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Let The Market Tell You What To Do, Episode 707
As you know, our operating thesis as to how to navigate markets is, don’t overthink it. Watch the market, measure it, use any form of pattern recognition that works for you. But as for formulating theses that say, well, variable X is doing this, so the price of the S&P500 is likely to do that, is usually fruitless. Let’s take, for instance, the yield on the 10-year US treasury note. As everybody knows, yields down, stocks up. Right?
Oops.
In the last ten years, if you zoom out, equities have been only-up whilst the 10-year yield has been down, up, down, up and down again. Certainly in the short term, yield changes and equity level changes are related and can be traded - that is not our purview here but it can most certainly be traded successfully, a method employed by our friends at Predictive Analytic Models - but in general with markets, one should not buy the myth that if x, then y over the long term. We can bore you for hours on this topic any day you choose but as a shortcut we can assume for now that as Robert Prechter teaches, market prices move according to their own endogenous logic. (Note, we have a deeper theory than that. But it can wait for another post).
In our daily market analysis notes here at Cestrian Market Insight (today’s is here if you missed it) we focus solely on price as the indicator. Well, price and one other, and that is volume x price. That tells us how much of any given security is being traded at each price zone, over the time period we choose to consider. The reason to do this is to try to judge where the smarter element of Big Money is accumulating a position (= buying slowly over time in a way designed to not disturb the price), and where it is distributing positions (= selling slowly over time in a way designed to not disturb the price). There is plenty of judgment involved in spotting these patterns but, broadly, high volume, sideways at the lows = probably accumulation, and high volume, sideways at the highs = probably distribution.
So in the pattern-recognition part of our work, which is to say technical analysis, we combine that accumulation / distribution logic above - an aspect of Wyckoff Rotation Theory - with the use of Elliott Waves and Fibonacci levels to measure how far in a particular move up or down that security is, and where it may terminate in each case before reversing.
Want To Know More About Using Wyckoff Rotation Theory? Watch This Video:
And so to our sector ETF work.
We believe sector rotation analysis to be a compelling way to invest. If you put yourself in the mind of Big Money, you have so much money that you can’t just buy say MSFT 0.00%↑ or DAL 0.00%↑ and hope they go up. Because in doing the buying, you will move the price against yourself before you are done buying - hence the accumulation logic. And when you are done buying, then what? Wait for another whale to come along to buy the thing off of you? No, the way to play if you have the big money is to constantly rotate from growth to value, sector to sector. Accumulate over here, hold over there, distribute a little further over there, sit back do nothing while retail gently weeps, then rinse and repeat.
Pro-tier members here at Cestrian Market Insight can access our sector ETF analysis 24/7. Just head to this note and click through to our charts and ratings. (You can upgrade to Pro-tier membership there if you wish).
Most sector ETFs we now have rated at ‘Hold’, because the securities look to us to be in the markup zone, ie, the place where late money arrives to bid up the stakes accumulated months ago by Big Money. There are, however, a couple of sectors that have still to enjoy the everything-rally that has taken place since Bill Ackman told you to buy equities and bonds. (He actually did. He said it out loud and in public. And bearing in mind that Mr. Ackman is a member of the Advisory Committee of the New York Fed, that call was well worth listening to. It marked the recent bottom in yields and equities alike).
Here are the sector ETFs we rate at Accumulate.