- Measure Risk First After working in the retail money management industry for close to 30 years, I have absolutely developed a few strong convictions along the way
- One of my […]
Measure Risk First
After working in the retail money management industry for close to 30 years, I have absolutely developed a few strong convictions along the way. One of my convictions is that before we invest in a stock, ETF or any other vehicle, we should first assess the overall environment. If the overall environment is not rewarding risk-taking, why take the risk?
After shepherding clients through both the dot com crisis and the Global Financial Crisis (and getting crushed along the way), I realized that what I had been taught in college was not working. Unfortunately, those same failed concepts that I was taught in college were widely preached throughout the industry. For the sake of brevity, just know that I was doing everything that academia and the industry preached. My clients were diversified. We were patient. But we still got crushed.
Ultimately, this led me to the CMT Association and my CMT Charter. Through that work, I eventually developed a composite risk gauge which is shown in Chart #1. In short, this is one way my team and I measure the risk of the environment. It is also color coded. Here we can see that as of Friday, we are on a green candle.
Contrarian Trade, Logic and Trends
Late last week, I had a brief exchange with someone on LinkedIn about TLT, the iShares 20-Year Bond ETF. Chart #2 is showing the weekly chart for TLT. While I do not recall how the conversation started, this individual stated that he liked TLT as a “contrarian trade”. While he supported his idea with some logic, I simply looked at the chart. There’s absolutely nothing on this chart that compels me to think we should be holding TLT. It has been in a clear downtrend since 2020. One could argue that it has found support and should move higher off the support. Fine. Go right ahead.
If you consider yourself to be a Long-Term Investor, go ahead and buy TLT. As for me, I’ll wait until we can see evidence that the trend has indeed changed. I’m not investing client capital in TLT ‘til we see the trend is positive.
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What We Want – ITA
Chart #3 is an example of what we want to be holding. Unfortunately, we missed this trade, so we are not holding this right now. (Nor am I recommending that you buy this right now.) But this is a clear example of what we want to be holding. ITA clearly has some relative strength over the rest of the market.
What’s Strongest – Crypto
Chart #4 is an example of how we enter a position in our Sector Rotation model. To be clear, we are not currently holding IBIT. We are, however, holding a couple of other crypto related ETFs. But, again, I am not recommending that you buy this or any other position.
In this chart, I’ve added a blue-gray rectangle to illustrate what we viewed as classic resistance. In our studies of the stock market, when a stock or ETF breaks through an area of resistance, it can really start to move. Furthermore, if that resistance has been in place for some time, that move higher can be explosive. Nothing is guaranteed of course. But that’s the theory.
You will also see two dates marked on this chart along with a down-trendline.
The first date represents, in our view, the first place we would enter this trade. Technically, the position is moving into that area of resistance. However, it is breaking above the highs from the last couple of days. That is the first area where we would consider buying this position.
As the ETF broke through the resistance, it then consolidated sideways with a downward slant – hence the black down-trendline. That second date marked is the second spot where we would typically initiate a position.
While it is still early in this trade, this is how we want to enter a trade. Hopefully, the trend will end up looking like ITA in Chart #3. But we cannot know that in advance. What we can know is that:
- We are in a risk-on environment.
- IBIT is already demonstrating some demand.
- Now that it is pushing through all-time highs, there is limited supply.
- Increasing demand and limited supply means it should go higher.
P.S. If I could, I would trade Pokemon cards for clients. I posted this on LinkedIn here. You are welcome to connect with me there.
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
