If you’ve been wondering why the market has been so choppy lately, it’s because there is no clear trend.
Granted, that’s like saying that if I were 6’6″ and had a rocket-laser arm, I’d be a pro-football quarterback…
The obvious aside, the most fundamental part of being an investor is knowing the trend and taking appropriate action.
You can make money in bear markets by trading puts; you can make money in bull markets by simply buying stocks. And yes, you can make money in sideways markets by selling options, as well by using a host of other, more esoteric financial instruments.
But the key is knowing what type of market we are in…
Above is a ten-year chart of the SP500. Each candlestick is a month; the three lines are moving averages.
This is what I call my Tri-Directional Indicator (TDI). It tells you when to buy, when to short, and when to sit on the sidelines.
It works like this: If the lines are equidistant and trending, you are in a bull or a bear market. If the lines are crossing or deviate from a parallel, you are in a transitional market.
There have been four transitions over the last ten years on the SP500. It’s not a perfect tool, but it’s a good starting point.
You could have invested with confidence midway through 2004 and sold near the top in 2008. It would have gotten you out near the tops in 2000 and 2008. The TDI would have put you on the short side in 2001.
We are nowhere, man
Right now, there is no long-term trend in the market. And since I have no confidence in the direction of the market, I don’t want to be in a U.S.-focused diversified mutual fund.
But as they say in the funny papers, there’s always a bull market somewhere…
AutoZone, for example, has been on fire lately. People fix their own cars in recessions and keep them longer. Take a look:
American Oil and Gas has also been doing well. This is a small exploration company in North Dakota with many assets.
I’m sure you’ve heard about the North Dakota oil and gas rush before… My buddy Keith Kohl has been telling you about the Bakken formation for years now — and he is up more than 400% on one company.
Another big winner has been Bidu, the Chinese search engine. China kicked Google out and Bidu took off…
My point is that if you listen to the mainstream media, you’d think that there weren’t any opportunities out there. And you be right — if you want to invest in the standard “buy and hold” diversified funds that Wall Street has been shilling for years.
But the truth is that if you had bought any of these funds over the past 14 years, you’d be about to break even — or you’d be down.
As I write this, the Dow is down 208 points. The long faces on CNBC are pathetic.
But you don’t have to play their game…
We live in a stockpickers’ world.
The Mongolian Stock Exchange has gone from 4,719 at this point last year to 9,876 — and this is after the worst winter on record decimated the country’s livestock. (That’s a 109% gain for those playing at home.)
And this run is just getting started.
No one but me is talking about Mongolia… and it’s incredibly cheap.
I’ve found a coal company with a market cap of $18 million and reserves of $70 million tonnes… I’ve found an oil company with $618 million barrels of oil — plus some new licenses that could double that — and yet it has a market cap of $40 million. That’s just crazy.
I’ve found the largest broker in Mongolia that controls a 60% market share on the stock exchange. It will be one of the largest beneficiaries when investments continue to flood in.
This is a story that has been has been repeated over and over again in emerging markets. It is what South Korea, Indonesia, and Vietnam were 12 years ago, when no one would touch them. A number of those stocks went 100:1 in the past decade.
I remember when the likes of Brazil, Chile, and Mexico were places investors wouldn’t go. Petrobras (PBR) went from $2 in 2002, to $80 in 2008. That’s the kind of opportunity you have here in Mongolia.
But I digress…
What I’m trying to tell you is that the old Wall Street adage — there’s always a bull market somewhere — is true. You just have to find it.
Let the fools and hand-wringers mope and fret.
You don’t have to play their game.
If the major U.S. markets are uncertain, don’t buy them. Find your opportunities elsewhere.
When we get a solid bottom in the S&P, I’ll be sure to write.
Editor, Energy and Capital