Alpha Can Be Pursued, Just Listen to the Market

The market really does tell an ongoing story. If you look at enough charts of stocks and ETFs every week, as we do, the market sends you a message. No, this is not clairvoyant stuff. Its just a sense of how much risk is out there and how narrow the market is (e.g., are a few sectors carrying the load or is it a more widespread bull or bear move).

Furthermore, if you look across time frames, you can get a very good sense of how sustainable a move (up or down) in a particular ETF or stock may be. As we see it, any security can go up at any point in time. The key in analyzing markets, sectors, themes, and securities is this: how much risk of major loss is attached to that return potential (that any security has, at any time).

Why bring up all this geek-talk now? Because the markets are about as “wacked” as we have ever seen them. Don’t take my word for it. There is a long list of veteran market observers that have expressed the same opinion.

And, that sense of “we haven’t seen anything like this before” that is THE pivotal factor for investment performance this year, and likely next year as well. Look at what we are dealing with:

  • Inflation like we haven’t seen in 40 years
  • Stock valuations through the roof…yet the major market averages have shown remarkable resilience
  • The bond market is broken. Corporate and high-yield bonds are cracking, and at any moment could fall through the floor. Meanwhile, short-term rates are flying higher.
  • Cryptocurrencies are a topic of great debate. Are they a “risk-on” asset, a “hedge” asset or just a fad? By fad, we don’t mean the blockchain, but rather the obsession over the value of invisible coins.
  • A recession is a strong probability in 2023. This is a topic of much debate on Wall Street, but frankly it doesn’t matter if there actually IS a recession. The FEAR of a recession is all it has taken to increase risk for investors.
  • And, there’s the issue of a heart-breaking war in Ukraine, which weighs on the minds of so many of us, while we also must focus on the investment implications.

Sounds like a a lot of things for investors to worry about, right? WRONG! These are exactly the types of markets where “alpha” (return above what the market “gives” you through its own price movement) can be pursued. What does it take?

  • Listening to the market’s story: right now, that story says, “don’t own anything, rent EVERYTHING.” That is, be content to cash in profits at the first sign of trouble. There’s always tomorrow, next week and next month. The chances for a months-long “rip” higher for the stock market are pretty low.
  • Rotation is even more important than it usually is. But what are you rotating among? A few sectors? From growth to value, or large cap to small cap? We track 300 ETFs that cover over 150 market “segments” – sectors, industries, themes, countries, regions, commodities, inverse and hedged ETFs, volatility ETFs and more. When you greatly expand your “opportunity set,” you give yourself more chances to “win” the rotation game. This is so important in a market that might just be shifting gradually from a long-term bull to long-term bear.
  • “Listening” is not about analyzing economic data, corporate earnings, and market sentiment. It is about staying right on top of what securities prices are actually doing, not what market pundits are blabbing about (OK, I’m kind of a market pundit, too, but whatever). Because price patterns (charting) are based on patterns of human behavior that reflect our base emotions: fear and greed.

Those emotions can be exploited for profit, particularly in markets like the current one. And they are way more important than what the Fed may or may not do, or what Elon Musk is doing today. Great Exploitations await!

Related: Talking Points For Today’s Market