The 'Big Picture' in Stocks Isn't Good Enough
Editor's note: Today, we're beginning a special year-end series focused on our most popular Digest essays in 2022. First up, I (Corey McLaughlin) want to share an idea delivered by the founder of our corporate affiliate Chaikin Analytics, Marc Chaikin...
Back in March, nearly 300,000 people signed up to listen to a message from Marc, in which he shared insights gleaned from his five decades in the markets about how Wall Street really works... and he explained the ongoing "rolling crash" he was seeing take shape.
As Marc said during the presentation...
Until recently, it's been a relatively smooth ride to all-time highs. As long as you had money in the markets, you were doing everything right.
On both a fundamental and technical level, the U.S. stock market is a wildly different animal than it was even just three months ago.
And it's time to pull over, take your hands off the wheel, and see what's really going on.
Importantly, Marc then shared a simple yet powerful idea that many of the world's best investors use to make money – in bull or bear markets – and how everyday folks could put it into action... It was prescient advice, as a yearlong bear market ensued...
Here is an essay from Marc, originally published in the Digest on March 30, the night of his event.
The 'Big Picture' in Stocks Isn't Good Enough
Many investors began worrying about a crash earlier this year...
And Russia's invasion of Ukraine in late February amplified those fears.
The S&P 500 Index lost as much as 13% from the beginning of 2022 through early March. That put the benchmark index in "correction" territory for the first time since the early days of the COVID-19 pandemic.
It makes sense... Folks typically start to panic when the "overall market" falls. They ignore all the tidbits of news along the way. And they don't react until the declines start to make headline news.
In other words, they're looking at what they consider the "big picture" in stocks.
That's how most regular investors and the mainstream media think and talk about the stock market. They'll say that "stocks are up" or "the market is down" as if it's all one big entity.
You'll notice that many folks swing from euphoria to panic depending on whether "the market" has a good or bad day, week, or month. They're wrapped up in their emotions as if it were a sporting event.
But that's simply not the best way to invest. It's not the way most professional investors see the market. And it isn't how I (Marc Chaikin) have seen the market during my 50-year career, either...
Since the day I started at Wall Street brokerage Shearson, Hammill in October 1966, I learned to dismiss this idea of a uniform entity moving either up or down.
Plain and simple, the stock market isn't just one big thing.
It's actually a multitude of different, smaller things...
Things like energy, materials, industrials, utilities, health care, financials, consumer discretionary, consumer staples, information technology, communications services, and real estate.
And you can break them into even smaller groups, too.
The problem is, this makes for too many moving pieces. That's why many regular investors just completely ignore the idea.
Instead, they'll think of "the market" in terms of the S&P 500. And a lot of folks keep track of how the Nasdaq Composite Index is doing so they know what's happening with "tech stocks."
This mindset is also how most folks invest... They just buy stocks. They're more focused on individual-company metrics like earnings reports, growth projections, and stuff like that.
That's actually a big mistake.
You see, investors could set themselves up for greater success if they followed a different approach...
Studies have proven that 50% of a stock's performance can be attributed to its industry.
50%!
That means choosing the right industry is literally half the battle when deciding which stocks to buy and which stocks not to buy. If investors know which industries are doing well and which ones are struggling, they can get a head start on finding the best opportunities.
This mindset directed nearly all of my buying and selling decisions while I was on Wall Street.
Whoever could see the biggest threats and opportunities in the market first – and correctly determine how they would ripple through specific industries – had a huge advantage.
This is how billionaire investor George Soros looked at the market when I worked with him...
He passed it down to the great Stanley Druckenmiller, who also worked with Soros before starting his own hedge fund. Even Bill Gross, the former manager of the biggest bond fund in the world, uses this approach.
Other big-name wealth managers operate this way, too. Citadel and Impala Asset Management were both in the top five best-performing funds of 2021... And they both look at the market this way.
The famed Medallion fund does this as well. And it's one of the most successful hedge funds of all time – if not the most successful. The Medallion fund has reportedly generated average annualized returns of 66% before fees since 1998, delivering nearly seven times better returns than the overall market.
What's Medallion's secret? The fund's managers don't pay attention to specific stock stories.
Instead, they search for elusive patterns across specialized groups that regular investors simply aren't looking for. Medallion is pretty open about this secret to their success.
My point is... this approach is how I learned to invest throughout my five decades in the business. And it's how I manage my own investments to this day.
For the most part, I don't worry much about the overall market. I don't watch every move of the Dow Jones Industrial Average or the S&P 500. I almost exclusively track industries.
But most investors are left in the dark when it comes to this approach. They're simply too focused on the hot stock pick of the day.
Don't get me wrong, I love ranking stocks...
So I took the algorithm for evaluating individual stocks in our Power Gauge system... and applied it to industries.
The Power Gauge tracks all specialized groups I mentioned earlier. It's now possible to see whether entire groups of stocks are "bullish," "neutral," or "bearish" at any time.
In other words, instead of just predicting the performance of a single stock over the next 90 days... we can predict the performance of entire industries over the next 90 days.
We can figure out if it's about to experience a crash... or if it's poised for a big run higher.
I like to think of this functionality as an "Industry Monitor." It's constantly scanning every corner of the stock market – looking for signs of weakness or opportunity.
This Industry Monitor is how we've predicted the path of the "rolling crash" so far.
Let me show you the Industry Monitor in action...
On March 26, 2021, the entire innovative technology industry went "bearish" in the Industry Monitor.
Back then, the mainstream media still revered Cathie Wood and her ARK Innovation Fund (ARKK) as a "breakout star" in the investing world. And some publications were calling her "the market's new oracle."
But if you would've known about the innovative tech industry's "bearish" rating in the Industry Monitor... then you would've known what was about to happen to some of her favorite stocks.
Sure enough, after getting stuck in neutral for months following the Industry Monitor's warning, the entire industry quickly fell around 45% throughout the winter. Take a look...
This example alone proves the Industry Monitor's value. But it gets better...
We can use the Industry Monitor to drill down into the best and worst stocks in each industry.
We know that individual stocks tend to do much better or worse than the industry as a whole. And within the Industry Monitor, we actually rank which stocks are poised to outperform their industry and which stocks are poised to underperform it.
In other words, we know the best of the best stocks in any given industry. And we know the worst of the worst stocks in any industry.
Let's say you're one of the many investors who bought Zoom Video Communications (ZM) after the COVID-19 crash in March 2020.
In the early days of the pandemic, you couldn't go a day without hearing about this company. That made sense... The company was leading the world's pivot to remote work.
Investors saw that. And the company's stock skyrocketed nearly 1,000% in 2020...
But then, let's say you checked the Power Gauge in early 2021. You would've seen that the system issued a "bearish" rating for Zoom. And you decided to get out of your position.
Importantly, you would've done that just before the stock crashed as much as 80%...
Huge relief!
Again, when it comes to the perfect time to sell any stock, the Power Gauge works. But it's even more powerful when you add the Industry Monitor into the mix...
Zoom belongs to the innovative tech industry. And remember, the Industry Monitor would've issued a "bearish" warning for the entire industry in March 2021.
That's a one-two punch of warning signs against Zoom.
Within the Industry Monitor, you can instantly see the worst individual stocks in an industry. That way, you'll immediately know they're the ones you need to sell as soon as possible.
Imagine knowing weeks – and often months – in advance which industries will soon come crashing down. It's a perfect tool for any investor looking to gain an edge in the markets.
Now, I'm bringing this approach to individual investors...
Currently, this functionality is only available as a part of our highest level of software at Chaikin Analytics.
Only 3% of our users have access. A lot of those folks are financial advisers who use our software to help their clients.
But because of the current market conditions, I've decided to make this approach more accessible to individual investors. The reason is simple...
Regular Digest readers know that we're in the midst of what I call a rolling crash. It's a serious market event. And it's going to bring unprecedented challenges to investors.
Simply put, now is not the time to keep this strategy under lock and key. Folks need to be able to easily identify the best-performing industries – and the worst-performing ones, too.
Editor's note: The night we published this essay, Marc went live with more details on the "rolling crash" unfolding in the markets. He explained the industry-focused strategy he developed over his 50-plus years in the markets... and how folks could use it themselves.
Among other things, during his investing career, Marc invented the "Money Flow Indicator," which is part of every Bloomberg Terminal in the world. He has worked with some of investing's biggest names, saw how they made decisions, and incorporated what he saw into his own work...
And as he said, for decades, this "know the right industry" approach is what directed all of Marc's buying and selling decisions over the years. It led to him creating the Power Gauge. It's even the approach he took investing money earmarked for his own children...
Back in March, Marc also shared two free recommendations, including a warning to avoid the food-delivery stock DoorDash (DASH) at all costs. Shares are down more than 50% since that call, meaning folks who listened would have saved a lot of money.
Just two weeks ago, Marc went live with his latest market update... and he again shared why picking the right sectors and avoiding the bad will be critical to investors' success in the year ahead... and what he believes will be the best- and worst-performing stocks in 2023.
In Marc's new presentation, he also discusses the Federal Reserve, why the central bank's next move could decide whether you earn massive gains or suffer huge losses, and how his system has performed during similar rate-hike cycles.
He shares the technical indicators he's following right now to track the market and the best- and worst-case scenarios we can expect in 2023. And once again, he's giving away the name of his top buy recommendation and No. 1 stock to sell immediately, free of charge... but only until midnight tonight.