One of my favorite moments is when I can e-mail Barbara and say, "Now is a good time to buy. The storm is past." I take great satisfaction in scanning the market every day and taking the pulse of market sentiment. Things are not always what they seem in the marketplace. I am usually most anxious and fearful when investors are giddy. Conversely, I am usually most at peace when the headlines are proclaiming that the market has had its worst week in such and such a time. Those times are usually good times to buy.
Market Conditions This Week --
1. The market closed down for the week. We had a true selling day (more than 1% down) on every single index except for the Dow Jones Industrial Average. According to trader Gary Smith, true selling days are good times to be out of the market. I agree. Selling pressure tends to feed upon itself. Fear is a more powerful emotion than greed. Every investor and trader who bought the euphoria of the Federal Reserve's Quantitative Easing (QE2) when the Standard & Poors 500 Index was above 1200 is now underwater. They are hoping that the market will not correct further. I fear they will have a few more days (weeks?) of worry.
2. The S&P 500 Index closed below its 13-day moving average for the first time since August. This daily close below the 13-day moving average is a bearish development. It suggests that the trend has changed from up to down for now. The probabilities favor lower prices, not higher prices, for the moment.
3. On a weekly chart, the S&P 500 Index closed down. Probabilities again suggest that this down week will be followed by another down week in the marketplace.
4. I got a wonderful sell signal yesterday at the close of trading. I know that this signal is not simple but bear with me. (I know you're watching, Barbara/smile). There are smart investors and traders. There are dumb investors and traders. Smart money tends to be right more often than not. Maybe, they are better connected or have deeper pockets or whatever. But they tend to get it right. Dumb money tends to get it wrong. You can make money doing the opposite of what dumb money does.
Smart money is composed of institutions, hedge funds, and wealthy individuals like George Soros and John Paulson. Dumb money is the retail guy who watches Jim Cramer on CNBC and decides to buy gold because Jim said so. (not a smart idea!) Dumb money reads an article in the Wall Street Journal and won't touch an investment because the reporter said so. (Not a smart idea! You can make money by fading or going against the media.)
We want to be like smart money, not dumb money.
Now, how do we track the moves of dumb money? How do we pick up the trail of dumb money and go the other way? One tool is options activity on the index. Studies have shown that dumb money gambles on options and that dumb money loses like clockwork to smart money, particularly at extremes. So, when dumb money is absolutely convinced that the market is going higher and they rush out to buy calls, then it is good bet that the market will do the opposite and head lower.
This contrarian signal flashed yesterday between noon and 1:00 p.m., the last hour of the trading day. I could not believe my eyes when I saw how bullish people were on options. According to my chart, people were buying calls (bets that the market will go higher) at the highest rate since June 28. What happened after June 28? The market dropped 70 points within 3 days. So, yesterday, I felt very confident that the market would be dropping, not rising, for a while.
When Will It Be A Good Time to Buy?
I am looking for several factors to come together. These factors are as follows:
1. The Relative Strenght Index (RSI) needs to fall into the 30ish level on a daily basis. Today, the RSI closed in the 50s. That's better than last week but not good enough for me to place that e-mail to Barbara.
2. The stochastics needs to drop to the oversold level. The stochastics is still hanging up around 79. That's not a good time to buy. A good time to buy would be at least the 20ish level. During the last week in August, I saw with my own eyes how the S&P 500 Index reached down into the single digits on the stochastics! I knew from hard experience and observation that those readings were unsustainable. It was a good time to buy.
3. Resistance on the S&P 500 Index was @ 1129 on August 9. This number is very, very important to me. I think about this number alot (more than I care to admit/smile.) There is an important principle in investing that former resistance turns into future support. In other ways, there are a group of investors and traders back @ 1129 who missed the boat. They misjudged how strong the rally off of the August 27 bottom @1039.74 would be. Now, they have had to sit out a powerful rally up to the 1227 level for 2 1/2 months. They are eager to get on board the train. They may also be investors and traders who went short the S&P 500 @ 1129. Bad mistake! These people are eager to cover and cut their losses and get out even.
So, there are communities of investors and traders with a vested interest in what the S&P does @ 1129. We are concerned as well because this area may provide a good time to buy. We simply have to see if the market reaches down to this area and whether the other signals (RSI readings, Stochastics reading) support a buy decision.
The hardest part about investing is having the patience and discipline to wait for a good time to buy. Its like staking prey, according to trader Mark Weinstein. Its like stalking prey.
Conclusion: Sentiment has turned in the market. What goes up must come down. Our job now is to have the patience and discipline to wait for a good time to buy. No one can predict the future. But we know that a good time to buy will have a certain character. We are waiting for fear. As Baron Rothschild once said, we are waiting for the proverbial blood to run in the streets.
Then, we buy.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
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