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.

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’!

SPY MONTHLY CHART LOOKING GRIM

The technicals are mounting in favor of the bears. Looking at the monthly chart for SPY, I noticed yet another double top… and more ominous, divergence with the RSI and volume.

What does the declining volume tell me? It tells me that month over month buyers are becoming harder and harder to find. What does the declining RSI tell me? It tells me that SPY is trying to come down from such overpriced conditions.

Of course, fundamentally, you have QE (quantitative easing) propping up the price. This is creating a condition, in my opinion, that will eventually trap new and novice investors. The newbies are probably buying up stocks, because they see there’s a rally. But the problem is, the rally is so old, and so high in price, that they are bound to get burned when this thing comes crashing down.

Do I think a recession is imminent? No. Do I think a big correction (15 to 20%) will happen? Yes! However, with that said, lowering rates and QE after QE is not necessarily a good thing. That could lead to recession type behavior eventually… it’s called DEBT!! The more debt companies get themselves in, the harder it will be for them to climb out if and when interest rates begin to tick back up.

I am overall a bullish investor, but right now I have a bearish sentiment. The technicals and fundamentals are pointing to a big correction in the works. But that’s ok! Because, after it does correct, I will sweep in and scoop up as much as possible for the next leg up. That’s investing 101 for a bull: buy low, sell high. Right now, it seems investors are buying high and selling high… that’s very dangerous!

Remember: ALWAYS DO YOUR OWN RESEARCH AND CONSULT A PROFESSIONAL IF YOU ARE UNSURE WHAT TO DO.