The last few days serve as a perfect illustration of why talk is cheap – especially when it comes to investing and trading. Technical, chart, and market analysis will always – ALWAYS – beat the talking heads.
Despite non-stop chatter – predictions included – that were meant to raise red flags for equity market players, we had another up week, complete with a very strong day on Friday (the second consecutive Friday that posted a big gain).
Why all the talk? On Thursday, Fed Chair Janet Yellen made some “off the cuff” comments about equity valuations being “quite high,” yet we know that analysis is rather arbitrary. The valuation question is a valid one, but it is quite difficult to accurately predict when money will flee.
Meanwhile, many talking heads had expressed their view that a very strong jobs number would push the Fed toward raising rates sooner rather than later. The in-line jobs number for April was far better than March, yet we saw Fed Funds Futures rise, decreasing the chance of rate hikes coming anytime soon. The first fully priced 25 base point rate hike is now pushed out to January 2016.
The above two examples clearly demonstrate that, regardless of the jawboning Fed, economists, forecasters, analysts, and sundry talking heads, the MARKET is telling us what we should expect. This is market analysis 101 – learn it, live it, love it.
Therein lies the question of whether we should listen to predictions or just the market action. I have been a student of markets for many years and have learned that the market tells us the truth. I do not have to listen to anyone to know where price is headed. Even Investors Business Daily agrees with me:
Whatever skills Federal Reserve heads have, analyzing the stock market isn’t one of them. Fortunately, there is a better alternative: the market itself. The market is constantly giving feedback, and those clues are more useful than individual opinions.
On CNBC and other business networks, the pundits came out in full force, claiming the market was due for a sharp correction and that the six year bull run was over. Yet, as I mentioned above, by the end of the week we found markets up from the prior Friday, washing out some bull players midweek but catching many off guard after a rather pleasing jobs report was released.
Here’s something interesting that further underscores my point. I noticed before the jobs report was released that the market was quite strong. After the midweek rout, the indicators I follow were stretched too far down. I talked about this on Thursday during our weekly webinar, noting that a sharp bounce was due. This was not a prediction. Rather, I was just reading and listening to the message of the market.
As we see on the chart below, the SPX 500 was chopping around in a range; there were no clues of severe distribution (marked by institutional selling) – see the chart below. All we can see here is some consolidation on the right side of the chart after a very sharp rally in February, aka, a collection of higher lows.
Repeatable patterns of fear and greed show up in the charts over and over again. Human behavior never changes. Did you find yourself listening to the talking heads and jumping out of stocks instead of just listening the markets? I saw a quote this weekend on Twitter that reminded me of something Mad Money’s Jim Cramer says daily:
The key to making money in stocks is not to get scared out of them.
So, how did I know we were going to get a sharp bounce?
The
McClellan Oscillators reached some very extreme levels on Wednesday, signaling good odds that a market snap back was imminent. On numerous occasion, we have seen the following happen: The oscillators for the NYSE (shown below) and Nasdaq fall to extremely low numbers, which means sellers have exhausted themselves. A violent rally ensues. This is exactly what happened on Friday, and here at Explosive Options, we were perfectly positioned to take advantage of the strong day, because we listened to the markets, studied the charts, did our market analysis homework – and ignored random opinions.
