Some lessons you only learn the hard way.
This was definitely one of them for me.
For years I spent far too much time analyzing every little wiggle in the S&P 500. Every squiggle. Every minor breakout. Every fake breakdown.
It felt productive, but in reality it was just noise pulling my attention away from the real objective.
I’m here to make money.
And in order to do that, the job is simple. Buy things and sell them later at higher prices. At TrendLabs that usually means stocks.
Not the S&P 500. Not the Dow Jones Industrial Average. Not the Nasdaq 100.
Now don’t get me wrong. I talk about those indexes all the time. We track both the market-cap-weighted and equal-weighted versions. They help us understand the environment we’re operating in.
But if you scroll through every trade that’s ever gone through my model portfolios, you’ll notice something.
You won’t find S&P 500 ETFs. You won’t find index options. And you probably never will.
Because I don’t trade the averages.
Years ago my friend Joe Fahmy said something to me that stuck: “If you trade the averages, you’ll get average returns.”
That is not what we’re trying to do here.
Our goal is to find the tickers that are going up and avoid the ones that are not. Whether the S&P 500 is ripping higher, grinding sideways, or doing nothing at all.
Once I finally understood that, it completely changed how I look at markets.
What Does This Have To Do With Health Care?
Back around 2013 I was at a CMT Association event at Reuters in New York City where Chris Verrone was giving a presentation.
At the time I had a pretty strong opinion about the market. I thought the S&P 500 was going to struggle to make much progress to the upside. I also believed China and a lot of emerging markets were in trouble.
Chris was up there doing what he does best. Chart after chart, walking through stocks he liked and explaining why he wanted to buy them.
Toward the end of the presentation I raised my hand and asked him how he could be so constructive on some of these stocks when the S&P 500 had so much overhead supply and emerging markets were rolling over.
I’ll never forget his response.
“If you don’t like China,” he said, “don’t buy China. What does that have to do with health care?”
That stuck with me immediately. And it’s stayed with me ever since.
He was right. What does one thing really have to do with the other?
If you think financials are falling, don’t buy financials. If you think software stocks are going higher, buy software stocks.
The S&P 500 grinding sideways below this key 7,000 level shouldn’t change that.
The job is not to have an opinion about the averages.
The job is to find the stocks that are moving.
Are You Bullish or Bearish?
I used to be one of those people.
Someone would be walking through their strategy and the only thing I really wanted to know was simple: Are they bullish or bearish?
Up or down: That was the framework.
Even today, when I’m explaining what I’m seeing in the market and how I want to execute around it, someone will inevitably ask the same question.
“Yeah, but JC, are you bullish or bearish?”
And the honest answer is that it doesn’t really work that way.
I can sit here right now and tell you I’m bullish on certain stocks. Very bullish in some cases.
At the same time, there are other areas of the market where I’m neutral. And there are definitely a few places where I’d rather be short than long.
All of that can exist at the exact same time. And it often does. Because the market is not just one thing.
Earlier we talked about the lesson Chris Verrone drilled into my head back in 2013. If you don’t like China, don’t buy China. What does that have to do with health care?
That idea changes everything.
If financials are breaking down, don’t buy financials. If software stocks are breaking out, buy software stocks. If energy is trending higher, lean into energy.
What the S&P 500 happens to be doing in the background doesn’t change that job.
Right now the index is grinding sideways. People stare at that chart all day trying to decide whether the next 200 points are up or down.
That’s not the game I’m playing.
I don’t trade the S&P 500. I don’t trade the Dow. I don’t trade the Nasdaq 100.
I tried that earlier in my career. It wasn’t fun.
Because when you trade the averages, you tend to get average returns.
And average returns are not what we’re after.
We trade stocks.
Some are going up. Some are going down. And our job is simply to know the difference.
The index can figure itself out later.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs