Italian Stock Market

Can the Italian stock market stay above 19,802?  If it breaks that support level, it could bring down all of Europe, and Europe could bring down the US stock market.

The smart money will be watching the FTSE MIB this coming week — not the trade war with China.  Italy could be the end to this long bull market or at least the avenue to a 20+% correction.

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Bond Vigilantes

They used to have something called the “bond vigilantes” keeping the bond market honest and correctly priced.  There weren’t any actual people acting as vigilantes per se, but it was the general tendency of the bond market to adjust for either risk or inflation by demanding a higher rate of interest at a lower price.

The bond vigilantes have been basically asleep now for the last 10 years.  We even have negative interest rates with a great number of bonds issued by governments.  Central banks have taken over this market as a way to inject cheap money into their economies, so that the government debt market is highly artificial with central banks the one big buyer.  Think of that — you actually end up losing money by buying these government bonds and the bonds are sold at a very high price to boot, which is all due to the manipulation by central banks.

I think when the bond vigilantes finally wake up from their long slumber is when this current bull market implodes.  It will happen first in the bond market — you can easily make the case that the bond market today is even a bigger bubble than the bubbly stock market.  With interest rates rocketing higher, you would have huge losses in the bond market because the bond prices would be collapsing sharply — perhaps 50% losses in a short amount of time.  This magnitude of loss would have a ripple effect into the stock market, which would then have panic selling as well.  That’s when the whole house of cards comes crashing down.  Who knows how low both the bond market and the stock market would go?

Just wait for the bond vigilantes to wake up from their 10-year sleep.  Best to be out of both the bond market and the stock market when that happens — or invest in a very good parachute.

If interest rates really start to rocket higher, that would be a good time to short the stock market, in my opinion.  But it is very hard to time these things.  If you are short too early, you will be punished.

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Trading Strategies

Don’t trade individual stocks — too unpredictable.  Trade particular sector ETFs that you are familiar with.  And limit the number to no more than 5.  Have one of the 5 represent the broader market.  Become very familiar with how they trade and how volatile each tends to be so you know what to expect.  Look for ETFs that have a lower left to upper right chart pattern, and avoid ones with a chart pattern that is erratic.

But you have to have a strategy.  Mine is to trade corrections.  I buy in larger increments as the correction deepens, but sell when the recovery gets back to the starting point or a little above — don’t be greedy, get out when you have a decent profit and not more.  You need to have a large low buy when the correction gets to the low point to make any real money.

The challenge is that you never will know in advance when the correction has bottomed, so you must buy at a set pace, say with each 10% decline — not before — and each buy lower is larger to lower your average cost.

You never will know in advance when the correction is about to bottom but you can get a bit of a tell from the VIX.  A VIX in the mid 20s and above isn’t sustainable so you are probably close to the bottom.

Also, corrections in recent history have had a kind of time stamp to them.  The drop is sharp but on a limited number of trading days.  I find  that 19 trading days is a tell for when the bottom may occur — 19 days from the previous high.

The above strategy will always work in a continuing bull market, as the corrections will always recovery.  But in a true bear market, the above strategy can become a death spiral down, so one must assess whether a bear market has commenced.  That’s difficult to do.

And yet even in a bear market, one gets very sharp bear market rallies that can be traded on the long side if one is nimble and you don’t hold too long.

You can’t be both an investor and a trader.  You have to pick one or the other.

To be successful in the market, you can’t really be taught how to do it, but must find an approach that truly fits your particular temperament and outlook.  You have to try different things and see what fits because under stress, if it doesn’t fit, you will cop out and end up losing big.

There are sites where you can set up a pretend account and trade like it’s the real market.  Best to use those sites first to see whether your strategy has any merit.  It is much nicer to lose play money than real money!

You have to get to the point where you see the entire trade beforehand, so that you know the entry point, what you are doing while you hold the trade, and the exit point.  You know all of this before entering the trade.  Most traders also employ protective stops to get out of a seriously losing trade.  You have to determine if and how you will use protective stops.

It’s all too easy to lose money in the market, and actually quite difficult to make money consistently over time.  Never forget that trading is a zero sum game, with winners and losers both — the guy on the other end of the trade is always trying to beat you and beat you badly.

Keep a diary of your trades and ask yourself after the trade is over, what you did wrong and what you did right, i.e., learn from your trades — don’t keep making the same mistakes.

Guard against overconfidence, especially after having a string of wins.  Don’t allow yourself to get too confident with the market — it will devour you if you do.

My Story