Your Best Chance of Outsmarting Mr. Market
Editor's note: No investor can predict the future... But that doesn't mean you have to rely on "hunches" to identify the best opportunities.
Instead, you can study the data to make great trades, and to identify the best times to buy and sell... no matter how volatile the market gets.
We're talking about "technical analysis." This approach to investing focuses on looking at the markets in a quantifiable way – meaning it uses detailed, multilayered numbers (also called "analytics") to help you make financial decisions.
Today's Masters Series originally appeared in the June 10, 2020 Digest. In it, editor Corey McLaughlin discusses how he first came across the concept of technical analysis... and explains how one of our editors has used it to make spot-on market calls during the COVID-19 pandemic...
Your Best Chance of Outsmarting Mr. Market
I'm not going to name names...
But when I got into the financial-newsletter world several years ago, I found myself reading many stock recommendations... some good, most bad.
And unlike the good ones I'm now fortunate to read every day working at Stansberry Research, these bad ones seemed like nothing more than "hunches"...
This brand of stock analysis often sounded to me like it was based only on a "gut feeling" or a few headlines. It often began with an interesting story or big-picture concept... but one that felt loosely connected to the recommendation of what to buy that month.
Sure enough, over the course of a year or two, many of the returns of these suspect "long term" picks were terrible, some even losing double digits within weeks... without any suggestion in advance of the risks involved.
Here's how one editor responded to me about one such disaster...
It happens.
It's true... Nobody has a time machine. And nobody can predict the future. But there had to be a better way...
That's when "technical analysis" crossed my desk...
I happened to start collaborating with a brilliant technical analyst who worked with some of Wall Street's biggest firms, and my mind was blown.
I'm talking about the type of data-driven analysis that our resident short-term traders like Ten Stock Trader editor Greg Diamond and DailyWealth Trader editors Ben Morris and Drew McConnell use every single day.
While these traders might include a story for context, the meat of their issues includes detailed, multilayered numbers – in sports, they call them "analytics."
They explain things like price action, risk-reward ratios, support and resistance levels, Fibonacci math (it's cool... I promise), precise price targets, and how long it may take for a particular trade to play out – whether it's months, weeks, or days.
As with fundamental analysis, traders can apply these methods to literally any sector or stock at any given time... But you don't need to worry about hunches, headlines, emotions, or parsing CEO comments or Wall Street analyst reports.
Don't get me wrong... As with anything else, there are no guarantees for success with technical analysis. But what I like about it is that the decisions you make are all quantifiable. And you can use simple math to manage risk, which makes it particularly useful in volatile times when markets are swinging from highs to lows and back again.
For example, take a look at a couple of charts Greg shared with his Ten Stock Trader subscribers last May.
If you held shares of beaten-down General Electric (GE) in early 2020, you would have been wise to use Greg's "Sell Zone" advice around $8 per share in the months prior to May...
And you would have been just as wise to stick with tech giant Microsoft (MSFT) as it helped lead the Nasdaq Composite Index back to new highs last year...
The stock only briefly dipped below its 200-day moving average ("DMA"), a good, simple technical measure of a long-term uptrend. Shares were back above it before the end of March 2020...
Microsoft, of course, is trading at a new all-time high as I write today.
You'll also find common-sense qualifiers in these updates, and analysis from Greg – the "ifs and buts"...
For example, if the Federal Reserve drops a few trillion dollars in the economy bucket, things might change quickly... and we'll need to adjust our expectations for the trade.
In other words, as I relayed from Greg in the June 4 Digest... with stocks zooming back to new highs, it's critical to trade the market you see today, not the one you want.
For example, last June, Greg wrote to his subscribers...
I'm focused on the uptrend in stocks.
As such, I'm looking at potential corrections and where they could end. This sets up more trading opportunities.
Lately, the corrections have been incredibly short.
With the Fed meeting tomorrow and stocks on a torrid run of late, I'm looking for areas of support.
And Greg went on to describe a support level – which indicates more buyers than sellers – in the Dow Jones Industrial Average... It's around 26,300.
This 26,300 level in the Dow in June just happened to be around its 200-day moving average.
And when former "resistance" levels – more sellers than buyers – turn into support over time, that's a good signal of an uptrend in whatever index, stock, or asset you're looking at.
In other words, using technical analysis gives investors a reliable way to take into account the unexpected, or prepare for the predictable unpredictability of "Mr. Market."
Now, I am well aware the phrase "technical analysis" can rub a lot of people the wrong way. And it can cause a lot of debate in investing circles, even in our own (virtual) office.
Of course, no system is perfect. There will be losses along the way... even a few double-digit hits. But the important point is, you know precisely what you're risking ahead of time. As Greg has often written in trade alerts to subscribers, "We'll risk 100% to make over 100% on this trade."
And over time, the gains and insight gleaned along the way can outweigh any of the losses. For instance, Greg has recorded an impressive 18 trades that made more than 100% in the last two years. And he expects more to come in 2021...
And as Stansberry Alliance member Steve V. wrote to us back in March 2020...
Greg Diamond... thank you for the incredible insight into the markets. Your knowledge and insight open up a whole new perspective for me on what CAN happen.
While I often shy away from the purely technical reports, this morning's report was right up my alley and the best.
As we've written several times, using technical analysis makes sense for anyone interested in short-term trading. When it comes to the goal of short-term trading, price – where you buy and where you sell – is all that matters.
But even for a longer-term investor, the "technicals" have a place in the toolbox...
We love "capital efficient" stocks at Stansberry Research. Our editors believe they give us the best chance for reliable returns over the long term. We're not saying you should throw fundamental analysis out the window. But our collection of services includes a lot of views, perspectives, and experiences. And there's room for more than one approach in an investor's tool kit.
Famed American author F. Scott Fitzgerald is credited with saying...
The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.
In this case, understanding "what the chart looks like" can help you decide whether now or later would be a good time to buy or sell any number of assets that you already love... or that Wall Street hates.
For instance, think of arriving at Porter's recommendation to buy high-quality, capital-efficient stocks at the March 2020 lows, but with another – or better yet, a supporting – method.
The same week Porter shared his bold call, I shared one of the simplest technical indicators that someone could look at to "time the bottom" in the U.S. stock indexes. In the March 23, 2020 Digest, I wrote...
You can look at several indicators to guide you about when to more strongly consider buying in large quantities again...
Today, for example, fewer than 3% of the stocks trading on the New York Stock Exchange ("NYSE") are above their 200-day moving averages (200-DMAs). The 200-DMA is a good measure of whether stocks are in a long-term uptrend or downtrend...
The last time the numbers were that low was during the financial crisis. More from that Digest...
And back then, the number of stocks trading above their 200-DMAs lingered below 10% for months, from October 2008 until the ultimate bottom in April 2009.
Throughout history, only when this number gets close to or above 15% is the market "safely" rebounding...
Others are more comfortable with 10%. Sure enough, this range would have told you to buy stocks back in mid- to late April 2020, as the major indexes started to climb back to eventual new highs. And it would have done so by taking the emotion or hunches out of the equation, too.
It's even better when you get one, two, three, or more indicators (all from different methods) all telling you the same thing.
The point is, the "numbers geeks" aren't being told to go sit in the corner of their Wall Street offices...
It's like in sports, advertising, insurance, social media, or any other industry...
Analytics and data-driven decision-making entered the investment world long ago. And they're influencing it every day. As our Stansberry's Investment Advisory team put it in a special report, "Data is the new oil."
I interviewed an All-Star pitcher from baseball's Baltimore Orioles last year. When I asked him about numbers-driven analytics, he said, "It's here, and if you're not going to jump on board, you're going to miss it."
He said analytics don't necessarily change you as a player, but they can help tell you who you are as a player – what your strengths or weaknesses are. They can put measurable numbers to them and let you know if you were hitting your marks or not.
"The eye test doesn't always tell the whole story," he said.
It's the same thing in investing...
Numbers-driven algorithmic trading funds are a big part of every institutional trading house and can cause rapid circuit-breaker-tripping swings in the market, like we saw during March's panic. There's always so much fast-moving data in the world that it can feel impossible for an individual investor to keep up.
But at the same time, it's important not to ignore the information that can be available to you... and more important, that we already make available to you.
Good investing,
Corey McLaughlin
Editor's note: Ten Stock Trader editor Greg Diamond used his numbers-driven strategy to predict the 2020 market crash... three months before it happened. And now, he's warning that a huge turning point is coming...
Greg believes a surprising move on or around May 10 is setting up a great opportunity for investors that could propel them to spectacular gains – if they know how to take advantage of it. The difference has to do with a trading secret we almost never publicize... For a two-minute explanation of what he sees coming, watch here.