Weekly newsletter of Danny Merkel - Issue #92
Market Review:
Okay, so the market did bounce this week but, as I’ve been saying for months, it’s still not enough to move the needle.
The average trader, on the other hand, is hyper-sensitive to the any short-term movements and, as a result, has been stuck in a loop that looks something like this:
The market puts in a rally, even just for a single day
The average trader massively over-reacts - oh my god, this is the bottom!
Bear-market reasserts itself and the rally fails
New traders get stopped out
The market puts in another rally… and the cycle continues
The chart below shows that this hamster wheel has revolved about 19 times since the market topped in February of 2021
IWO growth stock ETF
Fortunately, there are some very simple rules of thumb that can help traders of all skill levels sidestep these very challenging conditions.
To recap past issues, you can ask yourself if price has made a new 52-week-high in the past 30 days. If the answer is ‘no’, then you don’t buy. Interestingly, growth stocks have made exactly zero new highs thus far in 2022.
The simple observation that price hasn’t made a single 52-week-high this year is powerful information. One reason it’s powerful is because it’s objective and indisputable.
By contrast, compare this kind of systematic mindset with what you typically find on social media:
-What does ‘buy right’ even mean? Put a million traders in a room and tell them to ‘buy right’ and you’ll get a million different answers.
-What does “some” mean, and what is “strength”? If I buy a stock at $10 and it goes to $10.01 is that strength?
-Define “more” exactly.
-What exactly is a “good profit”?
In my opinion, these are the same kind of pointless platitudes as saying the secret to making money in stocks is to “buy low and sell high”. Yes, maybe that sounds good, but when you really think about it, it has no meaning.
Anyway, another objective rule of thumb is to avoid long-term downtrends.
How do I define a long-term downtrend exactly? It’s when the 100ema is less than the 150ema. That’s pretty clear.
For example, for the IBD 50 index, the long-term has been down for almost the entire year, so that tells me I want to avoid it and that helps me ignore all of the numerous failed rallies we’ve seen all year, including IBD’s latest “confirmed uptrend”.
IBD 50 ETF of growth stocks
Although I think it’s unlikely, what if this latest “confirmed uptrend” actually does pan out and the market melts up from here? If Bear Market Rally #19 is the real deal, then what is my plan, exactly?
Given that I’m holding a portfolio of mostly shorts, I’ll get stopped out of most of them. But which shorts will get stopped out and what will trigger an exit, exactly?
The answer is that when price closes above the 20ema, then I will cover a short at the open of the next trading day. Give an exit rule like that to a million traders, and everyone could potentially follow it exactly, yet almost none would.
In a new bull market, the strongest shorts will be the first to get stopped out, as they plow through the 20ema. Some truly dead stocks won’t rally even if the market rallies, and so I’ll retain those, as long as they stay under the 20ema.
Meanwhile, I’ll be scanning each and every day for new stocks making new 52-week-lows to replace shorts that have been stopped out.
In a new bull market, the results of this scan will start to dry up, which means that I won’t have any new shorts to replace shorts that have been stopped out, thus the portfolio will evolve and become less short.
As my bearish scans dry up, my bullish scans (the scans looking for new 52-week-highs) will start to proliferate with longer and longer lists of new strong stocks.
We don’t know what the future leaders will be in advance, but that doesn’t matter - the new leaders will find you through your daily scanning routine.
Because most shorts will have been stopped out without replacement and because new leaders will begin to appear on the new highs list, my portfolio will be reshuffled, gradually becoming dominated by new longs and few shorts.
This organic, Darwinian way of thinking has been my approach since I first described it in a blog post way back in 2009.
You probably have never visited this dusty, old relic but try poking around in there and see what you find.
Stock Scans:
In spite of being called a “perma-bear”, I actually am looking for new things to buy every single day, but the trouble is very little is meeting my criteria.
What is my criteria exactly? I would be willing to buy any ETF that makes a new 52-week-high.
How do I find such ETFs exactly? Each day, I run a scan on StockCharts.com that looks like this:
[GROUP IS ‘ETF’] AND [DAILY SMA(20,DAILY VOLUME) > 100000] AND [DAILY HIGH > YESTERDAY’S DAILY MAX(253,DAILY HIGH)] AND [REGION = NORTHAMERICA] AND [DAILY CLOSE < DAILY OPEN] AND [GROUP IS ETFNOUI]
Basically, I’m looking for ETFs in North America that are actively traded, are rising to new 52-week-highs and that are not inverse ETFs.
When I run this scan today, you get the following results:
The first result, CMR.TO, is along the same lines of the other conservative interest paying ETFs that I discussed in Issue #86.
Next, we have DBMF, an ETF that I’ve discussed repeatedly before. You might think I like DBMF because I love Trend Following and perhaps did a Google search to find a Trend Following ETF.
But in actuality, I like DBMF because it’s making a new 52-week-high and my system buys new 52-week-highs. I didn’t find DBMF, DBMF found me.
Moving through the list, there are literally zero equity-related ETFs that are making new highs, so that’s why I’m still skeptical of this so-called uptrend. But given that there are about 1,700 liquid ETFs covering every conceivable niche, sector, country etc… my bar is set pretty low - I just need one of them to make a new 52-week-high.
Interesting ETFs:
It never ceases to amaze me how much effort most traders put into trying to identify market tops and bottoms. Spend five minutes on Twitter right now, and that’s all you see. Sentiment, divergences, equity flows, seasonality, technical indicators stacked one on top of another in a desperate attempt to get in at the lows.
The Trend Following mindset, on the other hand, ignores all that and just focuses on riding an already established trend.
For example, by running the scan I just outlined, you would have noticed that