Issue 29

Issue 29

November 18,2020 

This issue is dedicated to all those beautiful turkeys that are sacrificing themselves, for us! 

The Open 

It’s happening again. Desperate grabs and frantic looks. Insecurities driven by a fear of lack. It feels like the street brawls could return at any minute. 

The great toilet paper wars that began in April are back with a vengeance. I went to Kroger last night and witnessed what can only be described as the de-evolution of humanity. No sense of shared struggle and no compassion to help a fellow neighbor. Just snarling and gnashing of teeth, and a few elbows. I was left with empty hands, and a hope that inventory at the home front is enough to carry the winter. 

Here is what we know. Cases are spiking all over the world. Shutdowns are returning and people are growing more concerned. These concerns are translating to behavior that we saw seven months ago and prayed we wouldn’t see again. Shutdowns will lead to supply disruptions, which is why people are hoarding things again. 

We know a vaccine is coming, and according to the news last week from Pfizer it will be here by year-end. Moderna will also have one soon, followed by at least 

three other drug makers within four months. We know the stock market has been celebrating this news by rallying in all parts of the world. 

We also know that surging cases is a tragedy, but with vaccines on the way it is short-term in nature. Therefore, the stock market is rallying. The market sees past the next few months as it prepares for an environment 8-12 months from now. We know covid is toast a year from now. 

We’ve known for a while that regardless of who won the election, policy was going to be generally the same for the next six months. Both parties are under pressure to improve the economy and that means stimulus and other employment friendly moves. It has only been a question of degree. The market has known this since April. 

Here is what we don’t know. Dissemination speed of the vaccines will determine how fast countries get back to normal. There are difficult logistical issues to deal with (such as needing 80 below zero Celsius transportation methods and storage capacity). We don’t know how fully people will return to the way they lived just one year ago. Conditions changed for a long enough period for people and companies to create permanently new and different ways of doing things. A huge supply of large office buildings may never be needed again. I will never go to a mall again, ever (something I’ve been praying for decades!). 

From March 23 to September 2 the Nasdaq screamed up 85%, one of the largest advances in history. The Nasdaq is full of those tech stocks that benefited most from the lockdowns as the world moved a different way. Working and staying at home created huge business opportunities for firms like Microsoft, Zoom and Peloton. On vaccine Monday, these stocks all fell. Zoom fell 28% in the three days after vaccine Monday. Peloton dropped 21% that day alone. The market is adjusting to these unknowns. 

There is another big unknown out there, and it is the most important regarding your investments. Biden will become president, but the democrats lost critical house seats and are unlikely to gain the senate. This is called gridlock. It means few major policy changes for the next two years at least. Here is an interesting statistic. The stock market goes up an average of 17.5% during a gridlocked situation, 14% under republican control and 10% when the democrats are running things. 

I know one more thing. I will never get into a fight over a roll of toilet paper. Save the anger for something more important, like that last Stella Artois on the shelf! 

___________________________________________ 

Let the Dice Fly High 

Las Vegas lives up to its reputation, in every way. It is bright, loud, audacious and bodacious. The gambling goes on 25 hours a day and the party 8 days a week. The hotels are not only massive, but they are exquisitely decked out and chock full of world-class restaurants and entertainment. And how is all this decadence paid for? It is peeled directly from the hide of the gamblers. 

People don’t win in Las Vegas, not consistently at least. There is the occasional hot hand, and that shooter draws a crowd until his dice go cold. When I speak with people without experience in the stock market, they tell me they don’t want to get involved because they don’t like to gamble. I echo that sentiment; I don’t like to gamble either. But I do like to trade stocks and I appreciate the difference between them. There is a difference, and it is critical to long-term success in the stock market to understand exactly what that is. 

The legal definition of gambling is a game of chance. The odds are no better than 50/50. 50/50 are the best odds. They are often much worse. Visit a casino and play roulette. Place your chip on red and you have a 50% chance of winning. If it comes up black, you lose. And you lose all your money, not just a small portion of it. There is nothing you can do to improve your odds. You can’t work harder or think smarter. You can’t create a system. If you do and it works, the casino will kick you out. Roulette isn’t the only game offering zero advantage. 6-deck blackjack, craps (the name should tell you something!) and slot machines are all perfectly designed to keep the casino rolling in the dough. There isn’t much to be done about this. 

Except for one thing. 

Cards. One or two deck blackjack or poker. Poker does require skill. The proof is simple. A skilled poker player will win or place high in competitions on a consistent basis. There are no consistent winners in craps. Blackjack also offers an advantage, but only if it is played with two decks or less. 20 years ago, I was on a surf trip in Costa Rica and I walked into a small casino near the beach. It was off-season for the casino (peak season for surf, though!) and there were no other guests in the joint. I quickly noticed that the blackjack table was playing with two decks, so I quickly sat down and began playing. About two hours later I was up $750 (which is a lot of money in Costa Rica) and the manager approached me. He said I was winning too much and asked if I would leave. He was very nice about it and I understood the problem I was causing them, especially in the off-season with no one else to offset their loss. I left. 

I cleaned out that little casino because I had an edge. I know how to count cards in blackjack, but the system only works with one or two decks. The major casinos in Las Vegas play six decks with a shuffle coming after 70% of the deck has been played. No edge. 

There are a lot of ways to create an edge in the stock market if you know where to look. There are tested systems utilizing decades of trading data that take advantage of patterns which yield consistent returns. The Patterns are always there, just waiting to be spotted by the patient hunter. Spotting them is a learnable trait. Anyone willing to put a little time into the hunting procedure can be taught how to do this. 

If I see a consolidation pattern in a stock and I wait for a break-out, I have an edge. If I notice demand returning after a correction, I have an edge. If I manage my trades using proper techniques, I have an edge. If I throw money into Tesla and close my eyes, I don’t. It is all about the edge. 

Here is another way to help understand the difference between gambling and trading. If you put a chip on black and it comes up red, how much of that chip does the casino take? All of it. If you buy a stock and it drops 10%, how much of your money does the stock market take? Only 10% if it. And what can happen if 

you apply proven methods in the stock market? You can create a sustainably consistent trading business. 

___________________________________________ 

Shoeshine Corner 

His picks from last week are already on fire. XLF is up 3.5% and MS is up 5.3%. With the market overbought on a short-term basis, he is not adding to anything now. The key takeaway, though, is that he is not selling anything, either. 

___________________________________________ 

Bottom Line 

The market did exactly what I expected it to do, with the exception that it hit new highs in weeks instead of months. No matter. What’s next? 

New highs. Again. For the last several weeks I have been writing about being heavily invested in stocks. I repeat that mantra. If you are under-invested, you still have time to get in. You run a risk of buying into a minor correction that may be unfolding now, but any short-term setback should be resolved with new highs in coming months. I repeat, get in. 

I want to close with an important point regarding the longer-term. A lot of people ask me how much higher this market can go. Answer: a lot higher. Bull markets go through cycles. The initial phase is a massive surge to the upside with everything going up, even the worst stocks. This is when everyone feels stocks are a terrible idea and are about to smashed again. Think back to March and April. Stocks go up in the face of bad news. 

The next phase is a little more of grind to the upside. News is better, people feel more positive and the future looks bright. It is during this phase that reality sort of matches expectations. I believe we entered this phase last month. It is the longest lasting of the phases. 

The final portion of a bull market is a stupid explosion to the upside, with caution thrown to the wind. The favored stocks go parabolic and everyone is starry eyed about the future. Expectations no longer match reality, as people expect 

unattainable results from corporations. The duration of this phase is typically the shortest. We are not there yet. 

It will take many months before we reach the final phase. The S&P 500 should hit 4,000 at some point in 2021. Some stocks will go much higher. The short-term could be a little goofy, but 4-6 months has upside written all over it. 

___________________________________________ 

Investing and trading are hard; TradeHawk can help. Please contact us with any comments or questions. 

hawk@tradehawk1.com 

317-452-2083 

TradeHawk is published weekly by TradeHawk Corporation and is made available to subscribers for information purposes only. References to any specific securities herein does not constitute an offer to buy or sell such securities. This publication contains statements and statistics which have been obtained from sources believed to be reliable, but cannot be guaranteed either as to accuracy or completeness. TradeHawk accepts no liability whatsoever whether in contract, in tort, for negligence, or otherwise for any direct or consequential loss of any kind arising out of the use of this publication or its contents or of the recipient relying on any such information. Subscriptions must be entered in the name of an individual. Subscriber agrees, subject to immediate termination of service, not to disseminate or furbish to others, including associates, branch offices or affiliates, the information contained in any reports issued by TradeHawk without consent. All quotations and reproductions are strictly prohibited without consent.