Trading Lesson of the Week

• November 13, 2023
• DIDIY | BBAI

In This Week’s Issue:

• Market Outlook – Bond Market Reversal?
• This Week’s Market Minutes video – The Next Strong Stock Group May be This One
• Trader Training – A Good Time to Buy?
• Strategy – Stockscores Simple

Market Outlook – Bond Market Reversal?

Stocks are showing signs of bottoming with the large cap stocks leading the way to the upside. While the small cap stocks have lagged the bigger companies, they likely have the most to gain if the bond market bottoms out and starts to move up, taking interest rates lower. That’s because the small cap stocks are much more sensitive to higher interest rates and should move up if the weak bond market continues to stabilize and move up.

Gold and Oil are stable but don’t appear likely to move significantly higher in the short term. If the TSX is to move higher, it will need the non-commodity sectors, which have lagged, to recover. Some sign of improvement but still a lot of work to be done for the TSX.

This Week’s Market Minutes video – The Next Strong Stock Group May be This One …

The worst sectors of the stock market often become the best. This week, I highlight an area of the market that has underperformed but is starting to turn and could be the next hot sector. Then, I provide my analysis of the overall market and look at the day trade of the week on TLS.

https://youtu.be/3utUzy-y9iI

Click here to watch this week’s video

Trader Education – A Good Time to Buy?

Simple approaches to any practice usually work the best. Finding the simple solution is not always easy, doing so can take the most experience. This is true in trading too and one simple concept to keep in mind when trading stocks is that there is strength in weakness (and weakness in strength).

What do you do when you are optimistic about a stock? Assuming you invest in stocks at all, you probably buy. When you are pessimistic, there is a good chance you sell.

Suppose there are 100 people who can trade the stock market and approach the market in this rational way.

If 30 of them are optimistic about the market and 70 are pessimistic then there are 30 potential buyers and 70 likely sellers. The sellers are stronger and will likely push the market lower.

What happens when a pessimist sells or an optimist buys? The seller no longer has shares to sell and becomes a person who is more likely to buy in the future. The buyer now has shares and is a more likely seller in the future.

If most people in the market are optimistic, they are also likely owners of the market and less likely to buy in the future. The more optimistic the market, the more likely people will sell in the future.

If most people in the market are pessimistic, they have likely already sold and are therefore likely to be future buyers as prices fall.

Market strength is driven by optimism that is likely to turn to pessimism once prices get high enough. Market weakness is driven by pessimism that will eventually turn to optimism once prices get low enough.

That is why weakness brings strength, and strength brings weakness.

Keep this in mind when analyzing a stock. It is why I don't like to chase stocks that have been going up for a while. I prefer to buy just when stocks start to go up. I also like to sell just when upward trends are broken rather than sell after a stock has been going down for a while.

You can apply this thinking with a very simple chart analysis method. Use trendlines to define who is in control of the market and then look for a change of control. A downward trend means the sellers are in control so watch for a break of the downward trend to indicate the buyers are going to come in off of the sidelines and turn the market around.

There is strength in weakness as long as you get the timing right. With the break of the downward trend line that happened today, it may now be the time to start buying again.