Last week, my Friday morning started out with me pulling out my hair - only figuratively, of course.
I woke from a restless sleep and spent three hours on market and individual analysis, all above and beyond my normal scans and reviews.
And I came to the same conclusion no matter what I looked at: "There's nothing to do!"
And then... a great feeling of calm washed over me.
Because I get to share a powerful, profitable message that every single individual trader and investor should hear once in a while...
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The "Open Secret" of Highly Successful Investors
I think the legendary Warren Buffett summed up this fundamental truth best.
"I call investing the greatest business in the world ... because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it."
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What Buffett is saying here, in his own inimitable style, is: One of our great edges in the market is... we don't have to trade. We don't have to be invested.
Institutions often have a mandate to be fully invested, or nearly so. We have an extra freedom that they don't. And it's an important one. Let me explain...
One of my longtime friends and co-author of my first book, Dr. Van Tharp, is a PhD psychologist and trading coach. Van developed his "Ten Tasks of Successful Traders" almost three decades ago, when he interviewed and coached many successful traders and found that these 10 things were what set them apart.
In the last 10 years, Van's expanded that list to 12 tasks. One of the new tasks is "Being out of the market."
Yes, it's that important.
Waiting for the right opportunity is also such a cornerstone for - you guessed it - Warren Buffett; that one version of his thoughts on the subject has become an Internet meme.
Right now, as I'm sure Warren Buffett and Van Tharp would agree, there's a lot going on out there in the markets to recommend a "do-nothing" posture for the time being.
Here Are Some Very Good Reasons for Hanging Back - for Now
My market charts are showing some technical damage stemming from last week's events; they're in a somewhat precarious position.
Here are the risks and unanswered questions I see out there now, in approximate order of importance:
- Last week's massive plunges have inflated options premiums to the point that buying a single call or put is so overpriced that reward-to-risk ratios are very difficult for puts or calls. (As an aside - next week, we'll talk about using an additional tool called "vertical option spread," which allows us to minimize this increased premium due to volatility.)
- Headline risk - and boatloads of it. This is simply the potential for news items to move stocks, options positions, or, in this case, the market as a whole to an extreme degree; this can knock nimble traders and buy-and-hold investors alike through a loop - just like it did last week. There are three areas where we have heighted headline risk today:
- The Trump vs. China Trade Wars: Will this become known as Trump's folly... or is the "National CEO" making a shrewd negotiating ploy? Either way, this is the single biggest threat that could derail the important "Trump Growth" narrative that's been helping propel market gains since the 2016 election.
- Facebook and Social Media: The way I see it, the problems of social media in general, and Facebook in particular, are probably going to get worse before they get better. However, I still don't believe there will be long-term damage to FB shares from this issue, and even if that is the case, a rocky ride for Facebook stock could present some interesting profit opportunities.
- Trump/White House Staff Unrest: The unprecedented West Wing revolving staff door, combined with the ongoing Russian investigation, seems to be getting closer to a tipping point. News on these fronts can - and likely will - move markets...
- Friday's Trading: Last week's massive pre-market rebound from Thursday's lows not only ran out of steam in the early going, but things went from flat to... much worse... over the course of the day. Talk about a roller coaster. This isn't confidence-inspiring, let alone anything we can use as confirmation for taking a bullish or bearish bias.
When uncertainty and headline risk combine, I feel very comfortable sitting on the sidelines.
But, like I told FOX Business Network's Neil Cavuto yesterday, the fundamentals are still broadly supportive. They still look good.
The United States and world at large are enjoying robust economic health, for the time being (though now would be a good time for Trump to sound a more conciliatory note on trade). Earnings, now and into the near future, are supported by the impact of tax reform.
The bottom line: We're in a volatile, "two-way" market ride now and will be until fears of a trade war subside (or materialize into reality). Sometimes, sitting it out is the smartest move you can make.
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About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.