Stocks slid yesterday as weak economic data tamped down last week’s bullish bias. Bond yields are retreating, reflecting the growing fear the global economy may be heading for the rocks.
The trend is your friend. There is a nice one from my old book of Wall Street sayings. The potential to beat the market has lured countless would-be conquerors who queued up over the centuries with would-be winning schemes. The “would-be” is kind-of the giveaway- they all failed. As computers became cheaper and more powerful, the schemes became more complex and more widespread, but complexity simply pulled traders farther away from success. Of all the schemes only one has been mathematically proven to increase probability of success, and it is one of the simpler ones, trend, and momentum. That is technically 2, I know, but I like to lump the two together.
Forget about the math for a second and think about it. It makes sense that knowing a trend would give a trader a leg up. It also makes sense how momentum in a trend could persist given the way markets work. Psychology is a large driving factor. A stock takes flight for whatever reason (hopefully a good one like solid results and good management). First the big guys and gals jump in on the news because it is their jobs to watch the market all day, every day. Next come the savvy investors, who are constantly watching the market on their phones while they commute to their real jobs. They see a stock on the move but may not have time to do the research, but they hit the “buy” button anyway, thinking “YOLO, why not?” Also, their stop on the subway is next.
Then come thoughtful investors. They may commute by car, and they listen to the news on the car radio on the way home. At the top of the hour the announcer says (over background music of “We’re in The Money”) that “Wall Street was higher today,” adding, “stocks were led higher by XYZ Corp.” The thoughtful investor thinks, “I’ve gotta do some research on XYZ Corp over the weekend.” Research done with interest appearing to be legitimate, this investor carefully places a buy order on Monday morning. All this buying has propelled the stock higher and higher. And higher yet, as more and more folks pile in. Finally, your average Joe or Josephine is visiting with friends, and they catch someone’s long-retired mother mention that her financial advisor bought her this great stock “that is just killin’ it,” she thinks it was XYZ Corp. Guess who places a buy order for the next day’s open?
Now, I have greatly simplified it to illustrate the point, but through this example, you can see how knowing the trend of a stock, bond, or commodity can increase your chances of success. Of course, I should add that you should probably rethink buying a stock that is trending down. Sometimes, finding a trend is very difficult, because sometimes, there are simply… no trends. We see a lot of that when markets are undecided, or they are at a key inflection point. But they always ultimately turn around and trend in one direction or another. One of the best tools for investors searching for trends is a simple chart. I provide you with my daily chartbook… um, daily, as its name implies. Most of the charts are embellished with some of my favorite trend indicators. Today, I will save you the trouble of opening the PDF and insert chart number 16 “Ten Year Treasury Yield” right here. On it you will see how yield topped off at 4.33% last October. Since then, it has been a bumpy ride as yields crashed through Fibonacci Supports, simple support lines, and just a few days ago through its 200-day moving average. If you step back and try to find the general trend pattern you should notice that it is trending down. This is also consistent with the reality that the Fed may be nearing its own turnaround point on rates, combined with growing concern for global economies. Yields trending down means the prices of bonds are trending higher, but they also mean that growth stocks may be getting a leg up if the trend persists. You can check that theory out by opening the chartbook and looking at chart number 8 “NASDAQ Composite Index”, which is good proxy for growth stocks given its makeup.
WHAT’S SHAKIN’ THIS MORNIN’
Alphabet Inc (GOOG / GOOGL) shares are higher by +1.22% after the company hyped the increased efficiency and performance of its own chips over those from NVIDEA (NVDA). The company is due to announce its Q1 earnings later this month. Potential average analyst target upside: +21.0%.
Costco Wholesale Corp (COST) shares are lower by -2.61% in the premarket after the company announced weak sales figures for the month of March. The company reported a notable decline in large-ticket discretionary items which is consistent with the broader retail sector (take note Fed). The company also reported a -13% in E-commerce for the month. Dividend yield: 0.72%. Potential average analyst target upside: +8.4%.
YESTEDAY’S MARKETS
Stocks sold off yesterday after an ISM Services miss and weaker-than-expected ADP Employment number (be careful what you wish for, Fed). The S&P500 slipped by -0.25%, the Dow Jones Industrial Average gained +0.24%, the Nasdaq Composite Index fell -1.07%, and the Russell 2000 Index declined by -0.99%. Bonds gained and 10-year Treasury Note yields gave up -2 basis points to 3.31%. Cryptos gained +0.96% and Bitcoin slipped by -0.35%.
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