How to Find the Best and Biggest Trends in the Market
How to find the best and biggest trends in the market… A technical strategy even professional traders often miss… 'Diversification is a dirty word'… The No. 1 reason investors go broke…
Editor's note: While the Digest team returns from our yearly Spring Editors' Conference, we're finishing up our special series from Ten Stock Trader editor Greg Diamond.
In Monday's Digest, Greg discussed how he ended up ultimately joining Stansberry Research. Yesterday, he revealed a handful of his favorite technical indicators and patterns. In today's Digest, Greg concludes the series by sharing two more critical strategies to pay attention to, and discusses his trading approach in Ten Stock Trader...
One of my favorite trading strategies is 'ratio analysis'...
I'm constantly looking for the biggest trends in play as they relate to other asset classes or sectors of the stock market.
As a trader, I want to own what goes up and sell short what goes down. Within the domestic equity markets, certain sectors behave differently given the current environment. Sector ratio analysis cuts through the weeds of individual companies and graphically shows what sectors are outperforming the overall market.
Take this example of the Technology Select Sector SPDR Fund (XLK) versus the iShares U.S. Real Estate Fund (IYR)...
This chart reveals that buying XLK and selling short IYR would be a great trade. These are the trades we will continually analyze and trade in our portfolio.
Another example of ratio analysis is used on different asset classes...
This chart shows what would have happened if you bought gold and sold stocks. In other words, you would have lost a fortune.
This is ratio analysis at its best. It signals the best trends relative to other asset classes to allocate to your portfolio – and more important, the assets or sectors to avoid.
This type of analysis is also fantastic at signaling a change in correlations between asset classes – a critical component to understanding major shifts in economic trends.
In Ten Stock Trader, I analyze every major asset class versus another along with the sector ratio analysis mentioned above.
One of the biggest aspects of technical analysis that gets overlooked is time...
As I noted earlier this week, the history of the market repeats, usually in cycles.
Finding those cycles can be difficult, but using time as a roadmap for what to expect is critical for successful investing.
I've spent more than a decade studying the history of the market and extrapolating the data to better understand when to expect a market move.
The key is to understand the larger cycle in play and then use the shorter cycles to pinpoint turning points within each month. It is not an exact science – nothing in the market is. But combining the technical indicators above with time-cycle analysis can be a very powerful combination...
I can sum up my approach to trading with a quote from one of the most successful hedge-fund managers alive...
Famed investor Stanley Druckenmiller once said diversification is a dirty word. "Put all your eggs in one basket and watch the basket very carefully," he said.
That quote profoundly changed my thinking on investing and portfolio management.
I attended an exclusive, invitation-only conference at Goldman Sachs, where Druckenmiller and President George W. Bush were the main speakers.
I'll save the details of the speech for a more appropriate time, but I want to emphasize how important this idea is... that being too diversified and having too many baskets with too many eggs in them can wreak havoc on performance.
In my experience, more positions means more problems.
That's why I'll only recommend a maximum of 10 positions at any one time in Ten Stock Trader. This allows me to use all of my energy and attention to a limited number of positions and it keeps things simple.
I'll also allocate a large percentage of our trades to a core macro view...
What does this mean? It means I have a medium- to longer-term outlook on the future of the major asset classes – stocks, bonds, precious metals, and commodities.
This is where the short-term trading of options and technical setups come into play. Many global macro hedge funds trade their portfolios this way every day.
We'll be trading exchange-traded funds (ETFs). I'll recommend these to track the major stock indexes like the S&P 500 or sector trades like IYR, and I'll recommend both long and short positions.
We'll also trade naked call and put options, along with more complex options strategies like "risk reversals," "call spreads," and "put spreads." If you aren't familiar with these strategies, don't panic. The names sound sophisticated, but I'll explain each trade in detail.
Finally, we'll trade individual stocks. I analyze thousands of charts every single week. I'm looking for a combination of various factors (many of which I've outlined over the past few days) to determine the best trading setups.
And finally, I saved the most important piece for last...
I'm talking about position sizing and risk management.
The instructions for each trade in Ten Stock Trader will be based on a percentage of your portfolio.
For example, if I say buy a 10% position in XYZ stock and you have allocated $100,000 to Ten Stock Trader, then you would buy $10,000 worth of XYZ stock for that trade.
I will always indicate the percentage allocation on every trade. Make sure you follow these instructions.
Never risk your entire portfolio on one trade. Ever. Period. This is the No. 1 reason why investors go broke.
Thanks for reading this week's Digest series. If you'd like to learn even more about technical analysis, I highly recommend visiting the Chartered Market Technician ("CMT") Association website.
Editor's note: We hope you've enjoyed this series, and that Greg has convinced even the most diehard fundamental investors among you of the value of technical analysis.
But if you're still on the fence, we'd strongly encourage you to watch the brand-new presentation we just released. In it, Greg discusses his strategy in-depth and shares even more of the chart patterns he relies on each day.
If you decide to take us up on our offer to become a "beta tester," you can save up to 85% off what we will eventually charge others when Ten Stock Trader is released to the public. And again, if you sign up before midnight Eastern time tonight, we'll even throw in a gift worth $1,188 for free. Click here to sign up now.
New 52-week highs (as of 4/17/18): CBRE Group (CBRE), First Trust Nasdaq Cybersecurity Fund (CIBR), Genco Shipping & Trading (GNK), Intel (INTC), Match Group (MTCH), Pioneer Natural Resources (PXD), and Sprott (SII.TO).
In the mailbag, several readers write in with feedback on technical trading and Ten Stock Trader. If you've signed up as a beta tester, we'd love to hear your thoughts. Send them to feedback@stansberryresearch.com.
"I have always had an interest in technical trading and I knew there were signs that foretold events to come. I had read of a trader in the 1920's who saw a trend and sold all of his holdings just 6 months before the market crashed. This looks like it would be very helpful as it seems to have very specific signs that must be interpreted correctly in order to evaluate the coming events.
"I have always been told that you cannot forecast the timing of the market, but yet people have done it and it looks like a very interesting process. I am eager to see what Greg Diamond has to show us." – Paid-up Flex Alliance member John H.
"Thumbs up on Ten Stock Trader! As market moves become increasingly more predictable through complex analytics and discerning algorithms (and some horse sense), short-term trading through technical analysis may be much more fruitful (in the near term) than long-term investing through murky fundamentals." – Paid-up subscriber L.A.F.
"As a retired broker I teach technical analysis FREE at local libraries. My title is 'TECHNICAL ANALYSIS – PROOF THAT IT WORKS.' It will be interesting to view your other indicators." – Paid-up subscriber Roger R.
"What price do you plan to offer the Ten Stock Trader after the test period? I am interested in the service. Thanks." – Paid-up subscriber Lee G.
Brill comment: We haven't finalized the price for Greg's Ten Stock Trader, but we expect it will cost upwards of $1,000 per month when we officially launch it to the public. As we've explained, for a limited time, you can "beta test" this service for a tiny fraction of that cost. And again, you can get all the details and sign up right here.
"I assume Ten Stock Trader is free to lifetime Stansberry Alliance members, correct?" – Paid-up subscriber Pierre P.
Brill comment: Of course, Pierre. As promised, Stansberry Alliance members receive access to everything we publish for life... including new services like Ten Stock Trader and any others we may publish in the future.
"What option trading level is necessary to trade the Ten Stock Trader strategy?" – Paid-up subscriber Dave G.
Brill comment: The designation can differ from broker to broker, but you'll want to get approved for the highest level of options trading – typically called "Level 4" – to fully take advantage of Greg's Ten Stock Trader recommendations.
Regards,
Greg Diamond and Justin Brill
Palm Beach, Florida
April 18, 2018