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More on sure thing investing

September 7, 2022

For 100s of years alchemists were engaged in a fruitless search for a way to turn base metals into gold. They never found it because it is impossible to do, at least with the forces which humanity has at its disposal. On the way they laid the groundwork for the modern science of chemistry so it wasn’t all wasted effort.

My search for a sure thing way of investing may seem to have echos of that hopeless endeavour. It is often said that there are no sure things in investing, at least none that are legal. But still the search goes on. My take on it, discussed in an earlier alert was that the nearest thing to a sure thing investment was an investment made when ALL my indicators were pointing in the same direction.

In this alert I am going to look little more closely at what that might mean in practice. As we know presently the vast majority of my indicators are pointing down, the very definition of a bear phase in the market if that was not already obvious. This means that any attempt to buy anything in this market is like trying to swim upstream. So, the first conclusion is, down waste your pennies, don’t buy anything because the odds are against success even if you are buying into a buy signal for an individual stock.

What we are seeing in this stock market is that companies with heavily beaten down shares announce great results based on continuing outstanding fundamentals and the shares bounce, sometimes dramatically. But the rallies are hard to sustain as the river of negativity rolls on and the shares fall back.

Now imagine another situation where the vast majority of my benchmarks and especially such critical ones as the major indices are heading higher and we are clearly in a bull market. Then it is much more likely that individual buy signals will be worth acting upon.

There is a simple moral to this story. In a bear market sell signals for individual investments are likely to work and vice versa for a bull market. Take a look at the chart for Nvidia. It looks like a breakdown and this breakdown is in line with the stock market current so most likely these shares will go lower, maybe considerably lower.

I don’t recommend short selling because when the stock market turns the shorts usually get crucified. I would rather just wait until we have a ‘sure thing’ buy signal where Nvidia signals and so do many other stocks and indices.

Another investment with an alarming chart is bitcoin. The only investor who is going to buy bitcoin just now is one who does not believe in charts because this chart looks threatening and is almost the obverse of the chart for US 10 year Treasury bonds where the yield is rising and has recently staged what looks like an upside breakout. If bitcoin breaks down from here it is going to drop sharply towards support around $10,000.

Charts are good because they take the emotion out of investing. Fundamentals act on our emotions, at least they do on mine. I read or listen to what the CEO is saying about his company, which as often as not he founded, and it is a bit like being in the audience with a revivalist preacher invoking us to follow Jesus with periodic cries of ‘praise the lord’ and glorious bouts of gospel singing. It is hard not to get carried away on a wave of enthusiasm.

But when he is no longer there and that choir of gospel singers has all gone home the enthusiasm fades and the shares fall back; that is why I have become not exactly disenchanted with fundamentals but reluctant to use them to time buying and selling.

Fundamentals can tell if a share is worth considering. Is the company basically 3G (great story, great growth, great -long term – chart) but they are no help with timing; that, for me, is all about charts and having the discipline to use them, which is not easy because we humans are such emotional creatures. We fall in love with other people and we can even do the same with shares. I try not to do that now, at least with shares.

Most of the other shares in the semiconductor sector, names like Taiwan Semiconductor Manufacturing, Advanced Micro Devices or ASML, have charts which look like the Nvidia chart. This is summed up by a chart of SOXL, a three times leveraged ETF which tracks the Philadelphia Semiconductor index and is enduring a torrid bear market. The shares are down from a $70 peak in January to $12.42 currently and the Coppock indicator has tumbled from plus 502 in July 2021 to minus 92 for July 2022.

The only reason for buying this ETF would be that it has dropped a long way but I expect most people would rather stand aside and wait for a buy signal. There will be one eventually and when it comes most likely the whole stock market will be looking more positive. In that wonderful investment metaphor we need to choose that moment when the light at the end of the tunnel is not an oncoming train. Hopefully with my indicators we will be able to tell the difference.

Strategy

My basic ‘sure thing’ rule is simple. Don’t try to swim against the tide. If the tide is going out (bear market) sell signals will mostly work and buy signals should be distrusted. If the tide is coming in (bull market) buy signals can be acted on with much greater confidence. There probably is no such thing as a sure thing but successful gamblers with cards can use probabilities to make a killing and we should do the same in the stock market. At the moment the tide is going out. We need to wait until it turns and is clearly coming in. This will happen. It has not happened yet.

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