The key to making money in the markets is to know the difference between what the market thinks is happening…
And what the data actually says (or in today’s case what it clearly is missing…).
I call this a “Reality Gap,” and it’s what lets us know the most probable direction for the market or a segment, and how to set up our trades.
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In the past few weeks, I’ve said on national TV and in my articles here that the markets have been responding favorably and moderately to the coronavirus confirmed case and mortality data coming out of China. And big trading houses like JP Morgan send out notes to their investors with this same sentiment (two days after mine – ahem…).
But a key to identifying Reality Gaps and acting boldly on them is seeing beyond what’s being covered in the News Media, and processing new data as it comes in. That has allowed me to see rebounds coming after initial processing of the coronavirus data – and give subscribers to my premium services six 100% gains in the last two weeks.
And when the real data changes and the meaning behind it changes course, we have to be flexible and update our Reality Gaps.
As a trader or investor, I believe you have to a have “strong opinions, loosely held.” Using all the best data available, you have to form an opinion to take a position or make the trade. Strong opinions help you have the confidence to pull the trigger.
But those opinions must be loosely held. That means that if the data changes or the meaning behind the data changes, you have to be able to change course. For example, to close a trade when the original investing or trading thesis has changed.
Or in today’s case, to change your market directional bias because the data (or in this case, the validity of the data) has changed.
It’s this “strong opinions, loosely held” mindset that allows us to act boldly at extremes. To see the opportunities to make money in up markets, down markets, and sideways markets.
And in today’s case, I have let go of my strong bullish bias. For three weeks I’ve seen indications that market participants were interpreting coronavirus data as a modest to light market impact. And that made me guide subscribers to take those winning trades with confidence. But that strong opinion was loosely held – ready to be updated with new data, which I am constantly scanning.
Rest assured that I’ll let you know my directional biases for markets and sectors. And they will usually be strong opinions. And I will let go of a strong opinion when the available real data demands it.
And after processing key data from the past few days, I am updating my short- and intermediate-term market outlook. Because that’s where the informational data leads.
When it comes to the tragic coronavirus outbreak in China, it’s now become clear that we can no longer rely on the “data” the Chinese authorities are putting out (and that the World Health Organization is irresponsibly rubber stamping).
The official data simply does not fit how epidemics behave. The curve of cumulative deaths that China has reported seems to fit a basic mathematic formula (called the Quadratic Equation), not numbers that reflect real-world factors. I’ll be back with more on this topic later this week…
Meanwhile, recent spikes in the number of reported cases are allegedly due to new ways of confirming infections.
What’s much more likely is that previously covered-up cases are now being included in the official count. And many top infectious disease professionals believe the counts are much higher than those being reported. A blue-ribbon group of health professionals published just such an article in the prestigious journal The Lancet.
In short, we’re working with data that is at best questionable and uncertain. And at worst, the data is just plain wrong. A misdirecting ruse. All we know is that the situation in China is probably worse to much worse than we’re being told. And that’s why I’m going to be much more cautious with my trades going forward. You should be too.
We’re already seeing the effects of this on the market. Apple Inc. (AAPL) yesterday announced they would probably miss their sales guidance for this quarter – and they opened down more than 3%.
Apple’s Chinese suppliers are closed or operating at minimal capacity because of the outbreak, and so Apple simply won’t have enough parts or assembly capacity for iPhones, watches, AirPods, and so on to sell. And a greatly reduced demand from China to boot.
This is just the first of many such warnings to come. Stay away, or even short, companies with strong exposure to China, either in their supply chain or as the buyer of their products like Qualcomm (QCOM) and Qorvo (QRVO).
And focus your trading on companies with little to no China exposure, like utilities.
Also, this week kicks off a binge of retail earnings reports, starting with the big cheese, Walmart (WMT). I’ll be keeping a close eye on China supply chain comments from these key retail reports.
Great trading and God bless you,
D.R. Barton, Jr.