🍔The Most Important Lesson

Only elite investors understand this key idea.

Welcome back to MktContext! We explain the economy and time the stock market.

For the past two weeks, SPX has been in an unstoppable rally. 8 straight days of green bars and up nearly 10%. We were lucky to buy near the bottom, as shared with our paid subscribers.

This week we deployed the remainder of our cash — our trades and portfolio are in the premium section.

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Today’s topics: Opportunity costs, market psychology, our BIG framework, new econ data, SECRET bull signals, our trades and portfolio.

What’s your opportunity cost?

The bid has been relentless and many are calling this the most hated rally (and most hated bull market) of all time. In times like these, there is a huge opportunity cost to missing out on the rally. This is perhaps the most important lesson you will learn as a market timer – one that absolutely no one talks about.

Most market timers understand the objective of avoiding a selloff. You want to sell at the peak, sidestep the selloff, and buy at the bottom. Simple (lol). That's how we protect the portfolio and add to returns compared to a buy-and-hold strategy.

The second, more important objective is to participate in upside. The stock market on average goes up 9% a year; much more in a bull market. That’s your opportunity cost. The market tends to go up, therefore you want to be invested as much of the time as possible. It’s like having the house edge in a casino. You are losing by holding cash/bonds while the stock market is going up.

Look, we get it wrong sometimes. It’s hard to catch tops and bottoms. Fake-outs happen. But the worst thing you can do to your returns is NOT buying back in once a rally is happening.

Let’s say you sold your whole portfolio on July 16^th at the exact peak of SPX at $5,670. Great job! But oops, you missed buying the bottom. No worries, you’ll wait for a pullback. Hmmmm, there’s no pullback. It’s gotta pull back some time right? Before you know it, the market is at new highs and you’re still in cash. Your perfect top call is now losing you money; you would’ve been better off holding through the drawdown.

Straight green bars, no pullbacks.

The remedy is to set a stop-buy. That’s like a stop-loss, but instead of selling, it buys. This is a line-in-the-sand that says, “no matter what happens, if the market recovers to this level, I will buy”. So if the selloff doesn’t materialize, or you miss the bottom, the stop-buy will automatically bring you back in so you don’t miss the rally.

In 2009 smart investors held onto cash, expecting a deeper recession, only to miss a DECADE-long bull run. “I’ll buy the next crash!” they say. Of course, the crash never comes, and even when it does, the bottom is higher than where they first sold. Some of the market’s biggest up days are found in the depths of a bear market. It’s expensive to miss those.

Even the best investors fall into this trap. Warren Buffet had an unfathomable $150 billion cash pile exiting the Covid crash. Ironically, he was waiting for an emergency phone call from the Federal Reserve that never came. When the world didn’t end, he missed out on one of the greatest bull markets of all time.

That’s a key tenet of market timing. You must time BOTH top AND bottom, not either/or. If you miss, have a plan to get back in.

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Market psychology

It’s also important to understand market psychology. Do any of these sound familiar:

• “It’s gone up too much too fast; it HAS to come back down”

• “We’re still in a recession, there’s no way it can rally”

• “It’s too high to buy now, I’ll buy the next pullback”

• “There’s still [X, Y, Z] risk out there, I’m fine holding cash…”

Sound farfetched? These were real quotes I heard daily after the Covid crash of 2020 when the market was making that unbelievable V-shaped recovery. Granted, it was easy to believe the world was ending. But those people missed a massive 120% rebound to new highs. We saw some of the largest daily up-moves on record. For example, if you were 30% cash, which a lot of people were, you missed out on a whopping 36% return in SPX.

Again, same remedy — set a stop-buy to get back in. Protect yourself from yourself in case you’re wrong. No matter how confident we are in our macro or technical view, we can be wrong. A trader’s greatest asset is an external voice to tell them they’re wrong.

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Our big framework

Ok back to business now. Where is the SPX going? SPX price is driven by three things: 1) earnings, 2) P/E multiple, and…

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• Our big framework

• New econ data

• Secret Bull signals!

• Our trades and portfolio

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