When I trade, I always try to keep a bigger picture in mind. While I trade on technicals, I still do keep a broader fundamental view. But unlike fundamental traders, I let the technicals tell me what the major trends/themes are and then I may read up a bit to understand the bigger picture. Many fundamental traders take their own view (dangerous) of the big picture even if the charts are telling us something much different.
For those that have been reading over the past week, I’ve made a shift from the sidelines to adding long exposure. You might say that I’ve upgraded my view on the market.
Here is how I see the big picture. I have spotted only three primary trends. First, is the China story that we are all so familiar with. Second is tech. Third is financials. I rank those in order of importance. China is really a super trend.
China is the engine behind the world economy right now. Flowing out of this primary trend are smaller secondary trends such as commodities and globalization. With respect to commodities, take a look at Australia, Brazil and Canada. China’s growth is fueling the need for commodities from these countries which is subsequently causing economic growth in these countries. In my view, investing in Australia, Brazil and Canada are really just derivative bets on China’s growth. If China declines, I believe it is a safe bet that commodities will deflate and that Australia, Brazil and Canada will suffer as well. Even gold is really just a derivative China bet in my eyes. I know many would strongly disagree. Many believe gold is some kind of special money store. I’m not buying it. When the market declines, all boats are lowered including gold. It isn’t a special safe haven. So it all comes back to China.
Another secondary theme from the China theme is globalization. When you look at the S&P 100, most of the companies have some kind of China story. Remember how Google tanked when they announced that they might pull out of China? So if China tanks, the globalization story for the S&P 100 (and many other smaller US companies too) goes down the tubes. This is why FXI and PGJ are the first two ETFs that I always look at. From a fundamental point of view, if those ETFs are not working, everything else is going to stop working too.
My next primary trend is the broad category of tech. Many of us that follow the US economy have a sense of disappointment. We look at our economy and see an economy of credit and services. We don’t see tangible industrial production like we see in China. We’ve got Boeing, GE, a weak auto industry (but getting better) and some other names to be proud of, but we’re not the export economy that we desire to be.
I think one major theme passing under the noses of most people is Tech 2.0. So many people got burned by the Internet bubble, that they are not seeing the second coming. Amazon is now a primary retailer for most people. Apple has changed the entire media industry. For a while, it looked like services such as Napster would ruin the music industry (and really film too). But then Apple came out with the iPOD and made it so convenient to pay a buck for a song that it simply made more sense to pay than to dig through Napster for a pirated version of the song. Apple again changed the web with the iPhone. Until then, we bought clunky devices with a Microsoft operating system. These smartphones locked up just like Windows at the worst time and the interface is and was a joke compared to the iPhone. There are many out there that believe that the iPhone will become the primary device for Internet access for many people (and I’m sure it already is for many). Meanwhile, Google changed advertising with its Adwords platform. Google is responsible for killing old media and moving advertising dollars to the Internet. Because of Google, we now have services such as Facebook that can be profitable by selling advertising. Of course there are many other examples. But the point is that this tech revolution is driving the QQQQs higher and there is a fundamental basis behind it. While Detroit may be suffering, all is well in Silicon Valley. The VC firms are flushed with cash and bringing new ideas to the market everyday. While many tech stocks tanked with the rest of the market, I also noticed that these companies never really felt the pain that the broader economy did. Apple stock tanked, but nobody seemed to stop buying their products and the innovation continued. In fact, it is quite possible that the tech trend could continue even if the China trend breaks. A secondary trend off the tech trend is India. If you follow momentum stocks (e.g, IBD 100), you will often see names such as WIT on the list.
My final primary theme is financials. I’m not talking about JPM and WFC that are already trading back near their highs. I’m talking about BAC, C , GE (partly a financial) and many of the beaten down regional banks in the IAT ETF. Sure there are risks, but none of these institutions are currently in jeopardy of failing. You have KEY and RF trading at around $7. Both of the names once traded north of $30. Things can change quickly, but the solvency issue is currently off the table. Because financials are not real companies and don’t produce anything, their stock price can change much faster than a company that actually makes goods and has factories.
Here is an illustration. Before Bear Stearns failed, it was trading north of $60 per share. In a matter of days, it went to $0. I’m not saying KEY is going to $20 tomorrow, but these financials can move quickly in both directions. Just like Bear lost all its value in days, it is quite possible for estimates on these beaten down financials to be raised drastically over a short period of time.
This is how I see the big picture. Because I only started opening positions earlier this week, I’m currently only 15% invested but I’m looking to scale up so long as profits increase (see my post from earlier this morning). My current holdings:
China
Primary: PGJ
Globalization: V, MA
Commodities: EWZ
Tech
GOOG
CTSH
Financials
IAT
C
GE