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The answer could be worth 20% of a portfolio's current value.
This month has been an absolute textbook case for so many of the things I’ve tried to educate investors on about how markets really work. It’s like a holiday all by itself!
For those who grew up in the NYC area as I did, or if you just google “Crazy Eddie TV commercials” you will see a raving consumer electronics salesman in a Santa hat, but it is summer. Christmas-like sales in August. So that’s what I thought of when I saw that the SPY chart looks very nice after yesterday’s Fed-induced celebration, but it also resembles what we just saw back in August of this year.
Since I’m always scouting for potential risk i.e. “what can ruin my attempts to make money buying equity ETFs or stocks or owning call options,” it seems that we are dealing with a possibility of August in December, if you will.
My most current thinking on the stock market
Here are a few things I can say that we’ve been reminded of in just the first 2 weeks of December. These are not the typical “if you miss the best 10 days” or “60/40 is amazing” garbage we see flooding our inboxes from sources who might as well have been AI-style copycats, simply re-printing what someone else said, who was repeating what another person said before them. Like the old game of “telephone,” the message often gets diluted when we are dealing with insight about how markets work.
OK, rant over (if anyone thinks we should just call our Thursday edition “Rob Rants” lmk :-))
Here are the key takeaway learning points from recent activity in the S&P 500 Index, charted below as of Wednesday’s close, and following Fed Chairman Jerome Powell’s press conference yesterday:
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No one knows for sure. Investing is about sizing up the probabilities, not about making bold predictions that no one will remember a week later. Or, if they do remember, they will rip on the source, and take it out of context. All of that just distracts from the learning that the rest of us are trying to do (yes, I continue to learn every day, 37 years into this).
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I would love to see the market fly higher, and I don’t care what the reason is. Neither should you. Now, we should work hard to understand why in the midst of so many barriers to good long-term returns (see our MOFO list), SPY and much of the global stock market around it is threatening to make a new all-time high before year-end or early in the new year.
All we really care about as investors is getting the results we want, and that we learn enough continuously about the markets and ourselves that our profitable times can be repeated. Otherwise, we can end up like the poor (literally) souls who made life-changing money in the late 1990s, then coughed it all up and declared bankruptcy when the Dot-Com Bubble broke from 2000-2003.
I witnessed and survived it all, and ETFYourself.com exists in large part to try to help a wide audience of investors to learn from what I’ve seen. That doesn’t mean I know it all, it just means I’ve been up to bat enough times to be a “veteran batter” which hopefully helps our now more than 1,500 subscribers, just 3 months into this venture (thank you!!…and tell a friend, please).
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The chart above tells or reminds me of a few things:
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That’s a mighty fine breakout! And the market’s signaling that it was not just possible, but increasingly probable, is what lifted our ROAR Score from 10 a short time ago to 35 now. Do I wish it was 100 yesterday? Of course! Would that have been a prudent move? No freaking way.
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Anything can go up in price at any time, but there is always risk of major loss attached to that venture. I continue to assess that risk of major loss is historically high…which is exactly the condition that can produce strong gains. We are not in a “coast is clear” moment for SPY. We are in a “big win or big loss” moment. That leads to how I position our model portfolios, which as a reminder, I have my own money in. They are a significant chunk of my liquid net worth, so I am not just talking for brownie points (that said, Dana made some awesome brownies for a gathering we attended recently…but I digress).
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Christmas in August? The upside run to new highs and beyond is on the table, now more than ever. But just as quickly we should remind ourselves that we were in a very similar situation back in August.
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Your guide to this in the chart above is the circles. The top and bottom together show us that when SPY surged through July, it ran up like it was going to launch off the pad at Cape Canaveral. Then it stopped and reversed, and that was the risk because of how elevated the PPO momentum indicator was below.
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When you’re literally in “uncharted territory” as we were then and again now, it helps to have a gas tank monitor of sorts, and that’s what the PPO has been to me for decades. It has helped me make money, but much more importantly it has kept me out of big trouble!
That’s the analysis. So where are we now?
Sizing up where we are right now, you can see that the PPO has a similar “curl up” (my technical term) going on. That could lead us to a 5,000 or, as in August, to a 10% drop in fairly short order, say to 4,100. The ROAR Score at 35 should send a message to you. If it is 50 or under, that signals that I assess that the downside case is more likely than the upside case. More importantly, BOTH ARE VERY POSSIBLE. So together, that’s a 20% swing from good case to bad case, and it could happen in 1-2 months or so. That’s a lot of reward AND a lot of risk.
My end result here is that the “easy” part of getting to that purple downtrend line in the chart is over. Now we see if the breakout is a fake-out, or if it is late 1999/2000 all over again. If that is the case, there will be a ton of profits to go after very soon, and when Christmas/Hanukkah season ends and Easter/Passover season gets closer, we might have much higher stock prices, and be set up for a bubble bursting.
The bottom line
Many possible outcomes are on the table, always. My approach as an investor has always been and forever will be to strike the balance between offense and defense after accounting for as many possible scenarios as I can. ETFYourself.com is all about explaining that to our audience, so that they can personalize my time-tested investment process however they see fit.