The Selloff Is a Signal Something Is Very Wrong

Central Banks Have Created ‘Huge’ Systemic Risk

Marc Faber, founder and publisher of the Gloom, Boom & Doom Report, was on Bloomberg after the bell closed on Monday. Faber discussed the recent market sell-off and why he believes that the the central banks have created massive systemic risk. He went on to discuss why he believes there is no growth in China. Faber said that he would put money to work at far lower valuation. He makes its clear that the market is oversold and more companies are hitting new lows than companies hitting new highs.

Click on image for video:

The man who made and lost, many times has a few words to remind you.

Quotes…

“One of the most helpful things that anybody can learn is to give up trying to catch the last eighth – or the first. These two are the most expensive eighths in the world. They have cost stock traders, taken together, enough millions of dollars to build a concrete highway across the continent.”

“After spending many years in Wall Street and after making and losing millions of dollars, I want to tell you this: It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!”

“The desire for constant action irrespective of underlying conditions is responsible for many losses on Wall Street, even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.”

“Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position. But my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities.”

“Every once in a while you must go to cash, take a break, takes a vacation. Do not try to play the market all the time. It cannot be done, too tough on the emotions.”

– Jesse Livermore

COMMENT: The market has fallen hard and fast. The leverage has done damage you can not see, it will take some months before the supply dries up. Buyers time to take a vacation, come back in Nov 2015. Any bounce may be a great short. Those with RTT Plus service can follow our RTT Market Timer to help guide you back in to the market. Just like all the other pullbacks over the last 30 years.

In this week’s issue: 

• Weekly Commentary
• Strategy of the Week
• Stocks That Meet The Featured Strategy

In This Week’s Issue:

– Stockscores’ Market Minutes Video – Upward Trend Reversals
– Stockscores Trader Training – Doing the Hard Things
– Stock Features of the Week – Dead Cat Bounces

Stockscores Market Minutes Video – Upward Trend Reversals
When do long term upward trends come to an end? This week’s video shows the three stages of an upward trend reversal. Click Here to Watch To get instant updates when I upload a new video, subscribe to the Stockscores Youtube Channel.

Trader Training – Doing the Hard Things
I believe that making money in the market requires doing what is hard. Often, when your emotions are telling you to take one course of action, you have to go the other way. Here are 10 hard, but necessary, things to do if you want to beat the stock market. A good reminder for the current market condition.

1. Take losses when you are wrong
No one likes to take a loss but losing is part of making money. You have to recognize that the stock market can not be predicted with 100% certainty and accept that being wrong is ok. When the market proves your decision wrong, take the loss!

2. Let profits run when you are right
Never be satisfied with a trade unless it returns you at least twice what you risked on the trade. Of course, more is better; one trade that returns 10 times your risk will pay for 10 losers. Our natural tendency is to fear letting our winners turn in to losers and so we are quick to sell our winners at the first sign of weakness. But realize that is what most people are thinking which means trends will start with a lot of back and forth moves because many investors lack commitment. It is only after a sustained trend upward that the fear diminishes and the trend really starts to accelerate. That is where investors can make the most money, if they stay in the stock long enough to enjoy it.

3. Buy when there is panic selling
The emphasis here is on panic selling, where the overwhelming pessimism has people accepting prices that make no rational sense. Don’t confuse a bear market with panic selling; weakness is not a reason to buy unless it is motivated by panic. Contrarian investing is only effective when emotion causes stocks to be mispriced and that comes with panic selling.

4. Sell when there is irrational buying
When the mass media is espousing the virtues of an investment, when people who know less than nothing about investing are dumping money in to the market, it is probably time to be a seller. If the upward trend goes from being linear to a curve, watch for signs of weakness as the upward trend is nearing its end. At this point, volume will often be much higher than normal and it will seem as though the stock can do nothing wrong.

5. Judge success in groups
Most of us judge our success one trade at a time. Trading is a probability game; you will not make money all of the time so why beat yourself up over a few losses? The only way to judge success is by the amount of money in your account over a large number of trades. Don’t even judge success by how often you are right, it is only about how much money you make over a large number of trades.

6. Test before you trade
To make money in the market, you need a strategy that has an edge. Don’t make investments on a hunch or what someone else tells you to do. Make investments based on a set of rules that you have tested and proven to be successful. Every great trader has a formula, what is yours?

7. Don’t follow the crowd
Average is what most people are doing; do you want to be average? It is only a small percentage of the population that has most of the money and they are making it from the largest group. If you want the money to flow your way, you have to be ahead of the crowd, do things before it is popular.

8. Avoid the headlines
The mainstream media seems to do their big features at or near market tops. If a media outlet has a large audience then their information is going to be priced in by a large number of people. Always remember that it is only a small number of people who beat the stock market which means if you are doing what the large numbers of people are doing, you are probably on the losing side. Going against the headlines will often be the winning strategy.

9. Don’t find comfort in the news
You buy a stock on a tip, based on a trading strategy or maybe after some in depth research. The stock goes down and the market tells you that you made a decision that was wrong. Rather than take the loss, you dig in to the news and find a reason to hang on. Perhaps it is that there are more results coming or that management has a proven track record. Any bit of fundamental information to justify holding the stock when the market tells you not to will help you avoid that negative feeling of taking a loss. Remember, the market never lies and the collective opinion of investors is based on all the information you are looking at. If what you are using to justify the hold is such good information, why are others selling?

10. Keep it simple
Investors have a tendency to get more sophisticated as they lose money. If there set of rules are not working, they add more rules. However, it is not usually the rules that are the problem; it is the application of the rules. People who make money keep it simple but work very hard at being disciplined and unemotional. Easy to say, hard to do.

In times of emotional decision making, investors can easily accept prices that are too low. Fear is a powerful motivator but not a rational one. When stocks make sharp sell offs, look for quality names that hit a new low on high volume but manage to close above their open. Here are a couple of names that appear likely to do that today.

1. DIS
Bounced off of long term support at $90 this morning and has come back dramatically through the day. With the release of the next Star Wars movie coming soon, DIS should be able to overcome the pessimism that has corrected the stock down from $122.

2. AAPL
Off the highs of $134 to a $92 print this morning, AAPL has rebounded well through the day and is well back above $100. Blue light specials don’t last for long.

3. T.CPG
This is my long shot play because Oil prices are so poor. T.CPG has gone parabolic to the downside but has come back well from morning weakness to be above the open.

References

• Get the Stockscore on any of over 20,000 North American stocks.
• Background on the theories used by Stockscores.
• Strategies that can help you find new opportunities.
• Scan the market using extensive filter criteria.
• Build a portfolio of stocks and view a slide show of their charts.
• See which sectors are leading the market, and their components. 

Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligenc

A priority market update sent to premium subscribers this morning, for the consideration of eLetter readers…

The plan [per this week’s NFTRH 357] as best my logical mind could foresee it was for a potential Monday (Margin Monday?) swoosh down with a bounce toward broken support soon to follow. But this swoosh down would not have brought indexes so close to the October lows just yet.

Well, so much for logic.

The main theme is still in effect, but it appears we are going to get the big bull/bear test at the October lows sooner rather than later.

This is actually good news if you are the type who wants to get on with things, on the bigger macro picture.  To review, the October low is generally the major point that markets need to hold in order to avoid putting in a bear market signal.  A lower low there to close a day or especially a week or month, would be bearish on the big picture.

Not being a resolute bear trader, I am going to settle for cash and patience, although it seems we will need less of the latter than originally thought.

Things to watch for (potential)…

• An in-day collapse and furious reversal (i.e. ‘V’ recovery)
• In-day volatility with big swings up and down
• A leaden down day that just keeps sinking, taking bulls’ spirits down the drain

Thing 1 would hold the October lows on a closing basis and keep open the prospect that this is all just an amazing summer shakeout prior to da boyz comin’ back from da Hamptins to guide the market to new highs.

Thing 2 is an argument for cash and a calm orientation, letting others sweat the outcome.

Thing 3 would bring a crash scenario front burner and usher in a bear market to boot.

I am not a river boat gambler.  So you know my orientation is to establish what the macro trend is out ahead and be in line with it.  I may try a couple circus acts, like shorting volatility (VIX) or leverage longing the S&P 500 or NDX.  But the biggest interest remains the question about the next phase.

If October’s lows are lost and held, gold, which is down slightly this morning (and positive against everything else not named Euro or Yen) would get a big fundamental underpinning for itself and especially for those beleaguered people who dig it out of the ground.  That underpinning would be a trend change in gold vs. the US stock market.

But as we saw on Friday, the pressure can hit the miners too.  Silver is down as if it thinks it is the commodity that it often is.

We are in full deflation mode now.  The Fed is looking stupid with its flapping Jawbones and tough talk on rate hikes.  The biggest fundamental of all for the gold sector is a loss of the pervasive confidence these people have gained during the post-2011 bull atmosphere.

We may see that big macro change happening in real time, but remember, the average casino patron market participant, does not.  So you can be right but also be early.  A lot of patience is still advised on a bull stance in the gold sector.

Bottom Line

The decision on whether this is a shakeout prior to a new bull market mania leg (ref. 1998 to 2000 when not coincidentally an Asian Contagion was an accelerant) is going to be made sooner rather than later.

If the macro shifts, gold and its counter cyclical miners take center stage.  But the short-term could be volatile.

If this is a shakeout and the macro resumes toward bull mania, gold is going to be left looking mighty conspicuous with its safe haven bid.  It would be vulnerable.

Most people should probably let the short-term play out comfortably in cash, as we have noted all along.  Take a front row seat and let it play out.  Traders can take the above information and their own research and place their bets.  The key for all of us is to be calm while other lose their wits.

While I have a difficult week that will have me away from my desk off and on, we will keep a tight watch on events and update as needed.  It may or may not being in real time, which is probably for the best in a volatile environment.

* Aside from any physical gold holdings, which as we often note never goes out of style in this type of monetary/financial environment. 

For consistent, high quality analysis (weekly report and in-week updates on markets and individual equities) that keeps subscribers on the right side of markets, consider an affordable premium subscription to NFTRH.

Two weeks ago, I started off this missive stating:

“Well…after months and months of indigestion, the markets MAY, and I repeat MAY, have finally come to a decision to end the current bull market run.

The chart below is updated through LAST Thursday’s close. (click for larger version)

The reason I say MAY, and not definitely, is that we have seen initial breaks of trends previously (red circles in the chart below) that were quickly resolved by rapid Federal Reserve interventions.”

As I stated last week:

“In years past, when you had this kind of technical deterioration, a move to substantially all cash within portfolios would have been both a wise and timely move. However, the problem currently is that the ongoing interventions of Central Banks globally are keeping asset prices inflated which increases the risk of being “wrong” with respect to the timing of a ‘risk reduction’ strategy.”

The time has now come to start moving more heavily to cash. As I will discuss throughout this weekend’s missive, including the 401k-Plan Manager, it is now time to “OPPORTUNISTICALLY” REDUCE PORTFOLIO ALLOCATIONS.

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