Decoding the Stock Picking Myth

Weekly Plan 1.14.24

Traders-

In traditional technical analysis, a lot of time and effort is spent on picking “good” stocks. Thousands of dollars are paid to the experts and subscription services to help us zoom in on the right stock with the right fundamentals and perfect technicals.

Yet despite doing all this, sometimes the results are far below than the average.

Why is that? Why can we not all pick great stocks and become unimaginably rich?

I think the answer lies in “when” rather than the “what”.

Commonly this is known as Market Cycles. Far more thought is given to the what rather than the when. The average stock investor is focussed on what to invest in rather than when to invest in. This extends to all sort of assets not just the stocks, from commodities to real estate to bonds.

Market cycles are often confused with Macro. Macro in my view is not the same as market cycle and in fact the two are extremely two different things in one key regard- I believe market cycles are recognizable whereas it is not possible to predict Macro with any degree of accuracy.

Macro deals with things like where the interest rates will be 2-3 years from now, how much GDP will the Eurozone produce this year, what is the inflation rate going to be in China at end of the year.

We have a whole crop of experts who are active in Macro, but in my view, the Macro is simply impossible to predict. Let me know down below if you think otherwise.

Don’t get me wrong in the sense that I can tell you the economy is headed for a recession. I believe the stocks will shed about 30-35% value soon.

I can tell you that the rates are here to stay higher for longer than what the majority believes. I just can not tell you when that recession will hit and when the rate cuts will finally begin. I think no one can tell and any one who says otherwise either goes not know or is not being upfront.

On the other hand, the Market cycles have some very recognizable patterns. I am not going to get into the technical aspect of Market Cycles. A lot of folks use tools to predict this, folks use Elliott waves, I know some who use astrology to predict these market cycles. I do not subscribe to any of that. I am not saying they do not work, I am saying I just do not use them.

I have more simpler construct of Market Cycles. I simply divide Market Cycles into 2 categories-

1. Greed or Optimism.

2. Fear & pessimism.

Optimism is what drives the markets higher. When people are optimistic, they spend.

They spend on all sort of things. Gadgets, cars, vacation homes and they buy stocks.

When people are scared, they sell. Sometimes they get so fearful that they sell at a loss, and in most cases they sell at the low. They forget to send Christmas gifts to their grandma when they are scared.

Central Banks are often key players who orchestrate these cycles, knowingly or unwittingly.

For instance, at cycle lows, the FED often smashes the “Risk Free Rates” to very low levels, thereby encouraging investors to take wild bets in order to meet returns comparable to previous, higher Risk Free Return Rates.

At the cycle tops, the FED often increases the Risk Free Rates to motivate investors to unwind these risky bets as we are seeing now.

Market Cycles and hence Markets are driven by flows. They are not driven by opinions. Below are some key stages in money flow-

1. Most money is out of the market and in cash (At the lows).

2. Some money is in markets and most is in cash (bull trend begins).

3. Money chases markets in FOMO mode (markets begin to peak).

4. All money is now in markets and very little, if any is in cash (At the tops because “Markets only go up” and Bitcoin will be 1.5 million soon).

I strongly believe that if you become good at knowing when market is optimistic or when the market is fearful, you really do not need to know what to buy as an optimistic tide lifts every thing and a scared market dumps everything.

You do not need to do any intricate analysis to pick winners. You simply become aware of the market cycles and you are more aggressive when the market is fearful and you become fearful when the market is too optimistic.

Those who think like me, tend to have some common traits-

1. They are patient.

2. They are observant.

3. They are not jealous when their neighbor just made a killing buying the brand new alt coin that went from half a cent to 5 dollars in a month.

I have been following different markets since 2000 in one form or the other. In my brief experience, I have seen at-least 5 major cycles.

1. The 2000 Bust.

2. The 2008 crash and then the 2009 Bottom.

3. The 2016 era trade wars.

4. The 2020 panic.

If you average these out, then it turns out that we can expect to see 2 major cycle turns every 10 years.

This is what you prepare for. This is what you look forward to. You are active and an optimist when everyone else is fearful. You are cautious when everyone else is just too happy.

Now preparation can come in mainly 2 forms. One is the mental fortitude. If I know the markets can crash 40-50% once every 10 years (on average), then I need to accept that and not be scared when the market indeed has crashed 40% in a year. I want to be looking forward to that.

The second aspect of being prepared is to have some cash to buy when such a crash does come. If I am also part of the crowds that bought stocks at the top because I thought markets could go up forever, then when they crash, as inevitably they do, I do not have any cash to buy.

So are there any signals that can tell us if the market is in fear or happy state?

Yes.

Objectively speaking, the signs of a panic are easy to spot. Obviously, when the markets drop 50% , that is the extreme panic state. You do not need any skill or analysis to find out when the markets have crashed. You will know. You will see it everywhere. On Social Media, on news, in office chatter, and you will notice when your neighbors’ Red Lambo disappears suddenly from the driveway.

Cycle lows are easy to spot.

The cycle highs on the other hand are not so obvious. But there are few signs-

1. Money flows into Market ETF funds reach new highs.

2. There is a sentiment amongst the crowds that “markets only go up”

3. Insane targets like Bitcoin will trade 1.5 million in few short years are openly shared. Bearish voices are ridiculed and trolled.

However, in my experience, timing the tops is almost impossible. And acting on your timing by shorting stocks or futures is dangerous. While I think these tops can not be timed, you can pick good spots for shorts by measuring commonly available indicators like a new 50 day low when the 50 day average is below the 200 day average.

This is just one technical system, there are probably hundreds more that you can find on internet.

If you can become good at these market cycles, I personally think it really does not matter what stock is bought. A rising tide lifts everything. This is why I have shared with my subscriber a list of about 20 stocks like AVGO, AAPL, NVDA, PANW, LULU (MANY MORE) and their corresponding long term support levels where I will buy. I own many of these and I will aggressively add to that list, if such levels were to trade in near future.

Now what I just shared is mainly applicable for Investor time frames of few years.

These are not that much relevant to trading which is dominated only by the tape. In my experience, most if not all folks should be investors and extremely few should be trading. In reality, we see most are trading and very few are disciplined investors.

Trading will be the most extremely hard endeavor one can undertake. The first hurdle is that it just takes a lot of time to master. Most people’s idea of mastering the market is adding more indicators on a chart. This means only more frustration as there are practically infinite permutations and combinations in a chart. You can never master them all!

Mastering trading can mean watching the tape to look for clues in order flow for severals hours, every day, every week. Now who has time or willpower for that?

Then there are psychological issues. Even if you become good at tape reading, it is easy to self sabotage when you are not following your system but are instead relying on opinions or random thoughts. So a months gains can be lost in one bad day.

In other words what I am saying is if your idea of trading is to buy random short term puts and calls, that is a wrong idea. At the very least, one should be aware of key inflection points for instance, an 18 on MARA or a 30 on MARA, or a 270 on TSLA etc. Random actions produce below average results.

When we invest, we are buying a day when we do not have to work. Unfortunately most approach trading as a get rich quick scheme. Nothing could be farther from truth. Trading is a job like any thing else and you need 100% devotion to it for about 6 hours a day. Every day.

So where are we in current cycle?

I think we are close to a top but a few things may have more room to run.

What are these?

I think in the US stocks alone, the cat is out of the bag that the FED will soon cut rates aggressively. Majority of people with money believe that, else stocks won’t be making new highs. Money is flowing into stocks.

Then you have names like GOOG, NVDA, MSFT, potentially TSLA which I think still have some more room to run.

These factors suggest to me while we may be close to a top, we are not there yet.

My goal is to share with subscribers when I do see the cracks appear at the top. I also will share when I think the market is at a cycle low. Obviously this will be my personal opinion so take that with a grain of salt.

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Keeping in line with recent price hikes, I am now raising the prices to $40. However any one who is subscribed and does not resubscribe, will not be impacted by these price hikes and will be grand fathered in. Make sure your payment method is updated before it expires.

This brings me to some short term levels in SPX/ES.

So the ES closed around 4810 on Friday. My main expectation for the week was to see the lows being supported and 4850 area being sold. These 2 assumptions were quite correct as we saw the weekly action between these 2 levels. Nothing above or below them.

Going into next week, there is some geopolitics risk over the weekend. Namely if Iran gets engulfed in this war in Middle East, I think we can see very rapid sell off towards the 4500 area.

Minus that however, I continue to lean on my recent weekly levels for support to come in.

This means that 4770-4790, unless taken out on the downside, could provide some support for a move back into 4850.

Scenario 1: I expect 4770, if tested to provide support for a weekly level move into 4850 area.

Scenario 2: 4850 level may continue to act as resistance, and I believe if the geopolitics risk were to reduce over next week or two, this level at some point can break to trade into 4871-4876.

Bitcoin levels

I had some extremely good calls on Bitcoin in particular and in the crypto space in general.

At start of the week, I expected a “sell the news”event in Bitcoin. This was a good call as at one point we sold down some 20% in Bitcoin when measured from High to Low.

While 20% is nothing to be sneezed at, the real catastrophe in Crypto world came for the miners.

Miners like MARA and RIOT sold off heavily from my levels shared in my last weekly plan, and at one point were down 40-50% down from their weekly highs.

MARA

Recently I have shared $18 as a potential support level on MARA and on Friday it closed at 18.

I am looking at these February 9, $22 call which is currently priced around $1.5.

With the ETF on BTC being such a big flop (it can take about 3 days for the new ETF flows to translate to Bitcoin buying); I say that because those who bought on D1 are now well down double digits, I think there could be room for some more volatility in the crypto space.

This is why while I think 18 is a good level, I will not be surprised if there is an impulse move down to $15.

If this happens, the February 9 $22 call may become quite interesting, may be it dips down to 30-40 cents. Ultimately if $15 holds, I see MARA retrace into 22-24 area. For further bullish action on this, this 24 level I believe will need to be taken out, else it could become significant resistance.

On Bitcoin itself, before the ETF I expected a test of 37-39K before some support comes in. I still think that is the case. If 37-39 were to be tested, I think it could be support for a move back above 44-45K.

TSLA

Tesla had a bad week and was trading around 218 level on Friday. I thought an intraday rally could come at 220 which it did but the prices just did not hold. And we sold down from 225 back below 220.

My key LIS on TSLA is about 200-205. I still do think if this level trades and holds, this could support for a move back into 250 area. Void if we begin making few daily closes below 205 area.

Note that I still think this 218-220 level is a decent level but if the general market begins exploring below 4770 next week, TSLA will not be immune from further sell off.

Let us now talk about some other weekly ideas. These ideas are usually based on below 3 factors-

1. Option flows

2. Orderflow in stocks

3. Macro and fundamental analysis

Note that I do not share a lot of charts as I do not use charts in my analysis at all. None of my ideas are based on chart or indicator based technical analysis.

Head and shoulders? No.