’ve busted unions, moved to “right-to-work” states, outsourced abroad, reclassified workers as independent contractors, and turned to labor-saving automation.
Prior to 1989, economic growth accounted for most of the stock market’s gains. Since then, most of the gains have come from money that would otherwise have gone into the pockets of workers.
Meanwhile, corporations have used their profits and also gone deep into debt to buy back shares of their own stock, thereby pumping up share prices and creating an artificial sugar-high for the stock market.
All this has made the rich even richer. The richest 1 percent of American households own 50 percent of the value of stocks held by American households. The richest 10 percent own 92 percent.
But it’s had the opposite effect for everyone else. More and more of the total economy is going into profits and high stock prices benefiting those at the top, while less and less is going into worker wages and salaries.
America’s CEOs and billionaires are happy as ever because more and more of their earnings come from capital gains – increases in the prices of their stock portfolios.
Meanwhile, the Fed has taken on the debts many corporations generated when they borrowed in order to buy back their shares of stock – in effect bailing them out, even as millions of Americans continue to struggle.
So the next time you hear someone say the stock market is a reflection of the economy, tell them that’s rubbish! The real economy is jobs and wages
October 28, 2020
How soon they forget Contrary Thinker’s headlines.
Today 9/3/2020, the markets are flashing “DANGER,” and no one is paying attention, NO ONE.
Today 9/10/20, the majority continue to find a rationalization for more bull market.
Yet a full month later, the boogie-man-month of September is done and dusted, hence an all-clear for the bull market. Contrary Thinker sees the next range day lower that exceeds 4% without an intervening new high etching in stone that the market is in a long term bear market. The Summaries below support that expectation and the Chart Gallery to follow.
As a general observation of all the primary markets, they all peaked on panic buying in August – based on the TE Model. Such action, as previously observed, is easy to stop and will be flipped at least back to the point where the highly emotional buying began. However, given the age of the uptrends, the flip, the reversal should take prices very much below that point.
October 26, 2020
If you put social media in a can, one of the themes that stand out is the envy, doubt, and cynicism posted by the many “new generation” types that accept the industries line that market timing, technical analysis does not work or at best TA is an excuse when a major change happens for no apparent reason touted by the media.
Today when one reads market commentary it is a slave to whatever the media is hawking. “President Donald Trump said Friday that he does not want the aid deal to bail out Democratic states. The major averages fell to their session lows on those remarks… Several market experts and economists including Federal Reserve Board Chairman Jerome Powell think it is imperative that lawmakers reach a deal on another stimulus package.” According to CNBC’s Fred Imbert October 23, 2020. So the market is hanging out for fiscal stimulus.
If we know what the majority is focused on as a contrary investor/trader where should our focus be? It should on our price-based process, with the main feature being risk and opportunity management. It is this concept that becomes blurred by people believing investing is guided by the outside news (anything other than price) or has something to do with the trailing P&L or the if the last trade was a winner or loser. When the market does not care about your money.
The main takeaway you need to know is the market is 180 degrees opposite social or anything that comes out of social media, the market is not social at all. When it comes to outside news, it can be used as an indicator of where the market is in the long term scheme of things. For example, when supposed good news is ignored, and purported bad news is exaggerated, you are in a bear cycle.
The above headlines point out two main tenants of Contrary Thinker. One is the headlines don’t matter directly, it is how the market reacts. The other is the envy and cynicism that many want to be pros have of the true market wizards. As if their mistakes somehow improve their stature of not knowing anything about achieving above-average returns. All they know is following the crowd and the media so they make the sale.
What Contrary Thinker wants is the same thing you want
I have set out to prove that Contrary Thinker’s methods – based on legendary concepts and rules, not lip service – can help you “protect your clients” and achieve above-average returns. That is why you were handpicked and invited into the LinkedIn private group I created for that purpose as well as to get the same information to my fee-paying clients: “Volatility Reports.”
I should have gained your attention via memos, group blog posts, and direct messages where I related to you, our methods, research, strategies and positions. My group and I bracket the media noise and the industry propaganda to focus on a process for optimal low-risk high-reward “one-way trades.” In other words, why take a risk trade for an average profit, instead of waiting for a few big trades each year achieving 30%+ annual return with less than a 5% MDD.
But do not take my word for it, the above idea is taught by Brett N Steenbarger PhD., director of trader development at Tudor Investment Corp. He confirms what I learned by reading the work of real market wizards and listening to all the videos produced by the legends, including Paul Tudor Jones II, and applying their rules seriously.
What they all have in common is 80% to 90% of their profits come from 10% to 20% of their trades. This is also a fact, according to Brett. A study revealed that “across different traders and trading firms, 90% of all profits were attributable to 10% of all trades.”
Here is a key take away that “a large percentage of trades have to be ‘scratched.'” Brett puts it this way, “A cardinal skill in trading recognizes that trade is wrong before it hurts the P/L. Time and again, I have seen good traders exit trades when the trades fail to move in their direction; bad traders exit only after the trade has moved against them.” They called risk management.
On the other hand, opportunity management is crucial with the lion’s share of profits coming from big trades. This applies to any time frame you trade. If you are a day trader, you are looking for the range days and annual one day return days. Days that move from open to close is the low and the high of the day, and that range is 2% or as large as 8% or 13%. We witnessed such days in the 2020 bear market.
To manage the opportunity is not as some think in putting on an opening trade size that will maximize returns from the excellent trade. Instead, Contrary Thinker uses and teaches a Turtle leveraging strategy.
Here is what Dr. Steenbarger found is that the worse traders zig when they should zag, being pulled and pushed by money, their trailing P&L. Whereas, “The best traders can identify superior trading opportunities—and are patient in waiting for those…”
The secret of trading success is the ratio of your largest position size relative to what you usually trade. Contrary Thinker takes the masters seriously in this opportunity management. Our strategies will leverage up to 10-to 1 and 20-to-1, depending on the liquidity of the market.
Successful in general and, more importantly, Alpha comes from the ability to identify—and wait for—immensely profitable opportunities and then take maximum advantage of those. While 20:1 position sizing may be too rich for your blood, the principle is valid: success is a function of putting size on for logical, not emotional, reasons.
So, risk and opportunity management boils down to scratching trades that do not move promptly as expected, while at the same time milking the opportunity, once it is clear.
The truly unsuccessful traders are moved by money, client and peer pressure, or pride.
Brett provided this antidote, “I recently asked a trader why he hung onto a long position for an unusually long period. He looked at me somewhat quizzically and replied, ‘Because I had the bottom!’ He was willing to sit through a choppy trade if it went in his direction and if nothing happened to convince him that he did not identify the bottom. That one trade made his entire day.”
Visitors at the “Volatility Reports” Group in LinkedIn need to opt-in as a subscriber before their free look runs out.
Great and Many Thanks,
Jack F. Cahn, CMT
A Thinking Man’s Trader Since 1989,
— ContraryThinker does not assume the risk of its clients trading futures and offers no warranties expressed or implied. The opinions expressed here are my own and grounded in sources I believe to be reliable but not guaranteed.
–Trading futures and options involve the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options.
October 26, 2020
The bear market is expected to confirm this week via long bar decline days
World Stock Averages both U.S. and European markets experienced a down week. The Asian markets were mixed with the Hang Seng and Shanghai Composite making secondary highs, pivoting to make new two-week lows in the same period, a bearish configuration.
The ATH posted on 9/2/20 and the secondary high posted on 10/12/20 held thus keeping the bearish outlook in place. In the report on the 19th, I pointed to the grey column on the right of the Change of Trend (COT) calendar because it highlighted the time frames when an acceleration of the trend is prone and long bar days become more likely. The expectation is to see 4% lower range days or greater in the Dow/S&P and 6% down range-days or greater in the Nasdaq is probable.
The majority of market content providers in the Tweeterphere for the last three weeks touted an advance to decline surge of some formulation, when in fact there was none, full stop and there was no massive confirmation of new highs by the major averages. Funny, from the peak that Contrary Thinker predicted in late January 2018 the Dow made new highs but the Dow Transports did not, an old fashion Dow Theory sell signals. Today the bulls can’t focus on anything else but – even with it being three years later – the Dow Transports making new highs. The problem is the Dow Industrials have not confirmed, which is another old fashion Dow Theory sell signal.
The price-based background is being dominated by the Long Term panic buying that occurred at the peak in all of the markets from bonds to gold to stocks. After a TE rule #1 – a panic event – is followed by a choppy market. It is a “V” or inverted “V” change of trend (COT) bottom or top 99% of the time ( see Four Rules).
October 24, 2020
The new Borat film will be released on Friday on Amazon. (IMDB) Rudy Giuliani has defended himself after being shown in a compromising position in a hotel room with a young actress pretending to be a television journalist in Sacha Baron Cohen’s latest mockumentary. The scene in the new Borat sequel, shot in a New York hotel room in July, includes a moment when Mr Giuliani is seen lying […]
[…,] tucking in his shirt with his hand down his pants with the young woman nearby.
Mr Giuliani, who is US President Donald Trump’s personal lawyer, went to the hotel room thinking he was being interviewed about the Trump administration’s COVID-19 response.
The young woman is flirtatious with him and invites him to the bedroom, which is rigged with hidden cameras.
The young woman is flirtatious with him and invites him to the bedroom, which is rigged with hidden cameras.
Mr Giuliani then asks for her phone number and address. He lies back on the bed to tuck in his shirt and has his hands in his pants when Baron Cohen rushes in wearing an outlandish outfit.
October 19, 2020
As an observer of the markets and the economy, I know there are no absolutes, but every good idea has its time. Back 40 years ago neo-liberal economic theory was right for its time and was accompanied by a rising tide of socio-cultural optimism. Today that era has come to an end and it can now be truly called “voodoo economics” and will be corrected over the next 40 years.
What goes hand and hand with that Macro change is the market in the time window to revisit and finish correcting the problems and issues left unresolved in the first quarter downturn. Remember the “shortest bear market in history?”
When the market made its low on March 23,
October 19, 2020
October 19, 2020 Recap
The bull markets are done, dusted, and bronzed.
Bonds: As I go to press, the bonds are testing the 174 12/ to 171 28/ I-T support zone, sitting at 174 1/. The context, the tension in the background from an I-T point of view supports that if a break occurs here of support, the next target is L-T 144-152. The tidal cycles and trends following the system are short and continue to support the downturn, as seen on the next chart in the gallery. The cycle is down, the MA crossover is down, the smooth CMB index is down, and the smoothed RSI is down.
From an Elliott Wave point of view, the secondary peak in August was the end of the I-T counter trend wave (2), which leaves the long government bonds on the brink of the best part of a trend, wave three.
Euro Dollar outlook, from a secular point of view, the very long term bull market that ensued after its creations are in a long term correction of the mistakes it was founded upon. From the Brexit to Greece and others, the theme during debt contractions is “separations,” and that does not bode well for a union of states that does not have a common language.