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Your Opportunity Lies Here [CHARTS]

By Steve Blumenthal. Originally published at ValueWalk.

“Change of a long-term trend is usually gradual enough that it is obscured by the noise caused by short-term volatility.  By the time secular trends are even acknowledged by the majority they are generally obvious and mature.  In the early stages of a new secular paradigm, therefore, most are conditioned to hear only the short-term noise they have been conditioned to respond to by the prior existing condition.  Moreover, in a shift of long-term significance, the markets will be adapting to a new set of rules while most market participants will be still playing by the old rules.”

 * Robert Farrell, Former Chief Stock Market Analyst Merrill Lynch

Most hedge funds today are hardly even hedging; they are record net long equities

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I listened to Bob Farrell several times a week.  Bob was the chief stock market analyst at Merrill Lynch.  Do you remember those old “squawk boxes?”  On my desk sat a small speaker box.  It was the firm’s way of communicating to the thousands of brokers.  I’d keep the volume low but when Farrell stepped to the mic, I’d turn the knob to the right.  His deep monotone voice would fill my cubical and echo in the office around me.  As a young broker, I had little idea as to the way of the financial world.  I hung on his every word.

Bob was unique on Wall Street.  Most firms pushed out product that had recently worked.  Easier to sell, as you might imagine, but rarely worked as those gains were in the past.  But Bob was different.  He had the trust and the respect and a track record of success that enabled his superiors to let him speak his mind.  Following his advice served broker and client well.  We investors need to be forward looking.  Unfortunately, most are not.

When your caddy is advising you to buy Facebook stock, as mine did recently; or when cab drivers are driving around with quote trek machines trading stocks, as they were in 1999; or when waiters and waitresses are flipping investment properties with access to no-doc mortgages, as they were in 2007, you can’t help but scratch your head knowing that this time isn’t different.  Today we have debt and demographics issues.  Asset prices most everywhere are overvalued.

Buy low, sell high.  Yep. Got it.   Bob Farrell’s sage advice, if captured in a picture, might look like this:

Your starting point conditions matter.  In 2009, forward return expectations were in the mid-teens.  But really, who do you know that was buying.  Certainly not the caddies and cabbies.  They couldn’t click the sell button fast enough.  It was pure panic.

Forward 10-year equity market returns are in the low single digits.  I’ll update those charts for you next week.  There is no way that bonds can help your portfolio like they have over the last 35 years.  Not a lot of get to be gotten from low 2.20% yields.  We need to do our best to get our clients from “you are here” to “you’re best opportunity is here.”

On the way to that opportunity, keep in mind that “It’s all about the Fed and it’s always all about the Fed.”  They’ve shifted gears… that wind is no longer at our backs. As a quick aside, Mauldin wrote a thoughtful piece last week titled, “Mad Hawk Disease Strikes Federal Reserve.” He writes,

While my rant last summer was about the Fed’s apparent willingness to embrace negative rates, we now face the opposite risk. Janet Yellen & Co. are asserting that inflation is such a serious threat that they must tighten policy with a two-pronged approach. They are already raising the federal funds rate and will soon begin reducing the massive bond portfolio accumulated in the QE years.

I don’t think these moves will create a crisis on their own. Rather, I think the mentality that they reveal may lead to much bigger mistakes when the next recession arrives. The mistakes may already be unfolding.

When our initial starting conditions are high valuations and low bond yields; well, Bob Farrell says it best, “…in a shift of long-term significance, the markets will be adapting to a new set of rules while most market participants will be still playing by the old rules.”  It’s what happened in 1999 and again in 2007.  It’s what’s happening again today.

Ok Steve, what do I do?  First, it’s important to know that there are ways to make money in periods like 2000-2002 and 2008-09.  One doesn’t have to sit on the tracks and get run over by the oncoming train.  I have some ideas for you to consider.  I advise you to do some research and set a clear game plan in place.

So today, let’s first look at some research in order to set the “you get from here to there in good shape” case and then I’ll share what I am personally doing with my portfolio.  Hint: “Investors need risk management in bear markets, not in bull markets,” Ned Davis.  Hint: Let the trend be your friend.

Grab that coffee and find that favorite chair.  Hopefully, a beach chair.  And do have a great holiday weekend.

? If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe here. ?

Included in this week’s On My Radar:

  • A Century of Evidence on Trend-Following Investing
  • What I’m Personally Doing to Get From Here to There
  • Trade Signals — Risk of U.S. Recession Low; Equity Cyclical Bull Market Intact; Bullish Signal on Bonds
  • Concluding Thought
  • Personal Note

A Century of Evidence on Trend-Following Investing

71% of DM sovereigns Yield under 1%, Risk Parity Will Cause The Crash

Let me begin this section by saying that I am biased.  I’m a trend follower and have been since I founded my business in 1992.  Maybe I was just optimistic when I started but many years and a track record I’m proud of tells me it works.

In recent

The post Your Opportunity Lies Here [CHARTS] appeared first on ValueWalk.

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Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!