Do Yourself a Favor and Just Be Greedy By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - Being contrarian is grossly overrated…
- Why you should be greedy when others are greedy…
- One big bear call to check on in 2034…
- Druckenmiller is short bonds and avoiding China…
- In the shorter term, expect a surge in volatility…
Being a contrarian investor is rarely a good idea… People love to think they can make money by being a naysayer maverick and constantly doing the opposite of what most people are doing. It’s an attractive idea, in an anti-hero sort of way. And some investors – mainly extremely well-connected hedge-fund types (like one we’ll talk about today) – can actually pull it off. But for the most part, it just doesn’t hold up as a good strategy for everyday people. Take one of the most popular investing maxims that new investors learn: “Be greedy when others are fearful and fearful when others are greedy.” Warren Buffett said this, and hardly anyone disagrees. Practically speaking, he’s advising you to buy stocks when they’re down a lot and sell them when they’re up a lot. Again, it sounds logical and clever… and most investors hold it in the back of their head every day. Right now, for example, the S&P 500 just closed out a six-week win streak. Sounds greedy. So, we shouldn’t buy stocks, right? The weird thing is, the data I’m about to share proves otherwise. In fact, it suggests that you should probably just be greedy all the time. Being greedy beats the market… Six-week win streaks have happened 66 times since the S&P 500 started trading in 1993. - On average, stocks were higher a month later almost 73% of the time.
- The average return was 1%, counting wins and losses.
- The average winner was 2.3%, and the average loser was 2.6%.
- All these returns beat the long-term average.
So, if you looked at the last six weeks and say to yourself “wow, everyone’s so greedy, I’m cashing in,” you’ll be missing out. Let’s pretend stocks were down six weeks straight and you held for the same period. Scary, right? What then? That’s a good trade, too. But not as good as you’d expect. A month after the six-week losing streak, stocks had a positive return 82.4% of the time, an average return of 2.6%, an average winner of 4.7%, and an average loss of -6.8%. Wait a minute… So, the average loss is quite a bit worse, but all the other stats are better. What’s not good about that? The fatal flaw is this has only happened 17 times over the same 29-year period. So, it’s almost four times more likely that stocks will put on a six-week win streak than a six-week losing streak. Would you rather make 2.6% 17 times or 1% 66 times? (The math isn’t hard, but I’ll do it for you: 44.2% vs. 66%. You want the latter.) Here’s why I bring all this up… Goldman Sachs came out with a report predicting a lost decade for stocks, forecasting 3% annualized returns over the next 10 years. And when they factor in inflation, their forecast becomes a real annualized return of 1% – painful. If that happens, it means the S&P 500 will be just 30% higher by 2034, or at a level of about 7,500. For comparison, the S&P 500 has returned close to 200% over the last 10 years. The reason why is a combination of valuations – as we covered Monday – and growth assumptions. We’re in a strange period where the largest companies are seeing some of the highest growth rates in the market. Goldman thinks that these companies won’t keep growing to the sky, and that the S&P 500’s over-concentration towards them threatens to kneecap its returns. To be clear, this may well turn out to be the case. The first 10 years of the 21st century were a lost decade for the S&P 500. We saw the same in the ‘70s. It could happen again. Stocks could go up, down, or sideways – and the fact is nobody knows exactly what to expect. But when you see headlines like this, you have to remember three things. The first one is, most people don’t just buy stocks one time then do nothing for 10 years, as this forecast presumes. Thankfully, most investors buy continually, taking advantage of long-term compounding and lowering their cost basis on an initial position. Secondly, this assumes that you’re investing in the broad S&P 500 rather than individual market-beating stocks or those that pay great dividends. You can find examples over any length of time of high-quality stocks beating the market. And now with interest rates falling, sectors like tech, small-caps, mid-caps and real estate all have tailwinds at their back to become the next market leaders. Finally, it assumes you’ll just keep holding and never trade your account. Sideways markets are a terrible time to buy and hold, but they’re great for timing the market by trading overbought or oversold conditions… or selling options for income… or seeking seasonal strength in certain stocks or sectors. We have the tools at TradeSmith to help you do all of this – not to mention picking great market-beating stocks. Jason Bodner’s your guy for that. Since 1990, his quantitative stock-picking model would’ve outperformed the market 7-to-1. Jason recently went live with a forecast of his own, one very different from the folks at Goldman Sachs. He believes that right now, we’re in a small window of time when picking the right stocks will lead to outsized returns in the next year. It’s the kind of setup that can shave years off the wait for a comfortable retirement. Go right here to learn more from Jason on this major timely theme, including some tips on how to prepare. Stanley Druckenmiller just outlined a few key bets… The billionaire hedge fund manager has given a bunch of headline-grabbing interviews lately. Apparently he’s been shorting U.S. Treasury bonds, accounting for around 15% to 20% of his portfolio. Details on which durations are not yet known, but he mentioned that he began building the short position right after the Fed’s first rate cuts. We agree with Druckenmiller on the reason why he’s shorting bonds. Essentially, the idea is that the inflation fight was called far too early… and that we should see inflation rates tick up again next year. Our own theory has to do with a growing Middle East conflict, the trend of blue-collar workers fighting tooth and nail against automation, and falling short-term lending and savings rates encouraging spending. (We won’t recap it all today, but you can go here for all the details.) Druckenmiller’s bond short points to a factor that nobody will disagree with: We’re in for even more fiscal irresponsibility out of the White House no matter who becomes president next. Shorting Treasurys means Druckenmiller expects long-term yields to go higher as U.S. debtholders demand more returns in a high-inflation, high-spending era. This forecast happens to feed right into what Goldman Sachs is saying, and even amplifies it. The lost decade of the 1970s was market by high inflation and poor stock-market returns. Goldman assumes a tame inflation rate of about 2% in its forecast, but a higher inflation rate would only eat into low returns even further, granting investors a negative real return. All this just reinforces what we said above. It’s more important than ever to not count on simple, buy-and-hold strategies. That means trading, stock-picking, and income-oriented strategies like options selling should all be on the table. You’ll be well equipped for those tactics with our TradeSmith tools and research manpower… And stay tuned for this afternoon, where Keith Kaplan will demonstrate how our founding ethos put our subscribers in an ideal position for what could be ahead of us. How to deal with election day volatility… At TradeSmith, we devote nearly all of our time and resources into helping our subscribers gain an edge other investors won’t have, especially if we can play off unique scenarios. The upcoming election is the perfect example. Everyone who’s aware of the election knows to expect a bit of chaos and uncertainty two weeks from now. But few know how to actually trade it. We found the answer is pretty simple. Going back and closely studying the movements of the CBOE Volatility Index (VIX) during the past eight election cycles, we found that there have been zero instances of a negative return in the S&P 500 between the end of October and the end of December. However, that’s despite the fact that the VIX does tend to pop around the date of the election … giving a short-term window of chaos to take advantage of lower prices. Take the most recent election. The week before election day in 2020, the VIX shot up to 40. Afterwards the VIX normalized, and the S&P 500 returned nearly 15% in the two months to end the year. We saw the same thing in 2016. The Friday before election day, the VIX rose to nearly 23 – high for the time. Despite that, stocks returned 9.2% two months later. Even in 2012, the VIX popped up to 18 right around election day; Nov. 15 was an ideal entry point to a 9.4% return two months later. These VIX surges around election day are key bull signals to watch out for. But our friends at The Freeport Society have identified something else set to mix things up this year. You see, the Fed is set to make its next interest-rate decision immediately after the election – possibly while the question of who’s won has not yet fully been answered. In other words, we have two events happening at once that both promise to drive volatility. And while the Fed does tend to meet around the same time each November, the recent start to the rate-cutting cycle means it’s a big deal. Along with volatility comes emotions. But do your best to set those aside when it comes to your investments. The experts at Freeport urge you not to panic-sell any long-term holdings even if the market goes risk-off for a moment. Instead, you’ll want to use any volatility as an opportunity to get into the stocks best positioned for growth no matter who enters the Oval Office on January 20. Freeport knows all about how to find these, similarly to how we do at TradeSmith – with money flows. And if you’d like to better understand the kinds of stocks you should look for during this post-election volatility hangover, you should join Freeport for their upcoming free research webinar. Get the details and RSVP here, then look to start raising a slug of cash you can deploy after Election Day. To your health and wealth,  Michael Salvatore
Editor, TradeSmith Daily | 
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