Market On Open - Monday 6 May

Market On Open - Monday 6 May
"Pull Hard. NOW!!!" Photo by Sina Saadatmand / Unsplash

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Rug, Pulled

by Alex King

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If you read this note regularly and, in particular, if you attend our weekly live Inner Circle webinars, you know that our house view is, the market has not yet turned full-on bull. Only once the S&P500 makes new all-time highs can that truly be declared. It is very possible that the rally since the 19 April lows is simply a countertrend move, a precursor of another selloff which may re-test the 2021 all time highs.


As a matter of fact there was a big rally since the 19 April lows, and if the article above is correct - and I have no reason to suppose it isn't - this will mean that as normal, smaller investors felt compelled to sell into weakness only to see that weakness eradicated - this time by that into April month end and through into early May. This is typical rug-pull behavior by Big Money of all flavors.

Want to not have the rug pulled from beneath you?

Well, it's surprisingly difficult to avoid. If you have a few minutes, take time to read this note, "Most Investments Are Bad" written by the esteemed Lyn Alden Schwartzer, published on Seeking Alpha recently.

Personally I think there are three ways to avoid the rug pull.

  • One, don't play at all. Do something else with your money, like go on vacation. You may have less money at the end of it all, but at least you will have enjoyed setting it on fire. More fun than watching other people set it on fire anyway!
  • Two, follow Mr. Buffett's advice; make regular investments into a low-cost S&P tracker fund - $SPY fits the bill in my view - using money you don't need anytime soon, don't stress too much about the ups and downs, have a timeline of multiple decades, and at least if history is anything to go buy, this will work out fine. As Schwartzer explains, most of the return in that strategy will arise from a handful of single-name stocks, but since it's not your job to worry about which stocks (the fund manager takes care of that), that can work out fine.
  • Three, learn to rotate your capital. You can do this with instruments as simple as sector ETFs. Even if all you do is know when to buy and sell XLE (energy), and when to buy and sell XLK (tech), you can do what everyone says you can't do, which is to outperform the S&P500. You do have to get good at it, and you do have to put the work and time in, and you will make mistakes along the way. But isn't that true of anything worth achieving?

The investing and trading method we use here at Cestrian Capital Research is inherently simple.

(i) We focus only on securities that Big Money uses; highly liquid ETFs and single-name stocks. That means that, most likely, there's limited fundamental risk at hand. Any small cap can go to 0 tomorrow. Most likely, SPY won't go to 0.

(ii) We use "technical" (price and volume) analysis to try to work out where Big Money is buying and where Big Money is selling. And we try to follow a little bit behind Big Money. So that when the rug pull comes, we're not standing on it like the small investors that JPM highlight above; instead we aim to be standing alongside Big Money, ie. with traction underfoot when things get slippy.

All the charts in this daily Market On Open note use that same simple method. Is the security (SPY, TLT, SOXX, whatever) fundamentally sound? And where in the cycle does it stand - does the price and volume analysis look like Big Money is accumulating (buying), holding, or distributing (selling)?

This is the method we use in our model portfolio work too. So far so good on that one, as we noted here.

Now, without further ado, let's get to that daily market analysis. As always we cover all four primary US equity indices (the S&P500, Nasdaq-100, Dow Jones-30 and Russell 2000); bonds (TLT), volatility (the Vix), oil (USO) and sector-specific ETFs. We provide long- and short-term insight daily and we include coverage of leveraged ETFs which - if you have gotten sharp at the rotation and hedging methods we teach - can be used to very good effect. All of this features daily in the pay version of this newsletter.

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Short- And Medium-Term Market Analysis