January 14, 2020
I had never played poker before, but my college roommates invited me to their poker game anyway. Maybe they needed an easy mark. What I lacked in skill was compensated by an old-fashioned poker face. I bluffed my way through, knowing nothing, and I won. It was both a great and an awful introduction to poker. It’s a great feeling to win, but when it’s pure luck, it likely isn’t repeatable.
I thought poker was a silly game of chance, but poker can be an acquired skill, not a gamble. The top 20 poker players have earned a collective $621.5 million. Brian Kenney stands at #1, taking home $55.5 million. They don’t make that much in one game, of course, they amass their fortune by winning again and again. I wanted to be an astronomer. Maybe I should have trained to be a poker player instead, although my favorite astronomer, Andrea Ghez, has a net worth of $84 million. Not bad.
So, if your kid tells you she wants to be an astronomer or a poker player, at least have an open mind…
Speaking of betting, self-made trader Larry Hite said there are four kinds of market bets:
“There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose. Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future, when the odds will be running against you. You can also lose a good bet, no matter how sound the underlying proposition, but if you keep placing good bets, over time, the law of averages will be working for you.”
In life and poker, you need to know the odds. When you’re holding aces, you can bet big. Even non-players know that. The odds are on your side and you could win big, but you may lose if someone else has a better hand. Still, aces are usually a good bet.
When you have 9-deuce it’s a low odds hand. Why risk your stack on crappy odds? Would you advise anyone to cash out their 401k to buy lotto tickets? No, you sit on your 401k and wait.
Right now, we’re holding a low-odds hand. Markets are heavily overbought. Buying in now long-term will be fine, but short-term odds say: Don’t expect greatness. The following shows the Big Money Index, which measures all buying against selling over a 25-day moving average. When there’s tons of buying and hardly any selling, it’s a high number, i.e., all buying, and no selling is 100%. In late December, we reached the red area of the Big Money Index. That’s the warning sign that buying is extreme.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That doesn’t mean to go out and sell stocks. The BMI will tell us when the wave of buying crests. When it starts to decline, and the data changes is great information. We don’t know when the massive buying will stop, and when the shift will begin. It might be today, or in six weeks. It will eventually stop though.
When Will the Buying Wave Crest?
When will the buying wave crest? They say: don’t fight the tape. Well, don’t fight the BMI either. Generally, stocks are going up if the BMI is rising. When it’s going down, stocks tend to follow. The BMI is accelerating right now. That makes sense, given the one-way market the past 3+ months.
This is what a crest looks like. A few weeks ago, we talked about Health Care becoming overbought. That light blue line is the wave cresting. Buying has slowed and we expect the index to fall soon…
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The big money is made by holding the best stocks over long periods. The big returns are made by being patient and going all in when you hold aces. Those who went in when the odds said it was a good bet are enjoying great gains now. Watch the waves and let them tell you what to expect. If it feels unnatural, just remember investing can be seen as chance or skill, just like poker. You can learn to win at poker and investing. Just ride the wave. “You can’t stop the waves, but you can learn to surf.” – John Kabat-Zinn
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Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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