Thursday, October 31, 2019

What should my investment strategy be right now if a recession is imminent?

While you could be in cash 100 percent right now, you would not have any earnings on your investments. In fact, you’d be losing about 2 percent annually due to inflation. So that’s not a very good strategy.

While it is probable that there will not be a recession in the next few months, if we created a strategy that assumed the worse, we might miss the opportunities for some great earnings in the meantime.

So this is what I recommend as an overall strategy:
  1. Have a written investment plan that outlines your risk tolerance and how you will allocate your resources. For example, if preservation of capital is the overriding goal, go heavy on money markets and bonds. Or if your risk tolerance (or you are young), go for high-growth investments, or at least those that have the potential, such as small caps, or something along those lines.
  2. Most stock broker’s web sites will let you design your portfolio based on these factors. Schwab offers customized wizards to design a portfolio based on your age and risk tolerance. Even if you are not a client, you can access a lot of information on Schwab’s website. Start with 3 ways to build an all ETF portfolio.
  3. Always have an exit strategy, because you never know when the market will turn. Normally, the stock market will begin a downward leg into a correction or bear market before a recession actually is formally announced. Use stop orders to automatically exit your positions and sweep the funds into money market funds.
  4. Learn how to hedge your portfolio, if you think this is right for you. Again, Schwab has some advice on this: How to hedge your portfolio.
  5. Part of your investment plan should be continuing education that covers different investment topics. The more you know, the better investor you will become. I try to read at least five or six books a year on investing, economics and history. And I subscribe to different newsletters for different perspectives.
I only cite Schwab because I happen to be a client. Other brokerage firms such as Vanguard and Fidelity offer the same type of information and services.

The buy and hold strategies that you hear about are not what I recommend. Read Ken Moraif’s book Buy, Hold, and Sell, to get you started with this philosophy. Why would you hold during a bear market and lose 50 percent of your portfolio’s value?

One of the key things to remember is that most of the “prophets” and talking heads of the media are just noise. Learn enough to make your own decisions.

Trading / Investing Tips

  • Fundamentals tell you what to buy. Technicals tell you when to buy.
  • Stick to your system of entry and stops religiously.
  • Use stops and stick to them.
  • When euphoria kicks in, that’s usually a local top.
  • Much of the trading-related news & social media troll boxes are noise. Ignore them.
  • Trades should end in 3 ways: Big Win, Small Win, Small Loss
  • Repeat after me. “The trend is my friend.”
  • Don’t scalp the counter-trend.
  • Keep a trading journal. Determine flaws. Eliminate them.
  • If you open a trade based on a high time-frame signal, don’t self-sabotage and close that trade based on a much lower time-frame signal.
  • Good sleep, proper diet & exercise are just as important for trading as they are for most things in life.
  • Don’t get chopped up trying to trade/scalp sideways price.
  • Expect consolidation after large price movements, not continued volatility.
  • All indicators are using the left side of the chart to try and predict the right side of the chart.
  • Chart the exchange with the most volume.
  • Most traders lose a significant number of trades when starting. Those who are most successful are persistent.
  • Trade your own account. Don’t let others trade it for you.
  • Agree with the ideas, not the people who supply them.
  • Don’t be married to any one asset class, position, or idea. Constantly reevaluate for flaws.
  • If you’re winning a lot, someone else is losing more.
  • A big loss will ALWAYS be more emotional than a big win.
  • You need a large sample size to determine if you are a winner or a loser. Variance happens to everyone.
  • No one strategy is a holy grail. Use multiple signals and find confluence prior to entry/exit. Use what you like and toss the right.
  • Trading tools can get sharper or duller. Don’t be afraid to brush up on concepts you’ve already mastered.
  • Look at everything as a number and not money. Always look to be increasing that number.
  • Start trading using high leverage and small position sizes. This tests the quality of your entries.
  • Fear, uncertainty, and doubt (FUD) are great drivers for panic buying and selling.
  • After a big winning or losing trade, step away and regather your emotions.
  • If you’re getting emotional in a losing trade, then your position size is too high.
  • Stop trying to rationalize everything. Trade the chart that is in front of you.
  • There will always be early bears and early bulls. Being right is more important than being early.
  • Zoom out first. Zoom in later.
  • On the way up, stocks look cheap. On the way down, they look expensive. Don’t let the market play with your mind. Stick to your trading plan.

Wednesday, October 30, 2019

Should I Day-Trade ETFs? Probably Not.

The great majority of ETFs are not designed for day-trading. I like to use them for longer-term trades (months to years), especially ones that pay monthly distributions.
There are some leveraged ETFs that I’ve used for shorter term trades (hours to days). I still don’t view these as specific day trades, which I define as trades that are never held from session to session; for example, the NYSE closes at 3 pm CDT, so all positions must be closed before that time.
For example, you could use SPXL and SPXS to trade the S&P 500. These ETFs are leveraged 3X the overall market. For example, if the S&P 500 increases by 1 point, SPXL should increase by 3 points. Generally, these two ETFs track the market very well.
There are other leveraged ETFs for almost any asset class; for example, OILU for a bullish 3X Crude Oil trade.
If I’m going to actually day-trade an asset, I’ll trade the futures market, which is highly leveraged and highly volatile. I would not suggest you trade in this market unless you’ve gotten some professional training first. It’s very easy to lose a lot of money in a very short time if you don’t know what you’re doing.
My best gains have come from looking at longer-term trading, such as days to weeks or months. For example, I recently traded CAT, buying at 115 and selling at 128 for an 11.3 percent gain. I was in the trade for three weeks.
I also did a recent trade in energy, using the following ETFs: ACES, FENY, TAN, XES, and XOP. I invested $5,000 in each one and used trailing stops to manage my risk. I was eventually stopped out between 2 and 4 weeks in each position for a total profit of $1,345. While that may seem small at only 5.3%, if you do that once a month, you’ve made a 60 percent gain.
I use two methods to gauge where and when I’ll enter a trade: 13–34 Moving Average crossovers and Fibonacci Retracements and Extensions. (Google these terms for in-depth coverage, or watch the following two videos for an introduction:

Be careful. Learn all you can. Practice with “fake” money before you invest. Have a plan and stick to it. Learn risk management. Use stops. Always. Have fun.
Happy investing.

Tuesday, October 29, 2019

On a three-week road trip, and the price of gas

I just spent three weeks on vacation, and drove 4,100 miles round-trip from Austin, TX to Traverse City, MI, with side trips to Ann Arbor and Petoskey.

Petoskey, Michigan
I drove through Texas, Oklahoma, Missouri, Illinois, Indiana and Michigan. As the trip progressed, I paid increasingly higher prices for gasoline, from about $2.15 in Texas and Oklahoma, to $2.50 in Illinois, and $2.60 to $2.75 in Michigan.

There are three factors that drive the price of gasoline at the pump: The price of oil, the amount of taxes per gallon, and the distance from refineries.

As you'd expect, Texas and Oklahoma have lower gas taxes (by as much as 50%) and are much closer to refineries, driving down the cost of transportation.

What I find interesting -- though everyone likes to complain about the high price of gasoline at the pump -- is that gas is not that expensive, if you factor in inflation. In 1968, while I was in high school, I could buy gas for 30 cents a gallon. If you factor in inflation, that is $2.21 per gallon in today's dollars. See Inflation Calculator.

Some more information on gas prices and energy markets:

IEA Cuts Crude Demand Growth Forecast as Supply Continues Outpacing Demand
Pump Prices are a Treat for Majority of Motorists

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