Simple Ain’t Easy!

Today’s Notes:¬†

Simple + Easy = Oxymoron! To put it another way… Simple ain’t easy, and easy ain’t simple! After reading the autobiography of Steve Jobs you do get a good picture of how hard it is to keep it simple. Complexity is always getting in the way. The quest for knowledge and getting better at anything invites complexity. Too often complexity is what makes whatever we are attempting to do, fail. The quest to make my trading and investing simple has met with exactly that challenge… complexity invites itself as we want to improve on our results and success level¬†in our portfolio. That is why we need to focus on having a breakthrough in SIMPLICITY!

Tonight as I run our ONE EGG scans,¬†it is clear what is leading, and what opportunities they have to maintain that leadership based on the correlating fundamental data. The point being, that having a defined strategy for filtering to find the opportunities that meet your criteria, keeps the process clear and executable. Simple isn’t easy! The noise all around the markets currently is distracting. A good example of this is my post to buy QLD at $100.70. Simple enough, the work was done relative to the research, the entry point determined, the stop calculated relative to the current risk relationship for this market, but all the noise this week with the up and down movement prompted by the Fed comments, news, Russia, etc. played havoc on the process of entry and I passed on the trade. ¬†With the ETF hitting $103 intraday (the target) you know what I said… STUPID. No, ¬†I am not stupid, I just took simple and made it complex… Why? I started interjecting other variables that could impact the trade. Those variables are not part of the scanning process to begin with… why are they now? The old adage of the more I know the less risk I believe I am taking on a trade. Bottom line I made it to complex and missed out on the opportunity. That is why simple ain’t easy.

As a trader/investor the one thing I don’t need is complex. Investing is hard enough without making it harder! This is why we have to practice, practice, practice and practice some more, until this process of simple becomes a habit. I have come to the firm conclusion the problem with diversification is… your energy is too displaced to deal with the complexity of managing a portfolio zoo. I have been studying the process of decision making, and the energy exerted by the brain each time it is put in a position of making even the simplest of decisions, we deplete our energy source with too many decisions, which leads to poor decision making from fatigue. I believe this is reflected in our trading daily when emotions step in and we react to events versus acting according to our disciplined strategy. The mulitple decision throughout the day drain our energy and we run low, allowing emotions to step into the process. By focusing on simple, and keeping the decision process limited to a few meaningful specifics, versus the trivial many, we make better decisions, and execute our plans with greater accuracy.

I will cover more of this in our webinar tonight and if you don’t make it to the live presentation, you will want to take the time to listen to the replay available on the website.

Chart to Note:

The Russell 2000 small cap index is what we looked all week to show the¬†current crazy activity of the markets at work. Thursday the index actually followed through on the upside from Wednesday and cleared the 1110 level we discussed yesterday as a start to a reversal or upside move.¬†The sector still is not taking on any leadership, but has managed to hang on for now.¬†Visually this chart depict what we have been discussing. The index fell to support, but has held. The tendency now is to want to trade the first upside move. Look for a break of the downtrend line first… then confirmation of the move. The goal is to take the trade that plays out based on the risk we are willing to accept, not predict what is going to happen with the market. We are not prognosticators or prophets, we are risk managers of the opportunities presented.

RUTX

We posted the chart of the¬†homebuilders last week¬†showing the downtrend in play from the March high. The homebuilders index, reported earlier this week, didn’t help the cause on the upside, but it did show/validate¬†our evaluation of the downside being in play. Tested below support at $30.50 level of support and held, but the damage is done as the sellers believe they can press the downside. Now we have to watch the impact of the existing home sales on Thursday, they pushed the sector up 1.9%. Still in the downtrend, but we have to watch how it plays out going forward. Plenty of pressure on the stocks relative to cost of materials and availability of land. The downside is in play, but holding support at the $30.50 still… see what happens, then act.

Japan – EWJ remains in trading range… from post last week.

NASDAQ 100 – QQQ moved to top of the consolidation pattern Monday… break above $88.50 gets interesting. (That happened on Wednesday!)¬†The question is opportunity or not? See our notes on daily Trading Notes for Wednesday on the current direction we have taken.

Notes to Note:

  • VIX index¬†moves to new lows again. No worries, be happy, keep buying… right?
  • Small caps (IWM)¬†as shown above, finally posted a nice gain on the day.
  • Interest rates have calmed and are testing the move lower. Watching to see how this impacts the bond market as it unfolds short term.
  • Oil is¬†back$104 and remains on the upside trek short term. $37.74 target on USO short term (hit today with a new high). Upside in play, not good for the consumer and something to watch as well.
  • News driven markets make for choppy events. Not willing to trade myself broke at this point… let it unfold and go play some golf, fish, take nap, but let this work through the constant up and down movement.
  • China (FXI) making a run higher as the global markets pick up again. Helping the emerging markets along with Turkey on the upside.
  • Natural gas (UNG) make solid move lower, but still trading sideways for now.
  • Biotech makes solid move as IBB gains 1.9%.

The markets remain uncertain in direction as we have discussed for the last nine weeks. The dividend and large cap stocks are leading the current bounce, but growth is still a lagging sector. The uncertainty remains in play and keeps the market in check for now. S&P 500 index hit a new high, NASDAQ 100 breaks from consolidation to the upside and the Dow only gains 10 points to lag on the day. Bonds have stalled with slight bump in rates as the fear has been withdrawn for the time being. The near term shows little in terms of clarity from either side. No one wants to get caught on the wrong side, and that has muted volume. Stay focused and remember that cash is a sector and sometimes the best trade relative to market risk.