Unlock the Market's 'Cheat Code' to Trade Like a Pro
Summary
Technical Analysis: JC Perez emphasizes the importance of technical analysis in understanding market behavior, focusing on data visualization through charts to identify market trends and positioning.
Market Positioning: Perez highlights that stock prices are driven more by market positioning and asset allocation rather than valuations and fundamentals, with major moves often resulting from positioning unwinds.
Investment Strategy: The strategy involves identifying sentiment extremes and waiting for trend confirmation before entering trades, focusing on relative strength and favorable risk-reward profiles.
Risk Management: A key takeaway is the importance of risk management, including position sizing and having a clear exit strategy to mitigate emotional decision-making in trading.
Sector Focus: Current opportunities are seen in small caps, particularly in regional banks and biotech, where high short interest suggests potential for significant moves.
Global Trends: The discussion includes the significance of global asset class rotation, with emphasis on monitoring international markets and major asset classes like forex and bonds for broader market insights.
Discipline and Process: Perez underscores the necessity of discipline in trading, adhering to a structured plan to avoid emotional biases and capitalize on market inefficiencies.
Market Opportunities: The approach involves exploiting market inefficiencies by identifying where market sentiment diverges from reality, thus finding profitable trading opportunities.
Transcript
[Music] Hello and welcome to the Stanberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and the Ferris Report, both published by Stanberry Research. And I'm Cory McLaclin, editor of the Stanberry Daily Digest. Today we talk with expert technical analyst JC Perez. JC is a great guy. Lots of fun to talk to. If you're into technical analysis, you will absolutely want to take some notes. So, get out your pens and pencils and let's do it. Let's talk with JC Perez. Let's do it right now. JC, welcome to the show. Good to have you. >> Good to be here. >> Yeah. I I'm glad that we have you on the show because you know stuff that I have never spent any time of my life looking deeply into like I'm not a I'm not a chartist simply put and you are that and more. Um I I guess the first thing I want to know is from the top down um you know just being a chart is describes you know a million different ways of looking at the market from the top down if you had to give me like you know a few bullet points or if I just asked you casually what kind of an investor are you or what kind of a trader are you you know how would you answer that? Well, I think a I think a lot of it and I appreciate you being here. It's a great question. It's a great place to start because I think there's a lot of misconceptions as to what technical analysis even is, right? So, every chartist is a technician, but not every technician is a chartist, right? So, what we're doing as technicians is that we're analyzing the behavior of the market and therefore market participants. You know, it just so happens that the best way to visualize the changes in equilibrium between supply and demand happens to be in chart form. So technicians are often seen looking at charts and things of that nature. But the truth of the matter is we're looking at a lot of data. And this data can be visualized on spreadsheets. And there's all kinds of different charts like uh scatter plots and line charts and bar charts and all kinds of different ways to visualize data. And why is it that we're doing that? We're analyzing the behavior of markets because one thing that you'll learn over time or if you're new to this, you can go and look and check the math. But valuations and fundamentals are not what are driving stock prices. We know we have the data, right? So, what's driving stock prices is positioning and how the market is positioned or in many cases misposition for a major move. And those unwinds are what are driving asset prices. Not just an individual stock, but stocks as a group. Uh specific sectors as a group, uh other assets like gold and bitcoin and crude oil and forex markets like what's happening in the dollar, you know. So there are major major asset classes all over the world that are really the big bullies in the room. So while the US stock market might be worth $60 trillion, you're looking at a bond market that's worth $130 trillion and a forex market that's in the quad trillion. So these major major moves are are what are trickling down to the individual stock level and that's really what's moving markets, you know, not things like valuations or earnings growth or anything like that, right? So that's what we focus on. um over what time are you telling me that those things don't move market like ever or just in the past few years or just this year or when? >> Yeah, I mean the the the big drivers are really asset allocation right and and rotation amongst asset class that takes you know a long time particularly at the large cap level. I think the largest disparities that you're going to see on a regular basis between what the overall market is doing and what an individual stock is doing is going to be at the small cap level, right? Where, you know, no matter how bad the market is, there's going to be small caps that are going to be doing well. And no matter how good the market is, there's going to be small caps that are doing poorly. Um, I'm I'm generalizing in terms of asset classes in general, and then we can work our way down from there. So we want to look at positioning globally and and understand the big tides and the direction that that's going and then work our way down. So for example, if we're in an environment where you know the uptrends uh are intact in the stock market for example and the outperformance is in the United States stock market and you know the the unwind is happening in that direction. You know what are some of the better ways to take advantage of that trend example that I just uh elaborated? probably in areas where the US shines that other countries might not have things like large cap technology, things like growth stocks and things of that nature, you know. So, it starts there and then we trickle our way down uh to the individual stock level. But, you know, our our big focus is in positioning and taking advantage of of that through a variety of different breath measurements, sentiment analysis, um and then just the overall data that we get from FINRA and the commitment to traders report. You know, that tells us a lot about the market's positioning. Yeah, let's tell me more about that. What what what does positioning mean? I'm I promise you that right now as we're talking um a significant number of our listeners are saying, "Wait a minute, what is what does positioning really mean?" >> Yeah. No, it's a great question. I I I mean, I love this. It's near and dear to my heart and I think it's important to understand that, you know, at the end of the day, you know, if you're an investor, you're these are humans that are making decisions and these are machines that are built by humans that are making these decisions. And us as humans, we have flaws, right? We have many flaws. Like we're great homo sapiens. We made it. Like we won the whole thing, right? Like we're here. Um but at the end of the day, there's a lot of flaws that come with that throughout evolution. So I think if you're trying to make money in the market, you want to understand the market. You really want to understand humans and and our own flaws. And so, you know, we make as humans, we make irrational decisions. We make poor choices when our stress levels are elevated. In this day and age, it's not when we're being chased by a lion in the jungle, but when there's money involved. That's when our stress levels get elevated. If you add a layer of politics on top of that, man, now the the crazy pills really come out, right? So, humans make really poor choices in those environments and the market is so massive that it exposes those human flaws. So, as investors, if we can understand that, there's a huge o opportunity to make money from those poor choices that we know for a fact humans are going to continue to make over and over and over again. So, we analyze a ton of different data to identify where the positioning is most extreme, where are people way too bullish, where are people way too bearish, right? That there's nobody left to sell. It's already priced in and the only way that we can go is higher. We are looking for those pain points uh all day, every day because that that's where the biggest moves come come from from the massive unwinds in positioning. So, we're looking at short interest. You know, people like people forget that if you own a stock, you're just promising to be a seller one day, right? But if you are short the stock, you are a guaranteed future buyer because the only way to unwind a short position, these are people betting that the stock price is going to fall. The only way to unwind that is to buy it back. In their perfect world or in our perfect world, if we're short, we want to buy it back at a lower price, right? So that we can keep the difference. That's how we make money when the price of the stock goes down. But when the price of the stock goes up, that's a problem because now we're losing money. It's going in the opposite direction and we're paying margin interest to be short. So we're getting taxed on the margin and we're losing money. And if we're a major hedge fund, we we have to do the opposite. Hedge funds are there to make money, not to lose it. So they're losing it. That's a big problem. So when the the majority of of of shares are short, that creates a lot of vulnerability when they're all covering at the exact same time. So that's just one example of a data set that we take that's publicly available that we organize it. You know, we look specifically for the most vulnerable areas and then we look to buy some of those names. >> So you look for meme stocks before they take off like rockets, huh? >> Could be. You know, it the the beauty of it is uh there's a time and a place for everything among other things. >> Yeah, of course. I mean there's a time when meme stocks are ripping. There's a time when meme stocks are collapsing. Uh there are times when energy stocks are collapsing. There are times when energy stocks are doing well. You know, look at small caps have been underperforming forever. Everybody knows it. Um the IWM, which is the Russell 2000 ETF, the short interest is making new 52- week highs as we speak. When we look at the futures positioning, speculators have the largest net short positions ever. So, you've got the quote unquote dumb money that we want to take the other side of um agreeing with all of these shorts. So, you know, right now small caps in general are vulnerable for a squeeze. Now will that happen or not? We have to see it. We have certain certain thresholds that we wait for. So just because everybody hates something doesn't mean we like it doesn't mean we want to buy it. That's that's not a good strategy. We want to wait for the market to then agree that that unwind has begun. We have a variety of different ways that we quantify that and then we participate, right? We wait for that turn. But the first thing we want to do is identify where those turns can potentially come from. Um, you know, we saw it in the fall last year when China, you know, everybody just, you know, all the Trump things were working. For example, going into the election, all the poly market was saying Trump victory. You know, you saw like Tesla and crypto stuff working. Banks were working like like Republican Trump's stuff was doing well. So, it's like, okay, well, if Trump wins, what's the trade? Everybody assumed that it was going to be sell China, sell emerging markets, terrorists, blah blah blah. So, we were buying those things. Those were the things that we were buying. We're specifically buying Chinese stocks. we're specifically buying uh stocks that would benefit from a weaker dollar. Um and that's exact but that was based on positioning. It wasn't like this massive fundamental shift uh that emerging market economies were like all of a sudden so profitable and so great. It was the fact that everybody hated them and and sentiment was so poor there was nobody left to sell and so there's only one direction it can go and we benefited from that. So those are the types of opportunities that we're looking for on a regular basis. This reminds me of uh Dan, I I I edited a newsletter from JC many many years ago for a little bit and this reminds me of one of the things that I and I learned a ton about technical analysis while doing it which was one of the great benefits and um do you still do that thing where you at the end of every month you look through like how many charts is it? it was like a thousand charts or something and and figure out what it was, figure out the big trends, >> give or take a few thousand. But yeah, I mean, listen, there's a lot of charts, you know, particularly on a monthly basis, I really like to rip through a lot of them because you're getting a lot of monthly closing data. So, it's a great time to do that. Take a step back. Um, but yes, I absolutely do that. That is, you want to know the hack? That's the hack. Everybody out there listening, if you're listening, be like, JC, like what is what's the cheat code to this market? Like, what is the holy grail? You want to know what the holy grail is? Once a month, go look at monthly candlestick charts once a month. Every single one of them. Look at the S&P 500 and the Dow and the Nasdaq. But then also look at financials, industrials, technology. Look at all the sectors. Look at all the countries around the world. German DAX, Japanese Nikkay, you know, look at Chinese equities, Latin America. Look around the world. Look at the commodities, crude oil, gold, silver, copper, right? Like understand where the 10-year yield is heading, the US dollar. Like think about the most important assets and then make a list. And at the end of every month, look at those. Look at the bellweathers, JP Morgan, uh, Apple, Microsoft, like the the companies, the big drivers, Amazon, that are driving these sectors. Include those on the list. If if reach out to me, I'll give you my list, right? It's all good. But have a list and then go through that every month and it's going to remind you, oh you know, this this trend is up. It's making an all-time high. It can't be down, right? Like it's a reminder because, you know, throughout every day and every week, it's like, oh, what did the Dow do? The Fed said this and the Trump tweet and the this, right? like it's a never-ending noise machine. So, taking a step back, pouring yourself a glass of wine or tea or whatever. I don't judge whatever you're into. Me, I'm more of like, you know, like I like a little baro uh to go with my monthly candles, but hey, that's just me, you know, and and I just sit there and take a deep breath at night when the kids are asleep, just me, some music, the charts, glass of wine. That That's the cheat code. That's the cheat code. Bo and monthly candles. >> That is what I remember. Yeah. just you doing the work and just looking through well it was probably 3,000 charts, right? It's like it's it's a lot, right? >> Depends what kind of mood I'm in. You know, it's usually about I don't know 3 to 5,000 charts a week normally. You know, it's just that that week I'm more focused on the monthlies versus other weeks I'm more focused on weeklies probably. >> Gotcha. >> So, when you look at all those, what do you come up with at the end of it? What do you What do you You're obviously not looking at them very long because there's only so many hours in a week. What what when you quickly, you know, are ripping through those and you're looking at a, you know, a monthly candle, you're just seeing, you know, what's up and what's down and that's and then what building some kind of a picture of the overall market out of it. >> Yeah. Yeah. I think you nailed it. You know, it's really a weight of the evidence thing, right? There's no one magic bullet. There's no one magic indicator that's going to be like tell you buy, sell, and what to buy or sell. It doesn't work that way. It's really a weight of the evidence. So, you know, if you're seeing, you know, certain indications, like for example, like this this uh in the first quarter this year, the dollar was getting slammed. Money was rotating hard internationally into Europe and Asia. I mean, these markets were ripping while the United States wasn't going anywhere. But while everybody was like, "Oh my god, the tariffs and the the market's going to crash and Trump's ruining everything and like look at the Economist magazine." Like, holy cow. Like the bald eagle walking out of a hospital with bandages. Like it was bad sentiment, right? like individual investors like historic pessimism, barren, big money polls, the most bearish ever. This goes back to the '9s, right? So like so many indications. Everybody thinks the market's going to fall apart, but the rest of the world is ripping. So if the world is really coming to an end, are you going to get uh outperformance from Latin America? Like no, they're going to be leading the march down to zero. You know, Deutsch Bank making new highs, Germany making new highs. Like these are not the types of things that would happen if the European banks breaking out, you know, to new highs. Like these are not the things that happen if the world is falling apart. So, you know, the rest of the world was supporting the case that yes, we should buy stocks. All these people are crazy. These historic pessimistic readings were not just buying it because everybody hates it. There are a lot of indications that that it's that we need to be buying very aggressively here in early April. Um, so fortunately, we're, you know, we're data driven, right? Like we're not here for the narrative. We're specifically looking for where what's actually happening is different than what people think is happening. Like those disparities, you know, I write um you know, we have a product called a divergence because that's what we're looking for. We're looking for divergences between, you know, reality and the narrative >> and you assess reality mostly by charts. So, when you look at all those, I mean, are you are you taking notes on 3000 charts or are you uh what I'm just I just I'm very curious to know how you what you do with that volume. I mean, the sheer volume of of information um on a weekly or monthly >> looking for trends. Just looking for trends. It's all it is. You know, it's either an uptrend, a sideways trend, or a downtrend. And then we're looking at everything on multiple time horizon. So while we'll start with a 30-year chart, the next chart will be that same asset in a an 8 to 10 year chart. And the next chart will be that same asset on a three to ninemonth time horizon. Right? So it's a multiple time frame analysis understanding the longer term trends and then the short-term secondary waves within those big trends. So what is it that we're doing? We're looking for trends very specifically. Why do we do that? Because we know asset prices trend. we know like we know that returns are not random like we have the data like we know so there's a lot about the market that we don't know particularly about the future so for me I find it easier to just start with the things that we do know exist asset prices trend momentum exists you know relative strength is real money goes to where it's being treated best right relative strength is a real thing we know those are three pillars of the market asset prices trend momentum exists and relative strength is real we know those three things but That's really what we start with. And then to answer your question, Dan, you know, we look at a lot of charts. Why do we look at a lot of charts? Because that is the only fact, right? Everything else is a guess. Everything else is an opinion. You know, an earnings estimate is exactly that. It's an estimate. Guidance from the company is exactly that. And by the way, they often change their guidance, right? It's kind of a a ritual around here. The government data that comes out, those are estimates. Those get revised. We know going into the number that they're going to be revised. The Federal Reserve does not, you know, the bond market doesn't do what the Fed says. The Federal Reserve tell does what the bond market tells it to do, right? And they could do their best to kind of, you know, maneuver that, but they're going to, you know, so if you want to know what the Fed's going to do, just follow the Fed fund futures, right? So, you know, the market is what's real. Everything else is a fugazi, right? Everything else is a guess, is an estimate. CEOs are wrong all the time or they're lying to you. Both happen quite regularly, you know? So the way I look at it, you know, we want to trust the only thing that is actually real. And there's no argument that when shares exchange hands at a specific time, on a specific date, at a specific price, that will never be revised. That is there forever. And then so those uh exchanges in those assets, the prices trend over time. They go for they go up for a while, they go down for a while. So participating in those trends is how we want to be able to make money consistently. uh because we start with what we know and we know that that's how asset prices behave. >> So you started out telling me that positioning was the most important thing but now it sounds like trends are super important. So can you put those like so we're building a you know how JC does things here and it sounds like those are two correct me if I'm wrong equally important pieces of the pie for you to make a trade. >> Yeah. I mean it and and it's it's one before the other, right? So, first you get the sentiment extreme and then those trends last for a long time. Those trends tend to persist and that's the real meat of it. Um and then you get that last move at the end where now everybody's like an optimist and everybody thinks it's going to go up forever and that's when you start looking for deteriorations in momentum in relative strength and look for those trend changes because while we know that asset prices trend, we're not like blind. We know that trends change too. there's a there's a much lower likelihood that the trend's going to change. But of course, trends change all the time. They go up, they go down. So, there are indications of those changes in trends, sentiment being one of them. Um, but yeah, so how do we start? We we're looking for positioning. We're looking for major trends across asset classes and rotation amongst them. So, it's not just the S&P 500 on an absolute basis. It's the S&P 500 versus foreign equities. It's the S&P 500 versus gold. It's the S&P 500 versus energy, right? So, uh, comparing, you know, so when the S&P 500 falls, you're going to see that relative strength. You're going to see that deterioration in the S&P compared to other alternatives like bonds perhaps, right? So, in the strongest trends, these assets are not just doing well on an absolute basis. The strongest trends outperform their alternatives as well. So a typical you know trade for you might if just to pick on the at the Russell 2000 which you mentioned right now you might be saying something like well the positioning is extreme everybody wants to be short everybody knows that it you know peaked whatever five years ago or something and still hasn't made a new high and it's performed like garbage. Um so therefore I am going to look for the moment now that I've established the positioning is extreme then step two is the moment when the trend goes in my favor. You know I don't want to be short as an at an extreme of shorting. So I'm really looking for an opportunity to go long but I'm not doing it just based on the positioning. I've got to wait until this is sort of like our friend Steve Sugarroo who says you know he wants it cheap hated and in an uptrend. So you've got hated and probably cheap maybe let's say by the positioning and then you're just waiting for that uptrend piece to kick in. Am I right? >> Yep. That's exactly right. And depending on the positioning there's different ways to take advantage of it. Right. But you're spot on, Dan. And so, you know, for example, in the China, like we're not going to go buy the Shanghai Composite Index or right or like you could buy an ETF like the FXI that trades that. We want to look for a specific vehicle that it will best um as a best vehicle to express that thesis in the open market. So, we've been buying Chinese stocks like uh 10-centent music, which is the Spotify of China, right? It was it was an outperformer within the Chinese space. So, we want to be in the space because of the unwind, but there's already something in there that's working better than anybody else. So, let's just buy that one because that's ahead of the pack, right? Same thing in the small cap space, you know, looking for um what's in small caps, right? We could buy the IWM, I suppose, and there's nothing wrong with that, but for our strategy, we'd rather buy a stock or an option on a stock. So, what's in the Russell 2000? Ton of biotech stocks, ton of regional banks, right? So, that's probably a pretty good place to start. As it turns out, regional banks and biotechs also very highly shorted, right? New multi-year highs in short interest for the XBI, which is the biotech ETF. Uh new 52- week highs in the KRE, which is the regional bank ETF. So, from a top down, we're seeing that small caps are hated on the futures market at the ETF level. Then, what's in the small caps also hated, right? So like these are really good these are really good pond to go fishing in to look for stocks that are showing relative strength that fit that check off those boxes. Uh so those are the types of names that we'd be buying, right? >> And let's just stick with this just to you know you can just purely hypothetically here. I'm not asking for, you know, for a real trade, but just hypothetically here then might you then um like so you're going into let's say that you know the bio you look at the Russell and then you say well of course given how much regional bank and biotech that you know those have to be you know heavily shorted too. So are you then like before you decide to get into the trade are you saying I we like these five or 10 or however many it is biotech and we like these five or 10 or however many regional banks um and based on what is is what I'm thinking like what when you when you go when it's about picking those names before the you know do you wait for the tren the trend to change and let the trend change tell you which of those you want or do you look at, you know, any sort of fundamental or any kind of other data to tell you, oh, this is probably the bank or the biotech that we want. How do you know which specific names there? >> No, it's a great question and Dan, you know, you're doing a great job of kind of like showing that funnel like starting with all of this and then working our way to this and then working, you know, like you're really you're really pinpointing the process really well. So, that's a great question. That's what our answer is. I promise that's what they want. They're taking I love this. This is fantastic. No, which is great because some people are like, "Just give me the stock, JC. I don't care about >> No, but that's giving them a fish. We want to teach them to fish." So, >> yeah, we like a >> great No, I really appreciate that. I hope you know that. Um, so that's exactly a great question. So, then what's next? Well, then what we'll do is we'll run a scan showing the relative strength in those industry groups, right? So you have the sector level which would be um so you've got the asset uh size level which is small caps right but then within small caps you got a lot of financials and a lot of healthcare but more specifically within financials and healthcare the sectors they are biotechnology and regional banks within the financials and now we're breaking it down one level we don't know that there's going to be a ton of short interest there we don't know it all we look and it's like oh there's a ton of short interest now that makes sense because there's a ton of short interest in the Russell 2000 So it's not a surprise but we don't know that going in right and we're then seeing that be like oh wow look at this so that makes sense okay great so all the pieces of the puzzle are being are put together these names are hated you know we want to look so we'll look at for the relative strength we'll look for the strongest ones within those groups and then we'll like you said wait for the change in trend how do we identify a change in trend that is a momentum shift you know an explosion in in high momentum also we take uh an anchored volume weighted average price so in other words, we're pivoting to former highs because one thing that we know is that when a stock is going up, the investors are making money. The people who own the stock are making money. The people that are short the stock are losing money. We know. So, if we know that investors that own the stock are making money in uptrends, we can reverse engineer that and say, well, how do we know if investors are making money? And the answer is you anchor a volume weighted average price to the prior peak and you could quantify whether or not the owners are making money or not. And you don't want to own things where the owners aren't making money. You want to own things where we are. So there's a variety of different ways that we quantify a change in trend. But it starts with that top down approach. And that's when we execute. Now of those, how do we know how do we pick? We look for the best risk versus reward profile. How the I don't care how high you think the stock goes. 10x, 100x, make it a millionx. What's the difference? I'm more interested in what the market would have to do to prove that thesis invalid, right? Where is your, you know, your guess that Apple's going to go to uh double or that Nvidia is going to go to this or that Bitcoin is going to go to that? What would the market have to do to invalidate that thesis? If you can't answer that, you're in a lot of trouble. So, I always answer that obviously because I've been doing this a long time and I know if you can't answer that, you're in a lot of trouble and I'm still here. So, I figured that one out. So what would the market have to do to invalidate the thesis? If that invalidation is very far, like the market would have to break below a certain price, you know, if that's very far and the risk versus reward profile is not very skewed in my favor, then I'm not really interested in it. I want very well-defined risk parameters where I say I'm buying the stock at 72. If the stock breaks 70 for a variety of different reasons, my I'm either wrong or or early. And either way, that's the same thing. So, I just don't want to be long the stock if it's below 70. Not because it's two points below my entry or a certain percentage below my entry, but very specifically because if the market were to do that, my thesis is probably very wrong and I don't want to be in this trade. So, I have to be able to define that before putting on the trade. And then how high can it go? Well, it better be a lot higher than what I'm willing to risk, right? Okay. So, if I'm willing to risk two points, man, I got to be able to make at least 8 to 10 points to the upside at least for me to be interested in putting that trade. So, then it just comes down to best risk versus reward profile. >> Okay. So, at least four or five to one. Um, and all >> I mean, generally, I mean, at least Yeah. >> And just to be clear, all of this when you say what would the market have to do, it's all about price levels and predetermining the market would have to violate such and such a price level to the downside to tell me I'm wrong. And it would have to confirm such and such a price level to the upside to tell me I'm right, etc., etc. >> That's right. >> Yeah. >> Yeah. And then you said it right there, right? Which is >> familiar, Dan, with all of the, you know, the different other traders that we've had on here, just managing the risk part of it that we always end up at. >> Right. So the next question becomes um and if I don't know if you want to hypothetically stick with this Russell 2000 example what but whatever makes sense to you to explain it like um but in that trade just say how many names would would you be looking for like what determines how many names you're talking about or how how large of a position you might take in biotech and how many of those names you might buy let's say >> yeah well we want to be adding to the things that are Right? And we want to be doing less of the things that aren't working, right? So, if you're eating cupcakes and donuts every night and you're putting on weight, ah, maybe you shouldn't do that. But then you go for uh, you know, 10 mile run and you feel fantastic afterwards, hey, maybe maybe do a little more of that running thing, right? Like you want to do more of the stuff that that is working, do less of the stuff that's not working. If we're long a biotech and it's working and and more setups are setting up, we're going to bet that those names are going to do the same things that the other these other names are doing. And if those start working, we're adding to positions in that space if it's working. Because as I started the conversation, from extremes in positioning tend to come massive unwinds and huge trends. So just because you're in maybe a little bit early doesn't mean that there aren't going to be more opportunities moving forward. In fact, I have learned the hard way uh that, you know, you really want to let the profits run. Like what, you know, I get asked, you know, JC, what is the risk with this strategy? The risk with the strategy is that you you you you're not greedy enough, right? You want to be really greedy because these trends persist. So, if you are bashful and you're taking profits early, like you're defeating the entire purpose of what we're trying to do here with this very specific strategy that we're incorporating, which is we're looking for huge winners because they're coming they're stemming from extremes uh in sentiment and we know that those are big moves. So, you know, I personally don't like to risk any more than 1 to 3% of my portfolio on any given position uh on a trade. Now, it doesn't mean that I'm only going to put 2% of the entire portfolio in the stock. What I'll do is I'll calculate, well, if I'm going to uh put a stop loss at 70 and I'm buying it at 72, that's two points of risk. So, I'll calculate how much money am I willing to risk on this trade. Let's call it a,000 bucks and I'm willing to lose $2. Well, then I'll buy 500 shares, right? Because if it breaks $2, it breaks 70, I lose those $2 at 500. At 500 shares, that's a thousand bucks. I said I didn't want to lose more than a thousand bucks. That's how I'll position size accordingly. If I want to buy an option, I'll say, "Okay, I don't want to lose more than a thousand bucks. I got a 100 grand in this strategy. I don't want to lose more than 1%. That's a,000 bucks. So, I I'll buy $1,000 worth of call options, right? I'll buy 25 delta calls, right? So, going out, you know, 60 to 180 days or so. Um, and you know, we'll we'll give ourselves enough time depending on where volatility is and then we can express it that way. But the risk is the same. I'll either position size the shares according to, you know, my uh reverse engineered math on how much money I'm willing to lose on this trade and then I'll position size the call options accordingly in the exact same way. >> Okay. So, position sizing is important to you as it is to like I I knew we'd get here eventually. Um we as we always do with all the traders that we that we interview um and even a fair amount of folks you know who call themselves like long-term fundamental investors will say well our position size is this or this or this. So so that's extremely important. That's that sounds like a very important riskmanagement tool for you. And would you say uh a lot of the traders we we talked to they'd say well you know how we enter a trade is important and you've told us a lot about that you know about the positioning and the momentum and you know the trend. >> Um >> would you say that the risk management is more important than the entry? >> Yeah. >> Yeah. >> 100%. >> Yeah. For sure. It's not even not even close. In fact, you know, you said you said before that, you know, a lot of the traders you interview and things like that always comes down to risk management. Always. That's not surprising at all. Go read Market Wizards by Jack Schwagger, who he interviewed, all the greatest traders of all time. They all, you know what you're going to find? All of them have different strategies, right? All of them did something different. >> But the one thing in every chapter is that it all comes down to risk management. Every single one of them. It doesn't matter what their strategy is. It doesn't matter the trader. It doesn't matter which book, right? Because he's written a few books, right? They're all the same. >> I was going to say every single trader in every single book. We've had him on the show. Yep. Every single one of them. Even the ones like um you know, oh Chris, what's his name? I forget. The guy who's doing something that no one else is doing like he's using social media and all this stuff to pick stocks. Nothing to do with like charts going up or whatever and or fundamentals. Neither fundamental nor chartist, you know. Um it's all like social media stuff. and he does and he's exactly the same way. So like that's the one thing that has been impressed upon you and me and hopefully our listeners like you can't not do that if you're going to be a trader. That means that you are in the business does it not of position sizing and stop losses and other risk controls. That's your business really. >> Yep. Yep. And yet >> that's why I always ask people like, "Oh, JC, I think that Apple goes to a million or whatever." >> Yeah. >> Where are you wrong? >> Yeah. >> I don't care how high you think it goes. Where are you wrong? What would the market have to do to prove your thesis invalid? And in a lot of cases, because investors, you know, humans are crazy as we discussed before. >> You know, they they just believe that a stock this is hope and dreams and oh my god, and they're going to revolutionize the world and d like we know. Well, we've heard all these stories before and maybe they do. Maybe they do. I don't know anything about that stuff. Where are you wrong? Right. Where are you wrong? If you can't answer that, then it's not a trade. It's not an investment. It's a religion. >> It's a cult. >> Yeah. A belief. That's right. >> If you don't have It's a belief. Exactly. And it's an emotion. >> You don't have >> Yeah. If you don't have an exit strategy of what the market's going to have to do to prove that thesis invalid, it's no longer an investment. It's >> I don't know what it is. It's evil is what it is. And again, we're here like all of the traders I've ever interviewed or heard of with one exception will say, you know, we're trying to um we're trying to mitigate the role of emotions here. We're not we're trying to not let our emotions screw up the trade. Um, and only one guy, um, uh, John Neto has said, "Well, no, I like to use I like my emotions and I use them and I pay a lot of attention to them and so forth." >> I know John I know John well. >> Yeah, I I found him fascinating as I as I found all all the you traitors fascinating. Um, >> he is. He is. >> Yeah, it's great stuff. Anyway, so here we are. We're we're at it. It's it's just so it's profound. I don't know why. Like I have to say this every every time we interview a trainer, but it's true, man. >> We we get to the same place every single time. >> But here's But here's the thing, Dan. We take all of this and we take it another step further. Right. >> So, we understand because we've been doing this a while and I have a lot of friends that you've mentioned and everything like that and I've read all the books and I've made all the mistakes. We know that humans are flawed and ourselves included. So, we're trying to overcome that. How do we overcome that? How do we take the emotions out of that? To have a trade plan. To have a plan before you enter the trade when your emotions are not high. When your stress levels are not elevated, you're not in the trade. Once you're in the trade, now the the crazy pills right now you can't think straight anymore. Now, you're thinking emotionally. So, you want to make a plan, a a trade plan before you're thinking emotionally, when you're thinking rationally. But the beauty of all of this is that we know for a fact that almost everybody in the world, they're not going to do that. They are not going to have a trading plan. They are going to just uh act irrationally and emotionally and they're just they're crazy, you know, lizard brains are going to be driving their decisions. We know, right? So, it's not just about overcoming our own lizard brains. It's about now taking advantage of the others that have not come to the conclusion that are not a self-aware enough to understand that yet alone take advantage of others flaws. We are very specifically trying to extract profits from the market for from those uh poor decision-making individuals. Um and that's you can see that in sentiment data and that's exactly what we're doing. So you have to take everything that we've discussed here today as far as risk management and then and then use that uh sort of against them uh for our own endeavors. Right. >> This might be a good time to to get into an example or two. Is there uh anything you could share? Is there like a combo regional bank uh biotech stock that exists or >> you got to go >> or what what are you looking at right now? And you need the uh AI uh you know gen you know uh genomics you know you got to get all the all the buzzwords in one >> AI biotech bank. Yeah. Yeah. >> Yeah. There you go. Um you know we we you know our our in our clients spent take uh spend a lot of money uh getting our trades. So I don't want to give away the portfolio in general. I did want to stick with um you know the the the the top down perspective just kind of how we think and those are names that we're looking at but you know I'll throw out some names like you know Bank Ozk Bank of the Ozarks or the artist formerly known as Bank of the Ozarks showing relative strength these are the types of names that we would be looking at uh also oil and gas a lot of short interest in oil services companies in the explorers and producers and we're seeing a lot of relative strength coming out of the refiners so as hated as energy currently is the energy stocks themselves there is relative strength in the refiner so those would be the types of names that we're looking at in the energy space uh so I mean that's really really how I think about it from a top down perspective and you know I can give you other examples of of really in the past you know coming into 2023 for example you know the short interest was off the charts u the majority of stocks had already bottomed out in the summer of 22 so while the majority of the indexes were still falling into the fourth quarter of 22. Most stocks had already bottomed. We know because I sit there looking at every single chart and I was telling everybody most of these things already bottom. And so short interest, not only did these short sellers not cover, they were adding to their positions, creating huge vulnerabilities um in areas like speculative growth and technology. So those were the types of stocks that we were buying. those were super high short interest where there was uh a ton of uh vulnerabilities there from those markets. Things like Carvana for example uh which was super highly shorted at the time just one of the biggest winners ever. Not because you know uh a a car vending machine uh was such a great idea. In fact, everybody knows what a terrible idea it is to have a massive vending machine of cars. like it's not a secret what a bad idea idea that is to the point where the short sellers were short shorted it you know at at such an aggressive rate that there was nobody left to sell. There was nobody left to sell and so the stock went up 10,000%. You know not because you know vending machines for cars is a good idea but it's because the positioning was so extreme to one side and we saw it in a bunch of other stocks as well. >> Right. No, that's a great example. Um, and and I totally understand it. Not giving away the farm here, uh, for for free. Um, what would you need to see from say, you know, going back, we were talking about small caps a little bit, like if we're just looking say at IWM in general or Wrestle 2000, like what do you would you need to see to confirm that move like to confirm the, you know, that you want to get into a trade uh, w with that, I guess. Yeah, I mean, you know, it's it's it's consolidations within uptrends. It's how the market's behaving. I wouldn't necessarily buy the IWM specifically. You know, it's it's looking for vulnerabilities in the Russell 2000 types of stocks and then owning those regional banks and biotechs are some of those. You can look at some of these transportation stocks as well. Transportation stocks also been very heavily shorted. you know, speculative growth in general. Also, a lot of these names fall within the small cap, you know, spectrum. You know, ARC, uh, Kathy Woods Fund has the highest short interest ever. >> Highest short interest ever currently. So, these are people that are betting against those types of stocks. What are those types of stocks? These are speculative growth stocks, you know, space stocks and robots and crypto stuff and AI stuff. And, you know, those are the types of names that people hate. So those are the types of names that we want to look very closely at and we have and they've been working uh and biotech is part of that by the way. Biotech is part of that arc sort of theme. Biotech is part of this small cap theme. So in a lot of instances you're getting similar messages from uh different different uh you know parts of the market. In this case you're getting you know data from the futures market. You're getting data from the ETFs. You're getting top down data in terms of what they're doing within those subindustry groups. you're seeing similar activity in the arc names which biotech also falls within you know so you're checking off a lot of boxes um and that doesn't necessarily mean that we want to change our position sizing or anything like that just to be clear you know when you know a lot of different data suggest that we should be doing something it doesn't mean we should do it more aggressively I like to think about it like you know uh looking at the rain coming in you got different senses that are telling you that it's going to start raining like you start to smell the moisture in the air perhaps you start to see the clouds coming in you hear the thunder like there are different signs that hey maybe I should go inside right like it doesn't mean it does it's not giving us any information about how long the storm's going to be or if it's going to be a bad storm or a not so bad storm we just know that it's going to start raining so we should go inside right it doesn't give us any indication of the duration or the amplitude same as this we just because you know we're getting the same data you know same points from from different areas suggesting that we should be putting on one of these trades doesn't mean we want to change what we're doing. Um it's just more evidence of the same thing. >> So there has to be a threshold then um for what you said before like do more of what's working, do less of what's not, right? What what technically speaking in terms of like metrics or what however you make the decision, what does that look like? What does it look like when you say, "Hey, that's working. What does that mean? It's >> means the stocks we're in are making money, right? Like we buy a biotech now we're up 20 25% in this biotech. You know, we buy this Chinese stock, we're up 15, 20%. You know, our options double in a week. Like, okay. Yeah. All right. We should do more of this. Yes, I think we should. And then so we'll go and, you know, look and and we'll look for opportunities that have favorable risk versus reward profiles in that space. And there comes a time where, you know, there just aren't any more risk versus reward profiles in that space, in which case we won't be adding to those positions. >> So, I'm just thinking through this in real time. I realize my my question there was a presumption under it, which is that you you might not add to every position that's doing well. But your answers seem to indicate that you might. >> Yeah. I mean, ideally we will, but the market doesn't care what is ideal for JC. You know, market's going to do what it wants to do. And in some cases, I I wish that there were more risk ver favorable risk versus reward opportunities, but the market just ain't giving them to me. Like that's that's life. So that's kind of how I think about it. >> Okay. I think I sort of get that. Um but I again I like to just for purely for our listeners sake make it more concrete. Um and and just say that uh well as you said you you know you it sounds like you seize all the opportunities you can find but you can't always find them and and that goes for adding to positions as well as initiating them. It sounds like >> Yeah. I mean listen there's areas that you know you can't own everything. So there's areas where it's like man I wish I had more exposure in that because it's working but you know I made a decision two weeks ago to have more exposure in something else. and you know that's working too. So you can't own everything. So there's an element of that. There's going to be things that you're going to see that you didn't take advantage of. I mean that's just what it is. Like missing trades is part of the game. But getting back to how we started which is the pillars of the market and really sticking to what we know for a fact to be true and that's that asset prices trend momentum begets momentum and that relative strength is real. Um we also know that if the market is open, there's going to be more opportunities in the future. So we don't have to swing at every pitch. You know, we'll wait. there'll be more pitches, right? Like what you just need to survive long enough to see them. And you know, if you're in a trade that's losing and you're in a trade that's, you know, causing you aggravation, you're going to be distracted and you're going to miss that giant elephant that's walking right past you, right? So that that's part of the risk management is not just protecting your money, but it's the energy that you're spending. And if you're spending all this time on things that are losing you money, you're missing out on future opportunities. Like I said, that giant elephant walking right in front of you, you miss it because you're complaining about some stock that you should have gotten stopped out of weeks ago, >> right? And you correct me if I'm wrong again, but um I know for me, like I I think I know what the elephant's going to be between two opportunities, but then, you know, the other one winds up far outperforming and the one I thought was the elephant just kind of, you know, fizzles out or is mediocre or whatever and doesn't do as well. Is it the same for you? Like you don't You don't really know the elephant before you get the huge elephant size return. You're just saying that you can miss trades basically. It sounds like >> Yeah. And I do all the time. And it's not so much that I miss them. Like I'll look at a stock that I can tell you this thing is going a lot higher. But the risk versus reward is not is not where it needs to be for me to participate. It doesn't mean that I don't think it goes up. It's that I can't manage risk responsibly if I were to enter this position right here, right now. Doesn't mean I don't think it goes up. I almost guarantee you it goes up. I'm just not going to do anything about it because it's not for me right now. >> That is very interesting to me because a technician telling me that he could look at a stock and say that thing is going higher and yet your process won't let you enter and you've been defining things like what's making money and what's working and all this stuff. But so, you know, understand that like the context you've built to this moment um makes that statement sort of uh a bit surprising to me, I have to say. >> Yeah. Because it all gets back to your your earlier statement that it all comes down to risk management. It doesn't matter how much I like a trade. If I can't manage the risk, then I'm not going to put it on. Another great example, like we have a naughty list. and this naughty list. These are the types of stocks that we're not going to sell naked puts against, right? Like I could look at this thing, I'm like, dude, we could sell these puts right now, make a fortune. There is no way this thing's going lower. It's going higher and I could be dead on. But if it's on our naughty list because it's too volatile to sell naked puts and I'm not going to sell the naked puts and I'm going to leave all that money on the table and that stock's going to rip and those puts are going to go to zero and I would have made a fortune. Uh, and we just don't put it on and we never will. And I see those all the time. It's like, "Oh, man. Sell those puts all day, baby." But there's no way we would, you know. >> I see. I see. So, so in in in the that earlier hypothetical with with the stock ripping higher, you're sure it's going to rip higher, but you can't do it. It specifically might boil down to well, you know, the the the chart is such that the the the only way I'd know it wasn't broken is if it falls, you know, so far that the amount I think it's going to go up is not so much more than that. Therefore, that's why I can't buy a stock that I think is going to rip higher. Something like that. >> Yeah. It's about the religion, right? If if I can't tell you where I'm wrong or if I can and it's just so far from current levels that it's not it's too much risk, then there's nothing there's nothing I'm going to do about it. I'll watch it. I'll be like, "All right, nice for the people who own it." I don't. But guess what? I I all the time I own things that other people don't own and you know, I'm making money. It's and it's my turn, right? It's okay, >> right? So I guess my my ultimate point here for our listeners that um the discipline required to do this and this always comes up too with all the market wizards that we've interviewed and Schwagger and everybody like every trader like the discipline to not in this example that we're talking about the thing you know is going to go higher that you can't buy the discipline required to say no to that is substantial as you've said human nature is like I want that and I want a lot of it. And yet, if you have a real process as you do, you say, "I don't want any of it." And that is, you know, as far as uh, you know, managing human emotions go, that's a pretty tough thing for a lot of people. Everybody wants the FOMO train. >> Yeah. >> Well, you can't take advantage of other people's flaws if you can't control your own. >> There you go. >> That sounds good to me. starts with being self-aware for your own flaws cuz we all have them >> myself included. They're all there and I've talked to a lot of psychologists about this for many many years. Um because you know how these behavioral people make their way into finance. So I talking to him and a big thing that they say that I see in common is you know don't suppress those emotions like don't you know uh be aware of them right when those feelings come about like expect them because it's perfectly natural uh for a human to have these fear and greed at those times like expect that be aware of them and then don't act on them but don't suppress them be aware of them and then we we just take it another step further and take advantage of other people's lack of self-awareness Right. It's a It's a It's a tough game you play, Jace. All you traders, in my opinion, play. It's not for the faint of heart. It seems to many people intuitively lots of folks want to do what you're doing. They think and they read Market Wizards and lots of folks say, "Hey, I want to do that." But daytoday, um, it's a it's a real slog, isn't it? Well, if you if you go in with a plan, then it's not that hard because you just follow the plan, right? So, you're taking the idea is to take the human element. >> Well, you want to take the human element completely out of the equation, right? So, if we know, again, getting back to the things we know, we know humans are crazy. And us lizard brains, we act irrationally when our stress levels are elevated. So, how do we overcome that? just take our crazy lizard brains out of the equation and say, "Okay, we're gonna do this and if it does that, we're gonna do this. And if it does that, then we're going to do this." So, we just follow the plan. So, if those things happen, we just do it. If we're going to take half off the table when it doubles, then we take half off the table when it doubles. If we're going to get stopped out, if it breaks two points below 70, then whatever, the machine stops us out. Like, just follow the plan. Have a plan and then make the plan before you enter the trade and write it down. literally write it with a pen and a paper or type it. Whatever it is that you want to do, have a plan. And then so when the market's moving and the alerts are going off, it's like, "Oh, what was I supposed to do when this stock did this?" Like, "Oh, let's go to the plan. Oh, I'm supposed to take half off the table." Okay, take half off the table. And then in a lot of cases already frontr run that. So, for example, when we buy call options, I'm always going to take half off the table when that premium doubles, right? Right? So, if I pay $5 for a call option and I buy 10 contracts, then as soon as I get filled on 10 contracts for $5, I'm going to go out and I'm going to put a good till cancelled order to sell five of those 10 contracts at $10. Right? So, when it doubles, so that's going to be a resting order, good till cancelled. So, now even my crazy lizard brain can't screw it up because not only have I written the plan that that's what I'm going to do with that price, now the machine is already set to do it for me. So now I don't even have to do it. And then so I'll be on the phone with my grandmother or uh ordering food for the kids or uh putting on a new trade or or looking at some charts and then all of a sudden I'll hearing and I'll look and I'll be like, "Oh, we just got filled on half our Tesla calls. Nice." And then I'll just get back to what I'm doing. Nice little dopamine hit. No big deal. And then just get back to what I'm doing. Or sometimes, you know, when the market opens, we get stopped out. It's like, "Oh, that's a bummer." Anyway, back to, you know, like you you use the machines to help you execute the plan. It does it doesn't always work that way depending on what your strategy is, right? You can't always have the machines do it for you. And I certainly can't have the machines always do it for me. But those are a couple of examples as to how the machines do help me. >> All right. So, uh, yeah. And for the rest of us mere mortal humans, you know, who have flaws, you could have JC do it for you as well, you know, and then just just let him do it. For sure, guys. Um, you know, I'm glad that you brought that up. Uh, you guys can go to jc'snewsletter.com, jc'snewsletter.com, and get my daily note called everybody's wrong, where we are specifically looking for areas of the market where everybody's wrong. And one of the great things is that, you know, the market is always wrong in in, you know, some place, right? Or some places, right? There's always extremes somewhere. And we're looking for those areas of uh sentiment extreme so that we can ride those trends the other way. >> All right. Um this is an excellent >> Everybody's wrong. All right. >> Yeah. Like that. >> This is an excellent moment to to um get into our final question which is the same for every guest no matter what the topic. Even if it's a non-financial topic, same identical question. And if you've already said the answer, feel free to repeat it. The the question is simple and it's for our listeners benefit of course just like everything else we do. And the question is simply, if you could leave our listener with one idea, with one takeaway today, what would you like that to be? >> Go jump in the ocean. Just go jump in the ocean. Underrated. You know, especially if you're a trader, an investor of any kind, you know, an entrepreneur, you know, if you are in the business of thinking about things, then think about things. Take time out of your day to think, right? People like, "Oh, I have to be busy all day." If you are a like a line worker somewhere like in a factory and you're busy all day, that's one thing, right? But if your job is to think and think through things, then you should set time in your day to think about those things, whatever it might be. In our case, we're talking about trading and investing. So those are the things that I think about. But nevertheless, go jump in the ocean because it's a great way to think. Like you're there doing the backstroke in the ocean. You're watching like the land or the houses, the hotels, the mountains, wherever you are. And you know, you're just in the ocean and there's so many minerals in there for your body. It's so like mentally like therapeutic. You get some sun. You walk on the sand. Like it's good for your entire body to walk on the sand. What do they call it? Grounding or whatever. Like I'm not an expert, but take my word for it. Go to the ocean, jump in it, swim, splash in the water. Like go does it's not just for foury olds or little kids. Like adults need it way more than the kids. Like go find an ocean and jump in it. >> I I believe in this advice deeply. I don't live uh close enough to ocean to go jump in it every day, but we have a pool and we do jump in it every day. And it's a great place to just, you know, leave everything else behind. you know, you're not on your phone in the pool and you're not on your computer and you're not reading and you're not doing anything else. You're just sort of letting the sun hit you and the water wash over you. It's great. I totally agree. And I and I would add to this, JC, um spend time my thing, spend time under the water. There is something about being underwater that I love. I'm absolutely love it. And I've got these two little four-year-old uh twin grandsons who who love it, too. Every time they come over, they spend half their time saying, "Go underwater with me, Papa Dan. Go underwater with me. Go." You know, because they just we all want to spend lots of time under the water. There's something therapeutic and special and serene about it. But that's a great answer, Jaci. Thanks. This has been a lot of fun. I've really enjoyed this. >> No, me too. I got twin two-year-olds, by the way. any advice? >> Um, no. I'm the grandparent, dude. I I don't have any of the real responsibility. >> Dan's got the easier job. Yeah. >> He gives them back. He gives them back when he's done. Yeah. Yeah. Boys, two-year-olds. >> That's right. Give them back. There you go. That's the advice. Don't spend too much time around. Yeah. All right, JC. Thanks a lot, man. We will definitely >> No, thanks for having me. This is great. >> You bet. >> All right. Thanks. >> All right, guys. If you enjoyed this conversation with JC, I want to suggest his free newsletter, Everybody's Wrong from Trend Labs. You can sign up at jc'snewsletter.com. As you heard from the interview, JC's a veteran trader and technical analyst who's not afraid to call it like he sees it. Every morning, he breaks down the charts, calls out the noise, and shows you where the real opportunities are. There's no payment involved. It's a free newsletter with useful content that comes out daily. If you're interested in gaining a better understanding of the markets, go to jc'snewsletter.com. [Music] Opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stanford Research, its parent company, or affiliates.
Unlock the Market's 'Cheat Code' to Trade Like a Pro
Summary
Transcript
[Music] Hello and welcome to the Stanberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and the Ferris Report, both published by Stanberry Research. And I'm Cory McLaclin, editor of the Stanberry Daily Digest. Today we talk with expert technical analyst JC Perez. JC is a great guy. Lots of fun to talk to. If you're into technical analysis, you will absolutely want to take some notes. So, get out your pens and pencils and let's do it. Let's talk with JC Perez. Let's do it right now. JC, welcome to the show. Good to have you. >> Good to be here. >> Yeah. I I'm glad that we have you on the show because you know stuff that I have never spent any time of my life looking deeply into like I'm not a I'm not a chartist simply put and you are that and more. Um I I guess the first thing I want to know is from the top down um you know just being a chart is describes you know a million different ways of looking at the market from the top down if you had to give me like you know a few bullet points or if I just asked you casually what kind of an investor are you or what kind of a trader are you you know how would you answer that? Well, I think a I think a lot of it and I appreciate you being here. It's a great question. It's a great place to start because I think there's a lot of misconceptions as to what technical analysis even is, right? So, every chartist is a technician, but not every technician is a chartist, right? So, what we're doing as technicians is that we're analyzing the behavior of the market and therefore market participants. You know, it just so happens that the best way to visualize the changes in equilibrium between supply and demand happens to be in chart form. So technicians are often seen looking at charts and things of that nature. But the truth of the matter is we're looking at a lot of data. And this data can be visualized on spreadsheets. And there's all kinds of different charts like uh scatter plots and line charts and bar charts and all kinds of different ways to visualize data. And why is it that we're doing that? We're analyzing the behavior of markets because one thing that you'll learn over time or if you're new to this, you can go and look and check the math. But valuations and fundamentals are not what are driving stock prices. We know we have the data, right? So, what's driving stock prices is positioning and how the market is positioned or in many cases misposition for a major move. And those unwinds are what are driving asset prices. Not just an individual stock, but stocks as a group. Uh specific sectors as a group, uh other assets like gold and bitcoin and crude oil and forex markets like what's happening in the dollar, you know. So there are major major asset classes all over the world that are really the big bullies in the room. So while the US stock market might be worth $60 trillion, you're looking at a bond market that's worth $130 trillion and a forex market that's in the quad trillion. So these major major moves are are what are trickling down to the individual stock level and that's really what's moving markets, you know, not things like valuations or earnings growth or anything like that, right? So that's what we focus on. um over what time are you telling me that those things don't move market like ever or just in the past few years or just this year or when? >> Yeah, I mean the the the big drivers are really asset allocation right and and rotation amongst asset class that takes you know a long time particularly at the large cap level. I think the largest disparities that you're going to see on a regular basis between what the overall market is doing and what an individual stock is doing is going to be at the small cap level, right? Where, you know, no matter how bad the market is, there's going to be small caps that are going to be doing well. And no matter how good the market is, there's going to be small caps that are doing poorly. Um, I'm I'm generalizing in terms of asset classes in general, and then we can work our way down from there. So we want to look at positioning globally and and understand the big tides and the direction that that's going and then work our way down. So for example, if we're in an environment where you know the uptrends uh are intact in the stock market for example and the outperformance is in the United States stock market and you know the the unwind is happening in that direction. You know what are some of the better ways to take advantage of that trend example that I just uh elaborated? probably in areas where the US shines that other countries might not have things like large cap technology, things like growth stocks and things of that nature, you know. So, it starts there and then we trickle our way down uh to the individual stock level. But, you know, our our big focus is in positioning and taking advantage of of that through a variety of different breath measurements, sentiment analysis, um and then just the overall data that we get from FINRA and the commitment to traders report. You know, that tells us a lot about the market's positioning. Yeah, let's tell me more about that. What what what does positioning mean? I'm I promise you that right now as we're talking um a significant number of our listeners are saying, "Wait a minute, what is what does positioning really mean?" >> Yeah. No, it's a great question. I I I mean, I love this. It's near and dear to my heart and I think it's important to understand that, you know, at the end of the day, you know, if you're an investor, you're these are humans that are making decisions and these are machines that are built by humans that are making these decisions. And us as humans, we have flaws, right? We have many flaws. Like we're great homo sapiens. We made it. Like we won the whole thing, right? Like we're here. Um but at the end of the day, there's a lot of flaws that come with that throughout evolution. So I think if you're trying to make money in the market, you want to understand the market. You really want to understand humans and and our own flaws. And so, you know, we make as humans, we make irrational decisions. We make poor choices when our stress levels are elevated. In this day and age, it's not when we're being chased by a lion in the jungle, but when there's money involved. That's when our stress levels get elevated. If you add a layer of politics on top of that, man, now the the crazy pills really come out, right? So, humans make really poor choices in those environments and the market is so massive that it exposes those human flaws. So, as investors, if we can understand that, there's a huge o opportunity to make money from those poor choices that we know for a fact humans are going to continue to make over and over and over again. So, we analyze a ton of different data to identify where the positioning is most extreme, where are people way too bullish, where are people way too bearish, right? That there's nobody left to sell. It's already priced in and the only way that we can go is higher. We are looking for those pain points uh all day, every day because that that's where the biggest moves come come from from the massive unwinds in positioning. So, we're looking at short interest. You know, people like people forget that if you own a stock, you're just promising to be a seller one day, right? But if you are short the stock, you are a guaranteed future buyer because the only way to unwind a short position, these are people betting that the stock price is going to fall. The only way to unwind that is to buy it back. In their perfect world or in our perfect world, if we're short, we want to buy it back at a lower price, right? So that we can keep the difference. That's how we make money when the price of the stock goes down. But when the price of the stock goes up, that's a problem because now we're losing money. It's going in the opposite direction and we're paying margin interest to be short. So we're getting taxed on the margin and we're losing money. And if we're a major hedge fund, we we have to do the opposite. Hedge funds are there to make money, not to lose it. So they're losing it. That's a big problem. So when the the majority of of of shares are short, that creates a lot of vulnerability when they're all covering at the exact same time. So that's just one example of a data set that we take that's publicly available that we organize it. You know, we look specifically for the most vulnerable areas and then we look to buy some of those names. >> So you look for meme stocks before they take off like rockets, huh? >> Could be. You know, it the the beauty of it is uh there's a time and a place for everything among other things. >> Yeah, of course. I mean there's a time when meme stocks are ripping. There's a time when meme stocks are collapsing. Uh there are times when energy stocks are collapsing. There are times when energy stocks are doing well. You know, look at small caps have been underperforming forever. Everybody knows it. Um the IWM, which is the Russell 2000 ETF, the short interest is making new 52- week highs as we speak. When we look at the futures positioning, speculators have the largest net short positions ever. So, you've got the quote unquote dumb money that we want to take the other side of um agreeing with all of these shorts. So, you know, right now small caps in general are vulnerable for a squeeze. Now will that happen or not? We have to see it. We have certain certain thresholds that we wait for. So just because everybody hates something doesn't mean we like it doesn't mean we want to buy it. That's that's not a good strategy. We want to wait for the market to then agree that that unwind has begun. We have a variety of different ways that we quantify that and then we participate, right? We wait for that turn. But the first thing we want to do is identify where those turns can potentially come from. Um, you know, we saw it in the fall last year when China, you know, everybody just, you know, all the Trump things were working. For example, going into the election, all the poly market was saying Trump victory. You know, you saw like Tesla and crypto stuff working. Banks were working like like Republican Trump's stuff was doing well. So, it's like, okay, well, if Trump wins, what's the trade? Everybody assumed that it was going to be sell China, sell emerging markets, terrorists, blah blah blah. So, we were buying those things. Those were the things that we were buying. We're specifically buying Chinese stocks. we're specifically buying uh stocks that would benefit from a weaker dollar. Um and that's exact but that was based on positioning. It wasn't like this massive fundamental shift uh that emerging market economies were like all of a sudden so profitable and so great. It was the fact that everybody hated them and and sentiment was so poor there was nobody left to sell and so there's only one direction it can go and we benefited from that. So those are the types of opportunities that we're looking for on a regular basis. This reminds me of uh Dan, I I I edited a newsletter from JC many many years ago for a little bit and this reminds me of one of the things that I and I learned a ton about technical analysis while doing it which was one of the great benefits and um do you still do that thing where you at the end of every month you look through like how many charts is it? it was like a thousand charts or something and and figure out what it was, figure out the big trends, >> give or take a few thousand. But yeah, I mean, listen, there's a lot of charts, you know, particularly on a monthly basis, I really like to rip through a lot of them because you're getting a lot of monthly closing data. So, it's a great time to do that. Take a step back. Um, but yes, I absolutely do that. That is, you want to know the hack? That's the hack. Everybody out there listening, if you're listening, be like, JC, like what is what's the cheat code to this market? Like, what is the holy grail? You want to know what the holy grail is? Once a month, go look at monthly candlestick charts once a month. Every single one of them. Look at the S&P 500 and the Dow and the Nasdaq. But then also look at financials, industrials, technology. Look at all the sectors. Look at all the countries around the world. German DAX, Japanese Nikkay, you know, look at Chinese equities, Latin America. Look around the world. Look at the commodities, crude oil, gold, silver, copper, right? Like understand where the 10-year yield is heading, the US dollar. Like think about the most important assets and then make a list. And at the end of every month, look at those. Look at the bellweathers, JP Morgan, uh, Apple, Microsoft, like the the companies, the big drivers, Amazon, that are driving these sectors. Include those on the list. If if reach out to me, I'll give you my list, right? It's all good. But have a list and then go through that every month and it's going to remind you, oh you know, this this trend is up. It's making an all-time high. It can't be down, right? Like it's a reminder because, you know, throughout every day and every week, it's like, oh, what did the Dow do? The Fed said this and the Trump tweet and the this, right? like it's a never-ending noise machine. So, taking a step back, pouring yourself a glass of wine or tea or whatever. I don't judge whatever you're into. Me, I'm more of like, you know, like I like a little baro uh to go with my monthly candles, but hey, that's just me, you know, and and I just sit there and take a deep breath at night when the kids are asleep, just me, some music, the charts, glass of wine. That That's the cheat code. That's the cheat code. Bo and monthly candles. >> That is what I remember. Yeah. just you doing the work and just looking through well it was probably 3,000 charts, right? It's like it's it's a lot, right? >> Depends what kind of mood I'm in. You know, it's usually about I don't know 3 to 5,000 charts a week normally. You know, it's just that that week I'm more focused on the monthlies versus other weeks I'm more focused on weeklies probably. >> Gotcha. >> So, when you look at all those, what do you come up with at the end of it? What do you What do you You're obviously not looking at them very long because there's only so many hours in a week. What what when you quickly, you know, are ripping through those and you're looking at a, you know, a monthly candle, you're just seeing, you know, what's up and what's down and that's and then what building some kind of a picture of the overall market out of it. >> Yeah. Yeah. I think you nailed it. You know, it's really a weight of the evidence thing, right? There's no one magic bullet. There's no one magic indicator that's going to be like tell you buy, sell, and what to buy or sell. It doesn't work that way. It's really a weight of the evidence. So, you know, if you're seeing, you know, certain indications, like for example, like this this uh in the first quarter this year, the dollar was getting slammed. Money was rotating hard internationally into Europe and Asia. I mean, these markets were ripping while the United States wasn't going anywhere. But while everybody was like, "Oh my god, the tariffs and the the market's going to crash and Trump's ruining everything and like look at the Economist magazine." Like, holy cow. Like the bald eagle walking out of a hospital with bandages. Like it was bad sentiment, right? like individual investors like historic pessimism, barren, big money polls, the most bearish ever. This goes back to the '9s, right? So like so many indications. Everybody thinks the market's going to fall apart, but the rest of the world is ripping. So if the world is really coming to an end, are you going to get uh outperformance from Latin America? Like no, they're going to be leading the march down to zero. You know, Deutsch Bank making new highs, Germany making new highs. Like these are not the types of things that would happen if the European banks breaking out, you know, to new highs. Like these are not the things that happen if the world is falling apart. So, you know, the rest of the world was supporting the case that yes, we should buy stocks. All these people are crazy. These historic pessimistic readings were not just buying it because everybody hates it. There are a lot of indications that that it's that we need to be buying very aggressively here in early April. Um, so fortunately, we're, you know, we're data driven, right? Like we're not here for the narrative. We're specifically looking for where what's actually happening is different than what people think is happening. Like those disparities, you know, I write um you know, we have a product called a divergence because that's what we're looking for. We're looking for divergences between, you know, reality and the narrative >> and you assess reality mostly by charts. So, when you look at all those, I mean, are you are you taking notes on 3000 charts or are you uh what I'm just I just I'm very curious to know how you what you do with that volume. I mean, the sheer volume of of information um on a weekly or monthly >> looking for trends. Just looking for trends. It's all it is. You know, it's either an uptrend, a sideways trend, or a downtrend. And then we're looking at everything on multiple time horizon. So while we'll start with a 30-year chart, the next chart will be that same asset in a an 8 to 10 year chart. And the next chart will be that same asset on a three to ninemonth time horizon. Right? So it's a multiple time frame analysis understanding the longer term trends and then the short-term secondary waves within those big trends. So what is it that we're doing? We're looking for trends very specifically. Why do we do that? Because we know asset prices trend. we know like we know that returns are not random like we have the data like we know so there's a lot about the market that we don't know particularly about the future so for me I find it easier to just start with the things that we do know exist asset prices trend momentum exists you know relative strength is real money goes to where it's being treated best right relative strength is a real thing we know those are three pillars of the market asset prices trend momentum exists and relative strength is real we know those three things but That's really what we start with. And then to answer your question, Dan, you know, we look at a lot of charts. Why do we look at a lot of charts? Because that is the only fact, right? Everything else is a guess. Everything else is an opinion. You know, an earnings estimate is exactly that. It's an estimate. Guidance from the company is exactly that. And by the way, they often change their guidance, right? It's kind of a a ritual around here. The government data that comes out, those are estimates. Those get revised. We know going into the number that they're going to be revised. The Federal Reserve does not, you know, the bond market doesn't do what the Fed says. The Federal Reserve tell does what the bond market tells it to do, right? And they could do their best to kind of, you know, maneuver that, but they're going to, you know, so if you want to know what the Fed's going to do, just follow the Fed fund futures, right? So, you know, the market is what's real. Everything else is a fugazi, right? Everything else is a guess, is an estimate. CEOs are wrong all the time or they're lying to you. Both happen quite regularly, you know? So the way I look at it, you know, we want to trust the only thing that is actually real. And there's no argument that when shares exchange hands at a specific time, on a specific date, at a specific price, that will never be revised. That is there forever. And then so those uh exchanges in those assets, the prices trend over time. They go for they go up for a while, they go down for a while. So participating in those trends is how we want to be able to make money consistently. uh because we start with what we know and we know that that's how asset prices behave. >> So you started out telling me that positioning was the most important thing but now it sounds like trends are super important. So can you put those like so we're building a you know how JC does things here and it sounds like those are two correct me if I'm wrong equally important pieces of the pie for you to make a trade. >> Yeah. I mean it and and it's it's one before the other, right? So, first you get the sentiment extreme and then those trends last for a long time. Those trends tend to persist and that's the real meat of it. Um and then you get that last move at the end where now everybody's like an optimist and everybody thinks it's going to go up forever and that's when you start looking for deteriorations in momentum in relative strength and look for those trend changes because while we know that asset prices trend, we're not like blind. We know that trends change too. there's a there's a much lower likelihood that the trend's going to change. But of course, trends change all the time. They go up, they go down. So, there are indications of those changes in trends, sentiment being one of them. Um, but yeah, so how do we start? We we're looking for positioning. We're looking for major trends across asset classes and rotation amongst them. So, it's not just the S&P 500 on an absolute basis. It's the S&P 500 versus foreign equities. It's the S&P 500 versus gold. It's the S&P 500 versus energy, right? So, uh, comparing, you know, so when the S&P 500 falls, you're going to see that relative strength. You're going to see that deterioration in the S&P compared to other alternatives like bonds perhaps, right? So, in the strongest trends, these assets are not just doing well on an absolute basis. The strongest trends outperform their alternatives as well. So a typical you know trade for you might if just to pick on the at the Russell 2000 which you mentioned right now you might be saying something like well the positioning is extreme everybody wants to be short everybody knows that it you know peaked whatever five years ago or something and still hasn't made a new high and it's performed like garbage. Um so therefore I am going to look for the moment now that I've established the positioning is extreme then step two is the moment when the trend goes in my favor. You know I don't want to be short as an at an extreme of shorting. So I'm really looking for an opportunity to go long but I'm not doing it just based on the positioning. I've got to wait until this is sort of like our friend Steve Sugarroo who says you know he wants it cheap hated and in an uptrend. So you've got hated and probably cheap maybe let's say by the positioning and then you're just waiting for that uptrend piece to kick in. Am I right? >> Yep. That's exactly right. And depending on the positioning there's different ways to take advantage of it. Right. But you're spot on, Dan. And so, you know, for example, in the China, like we're not going to go buy the Shanghai Composite Index or right or like you could buy an ETF like the FXI that trades that. We want to look for a specific vehicle that it will best um as a best vehicle to express that thesis in the open market. So, we've been buying Chinese stocks like uh 10-centent music, which is the Spotify of China, right? It was it was an outperformer within the Chinese space. So, we want to be in the space because of the unwind, but there's already something in there that's working better than anybody else. So, let's just buy that one because that's ahead of the pack, right? Same thing in the small cap space, you know, looking for um what's in small caps, right? We could buy the IWM, I suppose, and there's nothing wrong with that, but for our strategy, we'd rather buy a stock or an option on a stock. So, what's in the Russell 2000? Ton of biotech stocks, ton of regional banks, right? So, that's probably a pretty good place to start. As it turns out, regional banks and biotechs also very highly shorted, right? New multi-year highs in short interest for the XBI, which is the biotech ETF. Uh new 52- week highs in the KRE, which is the regional bank ETF. So, from a top down, we're seeing that small caps are hated on the futures market at the ETF level. Then, what's in the small caps also hated, right? So like these are really good these are really good pond to go fishing in to look for stocks that are showing relative strength that fit that check off those boxes. Uh so those are the types of names that we'd be buying, right? >> And let's just stick with this just to you know you can just purely hypothetically here. I'm not asking for, you know, for a real trade, but just hypothetically here then might you then um like so you're going into let's say that you know the bio you look at the Russell and then you say well of course given how much regional bank and biotech that you know those have to be you know heavily shorted too. So are you then like before you decide to get into the trade are you saying I we like these five or 10 or however many it is biotech and we like these five or 10 or however many regional banks um and based on what is is what I'm thinking like what when you when you go when it's about picking those names before the you know do you wait for the tren the trend to change and let the trend change tell you which of those you want or do you look at, you know, any sort of fundamental or any kind of other data to tell you, oh, this is probably the bank or the biotech that we want. How do you know which specific names there? >> No, it's a great question and Dan, you know, you're doing a great job of kind of like showing that funnel like starting with all of this and then working our way to this and then working, you know, like you're really you're really pinpointing the process really well. So, that's a great question. That's what our answer is. I promise that's what they want. They're taking I love this. This is fantastic. No, which is great because some people are like, "Just give me the stock, JC. I don't care about >> No, but that's giving them a fish. We want to teach them to fish." So, >> yeah, we like a >> great No, I really appreciate that. I hope you know that. Um, so that's exactly a great question. So, then what's next? Well, then what we'll do is we'll run a scan showing the relative strength in those industry groups, right? So you have the sector level which would be um so you've got the asset uh size level which is small caps right but then within small caps you got a lot of financials and a lot of healthcare but more specifically within financials and healthcare the sectors they are biotechnology and regional banks within the financials and now we're breaking it down one level we don't know that there's going to be a ton of short interest there we don't know it all we look and it's like oh there's a ton of short interest now that makes sense because there's a ton of short interest in the Russell 2000 So it's not a surprise but we don't know that going in right and we're then seeing that be like oh wow look at this so that makes sense okay great so all the pieces of the puzzle are being are put together these names are hated you know we want to look so we'll look at for the relative strength we'll look for the strongest ones within those groups and then we'll like you said wait for the change in trend how do we identify a change in trend that is a momentum shift you know an explosion in in high momentum also we take uh an anchored volume weighted average price so in other words, we're pivoting to former highs because one thing that we know is that when a stock is going up, the investors are making money. The people who own the stock are making money. The people that are short the stock are losing money. We know. So, if we know that investors that own the stock are making money in uptrends, we can reverse engineer that and say, well, how do we know if investors are making money? And the answer is you anchor a volume weighted average price to the prior peak and you could quantify whether or not the owners are making money or not. And you don't want to own things where the owners aren't making money. You want to own things where we are. So there's a variety of different ways that we quantify a change in trend. But it starts with that top down approach. And that's when we execute. Now of those, how do we know how do we pick? We look for the best risk versus reward profile. How the I don't care how high you think the stock goes. 10x, 100x, make it a millionx. What's the difference? I'm more interested in what the market would have to do to prove that thesis invalid, right? Where is your, you know, your guess that Apple's going to go to uh double or that Nvidia is going to go to this or that Bitcoin is going to go to that? What would the market have to do to invalidate that thesis? If you can't answer that, you're in a lot of trouble. So, I always answer that obviously because I've been doing this a long time and I know if you can't answer that, you're in a lot of trouble and I'm still here. So, I figured that one out. So what would the market have to do to invalidate the thesis? If that invalidation is very far, like the market would have to break below a certain price, you know, if that's very far and the risk versus reward profile is not very skewed in my favor, then I'm not really interested in it. I want very well-defined risk parameters where I say I'm buying the stock at 72. If the stock breaks 70 for a variety of different reasons, my I'm either wrong or or early. And either way, that's the same thing. So, I just don't want to be long the stock if it's below 70. Not because it's two points below my entry or a certain percentage below my entry, but very specifically because if the market were to do that, my thesis is probably very wrong and I don't want to be in this trade. So, I have to be able to define that before putting on the trade. And then how high can it go? Well, it better be a lot higher than what I'm willing to risk, right? Okay. So, if I'm willing to risk two points, man, I got to be able to make at least 8 to 10 points to the upside at least for me to be interested in putting that trade. So, then it just comes down to best risk versus reward profile. >> Okay. So, at least four or five to one. Um, and all >> I mean, generally, I mean, at least Yeah. >> And just to be clear, all of this when you say what would the market have to do, it's all about price levels and predetermining the market would have to violate such and such a price level to the downside to tell me I'm wrong. And it would have to confirm such and such a price level to the upside to tell me I'm right, etc., etc. >> That's right. >> Yeah. >> Yeah. And then you said it right there, right? Which is >> familiar, Dan, with all of the, you know, the different other traders that we've had on here, just managing the risk part of it that we always end up at. >> Right. So the next question becomes um and if I don't know if you want to hypothetically stick with this Russell 2000 example what but whatever makes sense to you to explain it like um but in that trade just say how many names would would you be looking for like what determines how many names you're talking about or how how large of a position you might take in biotech and how many of those names you might buy let's say >> yeah well we want to be adding to the things that are Right? And we want to be doing less of the things that aren't working, right? So, if you're eating cupcakes and donuts every night and you're putting on weight, ah, maybe you shouldn't do that. But then you go for uh, you know, 10 mile run and you feel fantastic afterwards, hey, maybe maybe do a little more of that running thing, right? Like you want to do more of the stuff that that is working, do less of the stuff that's not working. If we're long a biotech and it's working and and more setups are setting up, we're going to bet that those names are going to do the same things that the other these other names are doing. And if those start working, we're adding to positions in that space if it's working. Because as I started the conversation, from extremes in positioning tend to come massive unwinds and huge trends. So just because you're in maybe a little bit early doesn't mean that there aren't going to be more opportunities moving forward. In fact, I have learned the hard way uh that, you know, you really want to let the profits run. Like what, you know, I get asked, you know, JC, what is the risk with this strategy? The risk with the strategy is that you you you you're not greedy enough, right? You want to be really greedy because these trends persist. So, if you are bashful and you're taking profits early, like you're defeating the entire purpose of what we're trying to do here with this very specific strategy that we're incorporating, which is we're looking for huge winners because they're coming they're stemming from extremes uh in sentiment and we know that those are big moves. So, you know, I personally don't like to risk any more than 1 to 3% of my portfolio on any given position uh on a trade. Now, it doesn't mean that I'm only going to put 2% of the entire portfolio in the stock. What I'll do is I'll calculate, well, if I'm going to uh put a stop loss at 70 and I'm buying it at 72, that's two points of risk. So, I'll calculate how much money am I willing to risk on this trade. Let's call it a,000 bucks and I'm willing to lose $2. Well, then I'll buy 500 shares, right? Because if it breaks $2, it breaks 70, I lose those $2 at 500. At 500 shares, that's a thousand bucks. I said I didn't want to lose more than a thousand bucks. That's how I'll position size accordingly. If I want to buy an option, I'll say, "Okay, I don't want to lose more than a thousand bucks. I got a 100 grand in this strategy. I don't want to lose more than 1%. That's a,000 bucks. So, I I'll buy $1,000 worth of call options, right? I'll buy 25 delta calls, right? So, going out, you know, 60 to 180 days or so. Um, and you know, we'll we'll give ourselves enough time depending on where volatility is and then we can express it that way. But the risk is the same. I'll either position size the shares according to, you know, my uh reverse engineered math on how much money I'm willing to lose on this trade and then I'll position size the call options accordingly in the exact same way. >> Okay. So, position sizing is important to you as it is to like I I knew we'd get here eventually. Um we as we always do with all the traders that we that we interview um and even a fair amount of folks you know who call themselves like long-term fundamental investors will say well our position size is this or this or this. So so that's extremely important. That's that sounds like a very important riskmanagement tool for you. And would you say uh a lot of the traders we we talked to they'd say well you know how we enter a trade is important and you've told us a lot about that you know about the positioning and the momentum and you know the trend. >> Um >> would you say that the risk management is more important than the entry? >> Yeah. >> Yeah. >> 100%. >> Yeah. For sure. It's not even not even close. In fact, you know, you said you said before that, you know, a lot of the traders you interview and things like that always comes down to risk management. Always. That's not surprising at all. Go read Market Wizards by Jack Schwagger, who he interviewed, all the greatest traders of all time. They all, you know what you're going to find? All of them have different strategies, right? All of them did something different. >> But the one thing in every chapter is that it all comes down to risk management. Every single one of them. It doesn't matter what their strategy is. It doesn't matter the trader. It doesn't matter which book, right? Because he's written a few books, right? They're all the same. >> I was going to say every single trader in every single book. We've had him on the show. Yep. Every single one of them. Even the ones like um you know, oh Chris, what's his name? I forget. The guy who's doing something that no one else is doing like he's using social media and all this stuff to pick stocks. Nothing to do with like charts going up or whatever and or fundamentals. Neither fundamental nor chartist, you know. Um it's all like social media stuff. and he does and he's exactly the same way. So like that's the one thing that has been impressed upon you and me and hopefully our listeners like you can't not do that if you're going to be a trader. That means that you are in the business does it not of position sizing and stop losses and other risk controls. That's your business really. >> Yep. Yep. And yet >> that's why I always ask people like, "Oh, JC, I think that Apple goes to a million or whatever." >> Yeah. >> Where are you wrong? >> Yeah. >> I don't care how high you think it goes. Where are you wrong? What would the market have to do to prove your thesis invalid? And in a lot of cases, because investors, you know, humans are crazy as we discussed before. >> You know, they they just believe that a stock this is hope and dreams and oh my god, and they're going to revolutionize the world and d like we know. Well, we've heard all these stories before and maybe they do. Maybe they do. I don't know anything about that stuff. Where are you wrong? Right. Where are you wrong? If you can't answer that, then it's not a trade. It's not an investment. It's a religion. >> It's a cult. >> Yeah. A belief. That's right. >> If you don't have It's a belief. Exactly. And it's an emotion. >> You don't have >> Yeah. If you don't have an exit strategy of what the market's going to have to do to prove that thesis invalid, it's no longer an investment. It's >> I don't know what it is. It's evil is what it is. And again, we're here like all of the traders I've ever interviewed or heard of with one exception will say, you know, we're trying to um we're trying to mitigate the role of emotions here. We're not we're trying to not let our emotions screw up the trade. Um, and only one guy, um, uh, John Neto has said, "Well, no, I like to use I like my emotions and I use them and I pay a lot of attention to them and so forth." >> I know John I know John well. >> Yeah, I I found him fascinating as I as I found all all the you traitors fascinating. Um, >> he is. He is. >> Yeah, it's great stuff. Anyway, so here we are. We're we're at it. It's it's just so it's profound. I don't know why. Like I have to say this every every time we interview a trainer, but it's true, man. >> We we get to the same place every single time. >> But here's But here's the thing, Dan. We take all of this and we take it another step further. Right. >> So, we understand because we've been doing this a while and I have a lot of friends that you've mentioned and everything like that and I've read all the books and I've made all the mistakes. We know that humans are flawed and ourselves included. So, we're trying to overcome that. How do we overcome that? How do we take the emotions out of that? To have a trade plan. To have a plan before you enter the trade when your emotions are not high. When your stress levels are not elevated, you're not in the trade. Once you're in the trade, now the the crazy pills right now you can't think straight anymore. Now, you're thinking emotionally. So, you want to make a plan, a a trade plan before you're thinking emotionally, when you're thinking rationally. But the beauty of all of this is that we know for a fact that almost everybody in the world, they're not going to do that. They are not going to have a trading plan. They are going to just uh act irrationally and emotionally and they're just they're crazy, you know, lizard brains are going to be driving their decisions. We know, right? So, it's not just about overcoming our own lizard brains. It's about now taking advantage of the others that have not come to the conclusion that are not a self-aware enough to understand that yet alone take advantage of others flaws. We are very specifically trying to extract profits from the market for from those uh poor decision-making individuals. Um and that's you can see that in sentiment data and that's exactly what we're doing. So you have to take everything that we've discussed here today as far as risk management and then and then use that uh sort of against them uh for our own endeavors. Right. >> This might be a good time to to get into an example or two. Is there uh anything you could share? Is there like a combo regional bank uh biotech stock that exists or >> you got to go >> or what what are you looking at right now? And you need the uh AI uh you know gen you know uh genomics you know you got to get all the all the buzzwords in one >> AI biotech bank. Yeah. Yeah. >> Yeah. There you go. Um you know we we you know our our in our clients spent take uh spend a lot of money uh getting our trades. So I don't want to give away the portfolio in general. I did want to stick with um you know the the the the top down perspective just kind of how we think and those are names that we're looking at but you know I'll throw out some names like you know Bank Ozk Bank of the Ozarks or the artist formerly known as Bank of the Ozarks showing relative strength these are the types of names that we would be looking at uh also oil and gas a lot of short interest in oil services companies in the explorers and producers and we're seeing a lot of relative strength coming out of the refiners so as hated as energy currently is the energy stocks themselves there is relative strength in the refiner so those would be the types of names that we're looking at in the energy space uh so I mean that's really really how I think about it from a top down perspective and you know I can give you other examples of of really in the past you know coming into 2023 for example you know the short interest was off the charts u the majority of stocks had already bottomed out in the summer of 22 so while the majority of the indexes were still falling into the fourth quarter of 22. Most stocks had already bottomed. We know because I sit there looking at every single chart and I was telling everybody most of these things already bottom. And so short interest, not only did these short sellers not cover, they were adding to their positions, creating huge vulnerabilities um in areas like speculative growth and technology. So those were the types of stocks that we were buying. those were super high short interest where there was uh a ton of uh vulnerabilities there from those markets. Things like Carvana for example uh which was super highly shorted at the time just one of the biggest winners ever. Not because you know uh a a car vending machine uh was such a great idea. In fact, everybody knows what a terrible idea it is to have a massive vending machine of cars. like it's not a secret what a bad idea idea that is to the point where the short sellers were short shorted it you know at at such an aggressive rate that there was nobody left to sell. There was nobody left to sell and so the stock went up 10,000%. You know not because you know vending machines for cars is a good idea but it's because the positioning was so extreme to one side and we saw it in a bunch of other stocks as well. >> Right. No, that's a great example. Um, and and I totally understand it. Not giving away the farm here, uh, for for free. Um, what would you need to see from say, you know, going back, we were talking about small caps a little bit, like if we're just looking say at IWM in general or Wrestle 2000, like what do you would you need to see to confirm that move like to confirm the, you know, that you want to get into a trade uh, w with that, I guess. Yeah, I mean, you know, it's it's it's consolidations within uptrends. It's how the market's behaving. I wouldn't necessarily buy the IWM specifically. You know, it's it's looking for vulnerabilities in the Russell 2000 types of stocks and then owning those regional banks and biotechs are some of those. You can look at some of these transportation stocks as well. Transportation stocks also been very heavily shorted. you know, speculative growth in general. Also, a lot of these names fall within the small cap, you know, spectrum. You know, ARC, uh, Kathy Woods Fund has the highest short interest ever. >> Highest short interest ever currently. So, these are people that are betting against those types of stocks. What are those types of stocks? These are speculative growth stocks, you know, space stocks and robots and crypto stuff and AI stuff. And, you know, those are the types of names that people hate. So those are the types of names that we want to look very closely at and we have and they've been working uh and biotech is part of that by the way. Biotech is part of that arc sort of theme. Biotech is part of this small cap theme. So in a lot of instances you're getting similar messages from uh different different uh you know parts of the market. In this case you're getting you know data from the futures market. You're getting data from the ETFs. You're getting top down data in terms of what they're doing within those subindustry groups. you're seeing similar activity in the arc names which biotech also falls within you know so you're checking off a lot of boxes um and that doesn't necessarily mean that we want to change our position sizing or anything like that just to be clear you know when you know a lot of different data suggest that we should be doing something it doesn't mean we should do it more aggressively I like to think about it like you know uh looking at the rain coming in you got different senses that are telling you that it's going to start raining like you start to smell the moisture in the air perhaps you start to see the clouds coming in you hear the thunder like there are different signs that hey maybe I should go inside right like it doesn't mean it does it's not giving us any information about how long the storm's going to be or if it's going to be a bad storm or a not so bad storm we just know that it's going to start raining so we should go inside right it doesn't give us any indication of the duration or the amplitude same as this we just because you know we're getting the same data you know same points from from different areas suggesting that we should be putting on one of these trades doesn't mean we want to change what we're doing. Um it's just more evidence of the same thing. >> So there has to be a threshold then um for what you said before like do more of what's working, do less of what's not, right? What what technically speaking in terms of like metrics or what however you make the decision, what does that look like? What does it look like when you say, "Hey, that's working. What does that mean? It's >> means the stocks we're in are making money, right? Like we buy a biotech now we're up 20 25% in this biotech. You know, we buy this Chinese stock, we're up 15, 20%. You know, our options double in a week. Like, okay. Yeah. All right. We should do more of this. Yes, I think we should. And then so we'll go and, you know, look and and we'll look for opportunities that have favorable risk versus reward profiles in that space. And there comes a time where, you know, there just aren't any more risk versus reward profiles in that space, in which case we won't be adding to those positions. >> So, I'm just thinking through this in real time. I realize my my question there was a presumption under it, which is that you you might not add to every position that's doing well. But your answers seem to indicate that you might. >> Yeah. I mean, ideally we will, but the market doesn't care what is ideal for JC. You know, market's going to do what it wants to do. And in some cases, I I wish that there were more risk ver favorable risk versus reward opportunities, but the market just ain't giving them to me. Like that's that's life. So that's kind of how I think about it. >> Okay. I think I sort of get that. Um but I again I like to just for purely for our listeners sake make it more concrete. Um and and just say that uh well as you said you you know you it sounds like you seize all the opportunities you can find but you can't always find them and and that goes for adding to positions as well as initiating them. It sounds like >> Yeah. I mean listen there's areas that you know you can't own everything. So there's areas where it's like man I wish I had more exposure in that because it's working but you know I made a decision two weeks ago to have more exposure in something else. and you know that's working too. So you can't own everything. So there's an element of that. There's going to be things that you're going to see that you didn't take advantage of. I mean that's just what it is. Like missing trades is part of the game. But getting back to how we started which is the pillars of the market and really sticking to what we know for a fact to be true and that's that asset prices trend momentum begets momentum and that relative strength is real. Um we also know that if the market is open, there's going to be more opportunities in the future. So we don't have to swing at every pitch. You know, we'll wait. there'll be more pitches, right? Like what you just need to survive long enough to see them. And you know, if you're in a trade that's losing and you're in a trade that's, you know, causing you aggravation, you're going to be distracted and you're going to miss that giant elephant that's walking right past you, right? So that that's part of the risk management is not just protecting your money, but it's the energy that you're spending. And if you're spending all this time on things that are losing you money, you're missing out on future opportunities. Like I said, that giant elephant walking right in front of you, you miss it because you're complaining about some stock that you should have gotten stopped out of weeks ago, >> right? And you correct me if I'm wrong again, but um I know for me, like I I think I know what the elephant's going to be between two opportunities, but then, you know, the other one winds up far outperforming and the one I thought was the elephant just kind of, you know, fizzles out or is mediocre or whatever and doesn't do as well. Is it the same for you? Like you don't You don't really know the elephant before you get the huge elephant size return. You're just saying that you can miss trades basically. It sounds like >> Yeah. And I do all the time. And it's not so much that I miss them. Like I'll look at a stock that I can tell you this thing is going a lot higher. But the risk versus reward is not is not where it needs to be for me to participate. It doesn't mean that I don't think it goes up. It's that I can't manage risk responsibly if I were to enter this position right here, right now. Doesn't mean I don't think it goes up. I almost guarantee you it goes up. I'm just not going to do anything about it because it's not for me right now. >> That is very interesting to me because a technician telling me that he could look at a stock and say that thing is going higher and yet your process won't let you enter and you've been defining things like what's making money and what's working and all this stuff. But so, you know, understand that like the context you've built to this moment um makes that statement sort of uh a bit surprising to me, I have to say. >> Yeah. Because it all gets back to your your earlier statement that it all comes down to risk management. It doesn't matter how much I like a trade. If I can't manage the risk, then I'm not going to put it on. Another great example, like we have a naughty list. and this naughty list. These are the types of stocks that we're not going to sell naked puts against, right? Like I could look at this thing, I'm like, dude, we could sell these puts right now, make a fortune. There is no way this thing's going lower. It's going higher and I could be dead on. But if it's on our naughty list because it's too volatile to sell naked puts and I'm not going to sell the naked puts and I'm going to leave all that money on the table and that stock's going to rip and those puts are going to go to zero and I would have made a fortune. Uh, and we just don't put it on and we never will. And I see those all the time. It's like, "Oh, man. Sell those puts all day, baby." But there's no way we would, you know. >> I see. I see. So, so in in in the that earlier hypothetical with with the stock ripping higher, you're sure it's going to rip higher, but you can't do it. It specifically might boil down to well, you know, the the the chart is such that the the the only way I'd know it wasn't broken is if it falls, you know, so far that the amount I think it's going to go up is not so much more than that. Therefore, that's why I can't buy a stock that I think is going to rip higher. Something like that. >> Yeah. It's about the religion, right? If if I can't tell you where I'm wrong or if I can and it's just so far from current levels that it's not it's too much risk, then there's nothing there's nothing I'm going to do about it. I'll watch it. I'll be like, "All right, nice for the people who own it." I don't. But guess what? I I all the time I own things that other people don't own and you know, I'm making money. It's and it's my turn, right? It's okay, >> right? So I guess my my ultimate point here for our listeners that um the discipline required to do this and this always comes up too with all the market wizards that we've interviewed and Schwagger and everybody like every trader like the discipline to not in this example that we're talking about the thing you know is going to go higher that you can't buy the discipline required to say no to that is substantial as you've said human nature is like I want that and I want a lot of it. And yet, if you have a real process as you do, you say, "I don't want any of it." And that is, you know, as far as uh, you know, managing human emotions go, that's a pretty tough thing for a lot of people. Everybody wants the FOMO train. >> Yeah. >> Well, you can't take advantage of other people's flaws if you can't control your own. >> There you go. >> That sounds good to me. starts with being self-aware for your own flaws cuz we all have them >> myself included. They're all there and I've talked to a lot of psychologists about this for many many years. Um because you know how these behavioral people make their way into finance. So I talking to him and a big thing that they say that I see in common is you know don't suppress those emotions like don't you know uh be aware of them right when those feelings come about like expect them because it's perfectly natural uh for a human to have these fear and greed at those times like expect that be aware of them and then don't act on them but don't suppress them be aware of them and then we we just take it another step further and take advantage of other people's lack of self-awareness Right. It's a It's a It's a tough game you play, Jace. All you traders, in my opinion, play. It's not for the faint of heart. It seems to many people intuitively lots of folks want to do what you're doing. They think and they read Market Wizards and lots of folks say, "Hey, I want to do that." But daytoday, um, it's a it's a real slog, isn't it? Well, if you if you go in with a plan, then it's not that hard because you just follow the plan, right? So, you're taking the idea is to take the human element. >> Well, you want to take the human element completely out of the equation, right? So, if we know, again, getting back to the things we know, we know humans are crazy. And us lizard brains, we act irrationally when our stress levels are elevated. So, how do we overcome that? just take our crazy lizard brains out of the equation and say, "Okay, we're gonna do this and if it does that, we're gonna do this. And if it does that, then we're going to do this." So, we just follow the plan. So, if those things happen, we just do it. If we're going to take half off the table when it doubles, then we take half off the table when it doubles. If we're going to get stopped out, if it breaks two points below 70, then whatever, the machine stops us out. Like, just follow the plan. Have a plan and then make the plan before you enter the trade and write it down. literally write it with a pen and a paper or type it. Whatever it is that you want to do, have a plan. And then so when the market's moving and the alerts are going off, it's like, "Oh, what was I supposed to do when this stock did this?" Like, "Oh, let's go to the plan. Oh, I'm supposed to take half off the table." Okay, take half off the table. And then in a lot of cases already frontr run that. So, for example, when we buy call options, I'm always going to take half off the table when that premium doubles, right? Right? So, if I pay $5 for a call option and I buy 10 contracts, then as soon as I get filled on 10 contracts for $5, I'm going to go out and I'm going to put a good till cancelled order to sell five of those 10 contracts at $10. Right? So, when it doubles, so that's going to be a resting order, good till cancelled. So, now even my crazy lizard brain can't screw it up because not only have I written the plan that that's what I'm going to do with that price, now the machine is already set to do it for me. So now I don't even have to do it. And then so I'll be on the phone with my grandmother or uh ordering food for the kids or uh putting on a new trade or or looking at some charts and then all of a sudden I'll hearing and I'll look and I'll be like, "Oh, we just got filled on half our Tesla calls. Nice." And then I'll just get back to what I'm doing. Nice little dopamine hit. No big deal. And then just get back to what I'm doing. Or sometimes, you know, when the market opens, we get stopped out. It's like, "Oh, that's a bummer." Anyway, back to, you know, like you you use the machines to help you execute the plan. It does it doesn't always work that way depending on what your strategy is, right? You can't always have the machines do it for you. And I certainly can't have the machines always do it for me. But those are a couple of examples as to how the machines do help me. >> All right. So, uh, yeah. And for the rest of us mere mortal humans, you know, who have flaws, you could have JC do it for you as well, you know, and then just just let him do it. For sure, guys. Um, you know, I'm glad that you brought that up. Uh, you guys can go to jc'snewsletter.com, jc'snewsletter.com, and get my daily note called everybody's wrong, where we are specifically looking for areas of the market where everybody's wrong. And one of the great things is that, you know, the market is always wrong in in, you know, some place, right? Or some places, right? There's always extremes somewhere. And we're looking for those areas of uh sentiment extreme so that we can ride those trends the other way. >> All right. Um this is an excellent >> Everybody's wrong. All right. >> Yeah. Like that. >> This is an excellent moment to to um get into our final question which is the same for every guest no matter what the topic. Even if it's a non-financial topic, same identical question. And if you've already said the answer, feel free to repeat it. The the question is simple and it's for our listeners benefit of course just like everything else we do. And the question is simply, if you could leave our listener with one idea, with one takeaway today, what would you like that to be? >> Go jump in the ocean. Just go jump in the ocean. Underrated. You know, especially if you're a trader, an investor of any kind, you know, an entrepreneur, you know, if you are in the business of thinking about things, then think about things. Take time out of your day to think, right? People like, "Oh, I have to be busy all day." If you are a like a line worker somewhere like in a factory and you're busy all day, that's one thing, right? But if your job is to think and think through things, then you should set time in your day to think about those things, whatever it might be. In our case, we're talking about trading and investing. So those are the things that I think about. But nevertheless, go jump in the ocean because it's a great way to think. Like you're there doing the backstroke in the ocean. You're watching like the land or the houses, the hotels, the mountains, wherever you are. And you know, you're just in the ocean and there's so many minerals in there for your body. It's so like mentally like therapeutic. You get some sun. You walk on the sand. Like it's good for your entire body to walk on the sand. What do they call it? Grounding or whatever. Like I'm not an expert, but take my word for it. Go to the ocean, jump in it, swim, splash in the water. Like go does it's not just for foury olds or little kids. Like adults need it way more than the kids. Like go find an ocean and jump in it. >> I I believe in this advice deeply. I don't live uh close enough to ocean to go jump in it every day, but we have a pool and we do jump in it every day. And it's a great place to just, you know, leave everything else behind. you know, you're not on your phone in the pool and you're not on your computer and you're not reading and you're not doing anything else. You're just sort of letting the sun hit you and the water wash over you. It's great. I totally agree. And I and I would add to this, JC, um spend time my thing, spend time under the water. There is something about being underwater that I love. I'm absolutely love it. And I've got these two little four-year-old uh twin grandsons who who love it, too. Every time they come over, they spend half their time saying, "Go underwater with me, Papa Dan. Go underwater with me. Go." You know, because they just we all want to spend lots of time under the water. There's something therapeutic and special and serene about it. But that's a great answer, Jaci. Thanks. This has been a lot of fun. I've really enjoyed this. >> No, me too. I got twin two-year-olds, by the way. any advice? >> Um, no. I'm the grandparent, dude. I I don't have any of the real responsibility. >> Dan's got the easier job. Yeah. >> He gives them back. He gives them back when he's done. Yeah. Yeah. Boys, two-year-olds. >> That's right. Give them back. There you go. That's the advice. Don't spend too much time around. Yeah. All right, JC. Thanks a lot, man. We will definitely >> No, thanks for having me. This is great. >> You bet. >> All right. Thanks. >> All right, guys. If you enjoyed this conversation with JC, I want to suggest his free newsletter, Everybody's Wrong from Trend Labs. You can sign up at jc'snewsletter.com. As you heard from the interview, JC's a veteran trader and technical analyst who's not afraid to call it like he sees it. Every morning, he breaks down the charts, calls out the noise, and shows you where the real opportunities are. There's no payment involved. It's a free newsletter with useful content that comes out daily. If you're interested in gaining a better understanding of the markets, go to jc'snewsletter.com. [Music] Opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stanford Research, its parent company, or affiliates.