August 17, 2022

A lack of market-moving drivers other than earnings reports have allowed stocks to trade listlessly for most of this week. Intraday range has contracted as the averages have moved higher which is typical for a nascent advance.

Backdrop

From a macro standpoint, the biggest enemy of this market is inflation, and the Fed going too far in raising the fed funds rate to quell it. Almost always, the Fed overshoots to the up side with its rate hike campaigns, leaving the economy in a recession.

(As noted, a soft landing, whereby the economy slows enough to kill inflation but not enough to place the economy in recession is as rare as a blue moon. It does happen, and this is what the market is betting on.)

The 2s10s spread is minus 42 basis points. This means long rates are higher than short rates and implies the bond market expects the economy to stall, at best.

But the stock market sees things a little differently. The chart below of the bank index shows a buoyancy that suggests the market has not priced in anything more than a mild recession, if that. This is because a negative 2s10s spread like we have now makes it less profitable for banks to make loans which is their lifeblood.

Since we only make investment decisions based on what the averages and leaders are doing, we can safely ignore everything else, including the bond market's behavior. But it is worth keeping an eye on those early-cycle outperformers I have been discussing, including the banks and consumer discretionary. Serious damage to them would put into question the market's belief the worst is behind us.

A few issues have bolted up the right side of their cup patterns such as Clarus (CLAR), below. These are now pulling back or pausing to catch their breath.

Paylocity (PCTY) had been on the Focus List for the last few days. It is now off the List as the environment for momentum names ever so slowly decays at the margin. PCTY had run up about 67% in almost five weeks. While its fundamentals are respectable, it likely needs more time in which to digest the recent run-up.

At present, the Focus List is empty. TQQQ is being monitored for a possible pullback entry, as is Tesla (TSLA). This could change quickly.

In summation, there is not the type of conviction shown by large investors such that breakouts are moving up 20%-25%. Chalk this up to indecision amid a reluctance to get too involved with this market. We watch and wait.

Kevin Marder

Q&A

Q: Love your service and wisdom. Thank you for all. My question pertains to the pyramid structure. I understand the buy-in of 50-30-20...but where do I place my stops for the entries? Do they all share the same stops or are they all separate stops?

100 shares
50 share at 100
30 shares at 103
20 shares at 105.

If using 4% stop then it would be at $96...but does that include the tranches at 103 and 105? Thank you very much,

A: Thank you for your feedback. There are different ways to handle it, and each person must determine what is best for them. I prefer to use an average cost for all the tranches (either two or three) and then maintain my account risk at 0.24%-0.32% based on this average cost. I find it too cumbersome to have a separate s/l for each tranche when i have several positions on.

Q: Thanks for all your insight you provide with your service...I hope you continue this for years to come! In a recent report, you mentioned Chris Kacher...I looked into some of his work and he has a "directional model" of the overall market...do you personally utilize something similar to this to determine the overall direction of the current market for your thought process?

A: The superior model, in my opinion, is simply what O'Neil gave us: The price/volume behavior of the major averages and the action of the leading stocks. It will take some time to master this, but once you do you may realize there is nothing more effective. At least this is what I have found since using it decades ago. I would reread the part of his book that discusses it.

Q: I remember in one of the past videos, you talked about if a stock is "not acting right" and you could choose to stop yourself out before hitting your initial stop. That perked some interest...would that be a case where maybe a stock has been floating around for x days below pivot, or is it some other indicator that would cause you to stop yourself out? 

A: It could be above or below the pivot. How many days go by before you make that decision is a matter of personal preference. However, a general guideline might be ten days. This is not a figure I use all the time because my decision is contextual, i.e. it varies according to the general market condition among other things that will vary. Of course there will be times when it takes 11-20 days before a stock takes off. That's trading.

Q: After reading O'Neil's book, I have been wondering about if he ever mentioned drawdowns one should expect over time if implementing said strategy with strict risk management (i.e. 5-7% stop, scaling in, 0.5% max loss, etc etc). Obviously all traders are different, but didn't know if he had a target for expected drawdowns? Like, should one expect similar drawdowns to the major indexes for example? Or, perhaps, one can only go off experience with using the strategy over time like yourself...have you found that x% drawdowns occur/should be expected based on your implementation?

A: Drawdowns are a fact of life. Bill has said leading growth stocks tend to correct 1.5-2.5 times the averages during a market correction. In my experience, I have found it to be more like 1.5-3 times. Each person must figure this out for themselves because each person is different. Since you are a newer trader, you should be playing with very low risk until you get a feel for what a drawdown does to your mental capital, not to mention financial capital. These are for the most part aggressive growth names. You do not get the aggressive up without a certain amount of the aggressive down. If you are the person who said they were going to risk 1%, I would suggest you rethink that, and start with 0.25% risk. You can always increase that over time, if at all.

Trading Lessons
Introduction to the service (38:00)
Money management and risk management (20:27)
Bread and butter pullback (11:10)
Bread and butter pullback: Pt II (15:09)
Bread and butter pullback: Pt III (31:48)
Bread and butter pullback: Pt IV (30:16)
Bread and butter pullback: Pt V (1:41)
System R
Short-selling (25:53)
Wyckoff spring reversal (2:30) 
5-minute breakup test (8:01)
Screens (21:03)