Përshëndetje All! Yes, we are still quarantined and yes I am still exploring new things to learn as we all should I suspect. This week I got away from the French and tried something new…I am going to let you fine readers tell me which language this is and no cheating!!! Just kidding you can google it if you want, isn’t that what google is for, I mean other than tracking your every move? Oops, that was my inside voice. LOL

So, this week we are talking about the grand illusion that has been nicely created for us. Yes, I am talking about the current state of affairs of the stock market. Let me paint the picture if you are not completely clear on where we stand as of right now.

In the last four weeks, almost 23 million Americans filed for unemployment. This means that almost 7% of the population has filed for unemployment in a month and yet the markets have gone basically straight upwards since around March 23rd or so? As a matter of record, this recovery may be the fastest in the history of the markets and if not the fastest, definitely in the top 3 recoveries of all time. This may not be that much of a shock to some as just before the recovery we also had one of the fastest declines on record as well. I kinda feel a little like Bob Ross here, we need to add a seagull here or a little tree there… If you don’t know who Bob Ross is, just check out the picture below and then youtube his show…the joy of painting with Bob Ross. It has got to be one of the funniest things I have ever seen and remember I grew up in the ’70s and ’80s. So, much like Bob’s picture, we need to add a little something to ours as well so that we get the whole perspective. In addition to the abysmal employment numbers, we got a negative GDP number that was actually worse than expected and yet the markets are blasting higher today.

Our picture is still not complete yet, we still have to determine what will happen post “rona”? Will all the stimulus of the FED, which also announces today, save the world and bring back global demand? There is another part of our picture that some may have missed and that is the debt bubble that we had before this global pandemic came along. We had record-high student loan debt and auto loans as well. In addition to this, we had a rising default rate on corporate bonds which essentially means that some corporations were getting out of sorts from the easy money world we have right now. All of this and the market just keeps on chugging along like the energizer bunny?

The picture should be clearer now, things from a fundamental standpoint may not be as rosy as the current bull run would have you believe but what does this mean for traders and investors alike? We all know that you have to trade what you see right? This is where conflict can come into play. I see fundamental issues but I also see a charging bull in the markets so what is one to do? I cannot tell you what to do as I have no idea of what your particular situation might be, all I can tell you is what I am doing and then you can see if it fits into your game plan or not.

Let me say this may seem doom and gloom but its really just something I learned playing hockey…my coach said to me on many occasions…keep your head up kid! What the coach was telling me is that there is always something coming at us, sometimes it’s good like a sweet pass from Wayne Gretzky, or sometimes it’s a bone-crunching hit from Scott Stevens. If you keep your head up you will be ready to accept that sweet pass and you will also be ready to brace yourself for the hit or possibly avoid it altogether. This is how I approach the markets, I try to keep my head up. The following is how I try to accomplish this.

First, I keep a keen eye on my posture. My mom always told me to stand up straight to have good posture, however, this is not the posture I am referring to. I am referring to my posture in the markets, am I postured bullish, very bullish or neutral or maybe even bearish? Not only do I keep a keen eye on this posture but I also keep ideas on deck of how to change this posture in a moment’s notice. This may mean adding bearish delta or just reducing the overall bullish flavor of the portfolio.

Secondly, I am looking deeper into the markets to see if there are some clues as to where the markets might want to go next. Let me premise this by saying that there is no crystal ball for the markets but there are things that can show us that the market might be changing or at least slowing down in momentum. I do this by using momentum indicators like the RSI and the MACD as well as others. What I am looking for is an indication that maybe the market might be ready to go sideways or reverse. I am looking for divergence on these indicators and you may not be able to see these things on just one time frame so this is where being able to evaluate the other time frames effectively can help us see changing conditions. For example, take a look at the charts below. One is the daily chart of the SPY and the other is the hourly chart of the SPY. See if you can spot the differences in the two chart indicators.

Here is the daily chart of the SPY with MACD and RSI. You can see by the lines I have drawn on the candlesticks and the indicators that it is not showing any divergence currently.

Here is the hourly chart of the SPY, can you see the divergence in the indicators? Usually from an hourly chart you can see these things play out over the next few days. As I said above, this is not foolproof but its a great way to keep your head up.

Thirdly, I keep a cautious frame of mind. If this market flies high and I don’t make tonnes of money because I have a more cautious mindset then so be it. I am constantly fighting the fear and greed nature of trading and it has been my experience that falling somewhere in the middle is always a better space to reside in.

So, whether you buy into the grand illusion or perhaps like me your not quite ready to ride the bulls to the moon you can keep you head up and maybe if you do you will see if the illusion is truly real or whether the illusion fades away and you are ready to take massive swift action to ensure your posture is correct.

Happy Trading,

Coach Holmes