Market Outlook: Not Calling Tops and Bottoms Based on Ego Alone

This is a comment that I posted on a former subscribers blog. This individual is a wonderful person but has been doing a lot of the things I see new investors do and that subsequently leads to serious losses. Calling tops and bottoms WITHOUT proof from the charts is a clear sign of "ego trading." I think after doing this for 13 years and studying the past 120 years very thoroughly that I know this when I see it. The signs are that you fight for your beliefs even as the market rallies. This does not mean not liking the rally based on your views that the US economy is a NIGHTMARE of debt and lies. This is based on believing those views and then TAKING that trade. This means as the market rallies off the March lows you constantly go short, get stopped out, and go short again.

I am seeing a lot of people doing this lately and wanted to make mention of this as it is going to be financially very painful. Recently, since the rally off the March lows I was even very upset that I was not getting any 'perfect' charts or 'very beautiful-CANSLIM' charts. Still, did I go short the market? No. I kept getting more and more long. Why? How? Because the market kept going up saying that the market did not care what I thought. The charts kept breaking out and kept bouncing off key support/moving average areas. This is my signal to buy stocks.

Do I still agree with the rally? Well in the sense that I believe this is a MASSIVE inflation rally and nothing more. If the economy is better it is because we have flooded the system with money. If I am wrong does it matter? Heck no. The charts tell me what to do. It has worked for a decade+ now. It worked during the 110 years before I traded/invested. Therefore, history says it will work in the future.

HERE IS MY COMMENT TO THE BLOG where I will subsequently called a fool:

I told everyone that the top was in in 2000. How? The charts. Those were parabolic. I told everyone about the top in Nov 2007 (My first articles on realmoney.com prove this). Those leaders were clearly parabolic. Could this market be overbought short term? Absolutely. Do I have any “true leaders” putting in parabolic tops? Absolutely not. Do I still have fresh breakouts from solid (not perfect) and well-formed bases? Absolutely.

I still don’t think calling tops or bottoms is a smart thing to do until you have real distribution (we have absolutely NONE) and we see what “really is” parabolic tops. I have been doing this since 1996 and this looks more-like the start of a powerful bull move than an impending top. I am sure that when the markets do top short-term, fresh investors that never saw what I saw will say “I told you the market was topping.” What will happen then is they will short the market, the institutional buyers (that HAVE been buying recently–clearly evident in the volume even without FRI option expiration) will come and support these stocks, and more than likely we will continue higher.

Listen, I know our economy is in trouble but do we realize that we just DOUBLED our money supply from the last 100+ years in a COUPLE of months. This is a MASSIVE liquidity injection and I think the fact that I am holding (been stopped out of the few I have taken recently) ZERO shorts and I am now almost 100% long based on taking what “the charts tell me to take.” There is no top yet and to anticipate one when the market looks like this may seem smart but is a sign of inexperience. I repeat, I am NOT a bull on the US economy. But have you guys seen some stocks I have been long since April/May/June like KONG, CISG, FUQI, VIT. China is doing very well and has huge growth. As long as they keep putting their stocks here, we keep injecting liquidity, and people keep “calling (based on nothing more than ego)” tops, we are going to keep moving higher.

When we top, have breakdowns on big volume, distribution in the indexes, and we actually REALLY DO have climax tops, I’ll try to remember to stop back in here and let the new investors know. I have time now, sadly. Might as well do some good.

Aloha from Maui, where life is much better when there is surf and non-stop sun. It also helps you listen and do what the market tells you to do, instead of calling tops and bottoms. Let the charts tell you when to enter and exit and remember we can always remain more overbought and oversold for longer than you can stay solvent.

Top longs in my scans up today with total returns since purchase: SWI 45% CAMP 171% BSTC 49% CVM 101% OPK 27% MPET 34% RUTH 20% CISG 54% HOLI 28% ISLN 47% ATSG 191% CHBT 23% TXIC 37% CLRT 51% RURL 26% BTN 20% CHTP 47%.

Disclosure: long SWI, CAMP, BSTC, CVM, OPK, MPET, RUTH, CISG, HOLI, ISLN, ATSG, CHBT, TXIC, CLRT, RURL, BTN, CHTP

Comments

[logicalthought:]

>>I told everyone about the top in Nov 2007.<<

I imagine, then, that you must be worth around a trillion dollars. Or maybe you told readers on RealMoney one thing, and readers on your own blog something else:

>>IBD 100 And IBD 85-85 Are Officially In A “Confirmed Rally”; Excellent Price Action Today Signals Bulls Have Indeed Regained Control Of The Market On The Short-Term<<

By Joshua Hayes on November 29, 2007

www.bigwavetrading.com.../

Sep 21 08:59 AM

[David Van K...:]

While I agree with much of what the author says in this article (I have no opinion on the individual stocks, but his narration about "ego" called tops and bottoms is spot-on), he must answer the question in logicalthought's post above or else he has little credibility. Authors (and commenters) need to be accountable for what they say.

Sep 21 09:43 AM

[Roger Knights:]

Here is similar advice from the last paragraph of "The Stock Market Philosopher" by Gennady Favel:

"If you find yourself on the brink of making a trade simply for the sake of doing so and in this critical moment can remember only a single word from this book, I hope it's this one: Wait."

Sep 21 01:12 PM

[lo maximo:]

September and October of 2007 were sooooooooooo profitable on the long side! Portfolios grew unbelievably fast...it was beautiful. Did I worry? No, I was happy. I had all the shippers. IBD rated my shippers 99 99 A A A... life was good. Going over the cliff in November felt temporary. After all, those high IBD ratings of 99 99 A A A held up for weeks and months. Then found another service had called them a HOLD early November and called them a SELL late November. Too late for me. I love IBD for finding stocks but don't count on them to ring the bell at the top. I like this guy's article because I think a lot of us have not believed this rally could last...it seems so phony...so manufactured. After all, give me 43 billion and I'll be profitable too. They are throwing so much cash into the system it's like they are buying a good economy for political reasons. But can you make money shorting this phony market? I don't think so. The market will do what the market will do, not what it SHOULD do. You have to climb on board.

Sep 21 03:40 PM