The market continued yesterday’s rally this morning and is getting close to exceeding July 19th’s peak. The last couple days put in yet another higher-low and we are looking at another higher-high if this rally goes a few points further. The market’s gyrations continue to exhibit indecisiveness, but there is an upward bias as we are slowly creeping higher with each swing.
Fundamentally speaking, earnings seasons has been at best unimpressive. This makes it highly noteworthy to see the markets holding 3% from its 52-week high. Over the short-run the markets can ignore fundamentals as other factors dominate the market’s psyche. Right now Europe and the exchange rates are front and center. As we’ve seen, a declining dollar will rally the market even when all the marquee companies are lowering expectations. The question becomes, what is more powerful over the longer-term, the economy or the dollar? And of course this is not an exclusive either or situation. A weak dollar can boost earnings and a strong dollar can dilute earnings.
If you trade the markets, the one question you must answer is “what’s my edge?” The only way to consistently make money in this game is to have an edge over everyone else. Maybe it is inside information, maybe it is lightning quick execution, maybe it is arbitrage, or maybe something else. But without an edge, you are just throwing darts based on a gut feeling of what will happen next. Why is your guess about the future any better than the next guys? The truth is it isn’t and without a quantifiable edge your success is based on nothing more than luck.
Gurus would have you believe following their system gives you and edge. But if it is a widely publicized system, where is the edge if everyone else knows the same techniques? There is a saying in this business, it is far more profitable to sell advice than it is to take advice. These gurus are not rich from trading, but from selling their system. It is noble to think these gurus are wealthy beyond their wildest dreams from trading but are so unselfish that they spend half the year away from home living out of a suitcase simply because they love teaching. Really? I don’t know about you, but if I were loaded, living in motels is not how I’d spend my time.
Now don’t get me wrong, teaching and helping others makes people feel good, but there is a big difference between leading a local meetup group or teaching at a community college and spending months on the road selling multi-thousand dollar seminars. Never forget these people are in the business of selling seminars and are not helping out of the goodness of their heart.
But that is not to say these systems cannot work. In fact most of them do work………some of the time. The key to trading any system is knowing when it is applicable and when it is not. For traders without inside information or supercomputers co-located next to the exchanges, this is one of the few edges left to us. Any system is like a tool and it has a time and place where it works great. But using it somewhere any other time is bound to lead to undesired results.
CAN SLIM is a great system, but there is a very specific window where it works exceptionally well. The rest of the time it will produce false buy signals and erode your account one false breakout at a time. As I’ve shared many times before, I find it very easy to make money in the markets. The hardest part is keeping those profits.
Back to the original question, what is your edge? What makes you a better trader than the other people in our meetup group? What makes you better than all the other CAN SLIM traders? What makes you a better trader than other retail investors? What makes you a better trader than all the pros on Wall Street? If you don’t have a good answer to this question, how do you expect to beat all the other traders in the market and consistently out perform the market? This is a game of skill and you need that edge to come out ahead. If you can’t convincingly answer this question, you have two options. First, study and learn the markets until you develop that edge. Or if you can’t beat ’em, join ’em. Buying and holding index funds is the easiest and most reliable way to make money in the markets.
Now some people will argue with me, but if you think I am wrong, will your trading account back you up? Are you consistently outperforming the markets without an edge? Proof is in the pudding. If you find the market is easy to make money off of, then I’m wrong. But if you struggle to beat the markets, that should be sign your approach is incomplete and you need to find that missing ingredient if you want to improve.
Back to the present, the markets are up for a couple days and then down for a couple. We’re in the middle of two strong up days. If we continue this pattern, we have one or two up days left before we pullback. Up for a couple days, down for a couple days. The best way to trade this market is cash in any profits after a strong day and then prepare for the reversal. The only way to profit in this market is scalping a few percent at a time. Wait any longer and your profits will evaporate.
The news out of Europe continues to be encouraging, contributing to this upward trend. But what happens if we hit a rough patch when some of the anti-austerity leaders start asking for too much at these meetings and we hit another stalemate? Things have been going smoothly for a while now, but remember these are politicians we are talking about here and they can only play nice for so long. Given our proximity to 52-week highs, I continue to think there is material headline risk to the downside if we see one of these Euro meetings blowup.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.