Sometimes there are clear advantages to being in an all-cash position and avoiding the risks in the US/Global stock markets. For example, you should consider cash as a position when the markets begin to execute a broad market consolidation pattern that often results in many weeks or months of sideways, choppy price activity. It would be best if you also considered going to cash when a more significant shift in market trends occurs, putting your account at real risk should there be a 20% to 30%+ downside price correction. Moving your assets away from these risks and into cash as early as possible can save thousands of dollars in unwanted – and worse yet avoidable – losses and stress.
I know how everyone always says, “it is better to ride out the trends and buy into the dips in the long run.” Well, I believe there is a better way to approach these more prominent market trends. It does not include riding out the massive sell-offs and panicking out near the lows—watching your wealth melt away as the market’s collapse, which can last in some cases like in the Nasdaq over 16 years to reach new highs.
We believe the purpose of actively managing your investments/trades should include a “cash position” as an active instrument in your portfolio. Why? Because moving your money away from risks and into a cash position can often create a major advantage for all types of investors. We will get into more detail about this later.
First, we want to highlight the setup of the broad market cycle/trend and bring to your attention the unique similarities in certain symbols unfolding right now.
Understanding Broad Market Cycles
You may have seen a version of the following Stock Market Cycles graphic before. Yet surprisingly, many traders/investors forget to reference these broader market cycles when they focus on the short-term market trends. Often, traders get caught up in the excitement of the rally phase and forget to anticipate the peak, rollover, and breakdown phase that eventually comes into play.
The rally phase we’ve seen recently in the US stock market, certain global markets, cryptos, and commodities may have just completed the Belief, Thrill, and Euphoria rally phase – reaching what we’ve been calling an “Excess Phase Peak.” If our research is correct, we should expect to see a series of price patterns continue to play out over the next 2 to 6+ months that complete the Complacency, Anxiety, and Denial downward phases. There was a recent research report entitled “How to spot the end of an excess phase” back in November 2020, which touched on this concept as well.
The research report shared this understanding of the breakdown setup and the 5 phases that typically process through the Euphoria, Complacency, Anxiety, and Denial phases. And in our Excess Phase Peak example below, where we look at the NASDAQ’s 2008 peak, we have labeled these phases as follows:
1. The rally to the peak – Euphoria
2. The initial breakdown and sideways FLAG in price – the Complacency Peak
3. The breakdown to critical support – Anxiety Phase
4. The extended sideways trending before the eventual breakdown of critical support – transition into the Denial Phase
5. An finally, the ultimate bottom sets up eventually – Denial & Panic Phases
The Benefits Of Developing CASH As A Viable Trading Position
Take a look at the following example accounts that compare between staying invested in varying trends vs. rolling in and out of the market throughout broad market trends. In this example, the “Always-In” keeps the initial $100k investment fully allocated throughout bullish and bearish trends. The “Trading-Trends” rolls capital in and out of the market trends (giving up 20% of each trend before altering allocation levels) and continues to reinvest the full capital into new bullish trends. The difference is staggering – almost 50% more in total returns than the “Always-In” strategy.
As markets start to churn and start a new phase, you will undoubtedly hear from different advisors and financial gurus about how you should best manage your assets.
In our opinion, any form of more active position management is better than leaving your decisions up to another individual or chance. Suppose you can dedicate a few minutes a week to watch the markets or find a good trading mentor service to help you make sense of what’s happening in the markets and when to buy and sell. In that case, you can learn to outperform the S&P consistently with only a few trades each year trading ETFs, which is what I like to do myself.
I will highlight three very important charts on Tesla (TLSA), Apple (AAPL), and Bitcoin (BTC) that very clearly show we may be transitioning into the Complacency and Anxiety phases. These Phases 2 & 3 are the Excess Phase Peak transition and are something every trader and investor should be focusing on, in my opinion.
If this pattern continues to play out as we expect, traders and investors could be nearing a major decision-making time regarding how to protect profit and wealth, what to do next, and how to find out what the right answers are to these questions.
Over the next 6+ months and beyond, there are going to be incredible market moves. Staying ahead of these index and sector trends is going to be key to developing continued success. As some sectors fail, others will begin to trend higher, and this is the type of research and work I share each week at Technical Traders Ltd.
For a look at all of today’s economic events, check out our economic calendar.
Chief Market Strategist