If you’re a new addition to the Big Market Trends community, what we’ve been looking at over the past couple weeks is the relentless buying pressure in U.S. stocks.
This hasn’t let up throughout the whole first half of this month. Even when the Dow Jones Industrial Average did not register a positive day, the market didn’t really go down either. In fact, we’ve just seen the two smallest down days in the history of the Dow Averages that date back to the 1880s.
Some might think we’re overbought, but I would argue that the overbought readings are just normal characteristics of uptrends. They should be overbought. I still think the Dow sees 30,000, as I said earlier this week.
Asking the Right Questions
But we have to continue to raise the right questions, for instance: What are the signs that this thing could get derailed? Again, as I wrote here on Wednesday, if we see Consumer Staples making new highs relative to the S&P 500 and start to see a contraction of market breadth, then we reevaluate.
Technical Analysis doesn’t give us all the answers. But it certainly goes a long way in helping us ask the right questions. That’s really what this is about.
No one knows what is going to happen next. Contrary to popular belief, this makes it an even playing field. Where the advantage truly lies is in those who analyze the behavior of the market versus those who ignore it.
There are many investors, most in fact, who completely disregard the behavior of the market in favor of some other brilliant strategy they believe they have created. My point is, if at the end of the day, price is the only thing that will pay us, why not start and end the entire process with the study of that price?
Good Questions Lead to Rome
Not to get too philosophical on you guys, but just try to think about the things you’re thinking about. What are the questions you’re asking? Because you certainly don’t have the answers. You have no answers, and neither do I. We have, what we think, are higher probability and lower probability outcomes. But we don’t actually know.
So if we know for a fact that we don’t know, then the solution to the problem is to ask right?
You’ll often hear old Cubans say, “Que preguntado se llega a Roma.” It sounds better when you say it in Spanish, as is the case with most things, but it means that you can get all the way to Rome by just asking. In other words, if you ask questions you will get what you need or reach wherever you’re heading towards.
I would take this one step further and say that not only should we ask questions, but we should strive to ask the right questions. This is where Technical Analysis helps the most.
A great example that got me thinking this morning was that the questions we were asking in August and September were different than the questions we were being asked. The big one was, “JC, but what are the implications of Small-Caps and Transports underperforming and not confirming the new highs in the Dow Industrials and Large-Caps?
My argument at the time was that people were asking the wrong question. We wanted to know what the implications would be of rotation INTO Small-caps and Transportation stocks. We felt the risk was up, not down.
Most importantly, we had very well-defined parameters to tell us that the risk was in fact down, and not up. Because again, we know that we don’t know what’s going to happen. But we are confident that we know we can consistently ask the right questions. And that’s what this is all about.
I hope this helps you think about how we approach the market so you can use the information we put out more effectively.