In a mid-February edition of the Lund Loop I wrote the following;
Middle East tensions couldn’t take the market down.
Impeachment couldn’t take the market down.
China tariffs couldn’t take the market down.
And the coronavirus is not going to take the market down.
Turns out, I was correct, as this week the S&P 500 closed down just 0.17 year-to-date, proving once again, the key to making accurate predictions is to keep making them until you’re right.
But seriously, with the benchmark index almost flat, and newbie day traders ripping up the market, it's hard to argue that COVID-19 has had any lasting impact on investors, except those who happened to have their money overweight in brick-and-mortar stocks.
The question is, what happens next?
Can we get the broad-based rally we need to take us back to all-time highs?
If the S&P 500 chart is any indication, it looks like we might be setting up for that to happen.
S&P 500 Index (SPX)
Weekly: 1.25% YTD: -0.19%
This week the SPX moved into the gap created by the “island reversal” in early June and is basing just under resistance on low volume – both of which are bullish.
In addition, on both Wednesday and Friday, the index printed an NR7 bar, which means it was the narrowest range day - high to low - in the last 7 trading days.
From a technical standpoint, this means that buyers and sellers have gotten to equilibrium – a stalemate - with neither side having enough firepower to push price their way. And the next significant influx of volume from either side could lead to a big move.
The move is generally in the direction of the prevailing trend, which in this case is up.
Next week should be interesting.
Speaking of day trading, I came across a blog post this week that hit upon two of my favorite pet peeves – shitting on active investors and lazy thinking.
I’m not linking to the post because as always, I want to impugn the argument, not the individual.
From the post;
Why day-trading does not work
The grim truth is that day-trading does not work. As Burton Malkiel (author of A Random Walk Down Wall Street and other books) explains,
“To go and day trade and think that you are investing, that’s what I think is absolutely wrong and is likely to be simply disastrous for people. … It’s not that they can’t make money in gambling, … but over the long run, this is a losing proposition.”
And as is often the case with these types of myopic assaults, the author came loaded with “data.”
How can one be so sure that day-trading doesn’t really work? Let us count the ways:
1. In July 2000, the manager of a day-trading operation acknowledged in a U.S. government hearing that between 80% and 90% of their customers lost their funds and quit within six months.
2. A large 2004 study of Taiwan day-traders found that more than 80% lost money, and only 0.03% consistently earned significant profits.
3. A more recent 2017 study by U.C. Berkeley and Peking University researchers found that even the most experienced day-traders lose money, and nearly 75% of day-trading activity is by traders with a history of losses.
4. A 2019 study of Brazilian day-traders found that 97% of all individual traders who persisted for more than 300 days lost money in their trading. Only 1.1% earned more than the current Brazilian minimum wage, and only 0.5% earned more than the current starting salary of a bank teller.
5. A 2019 study by Crestmont Research found that from 1950 through 2019, U.S. large-cap stocks go up on a day-to-day basis only slightly more than 50% of the time, whereas, say, holding onto a U.S. stock for a 10-year period produces a profit 94% of the time.
6. A 2019 study of trading using “contract for differences” confirmed that only about 20% of individual traders actually made money.
7. A 2019 study of foreign exchange traders found that over 90% of individuals who trade in these securities lose money and quit.
8. Many day-traders rely on technical analysis methods. But as we have discussed at length in this forum and elsewhere, the blunt, unvarnished truth is that technical analysis does not work, particularly given that trading in modern financial markets is now dominated by hedge funds and other organizations utilizing very sophisticated, highly computerized, big-data-based, machine learning methods, together with sub-millisecond trading operations, all of which are far beyond the realm of technical analysis in general and amateur day-trading in particular.
I hate these types of constructed arguments.
I’m sure there’s a technical term for them but I refer to them as “constructed,” as they’re made based upon a pre-conceived set of assumptions, specifically selected to artificially validate the underlying argument.
We’ve seen a lot of these in the past few months in relation to the coronavirus. Here’s how one is often presented.
While acknowledging the impact COVID has made, but arguing that the risk of death is extremely low for those without co-morbidities, and we should be trying to get back to normal, the response comes…
“Look, if there was a bowl with 100 Skittles in it, and you knew 5 of them would kill you, would you eat one?”
It’s such a stupid argument.
For example, what are the consequences if I do, or don’t, eat a Skittle?
I mean, am I just walking down the street, living my life, and someone offers me a bowl of Skittles with death attached to a handful of them?
In that case, of course, I wouldn’t take the risk.
But what If I am cowering in my basement, after losing my job/business, depressed, having had no human interaction for months on end?
Because if it’s a choice between that or living a relatively normal life, I’m going to be much more inclined to take the 95% chance of tasting a rainbow than tasting death.
Those who say most people fail at day trading take a similarly lazy and biased approach, framing the argument as if day trading (or active trading) is like a midway game at the carnival – fixed, and unwinnable.
Instead of focusing on the activity, the focus should be on the amount of study and preparation those who attempt to day trade put in before starting.
Because without preparation, almost everyone will fail to swim the English Channel, complete a marathon, beat a UFC fighter, pass a calculus test, or be successful at any highly skilled endeavor.
Saying that most people lose at day trading is really saying most people don’t understand what is involved in being a successful day trader and thus don’t approach the endeavor seriously.
And it’s usually said by those who have never tried day trading or have tried and failed.
It’s just sour stonks.
Okay, I feel better now.
In a little bit we’ll go through more than 30 charts to see if we can get an objective idea of where the market is at, but first, stick with me for a moment while I tell you a story.
I promise it will be worth it.
If a tree falls in a forest and no one is there to hear it, does it make a sound?
If you don’t Instagram your beer, did you even drink it?
- A. Stillman
They say it’s good to push yourself outside of your comfort zone and last weekend I embarked upon an experiment that took me way outside of mine.
At exactly 4:17 PM on Thursday afternoon I erased all social media, news, and email apps from my phone, determined to go on a 72-hour content diet.
And at exactly 4:17 and 37 seconds, I reached for my phone to check Twitter.
Long before they were co-opted and demeaned by ‘Generation Woke,’ triggers – external and internal events that spark a particular behavior – were considered serious obstacles on an addict’s path to recovery.
Having a smoke, watching a football game, even preparing dinner could trigger the alcoholic’s desire to have a drink.
What I learned very quickly into my content fast was that when it comes to “checking in,” eating, drinking, walking, waiting, blinking, breathing - and everything in between - was a trigger for me.
I can’t even count how many times I reflexively started for my phone, first out of habit, but then later, out of a sense of panic.
What was I missing out on? I wasn’t up on the latest news and information anymore. I was uninformed. Out of date.
But not only that, I could feel myself become uneducated, unenlightened, and ignorant by the moment.
For what seemed like hours, I fought the urge to hop online and see what was going on, and in doing so, became anxious and uncomfortable.
It had been about 20 minutes.
Slowly but surely, it got better.
Once seated on the plane, I put on some music - one of my three allowable content sources for the weekend – and began to relax.
(The other two were podcasts and a couple of quick looks at the market. I’m mean, I’m not a monk for Chrissake.)
Side note: After boarding, an announcement was made stating that everyone had to wear a mask while on the plane, except when they were eating or drinking.
Then came a second announcement, “we will now be bringing our food and beverage service through the cabin,” prompting everyone to remove their masks for the next 30 minutes of our one-hour flight.
Fortunately, someone began to protest – something about the type of pretzels being served – and as we all know, the coronavirus isn’t contagious during a protest, so we were never at risk.
I made it through the rest of the day fairly easily but faced a big trigger the next morning.
Though I don’t check it during the night, I sleep with my phone next to my bed, and first thing in the morning I grab it and start pumping information into my brain like digital caffeine.
When I got up early Friday morning, that’s exactly what I wanted to do.
But I didn’t.
So with nothing to distract me, I decided to work on a writing project I’d been start-stopping for over a year.
In the early 80s, the U.S. Army ran a TV commercial that, upon waking, followed a soldier through his morning. A morning that included parachuting out of a plane, securing an airdropped vehicle, and leading his fellow soldiers out of enemy territory, back to base camp.
“We do more before 9:00 am than most people do all day,” comes the voiceover as the soldier, drinking a well-earned cup of java from his canteen, looks over at his implicitly lazy superior officer, and with a wry smile says, “hey first sergeant, good morning.”
By 9:00 am I too felt as brave, heroic, and productive as that soldier.
It was amazing how much I got done. How focused I was without the constant distraction of digital debris.
As the day went on I still got an urge here or there to cheat, but with each rejection of my device, it got a little bit easier, and the trigger cycle got a little bit longer until I was going hours at a time without thinking about it.
Later I took a short drive up north to the sleepy town of Santa Rosa, where I spent a languid afternoon browsing used bookstores, quaffing fine craft brew, and reading Burmese Days under the shade of a magnificent oak tree just off the town square.
And the more I tuned out the digital world, the more I tuned in the real world. The one that had been right in front of me all this time.
Friday night I wrapped up the Lund Loop and hit send, ready to hit the sack with a clear, calm mind.
But addictions are sneaky. They have many ways to storm the castle walls, and if you’re not vigilant, they’ll take you by surprise.
Saturday morning, a different trigger hit me. A feedback trigger.
What were people thinking about the latest Lund Loop?
Had I broken twitter with my incisive analysis, devil-may-care attitude, and rapier wit?
Were ISP servers around the world crashing en masse as legions of Lund Loop admires shared my pontifications across the continents?
Probably not, but somebody probably said something nice about it on Twitter. And I should probably thank them, right?
Oh, you tricky addiction, you.
Fun Fact: My buddy Seany was kind enough to highlight a Lund Loop factoid last Saturday, which got some traction on Twitter.
I didn’t see it until Sunday night, long after the fact, and although it would have been fun to see it blow up in real-time, all I could think about when I did see it is how much time I would have wasted checking and re-checking my phone to see “how it was doing.”
Perhaps the ultimate measure of how much this detox affected me became apparent after I realized that I forgot about the Sunday afternoon futures.
Normally, I watch at 3:00 pm PST like a hawk, guessing how the numbers will open based upon the weekend news flow, and then, depending on how they open, theorizing as to how that will inform the Monday open.
But an hour after the open I realized I had no idea what the numbers would be because I had no idea what the news flow had been.
Not only that, I didn’t care, because rarely, if ever, did my analysis of news flow translate correctly to the open.
Or inform my actions Monday morning. So I passed on checking them.
It was at that point that I knew my content fast had been complete and my weekend a success.
I had no idea what had happened in the world since I stepped on the plane Thursday afternoon, and not only had I been no worse off, I had been better for it.
Just before I boarded my plane home, where my experiment was set to end, I only half-jokingly texted my friend.
“Just tell me this,” I typed. “Is Trump still president?”
“Yes,” came the reply.
“But it’s Eric.”
As many of you know, I’ve been hiking hundreds of miles since the COVID crisis started.
It is out there on the trails, at the periphery of distraction, both digital and physical, where I find my clearest thoughts. My best ideas. My hope for the future.
When the opening bell rings and the red and green bars jump, my mind grows anxious and my thoughts begin to scatter.
But the further I am away from the closing bell the more clarity comes back in. The more the plan and the trade setup makes sense.
Last weekend was a great lesson for me.
I need less noise and more quiet in my life.
And I need to take advantage of that quiet time to put in place practices that will sustain me when the noise inevitably returns.
Okay, let’s get to the charts…
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Thanks for reading this week’s edition of The Lund Loop.
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Talk to you soon.
P.S. It should go without saying - but I’ll say it anyway - all opinions expressed in The Lund Loop are my own personal opinions and don’t reflect the views of my employer, any associated entities, or other organizations I’m associated with.
Nothing written, expressed, or implied here should be looked at as investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own diligence.