AS MARKET TRENDS CONTINUE TO DROP – WHERE IS A GOOD PLACE TO INVEST? – June 21, 2022
Market trends continue to drop due to investor concerns about geopolitical events, record inflation, rising interest rates, slowing housing, plummeting auto sales, increasing retail inventories, expanding consumer credit, and pending layoffs.
Even stocks that had previously held up or remained strong now seem to be showing signs of topping and breaking down. This is normal behavior for a bear market trend where the initial wave of vulnerable markets takes a hit which then causes traders to shelter their remaining cash in more robust markets. But as losses mount and their capital diminishes, traders eventually are forced to liquidate even their strong market assets to meet margin calls and raise needed cash.
As we review the following market trends, we quickly realize that the best option for most traders is to simply go to cash, watch, and wait.
BERKSHIRE HATHAWAY -25.34%
- BRK was one of the few companies in the early part of Q1 2022 that bucked the downtrend and had remained strong.
- By the end of Q1 2022, BRK had put in a top that was greater than 200% of its Covid 2020 low.
- Now, as we approach the end of Q2 2022, BRK has lost -25.34% and is down -10.34% year-to-date.
BERKSHIRE HATHAWAY INC • BRK.A • NYSE • DAILY
QQQ NASDAQ 100 ETF -33.16%
- QQQ put in its top at the very end of Q4 2021 primarily due to rising inflation and the strong US dollar.
- After its initial Q1 2022 drop of -21.6%, QQQ had a rally back up, which was a 61.8% correction to put in a lower top.
- Now, as we approach the end of Q2 2022, QQQ has lost -33.16% and is down -30.98% year-to-date.
INVESCO QQQ TRUST SERIES 1 ETF • TBF • ARCA • DAILY
RUSSELL 2000 INDEX -32.23%
- The Russell 2000 index (comprised of 2,000 small-cap companies) put in its top at the very end of Q4 2021 due to rising inflation and the strong US dollar.
- After its initial Q1 2022 drop of -20.93%, the Russell had a rally back up, which was a 38.2% correction to put in a lower secondary top.
- Now, as we approach the end of Q2 2022, the Russell has lost -32.23% and is down -25.81% year-to-date.
US RUSSELL 2000 STOCK INDEX • OANDA • DAILY
BITCOIN -71.87%
- Bitcoin put in its final top at the very end of Q4 2021.
- Bitcoin had a 68-day rally back up, which only corrected about 35% of its initial down move to put in a lower secondary top.
- Now, as we approach the end of Q2 2022, Bitcoin has lost -71.87%.
BITCOIN / US DOLLAR • BTCUSD • BITFINEX • DAILY
VALUABLE INSIGHTS FROM SUCCESSFUL TRADERS
Market Wizards by Jack D Schwager (www.Amazon.com) is packed with insights from successful traders who have shared their wisdom based on firsthand trading experiences. Here are a few of our favorites:
Willian O’Neil:
- “You have to cut your losses fast.”
- “You should be able to win even if you are right only half the time.”
- “The key is to lose the least amount of money possible when you are wrong.”
David Ryan:
- “A rigid stop-loss rule is an essential ingredient to the trading approach of many successful traders.”
Marty Schwartz:
- “One of the tactics in the Marine Corps officer’s manual is either go forward or backward.”
- “Don’t just sit there if you are getting the hell beat out of you.”
- “Even retreating is offensive, because you are still doing something.”
- “As a trader, you a forced to confront your mistakes because the numbers don’t lie.”
- “The most important thing is money management, money management, money management.”
- “I try not to go against the moving averages; it is self-destructive.” “Is the price above or below the moving average?” “That works better than any tool I have.”
LEARN FROM OUR TEAM OF SEASONED TRADERS
In today’s market trend environment, it’s imperative to assess our trading plans, portfolio holdings, and cash reserves. As professional technical traders, we always follow price. At first glance, this seems very straightforward and simple. But emotions can interfere with a trader’s success when they buck the trend (price). Remember, our ego aside, protecting our hard-earned capital is essential to our survival and success.
Successfully managing our drawdowns ensures our trading success. The larger the loss, the more difficult it will be to make up. Consider the following:
- A loss of 10% requires an 11% gain to recover.
- A 50% loss requires a 100% gain to recover.
- A 60% loss requires an even more daunting 150% gain to simply break even.
Recovery time also varies significantly depending upon the magnitude of the drawdown:
- A 10% drawdown can typically be recovered in weeks to a few months.
- A 50% drawdown may take many years to recover.
Depending on a trader’s age, they may not have the time to wait nor the patience for a market recovery. Successful traders know it’s critical to keep drawdowns with reason, as most have learned this principle the hard way.
Author: Chris Vermeulen