Email

Know the Trend, and You’ll Never Get Killed

21 | By Shah Gilani

Everybody’s got an opinion about the stock market.

That doesn’t make it easy for anyone who listens to anyone else, or worse, listens to everyone else, to get a clear picture about what’s really out there.

Of course, I have an opinion too. And of course, I’m going to tell you what it is.

But first, let me say this about that.

I never start with an opinion. I end up with an opinion, after trying not to have one.

That means I know I don’t know what’s going to happen, so I have to look at what’s really going on. And I get to my opinion by pulling back further and further until I can’t see anything small.

I pull back as far as I can because I want the big picture.

And the big picture is all about the major trend. If you’re on the right side of the major trend, you can’t get killed. You might take a few hits, here and there, but you make money. And while making money is great, it isn’t everything.

There’s something more, something bigger than making money…

It is not losing money, as in, not getting hit so hard that you’re hurting real bad, or that you get killed and are out of the game totally.

That’s never happened to me. I always make money, every year.

It’s not that I don’t have losing trades; I have plenty of those. But I make money because I mostly ride the big trends.

Usually, my losing trades are my more speculative trades, where I try and jump on a smaller counter-trend within the major trend. For example, I see the big trend as positive, so I’m mostly long (I’m buying), but I might think a stock is prone to a sell-off, so I’ll short it. Sometimes that’s a huge winner, but sometimes I will lose on a play that is counter to the trend because the major trend eventually overwhelms everything else.

My point here is this…

The trend is your friend, but within the major trend there can be opportunities riding mini-trends going in the opposite direction. Just don’t get greedy on those plays; the major trend will eventually consume most smaller counter-trending plays.

So, here’s what I see, and here’s my opinion about what I see.

When There’s Money Flowing,
There’s Money to Be Made

The stock market has been on a tear. Which stock market? It almost doesn’t matter. Pick one, any one, in almost any country. Markets everywhere have been on a tear.

But let’s talk specifically about U.S. markets – as in the Dow, the S&P 500, and the Nasdaq Composite.

They’ve certainly been on a tear. The rally since October has been stunning. But it has a somewhat slippery slope feel, in terms of almost being stealth-like, and uninspiring in terms of volume.

We’ve risen so far, so fast, that a lot of investors are shaking their heads and wondering, how the heck did this happen?

So, right now, almost at this very moment, the question is, how did we get here and is this going to last?

My opinion is, yes, this will probably last. The No. 1 reason I think that is because that is the trend, it’s been the trend, and the trend is your friend.

The big picture is all about liquidity. When there’s money flowing, there’s money to be made.

The Fed is keeping interest rates remarkably low and has articulated a low interest rate policy for the foreseeable future. That’s given corporations the ability to retool their balance sheets and do lots of financial engineering. That’s why so many companies are in such good shape right now. That’s a huge positive and not likely to reverse itself any time soon.

Europe was the virus that looked like it was going to make the world sick again. So far, that hasn’t happened. Why hasn’t it? Liquidity, liquidity, and more liquidity.

Just like the Fed pumping money into the U.S. by keeping rates low and by making more and more cash available to banks through its huge quantitative easing moves and “Operation Twist,” the European Central Bank is doing the same thing.

The ECB was buying European sovereign bonds in the secondary markets to try and keep various countries’ interest rates from getting too high. They weren’t that successful. So, in December, they switched gears and lent over 500 banks over 489 billion euros by giving them the money for three years at practically no cost.

They’re going to do another round of that type of term-repo lending on Wednesday. Basically it’s going to be a “come and get it” free-for-all. My guess is the banks will take another 400 billion euros. If they take more than that, it’s because they’re hurting more than we know…

The point is, they’re getting the money so they don’t have to hurt themselves.

China is loosening, too.

Whenever there’s a liquidity party, and a global one at that, and there is no crisis in sight (sure, there’s one in the background, hence the need for the liquidity), then the trend, when it’s up, as it has been since October, should continue.

That’s all I need to know. The trend should continue.

And I’ll continue to mostly play from the long side until the trend changes. Which, of course, it could. But it will take something really major and massively macro to derail this trend.

So, that’s what we look for. We’re on the lookout for an event that could blow up the trend.

A lot of investors are waiting for a pullback because they’ve missed this rally. If we get a correction – and if we do get one it will probably arrive shortly – that’s a good time to not be scared that it’s all over and you’re glad you didn’t buy into this “too far, too fast” rally.

Instead, that’s the time to average down into your good positions. That’s the time to add new positions. If it’s a correction, and the trend continues, you’ll be happy to be in it.

If the correction is a trend-changing event, we’ll know because we’ll see what is causing it. If any correction isn’t caused by a macro trend-changing event, it’s only a correction.

By the way, the Investors Intelligence survey says that 22% of newsletter writers expect a correction, 51% are bullish, and 27% are heavily into the bear camp. All that’s actually bullish for the market.

Right now, the S&P 500 is at 1365.74. Last April, on the 29th, it got to 1363 before falling through early October 2011. It’s up 24.25% since those October lows. If it breaks out higher from here, that’s a very bullish indicator. Heck, it might be on its way to its old record high of 1565.15, which it touched on October 9, 2007.

Dow 13,000? I think it’s here. We’ll see shortly, maybe shortly after we get a correction, if we get one.

And did you see the Nasdaq Composite at 2963.75? That’s its highest close since December 11, 2000.

Global markets have been rallying based on the U.S. economic bounce and our market jumping higher. And the world has the ECB to thank for its open money spigot and staving off a European banking meltdown.

Starting in July, the European Stability Mechanism will essentially layer up to 1.4 trillion to 2 trillion euros into the banking system to help banks finance almost 1.5 trillion euros of bank debt coming due this year. The ECB’s earlier funding and Wednesday’s upcoming round is to offset the 210 billion euros coming due in the first quarter.

Again, there’s trouble out there… but as long as the liquidity spigots are wide open, the trouble should be contained.

Yes, it’s a game of expend and pretend. But if you “fade” it, you already missed this rally, and you could miss the next leg up, too.

As I said, when there’s money flowing, there’s money to be made. And here’s how.

We’re Not Out of the Woods Yet

Greek bondholders had to take a 53.5% write-down, which they say they will do. We’ll see.

Greece will make its 14.5-billion euro payment to creditors on March 20. But its
GDP is expected to fall 4.3% in 2012, which was just lowered from the previously estimated 2.8% hole it was assumed to be digging for itself.

Greek 10-year bonds rose, after last week’s agreement, to 32%. That’s not exactly a vote of confidence in the whole process being successful.

Portugal’s bonds fell, too, increasing the yield from 11.81% to 12.07% on their 10-year paper. Reforms there are being implemented to yield mandated austerity and higher taxes after they got a 78-billion euro bailout based on their promises to fix their own house up. But Portugal’s GDP is forecast to shrink 3.3% in 2012, and even that might be too rosy a picture.

European markets have been on a tear. But Europe isn’t out of the woods. If Europe sinks into a steep recession, we would likely see the trend stop in its tracks and maybe even reverse itself.

Oil prices are another potential trend-stopper. We’ll have to keep an eye on them.

In the meantime, are you long oil stocks? Why not? That trend is up. And until it reverses, it’s worth a play. Just make sure you have your stops in because oil could reverse at any moment. Still, it’s a worthwhile play. I like ConocoPhillips (NYSE:COP), and I especially like its dividend (a 3.50% yield right now).

In my newsletter subscription services – Capital Wave Forecast and The Spin Trader – I’ve been playing from the long side and adding smart, conservative positions. We took some small dollar losses when I put on some counter-trending trades, which just got sucked up by the major trend.

But we’re in rally mode, and I expect we’ll stay here.

All that being said, a correction could be imminent. I and we (my subscribers) will be adding to core positions, averaging down. And we have our stops in place on the positions that we want to exit if the correction is steep.

And if we get a correction and it isn’t just a correction, you’ll know. Why? How? Because I’ll tell you (you’ll know yourself) what’s causing the trend change.

The neat thing is, that after 30 years of playing the markets, I know what I don’t know, which is a whole lot. And I know that if you know the trend, you’ll never get killed, and you will make money every year.

Shah

21 Responses to Know the Trend, and You’ll Never Get Killed

    • Citizen ry says:

      Dittos on today’s commentary. (We) too often catch market myopia when we get too much info regarding daily economic events, and tend to overlook the overriding fundamental as well as techical analysis.
      Thanks for reminding us to keep prudent perspective!

  1. Suresh says:

    What I like about your advice is that it is so simple, clean and easy. No complexities at all.
    Great work Shah!

    Warm Regards,

    Suresh

  2. Terry says:

    Where does the fed res, etc. get the money to ‘lend’ to the govt? They get it from the same place the govt would get it. They print it! If the govt printed the money there would be no 15 trillion dollar deficit. No multi billion dollar interest paid on the national debt which is America’s first entitlement.

    No bank in the world has enough money to lend 15 trillions dollars to a govt.

    Back before there was a fed res, there was money issued by the govt w/o interest paid to anyone. I suspect the robber barons of those days ended up in control of most of the money in circulation and then established the fed res to lend this money to the govt so the govt could do what it needed to do and govt debt was created. Our govt now operates in the debt mode instead of a cash mode. Someone owns all the debt instruments and thus collects interest on this debt.

  3. DAVE SWIHART says:

    MR GILANI
    I REALLY ENJOY YOUR VERBAGE.
    ITS A DELIGHT TO SEE SOMEONE CALL IT LIKE IT IS.
    BETWEEN YOU AND THE GANG YOU WORK WITH, I FEEL LIKE I HAVE MAJIC IN A BOTTLE.
    YOUR TEAM HAS GIVEN ME HOPE WITH ALL YOUR STOCK PICKS AND ADVISE, ILL STILL BE ABLE TO ENJOY MY RETIREMENT BEFORE I RUN OUT OF MONEY.

  4. Wikiderm says:

    What do you think of THIS?
    How about riding that countertrend, if there is one shaping up?

    Submitted by Bruce Krasting on 02/26/2012 10:44 -0500

    Creditors
    default
    Greece
    International Monetary Fund
    Italy
    None
    Portugal
    Reality
    Tim Geithner

    An interesting article in the Swiss press this morning regarding the big Swiss drug companies, Roche and Novartis.

    Apparently the PIGS are not paying their drug bills. The numbers are big. The bills have been unpaid for years. Some excerpts from the article:

    Hospitals in Portugal, Italy, Greece and Spain are delaying paying for drugs by up to three years.

    Three years??

    According to the European Federation of Pharmaceutical Industries and Associations (EFPIA), European states owe €12-15 billion (SFr14.4-18 billion) to the pharma industry, which includes groups like Roche and Novartis.
    $20 billion of unpaid drug bills??

    A number of public hospitals and state insurance schemes are close to bankruptcy. But before being unable to pay staff salaries they stop paying suppliers,” Ignazio Cassis, vice-president of the Swiss Medical Association.

    Hospitals and state managed health insurers are bankrupt?? This came as a bit of a shocker to me:

    The number of unpaid bills from Spain, Portugal and Italy increased last year, while those from Greece fell as a result of ‘zero coupon bonds’ issued by Athens, Roche spokeswoman Claudia Schmitt said.

    WHAT?? Greece is issuing zero coupon bonds? Bonds, not trade payable debt? To pay for drugs? How many zero coupon bonds has Greece issued? What are the terms for these bonds?

    This whole story blows me away. I’m not surprised that the bankrupt PIGS are late payers. But three-years? That’s ridiculous. If the PIGS are stiffing drug companies, who else are they stiffing? Are they paying for the oil they use? Food? How big are these trade IOUs?

    .

    Nearly every day we get some story about the progress being made to address the financial ills of the weak European countries. Last week it was the phony Greek restructuring deal (it won’t happen). This weekend the talk is for Trillions of dollars from the IMF. Complete rubbish. The USA has said it will not put up a dime, so there is no IMF option.

    You have guys like Tim Geithner saying silly stuff like this over the weekend:

    “I hope that we’re going to see, and I expect we will see continued efforts by the Europeans … to put in place a stronger, more credible firewall.”

    “Firewalls” indeed. Tim boy is worried about the sovereign bonds issued by the PIGS. He knows that if the Sov. bonds go tapioca, the lights will go off in the USA. But the reality is that the problem has extended far beyond bonds; the PIGS are not paying trade creditors. Timmy is just making noise about ring fencing debt.

    Where does this go? Can the drug companies keep up the charade? If one of the big pharmas breaks, and says, “No more IOUs, we want cash”, then they all will. At that point, things come apart very quickly. From the article:

    Swiss pharmaceutical giants Roche and Novartis are examining whether to limit supplies.

    This is a very sensitive issue. If the drug companies cut supplies, there will be hell to pay. These companies do not want to take a public position on this issue, they could become a target by demonstrators in the PIGS. The Swiss druggies avoid the publicity problem by having their trade group SMA, do the talking for them. I thought there was a very blunt tone to these words:

    Pharma companies are private. In a liberal, democratic society respect for private property is a fundamental value. Private firms are the only ones able to weigh the pros and cons of stopping the supply of certain medicines.
    Really? The drug companies are the only ones with a vote? Wanna bet?

    If the drug companies do limit supplies, there will be consequences. The question of whether or not the PIGS are, in fact, liberal democratic societies, will be put to the test. In the process, I wouldn’t be surprised if the issue of whether the drug makers are public or private is also tested.

    Note #1

    I was part of the problem (and part of the solution) for the Latin American debt crisis of the 80’s. I had a front row seat with each central bank as they went bust. Every effort was made to kick the financial can down the road. In the end, it all blew up.

    For every country, the death march was the same. When big trade creditors finally balked, and said, “No mas IOU”, debt default followed within weeks.

    Note #2

    Novartis and Roche have the PIG “trade receivables” and those Greek “Zeros” on the books at 100% of par. The other global drug companies who are sitting on the rest of the $20b of IOUs have it booked the same. These debts are not worth par. One day these drug companies will have to write them off. I do wonder what other big EU companies are sitting on chunky IOU’s from PIGS. None of this is “money good”. Novartis had this to say:

    Deteriorating credit and economic conditions and other factors in these countries may require us to re-evaluate the collectability of these receivables in future periods.

  5. Mike.B says:

    Several oil shares have been on a huge rise during the last months.I have been in and out of BOLT,CPE, and
    WLL,and my investments have appreciated
    25%. over the last 3 monts.I get a feeling that except for some special situations that perhaps this meteoric rise in oil stocks is aunlikely to continue at the same rate.
    I have however discovered an oil company in Canada whose stock I think will continue to appreciate.
    MEL is located on the Toronto exchange(TMX).(MELEF
    on the over the counter U.S.) Its price is $4.20 a share.The company continues to drill successful oil wells and earnings this year should be about $.30 a share.
    Future earnings look very good and one broker I know says his firm have a future price of $6.80 for the stock.

  6. scout says:

    I particularly like energy stocks at this time. Prices going up at the pump. Iran threatening the Strait of Hormuz and demand is rising. I bought PER and CHKR. Both have lots of room for growth and both pay a handsome 10% dividend. Helps offset the rise at the pump.

  7. Bruce says:

    I can’t tell you how true your advice is…I have gotten “killed” so many times trying to get “cute” by trying to jump in for a “quickie hit” against the major trend when I feel that there is a pullback happening…it’s like trying to swim against the tide…even with all my chart technical experience over the years…this still is a problem …it is greed…the easiest way to trade the “Big Picture” is on the long term charts…when they “roll over” up or down…then put on your “counter -trade”…otherwise…you will get “chopped” to death over time…nobody is that good…especially in volatile markets…

    Good advice Shah in this one that you wrote…well spoken.

  8. Darryl says:

    I followed the high tech trend in the 90s and lost my shirt. By the time I figured out the trend was reversing, I lost $200,000! Shah, I will give you my phone number, so you can alert me if the trend is reversing….only making a funny!

  9. Tim Morrison says:

    I would like to know what possible event…other than an all out war on Iran or a sudden and dramatic increase in domestic production…would cause a significant change in the rising price of oil?

  10. Alex says:

    Shah,
    You have great sense of humor and talent of a writer – nobody can write about freaking stock market better than you do. Please tell this to your boss (if you have one) – may be he/she will give you a raise?

  11. Mike Anderson says:

    Welcome to the bull camp. What kept you ?

    It seemed like all last fall you were cautioning of the looming crash, then towards the end of the year you were allowing for selected long forays, but with a keen eye on the door. Now you’ve come full bore to the bovine corral.

    You’ve missed a few thousand points on the Dow, but we’re glad to have you back.

  12. Guido says:

    Problem with this simplistic slant is there really hasn’t been a strong, primary trend for some time. Sideways moves in a major channel is what u.s. market has done.
    All the TA see the same thing and it never worked the past few years
    If you went long in early Oct. you were fighting the downtrend, not following the major trend.
    This article looks to me like writing in hindsight what traders should have done.

  13. bernice says:

    I love your witty writing. Do you have a stock advisory letter? We would like to subscribe
    Bernice in Germany

Leave a Reply

Your email address will not be published. Required fields are marked *