Bullish or Bearish? Week of Oct. 29, 2018

Here are the most recent market indicators:

S&P 500 one-month trend = Bearish  (The uptrend is broken. Caution is advised). 

S&P 500 is below its 50-day, 100-day, and 200-day moving averages = Bearish

RSI: (S&P 500) @30.34 = Oversold (Rallies are possible)

Intraday Volatility: Moderate to High 

Comment:  As I warned last week, this could get ugly real fast and it did. Once the indexes fell below its 200-day moving averages last week, volatility increased along with selling. The technical indicators are awful with one exception. The RSI is oversold, so a strong short-lived rally is likely. Volatility will continue as the bulls and bears fight it out.

Right now, the market is in a correction. However, and this is important, it’s too early to say if this will turn into a bear market. Corrections typically last no more than a month, so it’s possible we’ll have that hoped-for Christmas rally. Unfortunately, the market has been severely damaged, so it will take some time for it to recover. The last two corrections bounced back fairly quickly, and it’s possible it will happen again.

Unfortunately, we could also be heading right into a bear market (20 percent or more decline that can last for a year). If we do, it will get even worse from here, with occasional one-day rallies that gives hope to bullish investors. No one can predict which scenario will play out, but you should be prepared for both.

When there are strong rallies, take the opportunity to sell losers and move to cash. If you are a trader, you will primarily be shorting rallies (with puts) rather than buying on the dip, but you can do both. Corrections and bear markets are difficult to maneuver, so it takes practice and experience. One thing for sure: If we do enter a bear market, it will test the patience of buy and hold indexers who will not sell (at first). And who can blame them? After the last bear market and two corrections, the market bounced back. Since people often rely on the past to predict the future, most investors will sit tight even if a bear market ravages their portfolio.

Perhaps this will be a typical correction and all be well by January. But if it’s not, make plans now so you are not forced to sell at the worst possible time. Shred the losers, evaluate your portfolio, and learn how to survive and thrive in bear markets. One thing I can say with confidence: The great bull market that started in 2009 appears to be faltering as we head into uncharted territory.

Bottom line: Watch this week to see if the bulls can win more than a day, or if any rallies reverse during the day. The bulls desperately need to win this week and bring the indexes back above its 200-day moving averages. We’re all waiting breathlessly to see if they succeed, or not. 


For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts: www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: www.wolfstreet.com

Bullish or Bearish? Week of Oct. 22, 2018

Here are the most recent market indicators:

S&P 500 one-month trend = Pivot  (The trend is still broken. Caution is advised). 

S&P 500 is below its 50-day and 100-day moving averages = Bearish

S&P 500 is nearly even with its 200-day moving average = Neutral to Bearish

RSI: (S&P 500) @36.23 = Near oversold (a rally is possible) 

Intraday Volatility: Moderate to High 

Comment:  If you wanted excitement, the place to be was the stock market. After 10 years of relatively low volatility and an uptrend, the market has acted like it’s had a case of indigestion. If you’re an investor who has been used to a relatively calm uptrend for the last ten years, the increased volatility is a new and strange environment. Although the market has experienced short bouts of volatility in the past, volatility is lasting longer, and it’s possible it will be with us for a while until something breaks. 

While many traders are enjoying the volatility (if they are experienced), it’s not an easy environment to trade. For example, last week the SPX had major pullbacks and a huge rally but the SPX ended exactly where it started! Believe me, that is not a healthy sign. When you put it all together, the market has a very bearish tone. In fact, the stock market is in serious trouble right now, and few realize it.

Although it’s possible the market will get through the next few weeks unscathed, it’s unlikely. One strategy that worked last week was shorting the rallies. Nearly all of the intraday rallies failed.

Even with all this negativity, it’s important you do not enter the market with a negative bias. I have learned the hard way that you only look at the facts, ie. what the market is actually doing, and not make big bets in advance of the market direction. You can make a very good living by being a little late to the party (bull or bear). 

Right now, look closely at the 200-day moving average. For the bulls to keep control, they must defend the 200-day moving average, and they will try. But as soon as the 200-day is breached, and SPX or the DOW falls below it for more than a day or two, look out below. 

This week should be a Battle Royale between the bears and the bulls. If you are rusty or inexperienced with bear markets, now is the time to get educated. Start with Jesse Livermore’s books (i.e. Reminisces of a Stock Operator), and read one of my favorites, Jesse Livermore Boy Plunger by Tom Rubython, a biography about Livermore. I learned more from Rubython’s book than almost any other. 

Bottom line: Get out the popcorn as the market made a major pivot two weeks ago. It’s October, investors are nervous but hopeful, and the bears are licking their chops. This could get real ugly real fast so bring your “A” game.




For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts: www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: www.wolfstreet.com

Bullish or Bearish? Week of Oct. 15, 2018

Here are the latest market indicators:

S&P 500 one-month trend = Pivot Point  (The uptrend has been temporarily broken. Caution is advised.)

S&P 500 is below its 50-day and 100-day moving averages = Bearish

RSI: (S&P 500) @29.52 = Oversold (rally is possible)

Intraday Volatility: Moderate to Heavy (anything is possible if volatility increases) 

Comment:  Last week I saw some important clues that pointed to a trend change. For example, I correctly identified what is called a “pivot point,” which I said could be a “potential trend change.” Little did I know that it would be that severe. In fact, the Wednesday afternoon plunge took nearly everyone by surprise, including me. (FYI, “pivot point” was coined by Jesse Livermore, and is worth studying). 

There were many clues that we were hitting a short-term top. For example, investors had been bragging how much money they have made in the market. (That’s how I predicted the bitcoin top almost to the day). I was also getting emails and text messages from investor friends bragging how the market “will never go down” or if it does, “it will bounce back quickly, because the market always comes back.” 

The S&P sliced through the 50- and 100-day like it was butter. Right now, it’s a point above its 200-day moving average. If SPX drops below and stays below its 200-day moving average, that would be extremely bearish. In the past, however, the market recovered from these pullbacks and went on to even higher levels. It remains to be seen if it can do that again. Unfortunately for the bulls, interest rates are rising, and that is a huge negative for the stock market. There are other issues as well, but interest rates take center stage for now. 

Moving forward, we need to see if the indexes recover from last week’s short-term disaster. At a minimum, the S&P 500 needs to retake its 100-day and 50-day moving averages, just like it did in February and July. Investors are hoping for the best, while objective market observers know the market could go in either direction. It is still too early to proclaim that the worst is over, even after Friday’s snapback rally. 

Bottom line: If the indexes fail to rise above its moving averages, or if they continue to fall, that would be a huge warning sign. The coming weeks are important as the indexes try to repair the damage from last week.

Note: Here is my latest column on MarketWatch, about how to get started trading options: https://on.mktw.net/2Nx6inI


For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts: www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: www.wolfstreet.com

8 Day Trading Rules

As long as there is volatility, day traders may generate profits. Nevertheless, just because day trading strategies are working at the moment doesn’t mean you should quit your job or even use this strategy. That’s what many traders did in the 1990s, and it didn’t end well.

For those interested in day trading, consider the following:

1. Start small: The No. 1 rule is to start small. Whether you are day trading stocks, options, or exchange-traded funds, if you are a beginner, start with no more than 100 shares of stock or one or two options contracts. This way you can make every potential mistake using as little money as possible. It can take years to learn how to be a consistent trader. Your tuition is the money you will likely lose as you learn how to manage risk. Remember, most day traders lose money at first, which is why you want to keep losses small.

2. Trade for real, not practice: I no longer believe in using practice accounts. Practice accounts are not realistic if you want to feel the pain of loss and the thrill of making real profits. By trading small, (say $1,000), you will experience real emotions without severe financial damage when you’re wrong.

3. Be selective: If you have less than $25,000 in your account, you are limited to making only three day trades during each five business day period in a margin account (contact your brokerage for specific rules). Once you make that fourth round-trip day trade, you will be designated as a “pattern day trader” and must put $25,000 in the account to continue trading.

This is a good rule. Beginners will learn to make more selective trades, rather than buying and selling dozens of times a day. If you’re that good of a trader, you will eventually be able to build your account past the $25,000 threshold even if you’re starting with $5,000. Never trade more than what you can afford to lose.

4. Don’t be overconfident: The biggest danger to most day traders is overconfidence. Often, day traders make 5%, 10%, 20% on their money in one day. So instead of trading small, many traders bet big on the next trade, perhaps using margin (not recommended for most traders) — and instead of making the big score, they blow up their account. Never trade more than what you can afford to lose. Once you cross over from disciplined trading to gambling, you will likely lose money, perhaps all of it.

5. Be emotionless: The best traders are often the most unemotional. When you think you are a genius (as many long-term investors thought a month ago), you could give back your profits. Here’s a hint: After I make a huge profit, I stop trading for the rest of the day, and perhaps even the next few days. If you feel giddy or too eager to make a trade, that’s a clue to stop trading.

6. Keep a trading diary: If you want to be an educated trader, keep a trading diary. In this diary you will write all of your mistakes and what you learned. By writing it on paper,  you will eventually find strategies that work for you, indicators that will keep you on the right side of the market, and rules that will help you cut losses when wrong and increase gains when right.

7. Concentrate: Beginner day traders underestimate the concentration needed when day trading. Although you don’t have to sit in front of the computer and trade all day, when you do have an open position, you must watch it like a hawk or you may lose money. Speaking from experience, in the past I had large open positions, went to lunch, and when I returned I had lost thousands of dollars. If you cannot watch your open positions closely, don’t trade.

8. Trade only one or two stocks: You do not need to trade or even watch dozens of stocks every day. If you are starting out, focus on trading only one or two stocks or indexes. Popular index-tracking ETFs are good choices, such as SPDR S&P 500 ETF Trust SPY, -0.10%  , SPDR Dow Jones Industrial Average ETF Trust DIA, -0.22%  , iShares Russell 2000 ETF IWM, -0.24%  , or PowerShares QQQ Trust QQQ, +0.25%  . Or you can choose one or two stocks and learn their trading personalities. The more stocks you trade, the more confusing it gets when the market turns on you.

Teach Your Children to Be Investors, Not Spenders

As a guest speaker at colleges and high schools, I discovered that many teenagers need to learn more about investing. They get an “A” for knowing how to spend money, and many work hard for income, but few know how or why they should invest in stocks, mutual funds, or index funds. Typically, most teenagers haven’t thought about building wealth by paying themselves first.

Sometimes the biggest obstacle to making money is our perception. We believe investing is rocket science, or something that only professionals can do. By giving your children the confidence to manage and invest their own money, they can learn to be financially independent with the freedom to do what they want in life.

Do you want your children to be spenders or investors? In reality, they can be both. Before your children get their first credit card, show them how to make money work for them by investing.

Here are some actions you can take if you want your children to build wealth:

1. Open a joint brokerage account: Stick with self-directed brokerage firms such as TD Ameritrade AMTD, +0.19%   Fidelity Investments, Charles SchwabSCHW, +0.93%  , and eTrade Financial ETFC, +0.51%   (to name a few). If your children do not know what a brokerage firm is, use this analogy: a brokerage firm is like a shopping mall but instead of spending money on clothing or electronics, you’re buying different investments that can make money.

2. Open a UGMA (Uniform Gift to Minors Act) account: A UGMA is a custodian account used to hold and protect assets for minors until they reach legal age. The account can be opened at most brokerage firms with no minimum amount. Talk to the representatives for details in opening a UGMA in your state.

3. Consider potential tax consequences: Talk to a tax professional or the brokerage firm representatives before you open an account. When your child reaches legal age, the custodian (you) must hand over the assets to your child.

4. Start with an index fund:  The first investment your teenager should make is in a low-cost index fund such as a S&P 500 ETF (exchange-traded fund) that tracks the S&P 500 SPX, -0.12%  your brokerage firm will have a list of the most popular). The S&P 500 Index contains a group of 500 large U.S. companies, so when you buy the S&P 500 Index, you are buying a small piece of every company in the index.

5. Have a routine: The goal in opening the account is to get your child into the routine of investing a certain amount of money into the fund every month (you could also set up an automatic payment plan). If needed, use a portion of his or her allowance to invest in the fund. Here’s a hint: Match by 50% any money your child invests. (If your child invests $100, add an additional $50, etc.). Look for reasons (like a birthday) to add money to the fund.

6. Think outside the box:  The idea is to get children to think differently about how to manage money. By opening a brokerage account, you can show your children the value of routinely paying themselves the first of each month (in contrast to making a credit card payment).

7. Dig into the details: Show your child how to read the brokerage statement (either online or by mail), and how to follow the index fund prices (which are posted online at dozens of websites including here). Your children will see how easy it is to make (or lose) money every day without much effort, or having to be involved with the financial industry.

How to Get Started Trading Options

With the stock market becoming more volatile, it will be useful to learn how to use two basic option strategies: buying calls (if you believe the market or a stock is going up), or buying puts (if you believe the market or a stock will go down).

The benefit to buying either calls or puts is that you use as little money as possible to generate large returns. I’m sure you’ve heard the horror stories about speculating with options. Many people are afraid to consider options because they believe they are too risky, too complicated, or that you could lose your entire investment. There is some truth to these opinions if you don’t use options properly or if you don’t follow certain risk-management rules.

If you are willing to take the time to learn just the most basic two strategies (buying calls or puts), and follow the five rules listed below, you can bring in decent profits with less risk than if you had bought stocks. It’s hard for many people to believe that trading options is often less risky than trading stocks, but it’s true. In fact, the best part about buying single options is that your risk is limited while there is tremendous upside reward.  

Another advantage when buying calls or puts is the low cost. For example, instead of paying just over $22,000 for 100 shares of Apple AAPL, -0.46%  stock (at current prices), you might pay between $500 and $800 for one call or put option (100 shares of stock = one option contract).

If you are right about the direction and timing of Apple, you can make many times your initial investment. If wrong, the most you can lose is all or part of the initial investment. Don’t get me wrong: it takes a lot of practice and studying to learn to get the direction and timing right. Learning how to trade options is like learning a new language. For those willing to take the time to learn, and follow the rules, it can bring in decent profits.

If you’re interested in learning more about options, here are five important risk-management rules to get you started. A failure to follow these rules (and others) can cause you to lose money, so before you make your first trade, read them carefully. I created these rules based on the many mistakes I made when I first started trading.

The following five rules should help you to reduce risk:

  • Start by learning only three option strategies: Although there are dozens of option strategies, start with only three: First, sell covered calls if you own stock and want to rent shares to option buyers. This strategy works best with low volatile stocks. Next, buy call or put options. Since every option strategy is based on buying calls and puts, it’s essential you master the basic strategies first. Hint: It can take one to two years to fully learn even the basics.
  • Focus on trading options on only one or two indexes or stocks: If you are new to options, consider trading index options such as SPY or QQQ rather than buying options on individual stocks. The indexes often move more slowly than individual stocks (not always, but often), and they are often less expensive than buying options on stocks. No matter whether you buy options on stocks or indexes, keep your trading universe small.
  • Use less money: No matter how much is in your trading account, do not trade with more than $2,500. This allows you to buy between 1 and 5 option contracts (equal to buying 100 and 500 shares of stock). The biggest mistake many people make when first starting out is speculating with too much money. Once you start “doubling down” on your option positions, you cross the line from trading to gambling. Limit the amount of money you trade so you aren’t tempted to bet it all on one trade (that’s how traders lose all their money). Consider the $2,500 (or less) as tuition money. You don’t need to trade with a lot of money to make a decent profit with options.
  • Not everyone should trade options: Keep in mind that “less risk” does not mean no risk. If you get emotional about winning or losing, if you have a gambling personality, or if you don’t have the time to watch your options positions, then you might want to invest in stocks, mutual funds, or index funds and avoid options altogether.
  • Read and practice: Learn how to trade options by taking introductory online classes or free seminars with the OIC (Options Industry Council) or the OCC (Options Clearing Corporation) at various locations around the United States. If you have questions about options, you can also call the OIC at 1-800-OPTIONS Monday through Friday during market hours. Avoid expensive classes that teach complex speculative strategies. You can also buy books on trading options online or at a local bookstore.

Keep it simple and don’t rush

To review, most beginners only need to learn three option strategies: The two basics — buying calls and buying puts — along with selling covered calls. Start with less than $2,500 (you can open an options account at a brokerage firm for less than $100), focus on a small universe of stocks or indexes, and continue to practice trading with a limited amount of real money.

There is a high likelihood you will lose money when you are first starting out, which is why it’s so important to start small. After a few weeks or months, you will either find that options are not for you, or that they’re a way for you to boost income. Just don’t rush in with too much money and too little knowledge.

Bullish or Bearish? Week of Oct. 8, 2018

Here are the latest indicators:

S&P 500 one-month trend = Pivot (Potential trend change) 

S&P 500 is even with its 50-day moving average = Neutral  

RSI: (S&P 500) @46.16 = Neutral to Near Oversold

Intraday Volatility: Moderate

Comment:  As interest rates rose last week, the market fell. It wasn’t surprising since the indexes were overbought according to the RSI and sentiment indicators. Even with the slow selloff, there was little fear. There should be light trading on Monday, a perfect environment for the algos to run the market higher. Typically, after even a mild selloff, the algos take control. However, if interest rates keep rising, the selloff may continue into the week. That would be  a huge red warning sign that a correction is underway. 

My advice, as always: Wait and see which side is winning and join them. This week will give us important clues to see if we get a last gasp run-up into the end of the year, or if the underlying problems are so severe that the smart money is selling. If the market follows the same pattern as in the past, there will be a rally this week.

What to look for: Watch what happens if and when the SPX drops to its 50-day moving average at 2877.14. In the past, it would bounce off of it and rally. If it drops below its 50-day moving average and remains below all day or week, more pain will likely follow.

History lesson: The last time the SPX hit its 50-day MA was in July, where it bounced around that level for a few weeks before staging a strong three-month rally that ended last week.

Bottom line: This is going to be an interesting week, a “pivotal” week.

Note: Here is my latest column on MarketWatch, about how to get started trading options: https://on.mktw.net/2Nx6inI


For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts: www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: www.wolfstreet.com