How to Analyze Any Stock or Market in 10 Seconds

See the actual trading charts Tyler was talking about today and how he used them to make good trades this week. So important for investors to learn these basic skills.

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We just got through another Berkshire Hathaway shareholders meeting (something I hope to never attend), where Warren Buffett gave us an update on his “hedge funds vs. S&P 500” bet.

Back in 2008, Buffett made a very loud, annoying bet that the Vanguard S&P 500 index fund would outperform a basket of hedge funds over 10 years. Eight years into the 10-year period, Buffett is winning pretty handily. In the classic understatement we have come to expect from a former Business Insider editor, Joe Wiesenthal said that Buffett is “absolutely crushing it” on his trade.

Indeed he is. Here is the chart.

So a few things here. Buffett is very cynical and likes to take advantage of people’s stupidity. He also famously bet a billion dollars that nobody would pick a perfect NCAA tournament bracket, which he was mathematically certain to win.

This bet was a no-brainer from the start. Everyone knows that active managers underperform passive managers in the long run—this is not new. It’s been around since Malkiel and his random walk theory decades ago. Buffett is feeding the prevailing sentiment, which is that Wall Street people are corrupt and dishonest and charge lots of fees and add no value. People believe this because Buffett says it and he has credibility (hopefully they do not take his advice about drinking five Cokes a day).

But I’m going to ask you the same question I asked myself when I read A Random Walk Down Wall Street almost 20 years ago: If it were really true that active management was a fool’s errand, and that the hundreds of thousands of people who work in the money management business add no value, then why does it exist?

Because they do add value.

Minimizing Volatility

Go back to the chart above—what is the first thing you notice? I hope you notice that while actively managed funds underperform in up years, they outperform in down years.

There are many reasons for this, the first being that a hedge fund manager can go to cash. He can also short things, or even just go outright short. But even Buffett knows that the point of professional money management is not to simply beat the S&P 500.

The point is also to minimize volatility. Because if you can’t handle the volatility, then you’re likely to vomit out of your investment at the worst possible time—on the lows.

This is very important. Vanguard offers a whole slate of very low-fee index funds. You can sign up at Vanguard.com and send them some money and get started. You can look at the 1/3/5/10-year performance of these funds.

Now, here is the $24,000 question: Do you think people really realize the performance in these funds, or maybe do a bit worse?

They definitely do worse, because human beings are human beings, and if you are long the Vanguard Energy Fund, and it goes down 40%, you are going to barf it, and then you are going to buy it back when it goes up 40%. If you instead invested in a hedge fund, which was rolling around with 20% cash and shorted stuff on the way down, maybe you would only lose 15%—and make it all back, and then some, on the way up.

But guess what—minimizing volatility enabled you to stay in the trade and continue to compound returns over time. If you barf, the compounding comes to an end.

Buffett likes to say that you should buy and hold stuff forever, like he does, but not everyone is Buffett. Not everyone has permanent capital, not everyone has godlike status among his shareholders, and quite frankly, not everyone has the constitution Buffett has.

When things go down, Buffett buys more, which is what you are supposed to do (if you are a value investor). He says you are supposed to have a really long time horizon, like, forever. He is right. But most people can’t do that.

I bet Vanguard has data on what the actual rate of return of their shareholders is. I bet it is nowhere near that of the S&P 500. I bet it is very poor—even negative!

But at least the fees are low…

The Brokerage Industry

In addition to active management, the other class of people on Wall Street who get beat up pretty consistently are the brokers. The conventional wisdom is that these guys add no value and get paid to churn your account and jam you into mutual funds with fees so they get kickbacks. Some or all of that may be true. But you know what else they do? They talk you out of selling on the lows.

The most important function of a broker or investment advisor is to save you from your own worst instincts. They are amateur psychologists—when the market goes down 10-15%, they get calls from all the widows and orphans who want to sell their XYZ utility stock. The broker talks them out of it. He is acting in his own self-interest because he doesn’t want to lose assets, but temporarily, the interests of the broker and his customers are aligned. The broker is actually doing right by the investing public, by keeping them invested.

Of course, every 50 years we have this extinction-level event like the financial crisis, but even then, you would have been much better off holding on to your hat (just like Buffett).

The Conventional Wisdom Is (Almost) Always Wrong

The conventional wisdom is that:

1. Active management is dumb, you just need to be in index funds
    
2. Hedge funds add no value, considering how much they charge
    
3. Brokers are fools

All wrong. If hedge funds really added no value, then why would the richest people in the world invest in them? Are they all stupid?

Professional money management is first and foremost about minimizing losses, which is something you don’t get from an index fund. That takes talent, and costs money. An individual hedge fund can blow up from time to time, but the industry, by and large, does a pretty good job of conserving capital and—more importantly—giving you exposure to uncorrelated strategies that you can’t get at Vanguard.com.

Buffett knows all this, but ironically, it is Berkshire that has been doing a good job of closet indexing of late.

There are legitimate criticisms of active management (like closet indexing, for one) and there are legitimate criticisms of brokers, but to say that both industries shouldn’t exist is just moronic.

Let me put it this way. If you won the $350 million Powerball, would you put it all in the Vanguard S&P 500 Index Fund?

I didn’t think so.

…related: For a market situation that could very well precede a market pullback/collapse check out Morris Hubbart’s Dow Breakout of Danger Chart

Jared Dillian
Editor, The 10th Man

Okay, okay, we have heard it before; this market should crash, everything is fake, etc. We are as we have spoken many times over the past two years in a new paradigm. Reality is being recreated; this entire economic recovery is a hoax but despite this, the markets have soared higher. What gives? If you manipulate the data, you can control the outcome, and that’s what has been done throughout this so-called economic recovery phase. Hence, there is no point in looking at the markets through old lenses, because the playing field has changed. The only thing you can focus on now is price and market psychology.

Most players refuse to believe this market can trend higher, and they call us insane when we state that it can. Mind you; they have been calling us insane for over months on end and yet in each instance, they were wrong, but they will never admit to this. When push comes to shove, they will blame everyone, including their bag of tea leaves, skull bones, or crystal ball. Having said that let’s look at some random data that illustrates that this market should continue to trending higher. Note that; the upward ride will not be smooth, sharp pullbacks like the ones we experienced in August of 2015 and in Jan of this year should be expected. On each occasion, we stated much to dismay and later surprise of many that these pullbacks/corrections were nothing but buying opportunities

90%-95% will look at this chart and claim the Fed is in deep trouble. How far from the truth that conclusion is. Do you see what being part of the mass mindset does? If the premise is wrong, no matter how many experts you get to join your group, the analysis will be flawed. Look at the channels we have drawn in. The Fed is simply taking a break before they get ready to flood the markets with even more money. The longer the channel, the more explosive the upward move, so expect a massive flood. Naysayers will immediately respond and state; this can’t go on, the world will resist. Oh really; so when the assets doubled from $800 billion to $1.6 trillion, nobody did anything. When they doubled again from $1.6 to $3.2 trillion, still nothing was done. Now the Fed’s assets are up by over 400%, and naysayers feel that the end is nigh. Sorry dudes, the masses are still asleep. The number is irrelevant; have the masses woken up or not is the only question of relevance in this case. In this instance, they have not woken up, so we suspect that the Fed’s assets could surge to $8 trillion with ease. The Fed prints money with one hand, then with other it purchases treasuries in a process that is known as debt monetization, which is just a fancy word for a giant Ponzi Scheme. Do you see the masses revolting? As they are not revolting there is nothing to prevent this process from continuing.

Negative rates

Central bankers worldwide are slowly embracing negative rates. There is no choice now as we are in the “devalue or die era” and the race to the bottom is picking up in intensity. Hence, it is just a matter of time before the Fed embraces negative rates. This will be the equivalent of pouring rocket fuel on a raging fire; the corporate world will kick-start even larger buyback programs as this is the easiest way to boost earnings without having to do any work. The rewards for corporate officers are huge as their pay is based on performance. As greed is the main governing force in the corporate world, there is almost no chance that these chaps will pass up an offer to lock in huge bonuses. Share buybacks have increased every single year since 2009, and will continue to do so as long as rates remain low; you can imagine what will happen if rates turn negative.

Conclusion

We don’t expect the markets to rally upwards in one straight line, it will be more like a zig-zag type of upward move, but overall the markets will trend higher. The markets are currently overbought, after mounting extremely strong rallies from their Jan lows, so a nice pullback would not surprise us. All strong pullbacks should be viewed as buying opportunities and not as signal to run for the hills.

“Anybody who gets away with something will come back to get away with a little bit more.” ~ Harold Schoenberg

Since 1950, the six month period between April 30th and November 1st has been much weaker than the other six months. In the 66 years through April 30, 2016, the bad period actually lost 260 Dow points while the good period gained 17,141 points. That’s pretty significant. All the gains since 1950 have occurred during that good six month period.

More recently, since April 30 of 2007, the good period has gained 4,004 Dow points while the bad period has lost 610 points.

But, be aware that significant multi week rallies can occur within the bad period and not all bad periods are negative. The one, starting after April 30, 2014 gained 809 points.

The five week moving average of the percent bears from the American Association of Individual Investors dipped under 25. Readings that low have frequently, but not always, portended weakness. 

FIVE DAY RSI WAS RECENTLY OVERSOLD

In spite of some bearish considerations, we could experience some strength in the near term because of some short term gauges being oversold.. 

GOLD

.Gold has been in the midst of the most significant rally since mid 2013. Is this the end of the bear market? Too early to tell. It is overbought (arrow). 

CANADIAN MARKETS

The Canadian market seems to have ended its bear market in mid January. It’s a resource based market and with the rally in oil and gold, it’s not a surprise. 

TRADING FOR APRIL

For the month, our hotline recommendations lost .07 SSO points. The SSO itself gained .38 points. A very flat month.

From December 31, 2010 through March 31, 2016, The S&P 500 gained 808 points or 64.2%. The SSO gained 39.8 points or 167.3%. Our hotline advice resulted in gains of 67.76 SSO points beating the buy and hold by almost 28 SSO points. We can see the progress in the chart below. 

FINAL THOUGHTS

In listening to the talking heads on CNBC, some commentators dismissed the “sell in May and go away” quote. Obviously, they are speaking without researching.

I think it’s ridiculous for Fed officials to be constantly making speeches that are mutually contradictory. Their desire for some publicity keeps the markets in turmoil. As Rick Santelli says, “you don’t see board members from General Electric traveling around and contradicting each other”.

With earnings rather poor, it’s hard to imagine a new upleg from current levels. We need to retreat and regroup.

INTERMEDIATE TERM

Since 1993, we have given instructions to mutual fund investors to be either 100% invested or 100% on the sidelines. According to Timer Digest, of Greenwich, CT, which monitors over 100 advisory services world wide, we are only one of four
services to have beaten the buy and hold over the past ten years.

We were rated # 1 for the past ten years at year end, 2003, 2004 and 2005. In 2006, we slipped to # 3. At the end of 2007 we were ranked # 4.

Since then, we have dropped out of the top ten for stocks, but we were bond timer of the year at the end of 2007 and 2008 which means we were ranked number 1 both years. We were rated # 1 in gold timing for 1997 and again in 2011. We were #2 in gold for the year 2014. 

MANAGED ACCOUNTS

In association with Financial Growth Management, we can make available to you a low risk bond income program. Your account would be actively managed through TD Ameritrade or Trust Company of America.

Your funds will be exchanged between high-yield bond funds and money market funds based on a proprietary mathematical model. Our goal is to return 10-12% per year during a 3 to 5 year market cycle with very low risk.

If you would like more information, please contact Ray Hansen at 714 637 7784.

END OF LETTER

related by Lance Roberts M/T Ed:

Still Looks Like a Trap

Over the last couple of week’s, I have written extensively about the breakout of the market above the downtrend resistance line that traced back to the 2015 highs. To wit:

“With the breakout of the market yesterday, and given that ‘short-term buy signals’ are in place I began adding exposure back into portfolios. This is probably the most difficult ‘buy’ I can ever remember making.”

I also stated that it was probably a trap and that I will be stopped out in fairly short order. But that is the risk of managing money.

It was only a matter of time before the extreme short-term extension of the market begins to correct. Like stretching a rubber band to its limits, it must be relaxed before it is stretched again. The question is whether this is simply a “relaxation of the extension” OR is this a resumption of the ongoing topping and correction process?

Let’s take a look at a few charts to try and derive some clues as to what actions we should be taking next.

…..read more HERE

related:

NYSE Dangerous Technical Action Chart