Is the Stock Market Just a Big Casino?

I hear it all the time, “the stock market is just another way to gamble.” But is it a gamble or a calculated risk?

Let’s back up a minute and talk about balloons. Yep, ballons!

What happens when you keep pumping air into a balloon, over and over and over and over again? It eventually pops, right?

So what do you think happens when you keep pumping money into a company (or index) over and over and over and over again? Eventually, it too pops.

Some companies become so overpriced, for whatever reason (usually has to do with profits), that investors begin to sell their stake in them – the stock pops!

If a company is selling for $50 per share (hypothetical) but it is only worth $20 per share on paper, eventually a sell-off will ensue. The company at $50 just cannot keep up with its profits.

Or maybe they were committing accounting fraud, who knows!? But either way, they’re just too expensive for whatever the reason.

Now, take that same company and multiply it by thousands. Why? Because there are thousands of companies in the stock market. Sure, some might be undervalued (worth $50 but selling for $20). But some are also overvalued (worth $20 but selling for $50). When the balance tips in favor of overvalued companies, you get a bubble. Or balloon, you choose the wording.

When there are more overvalued companies than there are undervalued companies, things get risky when buying. This is when a lot of investors will sit on the sidelines in cash… or, they might buy bonds instead. They see the bubble (or balloon) expanding, and they know it will eventually pop (sell-off).

So what in the hell is my point?

Retail investors (you and me) are always the ones to get caught with our hands in the cookie jar at the top of markets. What happens is this: Joe Blow, your market wizard neighbor, sees that company ABC (hypothetical) has been moving up for a month or more. So what does he do? He says “WOW! This is fantastic. Easy money!”, and he buys shares of company ABC.

This is fine if Joe Blow bought the shares at a decent price. But if he did not buy at a decent price, then Mr. Market and Smart Money might decide to sell their shares soon because the company is now overvalued. And when Mr. Market and Smart Money sell shares, it’s usually in extremely large blocks – millions, if not billions of dollars worth. This, of course, drives the share price of company ABC down. Joe Blow is now bankrupt because he invested his whole life savings into company ABC.

Getting back to the original question, “Is the Stock Market Just a Big Casino?” The answer is a resounding NO, in my opinion.

The problem with most (the average) retail investors is this… they fail to do their homework. They don’t perform technical and/or fundamental analysis on the companies they buy into. They, in essence, have no idea what’s going on. So instead of chocking it up to a learning experience, they simply say dumb things like “the market is a big casino. It’s all just a gamble.”

I firmly believe investing is a calculated risk, and not a gamble. This is just my opinion. I relate it to buying a house; would you go out and buy house without researching home values in the area? If you don’t, you might pay thousands more for the house than you needed to. This basic concept applies to the stock market as well.

With all that said… you are never going to win them all. I don’t know of anyone who ever has. Even Warren Buffett has lost on investments.

But with solid analysis (technical, fundamental, or both), I believe it is a calculated risk and not a slot machine.

Bond Yields are Inverse to Bonds

It’s true. Bond yields are inverse to whatever activity is happening in the bond market. What is up is actually down, and what is down is actually up… confused?

Bonds are issued at face value with a coupon rate. For example: if I buy a bond for $100 (face value), it might have a coupon rate of 5% ($5). This would mean that the bond I purchased will return $5 (5%) if I hold the bond until maturity. This is called the coupon rate. The math is simple: $5/$100 = 5%.

But what if I decide I don’t want to hold that bond until maturity? There’s only one option… I can sell it. In fact, a lot of bond traders do just that – they buy and sell bonds and make money on the difference between what they bought it for and what they sold it for. And this is where the inverse relationship between yield and bonds come into play.

Let’s say I think the market is going to go up and I want to buy stocks. I decide to sell my bond so I can have more money to purchase stocks with. I bought the bond for $100, and it had a coupon rate of $5, for a total maturity value of $105. The yield on my bond is 5%.

Because other bond holders are thinking the same thing I am – that the market is going up and they want to buy stocks – there are a lot of sellers today. When there are a lot of sellers, the price of the bond goes down, but the yield goes up…

I can sell my $100 bond with a 5% ($5) rate for $99. I lost money *cue the tears*. The person who bought my bond, bought it cheaper than I bought it for, and their yield is much better. Here is the math…

Bought: $100 with $5 rate for a total maturity value of $105 = 5% yield ($5/$100=5%)

Sold: $99 with the same maturity value of $105 = 6% yield ($6/$99=6%)

Notice, the maturity value for the new holder is the same as it was for me when I held the bond ($105). But the new holder bought the bond for $1 less than I did. So that person got a discount, and therefore received a higher yield.

There is much more to bond trading than understanding how the yields work. So don’t run out there thinking you’re a bond wizard. Always do your own research before doing anything like that.

But, hopefully now you get the idea. Whenever yields are falling, that means there’s lots of people buying bonds. Whenever yields are rising, that means people are selling bonds.

I am no bond expert, but I do understand the basic concepts. I believe it is important to know because it might give a clue as to which direction the overall market is heading.

In general… VERY VERY general… When there are lots of bond buyers, and yields are falling, that means people are getting scared. They want to invest in the safety of bonds. U.S. treasuries/bonds are considered to be super safe. Less risk, however, equals less reward. Hence why yields are very low right now.

SPY KEEPS ON TRUCKIN’

On my Trading View account (JayC81 if you wanna look me up there), I just published this chart. Notice, I started my spiel off with “Unbelievable!” Know why? Because it is…

As I have said quite a few times recently, the technicals and fundamentals are mounting in favor of the bears. Yet, through it all, the market keeps moving up… like a freight train – you just can’t stop it.

So, my question is this: should we, as traders/investors, care if it goes up or down? I ask, because I have been focusing on when to short the market, while missing opportunities to long the market. In doing so, I have missed out on some pretty good gains. Any good trader can make money when markets move up, the same as they can when markets move down.

My point is this: don’t be shy! Always keep your eyes open for good opportunities. It’s always about the opportunity, more so than the direction… in my opinion. I am now playing the market both directions. That is the game it wants to play, so that’s the game I’ll bring.

I always say – LEARN TO PLAY THE GAME! If you can’t beat em’, join em’!

THIS IS THE BLACK SWAN

For weeks, if not months, you have probably been hearing the term “black swan” in the markets. People will say “this could be the black swan..” or, “is this a black swan?” Well, in my opinion, the black swan is here!

A black swan in market talk is any unforeseen event that could shake things up negatively. Well, as you probably already know, Nancy Pelosi announced plans to move forward with an impeachment inquiry against President Donald Trump.

This is my black swan event. This, in my opinion, is the catalyst that could send the markets lower. As I stated in a previous post, the technicals are mounting in favor of the bears. Chart after chart, bearish signals are increasing: Double tops, RSI and Volume divergence, lower-low/lower-close, etc. etc… I could go on. But it has seemed like a strong catalyst would be needed to put those bearish signals in motion.

I do not believe a trade deal will get done in October… and that, mixed with impeachment inquiries, could very well cause the markets to tumble. How much will they tumble (if they tumble), is anyone’s guess. But, if you held my feet to the fire and asked me my opinion on the drop, I would say somewhere between 10 and 20%.

Who was the architect behind this economy? Some would argue Obama was, but I think the majority would say Trump was. The threat of removing the very architect of this tremendous bull market is frightening for market participants. Not to mention the overall political uncertainty that impeachment proceedings bring.

If nothing else, this will create a pretty bumpy ride. Maybe I’m wrong, and honestly I hope I am, but I do not think so. I think when you factor in the mounting bearish signals, the market bears are looking for any catalyst they can get their hands on to drop it. But that’s not a bad thing.

When people here recession they almost freeze in terror. But I don’t. I’m not even saying this will start a recession… but, corrections and even recessions are actually healthy from a market standpoint. They bring prices back down to manageable levels, and the smart investor is just waiting at the bottom to scoop up all the good deals. Which, is what I will be doing when the time comes – bet on that!