Summary
- The stock market had a down day in excess of 2% for the first time in months and people got breathy.
- The S&P 500 is between the first and third most overvalued in history depending on how you account for interest rates and Fed funny money.
- Liquidity is done expanding, but high liquidity will remain for years, so using rotations by hyperactive traders to buy quality will be key for profiting over time.
- Tech is still king and clean energy is the biggest secular trend still gaining momentum.
- Some REITs and certain resource stocks are great places to generate income, have some growth and hedge inflation.
So, today the stock market was down a massive two-and-a-half percent. So, basically nothing given the massive liquidity driven speculative rally we’ve seen the past 9 months.
Yet, all over CNBC and Fox Bizness, there was breathy concern. I lost track of the narrative of the day. Something to do with Coronavirus or stimulus or debt. I don’t know. I barely care anymore.
There are only three narratives that matter and they don’t change:
- Fed liquidity and the broad stock market are over 90% correlated, meaning, when the Fed is expanding its balance sheet, stocks go up, when contracting, stocks go down, and when holding steady, the market is choppy.
- Quality wins in the long run. No exceptions.
- Value is only found in putting a correct valuation on something that the market is missing right now.
What Does It All Mean?
It means stop being a chaser if you’re chasing and stop worrying that you missed it. There is no “it.” There’s only the next time.
On the flip side, don’t be afraid waiting for the next big correction. If you’re like me 50-60% in cash, you can pick out value for now. You’re also waiting for chance to get more broadly invested with ETFs when that broad market correction comes. Which ETFs, pretty much the same ones that killed it before.
How Do We Find Value?
Focus on finding companies with future value to be unlocked. Screening will only narrow down the field. Most of the time the computers, algos and markets have priced value in already.
The only real way to find that value is to know the businesses you are invested in. That is the ONLY way to get a leg up on the 80% or so of folks who have no idea what they’re investing in.
So, find stocks like Sirius XM (SIRI) that is likely to see subscriptions triple or more in coming years. Or Liberty Sirius (LSXMK) which is trading a 30% discount because no spreadsheet has the value of LiveNation (LYV) in there yet. Or AT&T (T) which has HBOMax and WarnerBros with no implied value. Or Lumen Technologies (LUMN) which has great assets in fibre and a great enterprise business that is weighed down by a shrinking consumer division they’ll shed soon. Or Kinder Morgan (KMI) which has steady natural gas pipeline income, likely M&A on the horizon and is a backdoor play on hydrogen transport.
Some of those other stocks I’ve mentioned lately are really good too, but I made this article free so, I’ll stick with these for this article.
A big takeaway from what I’ve been talking about for months now in picking stocks is that you need a good company and something that can make it great. Think about it like cards. You need good starting cards AND something good to draw to.
And, whenever the next correction really happens, then, you can be a little more diversified and buy a handful of industry, sector and nation ETFs to have a broader asset allocation. What to buy then? What was winning before.
Don’t Get FOMO Or Think You’re A Hotshot Trader Now!
Right now, a narrow asset allocation is your friend because so much of the markets are overvalued. That means it’s a pickers market even more than a chasers market. Why? Because we know that around 80% of chasers take in the pants eventually.
The IRS tells us virtually every year how bad traders are. How? They take more losses than gains on their tax returns. It happens almost every single year. And, I only say “almost” because I’m not sure if it’s every year, but I think it is.
As with gambling, the gains are concentrated at the top for frequent traders. And, most of those big gains are due to luck and cheating as much as skill. That’s why I look for only a handful of trades per month. If you’re in more than one or two or maybe three swing trades at a time, that’s too many.
If you have been doing well trading, ask yourself 2 questions:
- How have I been winning?
- How easy would it be for me to lose?
When you answer those questions honesty you come to one and only one conclusion, be really, really careful. Build a margin of safety into everything.
Don’t get me wrong, there are some swing trades out there. And a bit of momentum to put a tight trailing stop up against, but in general, the market is irrational, so keep your wits about you.
Follow The Rich, Not The Poor
The telltale signs of when the great unwashed poor retail masses have finally jumped on a trade is that they experience a case of acute FOMO (fear of missing out) and buy a stock or fund as institutions and family office rich trickle their shares off to the retail masses. In essence, big rich investors selling to not so rich small investors.
Smart vs Dumb you’ve seen this chart before.
This cycle plays out over and over. Always try to inoculate yourself against FOMO with a dose of FOGYAK (feat of getting your assets kicked). This chart should help.
In the past several years, the relationship of institutions abusing retail has morphed into some institutions abusing retail and other slower moving institutions. This is important for us to know who to watch. Mutual funds and indexes are the slow moving elephants. We can do well trading against those, but we don’t want to try to keep up with the cheaters and supercomputers.
Tomorrow I have a lot to do. Buy the stocks in the webinars and this article. And sell cash-secured puts. I’ll put up a double dose of trades up this weekend for early release on Sunday night after we see how the week closes.
Disclosure: I am/we are long SIRI, LSXMK, KMI, T, LUMN.
P.S. Oh yeah, a bunch of Reddit readers in a chat room bid up some shit stocks (their term not mine) and got away with it because the SEC didn’t care for 4 years. We’ll see how that turns out. Don’t let the game stop.
