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If It Was Easy And Felt Good, Everyone Could Do It
If you’ve been with us a while here at our badly-named newsletter, Cestrian ETF Select, you’ll know that our focus here is sector rotation. This is a weaselly method used by Big Money types so that they can make money whether markets are going up, down, or sideways. It’s a particularly good method in sideways markets, when neither bulls nor bears are achieving anything much, but rotation artistes? They can be printing money.
In its idealized form the method is based on the Wyckoff Cycle. This is the notion that if you run enough money you can more or less define how a security moves. Some folks reading this note do run that much money, others don’t. Doesn’t matter. Since Wyckoff’s day, the advent of free stock charting tools give you a fairly clear view on what Big Money might be up to, so that you can tag along. You won’t know their plan in advance, but the delay is short enough that you can still collect more than a few meager breadcrumbs from their table.
The idea is simple.
Accumulation
When a security is in the doldrums, scoop up little chunks of it quietly whilst nobody is looking. If it runs up too much, take some gains. If it craters, buy a little more. All slowly-slowly, no emotion. Remember - your model here is a boring portfolio manager who looks like s/he worked for IBM in the 1950s, takes the same sliced-bread sandwich to work every day, drives a modest sedan, owns a nice but still modest home in a good suburb, takes nice vacations but they don’t involve yachts. And has a 401(k) that could buy a small town outright. Your model here is not Chad And The Crypto Bros, no matter how many Lambos they may have leased in the last couple years. If you find yourself getting Chad FOMO? Just repeat the mantra. “Only leased”, you say to yourself. “The Lambos are only leased”.
Markup
When you see a raft of talking heads on TV, grownups who ought to and in fact do know better than to be talking Grandpa and Grandma into buying Acme McDoodle Inc, the latest stock to wow the Street, you know you’re in the markup phase for ACME. This is when two kinds of investors are buying. One, momentum funds. They are smart and know what they are doing. They buy high and sell higher. That sounds dumb but works if you know how to do it. These kinds of investors are helping you if you already accumulated in the doldrums. Two, Chad. Chad is not smart and does not know what he (most always he) is doing.
Distribution
As the security reaches a local high and you see it plateau, you can assume some distribution is likely taking place. At this point Big Money is selling the stock - and only one kind of investor is buying, and that’s Chad. Because BTD. It’s gonna rip next week, etc. Institutional selling here is either rapid - that’s the momentum folks dumping to realize quick gains, kudos to them - or measured and slow - that’s your IBMers once more. Stock moves down too fast? They may buy a little to support the price. Moves up again? Sell a little. Calm. Careful. No yachts. Think Lexus not Lambo. You see?
Markdown
Talking heads again. It’s all going to hell - RUN! By now your momentum funds and your institutional IBMers are out of the name, Chad is still buying dips, long/short funds are shorting the name, it’s carnage out there. You don’t care, because if you followed the Wyckoff Cycle, you’re long gone too. You’re not buying dips because you know the downcycle will take longer than everyone expects. You’re looking around for the next doldrum-dwelling security to start quietly accumulating. YOLO does not feature anywhere in your mindset.
If you think the above is just idealized fairytale gumbo, it isn’t. Here’s IWM, the Russell 2000 index ETF.
Yikes. It’s real!! And look at the patience and the timeframes. Multi-year accumulation; rapid markup; yearlong distribution; rapid markdown. It may be that we are now in an accumulation phase once more, we shall see.
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Now for the meaty part.
Two Actionable Ideas
We have for you today two such opportunities which we believe are in the accumulation phase. We don’t think these are banzai Lambo plays; we do think that the careful investor who idolizes the IBMer approach to making money could do rather well with these ideas. They’re both simple SPDR ETFs.
Paying subscribers here can move right along to these two long-term ideas; if you’ve yet to become a paying subscriber here, it’s a great time to do so. Until the end of July you can lock in a 33% discount to the annual membership - pay just $99/yr instead of the rack rate $149/yr. You can sign up right here to claim the good discount.