I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Monday Money, I write about money management.
Three weeks ago, as the U.S./Israel/Iran war started, I wrote about portfolio moves after a weekend of war. At that point, I was still favorably oriented towards precious metals and rest-of-world equities (vs. U.S.). Now, as the conflict has played out, I feel less sanguine about both. I sold most of my gold and silver and trimmed back on all equity positions, domestic and international.
European and Asian countries are getting hurt more than the U.S. by the rise in oil and gas prices caused by the closure of the Strait of Hormuz. The U.S. is not immune, of course, to the inflation that’s likely coming our way. Many goods we buy from overseas are either made of petrochemicals and all use them in their production and transport. Oil is priced globally, even with premiums and discounts for different types and origins. We’ve already seen the average price of gas rise to almost four dollars a gallon from under three dollars a month ago.
thinking of a new kind of investing or should I say trading
I’ve recently been researching swing trading, as an approach to managing my money that might suit me better than buy and hold. Swing trading is similar to day trading, in that it looks to profit from short-term moves in financial investments. But it plays out over longer periods of time — days or weeks or even a couple months. You use technical analysis — looking at stock charts — to determine when to get in and out of a position. And you tightly control risk by quickly cutting losers if they decrease by more than some set amount.
I checked out Williiam O’Neil’s How to Make Money in Stocks: A Winning System for Good Times or Bad and read through it. First published in 1988, with the fourth edition published in 2009 right as the Great Financial Crisis was unfolding, it offers detailed strategies as well as example charts that show how to find stocks to trade in. O’Neil doesn’t call his approach swing trading, and maybe it doesn’t count as that, if swing trading implies staying in a position only for a few days.
O’Neil’s system uses the following principles:
- You buy stocks when they’re on the way up in price, not on the way down. And when you buy more, you do it only after the stock has risen from your purchase price, not after it has fallen below it.
- You buy stocks when they’re nearer to their highs for the year, not when they’ve sunk lower and look cheap. You buy higher-priced, better quality stocks rather than the lowest-priced stocks.
- You learn to always sell stocks quickly when you have a small 7 or 8% loss rather than waiting and hoping they’ll come back. Many don’t.
- You pay far less attention to a company’s book value, dividends, or PE ratio—which for the last 100 years have had little predictive value in spotting America’s most successful companies—and focus instead on vital historically proven factors such as strong earnings and sales growth, price and volume action, and whether the company is the number one profit leader in its field with a superior new product.
- You don’t subscribe to a bunch of market newsletters or advisory services, and you don’t let yourself be influenced by recommendations from analysts, or friends who, after all, are just expressing personal opinions taht can frequently be wrong and prove costly.
- You also must acquaint yourself with daily, weekly, and monthlyl price and volume charts—an invaluable tool the best professionals wouldn’t do without but amateurs tend to dismiss as irrelevant.
- Lastly, you must use time-tested sell rules to tell you when to sell a stock and take your worthwhile gains. Plus you’ll need buy and sell rules for when it’s best to enter the general market or sell and lower your percent invested. Ninety percent of investors have neither of these essential elements.
That last point is super-important. You can do everything right in selecting a stock to trade and if the broad market is down, you’re more likely to lose money than earn it.
O’Neil calls his system CAN SLIM, for the factors it looks at in determining which stocks to consider:
C Current Quarterly Earnings and Sales: The Higher, the Better
A Annual Earnings Increases: Look for Significant Growth
N New products, New Management, New Highs: Buying at the Right Time
S Supply and Demand: Shares Outstanding Plus Big Volume Demand
L Leader or Laggard: Which Is Your Stock?
I Institutional Sponsorship: Follow the Leaders
M Market Direction: How you Can Learn to Determine It
In his chapter on determining the market’s broad direction, the sixth criterion, he writes:
You can be right on every one of the factors in the last six chapters, but if you’re wrong about the direction of the direction of the general market, and that direction is down, three out of four of your stocks will plummet along with the market averages, and you will lose money big time, as many people did in 2000 and again in 2008.
Right now the broad equity market is looking very weak. The S&P 500 index dropped below its 200-day moving average last week, typically an indicator that many chartists watch carefully. Last week, I wrote about how to identify a stock market top or bottom based on O’Neil’s methodology. Right now, we’re in a downtrend, and until there is a rally and then a follow-through day, O’Neil would recommend that you remain mostly in cash.
Where is the U.S. stock market headed?
Today looks like it will be a rally day for U.S. stocks, based on the president’s morning declaration that there are productive talks happening with Iran, so he’s directed the Department of War to hold off on bombing Iran’s civilian infrastructure. This TACO (T Always Chickens Out) has been expected since the start of the war and it’s likely one reason U.S. equities have held up so well, relative to the world (though they had already started weakening last November).
I’ll be using this time of uncertainty to start checking out charts of stocks I might want to get into once the market gets onto better footing. However, I’m not convinced that’s going to happen any time soon. Bear markets can last years, as in 1973 and 1974. The S&P 500 peaked on January 11, 1973 and continued declining for 21 months. It didn’t recover its previous peak for 7.5 years. After the 2008 financial crisis, the S&P 500 declined for 17 months, then took five total years to recover from that peak.
Personally, if I hadn’t already sheared my portfolio I would be doing it today!