Trusting the Process

Trading and investing are some of the most fascinating endeavors out there…

The aspect we find most fascinating is the combination of factors that play into investment returns and the skill and process necessary to succeed.

One of those aspects is time.

Most investors focus on price. That is the value at which you transact – both buying and selling. Price decides whether you make or lose money.

Very often, though, movements in price are driven as much by time as they are by the actual price.

If the stock market is due for a correction – like it was recently – it doesn't necessarily end because we reach a specific price.

Instead, it ends as we exhaust the selling and the psychology behind that selling. We believe that most short-term movements in the stock market have little to do with the price but are driven by time and volume.

If you are focused on the short term, "timing" can mean everything.

You could get everything right about the fundamentals of a stock, but if they report decent results in a complex stock market, the shares are still likely to trade down.

We think that recent results out of mega-bank JP Morgan Chase & Co (NYSE: JPM) and Netflix Inc (NASDAQ: NFLX) are examples of this phenomenon.

An objective analyst would look at the reported results, the guidance, and how it compares it to analysts' expectations and will struggle to understand the significant sell-off in the stocks.

If you look at the overall trend in the stock market, though, and think of us as currently being in a period where the "tide is going out," then the price reaction of these stocks makes a lot of sense.

The question is – how can we know when the tide is going out or coming in for the stock market?

Unlike the tides, we can never know for sure, but there are many signals. A month ago, we wrote a half dozen notes expressing caution about the upcoming weeks and months for the stock market.

The stock market rally had reached a velocity, and overall levels of excitement had reached a point that historically has indicated to us that – at a minimum – the market was like to take a "breather."

Here is the note we wrote with that exact title exactly one month ago.

We also noted that it is never enjoyable when the stock market takes a break, even in the most robust BULL markets. The pain most investors feel is far greater than what you see in the indices.

This correction has been no different.

How does one deal with this type of situation?

We come back to one of our most essential mottos and one that is more important NOW more than ever – Plan the Trade and Trade the Plan.

A month ago, we were cautious about layering on additional trades in our TRADING strategies. We put out fewer recommendations than usual.

We also recommended taking smaller-than-average starting positions for our INVESTING publication, HX Legacy.

We feel vindicated in this approach.

Our recommendations, though, have certainly felt the pain. We have a number of them in both our TRADING and INVESTING publications that are down. We are NEVER happy about that…

We are, however, confident in our PLAN.

Our strategies are built to make money over months and years. They have done so successfully across three decades across all types of stock markets.

Were you selling stock a month ago? Are you buying them now? Tell us more in the comments section below…

Last Friday was an excellent example as one of our positions in our TRADING publication, HX Trader, went from a double-digit loss to a slight gain in one day. What happened?

The company reported the good results that we expected they would report.

Suddenly, the uncertainty about the company and the pull of the “tides” of the stock market were met with the positive fundamental reality of the company results. The reaction was explosive.

We think we will see more of this over the next few weeks.

Again, our strategies are built to survive periods of excessive bullishness AND bearishness and drive returns through time.

We will see them do so again.

So - now, we are TRADING the Plan!

We are becoming more aggressive on the trading side and buying more of our long-term ideas. The combination of (lower) price and time (a month of correction) tells us it is time to begin getting more active.

We encourage you to do the same…