Market Outlook 31-Jul-22
Reflecting and Sharing Experiences, Win the War Not Every Battle, Pro-Chart
Good morning,
The month of July is in the books. The markets were up handsomely for the month:
SPX: +9.1%
NDX: +12.6%
BTC: +19.2%
The equity markets have recovered quite a bit over the last 30 days and are now back to where they closed at the April lows, eliminating the May and June losses. Bitcoin is still playing catch up.
And with that, it is worth reminding that the monthly charts are a great time to pause & reflect on the big picture trends, eliminating the daily chaotic actions many market participants fall victim to.
But it’s not easy being patient and holding through drawdowns. I know there is an urge and temptation to play both sides frequently.
Today instead of sharing a bunch of charts, I’m going to share some experiences. I hope you find them valuable.
Making a Career out of Market Speculation & Investing: Long-term vs. Short-term mindsets
Bear with me while I share some recent and previous experiences.
I’ve got a friend who probably blows through most of his salary on day trading losses. He has to have big losses with the texts he’s sending me. Over the last month, he sent me multiple messages to buy calls, puts, and prepare for a dip after the FOMC. I couldn’t keep up with his positions and flip-flopping, but if I had to guess, it wasn’t looking good for him in July, a month where the majors were up 10%. Maybe he did get a few right, but I know the long-term path that will lead to, and it isn’t a good one.
At least I couldn’t figure out how to do it with success for more than a few quarters. Maybe now, with my experience, I would do better at it. But that trading type, with the baggage that comes with it, doesn’t entice me the way it once did.
Sometimes I feel like replaying: “Just pick a side, dude.”
His latest message is to “buy insurance puts, just in case.”
“Win the war, not every battle.”
One of the things I learned from studying market legend Richard Wyckoff was to avoid being long and short in the market at the same time. Just review the charts, and go long or short. Keep it simple. From my experience, trying to do both leads to headaches and losses more times than not. There might be special occasions where that make sense, but those are few and far between.
I used to be like that, and it was almost a guaranteed method to lose money. I learned how to lose money the hard way. Some people call it market tuition. Growing pains. And once you know how to lose money, it gets to a point where you decide to stop doing those exact things; you stop the bleeding. If you know, you know.
Step 1 to turning things around was to stop losing money on day trades and short-term lotto options, often viewed as “insurance.” Been there, done that. It didn’t work out for me. The constant headaches and daily mental battles took a toll on me. I couldn’t enjoy my weekends because I had that itch to see where markets would open on Sunday night. I would spend my Saturdays worrying about my short-term lottos. That baggage adds insult to injury.
“Is the market going to gap up/down?”
“What’s the latest news from DC, China, Europe, etc.”
“Am I screwed, and if so, when do I tell my wife how much I’ve lost?”
My “aha” moment that this wasn’t the way for me came on a Saturday when I was at the dog park with my dad, wife, and son. The entire time I was focused on weekend market headlines. I was so fixated on my phone that I missed the great weather and fun my family was having.
The following Monday, I was in the office break room, heating my microwave lunch, talking with a co-worker with whom I often shared trade ideas. And I admitted to him that I was tired of not having fun on weekends. I explained that I missed the weekend fun and couldn’t enjoy life anymore due to my short-term positioning. I was depriving myself of that part of life, and I needed to make a change. Maybe he needed to hear it too.
That ultimately led me to do less and use the higher timeframe weekly & monthly charts. But I had to commit to it and resist the siren’s call of the short-term lotto gains.
I’ve managed to turn things around by stopping doing the exact things that wiped my accounts out several times over. Survival and compounding is now my goal, and I’ll continue striving for them. I’ve learned that the market loves to screw the most people, and the only way I can defeat it is by taking a longer-term view and position accordingly. Sometimes that leads to large drawdowns, but I know I have a better chance now than when I was getting chopped up in the daily gyrations and CNBC headlines.
I admit I’m not always right on calling the big trends and learning to accept that reality has helped tremendously. Establishing stop losses and getting out when the market proves me wrong is of paramount importance. Seeing the account value fall with the markets in the 20-30% corrections is rough. Sometimes even more with high exposure to Bitcoin. But I know that if I play my cards right, the longer-term opportunities are tremendous, and compounding doesn’t happen overnight. I changed my mentality to “Survive for 30 years, not 30 days.”
Win the war, not every battle.
Personal Returns
For example, my dad recently retired and rolled over his funds to an IRA a little more than five years ago. Around that time, I was confident enough in my market studies and perspectives that I told him I could manage his account for him and have a good shot at outperforming the markets. And so far, thank God it has worked out.
At first, I was still growing and learning, as I still am today, and the first two years didn’t get off to the best start. But with a dedication to the long-term, things have worked out better than just putting the funds into a market index.
The 3-Year & 5-Year cumulative returns are below:
Note:
Data as of 06/30/2022
The month of July had account returns of 24.7%, so the updated returns for July will be even better.
I’m very proud to say that through discipline, many hours of studying, and perseverance, I’ve been able to help my parents buy a new house and vehicles.
You can see that the first two years were rough, but it became euphoric once things started clicking and going. They kept the faith in me, and I keep the faith in the process. This came after many years of struggles and painful losses.
I share all this because I want others to know it is possible. There will be inevitable tough stretches, as we’ve seen so far in late 2021 and 2022. But when the times are good, it is essential to capitalize. And when times are bad, stop and preserve as much capital as possible. The bull will rise again.
The following steps are what helped me:
Develop a system
Have a long-term mindset (up the charts from 5-minute-hourly to weekly/monthly)
Block the noise, including funnymentals.
Funnymentals
The above headlines came out after Apple and Amazon reported earnings this week.
One of the things that drove me to a technical analysis approach was that markets didn’t care if companies were losing or making money. The earnings could be “negative,” and stocks would go up. And on the opposite end, earnings could be “positive,” and the stock would tank.
It drove me insane. As an engineer, I couldn’t accept that reality or style of trading.
Pro-Chart
That’s when I started relying on charts. At least with them, I could have some idea of how the big players were positioning. I could see their footprint on the tape. I could see the strength and resiliency in the chart. I could count targets via Point and Figure.
Accepting that the big boys were positioned for a move regardless of the earnings outcome was a massive step to success.
Studying “campaigns” from Richard Wyckoff’s “Method of Trading and Investing in Stocks” made it all click.
Reading Edwin Lefevre’s “Reminiscences of a Stock Operator” (The Investment Strategies of Jesse Livermore) reiterated it. It was so good that I bought the audiobook and listened to it several times now.
There are many others, but those two helped win the mental battle, and I enjoy returning to them from time to time.
The short-term chop and mental battles
Right now, I am witnessing short-term traders getting chopped up. They are so fixated on the short-term gyrations that they are missing the forest for the trees.
Bitcoin is a great example.
Just look at the historical Bitcoin bottoms and compare that to now. People are playing chicken, trying to pick up pennies in front of the steam-roller. Yeah, they might be right on the next $3-5k move. Maybe that next move is down, and they’ll have their “told ya so” moment. But damn, I want to use those pullbacks to load up as many satoshis as possible. Big picture thinking!
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Maybe BTC chops around for the rest of the year. I don’t know. If it does, I will look for additional entry points. Perhaps it takes off from here. Who knows?
From what the tape shows now, I see a fantastic opportunity. I’ve missed enough epic rallies because I was waiting for a pullback, and I’ve been fortunate enough to participate in enough to know that I want to be adding Bitcoin here. I’m ok sacrificing the next 6-months if it means I get the next massive leg up.
Charts to resume next weekend.
Have a great week,
Trace