How to Spot a 2018 Trend Change or Market Top

Market tops take time to form, just look back at history and review the progressions of the previous setups.

When reviewing the 2007-2008 market top, it’s clear to see that the setup took six full months. Even then, the market bounced around for another four months but it was clear that the trend had changed, as the 200 day moving average had already started to trend downward and switched to resistance rather than the previous support it provided.

Looking at the DJIA, we can identify six progressions over the course of six months

  1. The index made a new high in July 2007
  2. It challenged the 200d ma in August, only to capture support
  3. Another new high was made (above the July high) in October 2007
  4. By November, the index broke below the 200d ma – NOTE: the 200d ma was still trending higher at this time
  5. The DOW then recovered the 200d ma but failed to recover new highs, a red flag in December
  6. By the end of the month, the DOW broke back below the 200d ma on above average volume, a clear sign that this market was headed for a correction
  7. The market made a final attempt to recover the 200d ma in April and May of 2008 but failed again, but much lower than the summer highs of 2007. If one hadn’t sold yet, this was another clear red flag to protect profits and move to the sideline (the market dropped another 50% from here).

A similar setup and duration took place with the Nasdaq market top in 2000.

Looking at the COMPQ, we can identify eight progressions over the course of six months

  1. The index made a new high in March 2000
  2. It challenged the 200d ma in early April, capturing temporary support
  3. The index tried to recover the 200d ma throughout April but that was short lived
  4. By May, the index broke back below the 200d ma – NOTE: the 200d ma was still trending higher at this time
  5. Tow months later, in July 2000, the COMPQ was working its way high, above the up-trending 200d ma but was still 17% off of it’s all-time highs, a lack of strength (market churn).
  6. By late July, the index closed below the 200d ma
  7. The COMPQ recovered the 200d ma for the third time in August but once again failed to trade above the previous high in July and nearly 20% below the all-time high set back in March.
  8. Lastly, the COMPQ dropped back below the 200d ma in September 2000, as the long term moving average started to trend downward, the first time in years.

By studying the major corrections of the past, a patient investor should be equipped to analyze the necessary and relevant data, recognize if a correction is normal or spot the technical red flags that will confirm a change in trend (i.e.: major correction).

A long-term investor must accept that they will NOT get out at the top but remain confident that they can avoid the bulk of the downturn. By studying the 2000 and 2007 markets, a long-term investor should be able to sell within 20% of the market top and well before the ensuing additional drop (which was greater than 50% in 2000 and 2008).

NOTE: The New High – New Low Ratio is another key indicator that substantiates the move, one way or another, but I will leave that specific analysis for another post. As it stands today, the NH-NL 10-d Diff is still positive.

As for the 2018 market, if anyone wanted a lesson in market psychology, it was on real time display as the calendar turned to February. The main stream media and scores of people on fintwit stared to freak out as the market started to sell off with 1,000 pt drops (less than 5% drops).

I posted this chart to Twitter & Stocktwits on February 5, 2018, which highlighted the previous drawdowns for the DJIA over the prior two years. I posted it to show that the 200d ma was still trending higher and that investors should welcome a normal correction, in-line with the previous 8%-19% drawdowns.

Further, the percentage of stocks trading above the 50-d ma started to drop rapidly, signaling a short term oversold signal, as this chart showed, posted on February 11, 2018.

I’m not ready to call a market top or change in long term trend but I am watching. What I have learned is that a market top or change in trend will likely take some time with several back-and-forth struggles between buyers and sellers.

Until the market confirms (continuation of the up-trend or a change in trend), hold tight with the stocks in your portfolio that are performing well. Specifically, hold the stocks that are trading near new highs and/or have strong relative strength ratings.

As for the stocks that start to fail, below their respective 200-d ma’s, considering selling a portion or all of that position.

The last chart shows possible progressions, not that it will follow the exact points that I have created here but look for something similar and WATCH the 200d ma.

Let’s see what this market wants to do.

Stock Trends for 2018

If you thought my Stock Trends for 2017 list was boring (same old stocks), just wait until you see the creativity of this year’s list. I said this last January 1st:

“Perhaps this list is old and boring (Buffett likes boring) but we’re here to make money, not be sexy.”

So, let’s get into the mind of Buffet, which will explain why I am going to “let it ride” for now…

“There seems to be some perverse human characteristic that likes to make easy things difficult.”

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”

Many of the stocks that I profiled in 2017, were the same old stocks that I profiled in 2016 and 2015. Following the trend has worked well so why should I try to get fancy, chasing a few percentage points here and there while increasing my risk? The 2017 portfolio returned nearly 42% and the basis of the setup didn’t include any sophisticated buy and sell rules. It was a simple buy and hold strategy. I’ll take 42% any year, hands down!

The current market run from the bottom in March 2009 will reach nine full years in 60 days. It has been an amazing run with amazing stats along the way. At some point, the trend will end. Unfortunately, no one knows if that will happen tomorrow, sometime in 2018 or at some point beyond 2018.

Take a look at these amazing S&P 500 stats:

  • The S&P 500 has had nine consecutive positive return years, tying the all-time record from 1991-1999 (we all know what happened in 2000).
  • Every month was positive for the S&P 500 in 2017, setting an all-time record, the first time that has ever happened in the history of the index.
  • In fact, the S&P 500 has been positive for 14 consecutive months, another all-time record.
  • The S&P 500 has been positive 14 of the last 15 years with only 2008 showing a loss.
  • The S&P 500 went 17 out of 18 years from 1982 to 1999, so perhaps there’s still room to run.

On the surface, the S&P 500 stats referenced sound like the end could be near but the famous quote:

“Markets can remain irrational longer than you can remain solvent”

keeps me from trying to guess. The “easy” thing to do is to continue playing until the market tells us otherwise. No one is smarter than the market and it will give signals when it’s over.

So, before I get into this year’s list, I once again suggest that 99% of all investors stick with low cost index funds and skip individual stocks altogether. Individual stocks are funny and carry too much risk for the casual investor.

*NOTE: the overall health of the markets must be positive for many these investments to do well.

Digital Currency & Blockchain:
Digital Currency has been on my list for several years and has worked well. I mentioned “blockchain and bitcoin” both in 2015 and 2017 but decided to ignore them as far as investments. Too bad for me as 2017 was the year of cryptocurrency.

Blockchain started to go mainstream in 2017 and I believe the mania will continue in 2018. The challenge with crypto currencies (coins, alt coins, tokens, etc.) is that 99% of the ones available today will not be here in the future, they are garbage or outright scams. Some may survive and new ones will be created but I suspect the leaders of these decentralized cryptos will start to emerge by the end of 2018. I am far from an expert on cryptos so please search elsewhere for advice on how and where to invest. The hope for crypto (and blockchain) is that the “technology” eventually supersedes the speculation and the intended benefits will be realized. (Disclaimer: as of this blog post, I own Bitcoin, Ethereum and Litecoin).

For a more traditional stock approach, these are the companies that I believe will continue to provide value and further upside through their stock shares:

  • V: 114.02. I continue to ride and hold Visa personally as it remains the world’s largest retail electronic payments network and is one of the most recognized global financial services brands. The stock returned 47% in 2017 and has been in an up-trend, above its 50-day moving average since last January. The stock provided a much better entry in January 2017, from a technical standpoint, but I am including again this year. As I said last year: “as a long-term shareholder, I’m holding, until it proves otherwise.”
  • MA: 151.36. Like Visa, MasterCard was also up over 47% in 2017 and has been riding its 50d ma since August 2016. The stock is currently trading sideways over the past several weeks, forming a base along the 50-d ma. My ideal buys are closer to the 200d ma but I will include Mastercard until it breaks down. Be careful buying any stock when extended.
  • SQ: 34.67. Square, Inc. was the one that got away last year. I went with PayPal (stocked up on $PYPL shares personally and it paid off with an 86% gain, I still own 50% of my original position). Personally, I still like PayPal (the company) but feel that the stock is extended so I am not including this year. I am going to take a chance on Square, a stock that went from $13 per share to as high as $49 per share in 2017. The stock has pulled back over the past five weeks, violating the 50d ma on heavy volume so we have to keep an eye on that (red flag). An ideal area to grab shares would be at or near the 200d ma, as long as it holds support. A violation of the 200d ma would be a big red flag. With all that said, I am going to take a chance on SQ. It carries with it some risk so be careful if you decide to grab shares.

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Stock Trends for 2017 Final Results

The results are in and the Stock Trends for 2017 outperformed the general market by a wide margin. The discretionary buy-and-hold (mock) portfolio logged final gains that were 48% larger than the Nasdaq, 66% larger than the DJIA and 115% larger than the S&P 500.

Final 2017 Results:

  • Stock Trends for 2017: +41.85%
  • Nasdaq Composite: +28.24%
  • Dow Jones Industrial Average: +25.08%
  • S&P 500 Large Cap Index: +19.42%

Final Results Fun Facts:

  • 20 of the 21 stocks show a gain for a 95% win ratio
  • 18 of the 21 stocks show a double digit gain or 86% of the stocks
  • 14 of the 21 stocks outperformed the three main US indexes
  • 8 of the 21 stocks gained more than 50% for an average of +69.23%
  • 6 of the top 10 gainers started as triple digit stocks (7 ended that way)
  • The top 10 performers had an average gain of +65.00%
  • The average gain of the positive stocks is +44.39%
  • The average gain of the positive stocks, with double digit gains is +49.16%
  • BABA was the top performing stock, with a gain of +96.37%
  • BABA peaked at $191.75 (52-week high), which gave the stock a +118% gain at the time

As 2017 ends, I maintain a bullish outlook on many of these names, heading into 2018 and beyond.

**Note: Adjusted close price adjusted for both dividends and splits.

Stock Trends for 2017 Portfolio:

The Wife’s Stocks Outperforming 3 Years Later

Back in August 2014, I decided to put a collection of stocks together that represent the products and services of companies used most often by my wife and family. I decided to call it “My Wife’s Mutual Fund”.

Original Post:
August 6, 2014: My Wife’s Personal Mutual Fund Outperforms the Pros

February 21, 2016: My Wife’s Personal Mutual Fund Crushes the Markets, AGAIN

August 7, 2016: My Wife’s Buy & Hold Strategy Still Crushing the Professionals

Based on past experience, I noticed that these companies were outperforming the market by a wide margin, especially on an individual basis.

What started as a playful review, became a serious pursuit of stocks that we decided to grab shares in. We don’t own every stock on the list below but we do own and have owned many over the years.

As of November 19, 2017, the 22 stocks have performed as follows (for purposes of the exercise, no trades have been made):

  • Total gain of 66.87% (adjusted for dividends & splits)
  • 19 of the 22 stocks show a gain
  • 17 of the 22 stocks show a double digit gain
  • 11 of the 22 stocks show a gain of at least 50%
  • 6 of the 22 stocks show a gain greater than 100%
  • The leading gainer, also the 2nd highest initial priced stock, is up 264%: Amazon $AMZN
  • 3 stocks show a loss: $CVS, $XOM and $KORS
  • An 86% success ratio

I’m not surprised to see, after years and years of gains (pre-2014), that these stocks continue to outperform the general market indexes. At this point in 2017, I believe that many of these stocks will continue to outperform in the years to come (and I’m making this statement deep into a multi-year up-trend).

I subscribe to a strategy of “keep it simple”. The run from March 2009 has certainly helped but these types of companies should continue to outperform going forward (a few may fall out of favor but the stronger ones will continue to dominate and innovative within their respective categories).

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Stock Trends for 2017 Beating the Market

The Stock Trends for 2017, comprised of 21 handpicked stocks (discretionary style), is beating the major market indices by a healthy margin. The Nasdaq Composite is the closest but still trails by four percentage points. In order to be even, the Nasdaq would have to improve its year-to-date results (12.24%) by 30%.

The Dow Jones and S&P 500 would have to more than double their year-to-date gains in order to match the portfolio gains.

Year-to-Date Results:

  • Stock Trends for 2017: +16.16%
  • Nasdaq Composite: +12.34%
  • S&P 500 Large Cap Index: +6.49%
  • Dow Jones Industrial Average: +5.96%

Note: Dividends not included in calculations.

Fun Facts:

  • 15 of the 21 stocks show a gain
  • 13 of the 21 stocks show a double digit gain
  • 6 of the top 8 gainers are triple digit stocks (5 started that way)
  • The average gain of the positive stocks is +24.77%
  • The average loss of the negative stocks is -5.36%
  • MBLY is the leading stock, with a 62.43% gain, after being bought by INTC (another stock on the list)

I will continue to follow the logic of the opening paragraph from the original post:

The trends that I am watching in 2017 are not much different than what I have been following and investing in over the past two years. As Newton’s first law stated, “An object in motion continues in motion…”. I could search for the “next hot thing” each year but why make investing more difficult than it already is when certain trends, technologies, products, services and companies continuously work.

The plan is to keep riding all winning positions higher, until the market trend changes.