Basic technical analysis and where we are today

The very basics of technical analysis is trend-following, with the idea of holding during the bulk of an up-trend and getting out for the bulk of the down-trend. Here’s where we are for the S&P 500:

Many investors like to use this perspective within different market sectors, adding exposure to sectors in upward trends and reducing exposure to sectors in downward trends. In general, money tends to flow from one sector to another. Here are the basic sectors that a lot of investors look at:

Some people like to use relative rotation graphs, but I could never figure out how to get anything out of those so I prefer simple 6-month candleglance charts. I put the best looking 6-month trends in the top row – which is energy, health care, utilities, and consumer staples. Below that, everything looks terrible. I put financials at the bottom left because they looked the weakest, and then I put technology right next to the overall S&P 500 index so that you can see how similar they look. The top 5 names in the S&P 500 are all considered tech (AAPL, MSFT, AMZN, FB, GOOG) and they comprise 21.82% of the value when you add them together!

Its amazing how top-heavy our stocks really are, but that is the modern world of popularized “passive” index funds. When the bulk of new money is allocated purely by current market cap weighting, the more expensive it is the more money is allocated there, you can get some crazy results. Who would’ve thought that Tesla would be the same weighting as Berkshire Hathaway, lol.

Regardless of what you think of the popular methods of asset allocation though, these large passive money flows greatly strengthens prevailing trends within stocks and sectors simply by investing more in larger weightings and less in smaller weightings, making trend-following and basic technical analysis more important than ever.

If I actually ran a fund, I would certainly do it very differently than I run my personal portfolio. I’m loaded up in cheap moonshots with hopes that it will launch me into financial independence someday. Rather than straight trend following, I’m crammed into tiny sectors that I think have intermediate-term favorable catalysts to grow.

US Cannabis: The coming federal legalization which will enable big investment firms to buy into the sector. I still believe that both Republicans and Democrats want to legalize, regulate, and tax this sector and that their current approach of turning a blind eye while states do their own thing can’t last forever. This has been a falling knife since I started investing, and I’m just holding at this point; I haven’t added here in probably over 6 months. The story isn’t dead, I just think its best to sit and wait for now.

Precious metals miners: I see an extremely unloved sector that has had very little investment and expansion. The metals themselves tend to be defensive in nature, and I believe they’ll do better in coming years as more countries centralize around a Chinese & Russian trade sphere where they trust bullion as backing more than each other’s currencies. For now, I see the downtrend as a side effect of an extremely strong US dollar, and I believe this will be an early sector to recover once the Fed switches from tightening to easing again.

Battery metals miners, particularly copper and nickel: I see a lot of temporary pressure as the demand destruction from the recession we’re in filters through the system. Meanwhile, the under-supply of these critical materials will have to be fixed in coming years, and this can only happen through massive investment which will have a side effect of shooting these mining stocks higher.

Uranium miners: This sector is the most bullish right now. It is a tiny sector which can shoot much higher, ESG funds can now allocate to this sector, and governments around the world are once again looking here as a means of energy security. This is the only sector I’m selling covered calls on right now, because the bullish sentiment is strong enough to get me some great prices on them while leaving me significant room for near-term price gains. I don’t think we’ll see the moonshot everyone is hoping for while the Fed is tightening, the world is in recession, and liquidity is draining from the markets. We’ll see some wild swings though, and prices will be much higher in coming years after this recession works through.

So what do I use basic technical analysis for right now? A couple things. I finally bought some SPY puts this week as it looks to me like we’re fairly close to topping before another down-leg. I also used it in the past to expand or contract leverage in certain sectors – like my gold miners – by buying long calls when I feel a significant short-term rise is coming, selling them off for shares to reduce risk as momentum seems to be shifting, and selling covered calls on those shares to reduce risk further if I want to stay long but I’m concerned about possible downside.

Anyway, I hope this leaves you with some food for thought – I’m betting many of you are sick of the debates on recession along with the federal reserve’s thought process and possible action going forward. There’s really only so much you can say about that. Here’s where my portfolio left off. Good luck and happy trading!

  • HEDGES (13.7%)
    • 12.6% TLT Calls
    • 1.1% SPY Puts
    • 4.2% AG
    • 3.9% MTA
    • 4.0% SILV
    • 2.3% LGDTF
    • 2.6% EQX
    • 3.3% SLVRF
    • 2.3% SAND
    • 2.1% MGMLF
    • 2.0% SSVFF
    • 1.8% RSNVF
    • 1.3% BKRRF
    • 1.4% HAMRF
    • 1.7% MMNGF
    • 1.2% DSVSF
  • URANIUM (26.3%)
    • 4.7% CCJ (covered calls)
    • 3.5% DNN shares & calls
    • 3.3% UEC (covered calls)
    • 3.4% UUUU (covered calls)
    • 3.7% BQSSF
    • 3.4% UROY
    • 2.2% ENCUF
    • 2.2% LTBR (covered calls)
  • US CANNABIS (13.8%)
    • 1.7% AYRWF
    • 1.7% CCHWF
    • 1.6% CRLBF
    • 2.2% CURLF
    • 1.6% GTBIF
    • 2.2% TCNNF
    • 1.1% TRSSF
    • 1.7% VRNOF
  • BATTERY METALS (11.2%)
    • 4.9% NOVRF
    • 4.7% SBSW
    • 1.6% PGEZF
    • 0.6% EMX
  • CRYPTO (2.5%)
    • 2.5% XRP
  • OTHER (2.5%)
    • 2.5% DOCN (covered calls)
    • 0.0% OGZPY (my account finally marked this to zero)
    • 0.0% ATCO calls (will expire worthless soon)
  • CASH (-4.8%)

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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