Market Breadth at All Time Highs - what do you trust?

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• 0:00Speaker 00

  Hey everybody, it's Michael Martin. Thanks for being here. So, following on from yesterday's episode, I wanted to talk to you about something that killed me when I was coming up. And you don't know these kinds of things. Nowadays, you might know it because there's some really good YouTubers who are doing lots of how-to videos and this and that. But it's one of the sneaky things that you see, and that is if you know you have your list, even names that are making all-time highs, you might be inclined to go long, you might be inclined to even add to your winner. But as we mentioned at the end of yesterday's video, even though some things, a few names, maybe even some of the markets are kicking into all-time highs, near-term highs, the breadth of the overall market has been weak.

• 0:44Speaker 00

  And I looked a couple of times last week, and although, yes, there are names that are making new 52-week highs, and in some of those instances, multi-year highs and even all-time highs, the overall breadth is just not there. So it's kind of misleading to think that the market is, I don't want to say healthy, but it's like, safe. That was where I had the mental issue, was like, hmm, things look good, the Dow's making new highs. Well, the Dow, it could be four names in the Dow that are cranking it, and the rest are just, you know, there's 30 names, so the other 26 could be falling to pieces. So you step back in, thinking like, hey, everything is fine, and then all of a sudden, the market just drops out from underneath you. Why? Because the momentum and the buying of those handful of names that are pushing the index,

• 1:28Speaker 00

  or even the indices higher, the buying there stops. There wasn't buying in all the other names, and all of a sudden, people are like, nope, I'm not doing it. We're facing a higher interest rate environment, we got $140 crude oil, whatever it is, I don't even know, USO, and whatever, 120 crude in the futures markets, like, all of that's gonna play out. Inflation is there, we might raise rates again, energy prices are gonna start to hit the tape. Most of those companies, they look at it as like, long-term, it all averages out, so they don't bother hedging. Maybe some of the airlines, like Scott Topping, used to be the hedger in the treasurer's

• 2:08Speaker 00

  office at Southwest, but he's been retired, probably 10 years by now. And some of the places just figure like, hey, if there's higher fuel charges, we're just gonna pass those costs on to the end-user, right? So if you're looking at buying plane tickets, you might find that your airfare's a little higher. Why? Well, Jet Fuel A comes from crude oil, right? Your UPS charges might go higher. Why? Well, because they're driving all over the place. Some of the vehicles are hybrids, some of them might be natural gas or biofuels, but at the end of the day, higher energy costs affect the overall system. So what happens when the market participants back off? You have to be very, very, very proactive.

• 2:53Speaker 00

  I'll say that again, very, very, very proactive. Be like your mom. Because what we're trying to do is be like the mice that are tap dancing in between the feet of the elephants, right? Especially if you're a short-term trader, you can do very, very well if you have a good sense of timing. I don't know when this is gonna hit the tape, or when it's gonna show up, but I have a feeling, right? And it's an emotional feeling that if this kind of stuff continues, you might see big rallies in the marketplace, but I don't know that they're gonna be sustained. So if you see a monster day in the market, I don't think the market's back. Yeah, we're back, baby.

• 3:32Speaker 00

  I hope your equity's burgeoning, but I would still be very, very protective of your cash in the world that we live in right now. Interest rates, higher interest rates tend to support the local currency, but that's something that you'd have to watch as well, as like, another one of those things, like I showed you on the chart, markets are making all-time highs, but there were 250 names making new 52-week lows, and 100 or fewer that are making new 52-week highs. So I would look at that as a surrogate, at least for market breadth. You can look at put-call ratio, and then watch the behavior.

• 4:15Speaker 00

  Like, when there's strength in the market, is it sustained? It hasn't been. So that kind of tells you that the moments are fleeting, and it's a, as we used to say, there might be different slang now, that it's kind of a make-it-and-take-it kind of market, which is hard for me, because that's not my natural inclination as a trader. I'm not a make-it-and-take-it guy, but I have been much more, put the trade on, adjust your stops very frequently during the day, and then, you know, get knocked out, to protect your capital, because that's what we're getting at here. This is about the emotional intelligence of learning how to play superior defense. Because if you can survive moments like this, there will be a time when the market comes

• 4:56Speaker 00

  back and it starts raging, and you'll have less of a drawdown to have to overcome, so you can get back to profitability that much more quickly. You see? So, look for these things, look for evidence of weakness, try to be a scientist, and to disprove the feeling that you have about, it's safe to come back into the market and buy some of these, you know, Michael Saylor, Bitcoin, chipmakers, whatever you might have fallen in love with, be enough of a scientist, dare I say journalism, because everyone wants to be an op-ed writer anymore. What is journalism? You can't get the who, what, when, where, why, and how anymore, and just get straight just the facts. Everyone's gotta give you color.

• 5:41Speaker 00

  Try to disprove, like a scientist, your own theory. Like, if you're bullish, don't just say, well, the stock is up, or the instrument is up, therefore it's bullish. Try to disprove it, look for evidence that would disprove you. It might make you uncomfortable, but the goal here is to save you from losing money. If you can develop that skill, you're gonna be much more successful, in my humble opinion, as a trader. Because being able to sidestep bigger losses, because I had friends saying to me, like, you're an idiot, it's Intel, the government owns 10% of it, or whatever the number is, I don't even know, like, you're an idiot to sell. And I'm like, well, you know, my basis was like 100 and, I'm gonna say 109, it might have been 105, maybe because they rhyme, I can't remember, and I got out near like

• 6:26Speaker 00

  120. And I thought that was a good exit, because it was showing weakness, and I'm like, no, on this particular day, I need to see a thrust day, I need to see strength, and I want to see above-average volume. And we just didn't see it. And so you have to trade the reality, you have to trade what is, right? Isn't that, I don't know who said it, amor fati, love what is? And so, you know, that was the right thing to do. I much rather would have held it, because it was kind of a starter piece, I think I remember telling you all here, I had about 10% of my account, I located to that position in the stock, not options, and I was ready, willing, and able to add more as we approached the 130, and then have a lot more as we took out the all-time high, at which point I would

• 7:10Speaker 00

  have been, as I say, fully loaded. And, of course, adjusting my protective stops all along the way, I'm not gonna sit there with a monster piece on. I would have taken it home, but it didn't work out, so you have to flush it. And, you know, that's just the way that it goes. So, be mindful before you start making gigantic conviction in the market on any one particular trade. If you're trading the indices and they're making all-time highs, then yes, you have to stick with the trend, but just understand that the overall breadth, which a lot of people look at to determine market health, has not been very, very strong. And that makes, what happens is, if the buying slows down, or abruptly stops, there becomes

• 7:54Speaker 00

  a lookout below kind of deal, where you can see a 5% move down in the market, in a day, or in a particular stock. For no particular reason, it's just that money's been cheap for so long, and some of these names are up 400, 500, 600, 1,000%, like, if you don't already own them, what the hell have you been doing the past two years? So, it's like, if there's no one left to buy, what are they gonna do? They're either gonna sell calls, trim their positions, you know, and wait for the pullback, and then use a continuation pattern to add back in at lower prices, when maybe you were holding the bag. So don't find yourself in that spot.

• 8:34Speaker 00

  You always have to be proactive, always managing the risk, even if you don't want to, because if the weakness shows up, you just don't know how weak it can get, right? Weak can get weaker, right? Bad can go to worse. That's how you have to think. You can always come back tomorrow and get back in. But this is a time, if there's ever been a time since I've done this show, this is a time where you really have to know, like, okay, what's the max amount of money that you want to risk across your entire account, right? Call that portfolio heat, and that could be across all the names that you either have right now, or that you may be in and out of at any particular time.

• 9:18Speaker 00

  And then, for sure, know what you're gonna risk on a per-trade basis. Lock that in, double-check your math, double-check your position size, because I don't know for sure, but I have a hunch, when the market slips, it could move very, very quickly and catch an unsuspecting person off-guard, like it did to me, you know, some, you know, whatever it was, 30 years ago, maybe, maybe more, in that if people don't tell you this, this is one of those things you kind of have to learn the hard way, well, I'm telling you now. Make sure you look at the breadth, look at the follow-through, if the things are making new highs and then are pulling back, that's the market talking to you, that institutions, people who have more money than you, people who might have much more research capabilities

• 10:02Speaker 00

  than you have, are selling into that strength. They're not looking to add risk, they're cutting their risk. So if you're looking to add risk, when people who have much more clout than you are de-risking, don't forget, there's a trillion dollars at leverage or something like that in type 2, like, that's money that has to get paid back. So I think that there might be some, and it's not a margin call situation, but I think in anticipation of knowing that those reg-t balances eventually have to get paid back, also knowing that when interest rates go higher, broker-call money goes higher. So all your reg-t margin rates now are gonna reflect the current interest rate environment.

• 10:43Speaker 00

  So if you're paying 8, 9, 10% on margin balance, and buying and holding is 8, 9, 10% rate of return, and we're coming into a market where the market breadth is bad, interest rates are high, inflation is there, we've had higher crude prices now since March, or whatever, institutions are saying, hmm, we have to go into defense mode. So don't, there's no indicator for that, it's more of a market feel, you can develop it, I have it. Just be mindful of what's going on, and look at the reality of these things, protect your cash. Please like and subscribe, and if you haven't already gotten your copy of The Inner Voice Trading, you can click the link below. Thanks for everything, and I'll see you tomorrow.