Market Review:
A down week in the market translates into a lower high for most stocks in America, as shown through the NYSE Index below:
The index is technically in a downtrend with a series of lower highs and lower lows, but just barely. The most recent rally failed just a hair below the August high, which shows that the bulls and bears are at almost equal strength, hence the term “stalemate” I’ve been using recently.
In terms of the S&P 500, the lower high is a bit more pronounced and, so far, both rallies have been rebuffed by the 200 day moving average:
With the market grinding below the 200dma, my main focus continues to be on playing superior defence.
One option would be to simply stop trading and go into cash and that is the strategy of an ETF that I mentioned before that trades under the symbol PTLC.
Using a 100% systematic, rules based approach, PTLC went into T-Bills when the slope of the 200dma turned down (black arrow) and, like a turtle hiding in its shell, has been in this defensive position for over 7 months:
Interestingly, for PTLC to leave its defensive posture requires something unique: five consecutive business days above the 200dma.
So, although the S&P 500 did manage to briefly pop above the line in the sand, it was not enough to trigger any change.
I’m a fan of this type of strategy. It’s objective, rules based and defensive. But has it actually been helping?
The ETF doesn’t have a long enough history to definitively answer this question, however the chart below shows that PTLC is doing a better job of keeping its gains from last year:
PTLC versus S&P 500 (2020 - present)
As the market was rallying last year, PTLC and the S&P 500 were both rising together in lockstep, but these two paths diverged allowing PTLC to accumulate a gain of 45% versus just 30% for the S&P 500.
Yes, it is true that a sample size for 2 years isn’t sufficient, however the key point is that one way to get ahead is by simply not losing.
Most amateur traders are insanely focused on making big money. Instead, they should be focused on preserving what they have. And there’s no better year to prove this point than 2022. If there was any time to concentrate on preserving capital it was this year.
Because retail traders are not typically holding blue chips, the S&P 500 and the DJIA belie the carnage wrecked upon most brokerage accounts this year.
For example, growth stocks are experiencing a dismal year with the IBD 50 index zipping to a new 52-week-low on Friday:
IBD 50 Index ETF (FFTY) with long-term trend (100 & 150dma)
With the index down over 49% YTD, you might think the folks over at IBD would start thinking something ain’t quite right but, no, to them everything is fine. It’s a confirmed uptrend.
In my opinion, this proves that you need to think for yourself, follow price action, go with the trend and play superior defensive in bear markets.
By the way, the IBD 50 index has just surrendered all of its gains going all the way back April 2015:
Performance of FFTY since inception
In theory, buying and holding America’s most innovative growth stocks and holding for “the long-term” sounds great and it did work really well during the 1980’s and 1990’s. But it’s not working now.
Fortunately, there is a solution and that is to cultivate a Trend Following mindset.
Commodities:
One of the pillars of a Trend Following mindset is to trade all markets and not get attached to a single theme, such as growth stocks.
For example, for most of this year there have been opportunities in the energy sector; however even this window of opportunity appears to be closing.
Based on the rules of my system, the long-term trend of USO (a fund that tracks Crude Oil) just turned down this week:
United States Oil Fund (USO) with long-term trend
Crude Oil initially got smashed in 2020, so it took a while for price to revert back to an uptrend, just like it takes time for a heavy freight train to stop and reverse directions.
But once the trend finally turned positive (dashed vertical line) it stayed on track for over 2o months until just now.
With this reversal, commodities now join all major equity indexes, bonds, real-estate, gold and Bitcoin in long-term downtrends. If you’re a long only investor and you want to invest in uptrends, then these are lean times.
Bitcoin:
It probably goes with saying that Bitcoin is in a long-term downtrend. Going back to November of last year, this “store of value” is down a staggering 74 percent:
As bad as this is, the Bitcoin Investment Trust (GBTC) has done even worse, having collapsed by 85%.
As I previously mentioned on Twitter, GBTC has an absurdly high management fee of 200bps per year. By contrast, a much more respectable fund like SPY only has a fee of 9 basis points.
This means that, based on my calculations, GBTC rakes in $216,000,000 annually to manage their “strategy” of doing nothing but holding Bitcoin.
In any case, this has been a year of massive pain for the Crypto community, although I can’t say this comes as a complete surprise.
Interesting ETFs:
Everyday, I scan for ETFs making new 52-week-highs. After running this screen on Friday, what is noteworthy is how completely conservative the results are:
There’s nothing but short-term bonds, money market funds and cash account ETFs. It’s doesn’t get any more risk-off than this.
For a while now, my hottest stock tips have been these type of conservative ETFs such as what again appears on the list above: TFLO.
I first introduced and explained TFLO in Issue #86 and since that time its dividend has increased to over 17 cents per share (red rectangle).
This means that TFLO’s dividend yield has cracked 4% for the first time. Okay, that’s still below the rate of inflation, I understand that, but I still believe this is the “least bad option” at the moment for most momentum traders, myself included.
Earning 4% a year is much better than getting killed in this current chop-fest of a market. Even though this might not be obvious, my gut tells me that almost all traders are getting shredded this year.
One interesting piece of evidence that collaborates this point of view comes by looking at the results of United States Investing Championship.
Although there are a few traders there who have managed gains for the year, the reality - if you dig deeper - is that fully 92% of entrants are negative YTD.
So even though a 4% yield isn’t a lot, if you entered this competition with a million dollars and just held TFLO, you’d be roughly in 3rd place.
Another neat feature of holding a million dollars of TFLO is that it would provide you with $3,391 per month in passive income.
Remember that if your passive income exceeds your living expenses then you are financially free.
Current Holdings:
Here are my holdings going into next week: