The hardest class I ever took in college was Physics, and it wasn’t even close.
While some concepts were fairly straightforward – Newton’s Laws, for example – the mathematics underpinning them was anything but.
Moreover, the successful communication of both concepts and mathematics often proved beyond the ability of mortal human professors. As a result, I spent a heck of a lot of time with my nose buried in that book.
I also fared pretty well in the class – which I still view as a minor miracle considering I essentially taught myself.
Although I probably couldn’t go back through the math without some serious review these days, the concepts largely stuck.
And believe it or not, those ideas even show up from time to time in my current line of work.
From a Certain Point of View
By far the most difficult unit we covered was Einstein’s Theory of Relativity.
Everyone is, of course, familiar with his famous equation E=mc2, which essentially shows that mass and energy are equivalent and transmutable.
But I can’t say as I’ve heard many laypeople talk much about the “relative” part very often.
Probably because learning it makes your brain feel like it’s being folded in half.
Simply stated, it says that the laws of physics are all the same for objects that are accelerating at the same pace.
For instance, the laws of physics for all of us are experienced similarly because we’re all hurtling through space on a giant hunk of rock at 19 miles per second and revolving at 900 miles an hour.
Put another way, it’s not terribly different from riding in a car. You are aware the car is moving because you can see the road whiz by… but you feel like you’re sitting still.
Similarly, if a separate car pulls up beside you and slows to the same speed as yours, it appears as though they’re not moving at all.
This is true whether both cars are going 100 miles per hour… or just 10.
But if velocities happen to differ and that other car is going much faster… well, let’s just say you’ll definitely notice.
How that difference in speed is experienced, however, depends on your point of view, young Jedi.
Banks See the Economic Glass as Half Full
In their quarterly filings, both banks reported a rapid rebound in profits, powered by their trading arms and way-better-than-expected loan loss charges.
On the earnings call, JPM’s CFO Jennifer Piepszak summed up their point of view by saying, “Things do feel better than we thought they would,” referring to the company’s ever-changing outlook for the US economy.
But when I happened to look at their forecast for the US Unemployment rate, I was stunned to see they’re still calling for 7-8% unemployment… in the fourth quarter of next year.
Source: JP Morgan, FT.com
Worse, that doesn’t include the “hidden unemployment data” I talked about last week – the “Pandemic Under Assistance” job losses, or “PUA.”
That’s important, because the truth is that a whole bunch of those 11.8 million people – perhaps 4 million or more – are going to lose their jobs permanently.
So, while I’m happy for the banks that profits are returning, I don’t think I share their relative optimism for the broader economy.
That said, it’s a productive process to learn how they are viewing the market, as it gives us a better overall picture of what’s likely to work over the coming months.
And judging by analysis from The Market Ear, all indications are that investment banks and hedge funds are going to try and seriously juice their portfolios in the coming months.
Source: The Market Ear
The question is… where are they going to put that money to work?
For the answer, we need to check back in with Einstein.
In This Market’s Horse Race, Time is but a Construct
Few people realize that time is arbitrary.
For instance, we divide our units of time in terms of days/hours/minutes – a unit based on the rotation of the Earth.
Yet for some reason, we tend to always put time on the X-axis of stock charts when it’s the performance we’re actually after.
For most of us, that usually means three things – the price, the direction of price movement, and the speed of price movement.
One charting technique that I’ve found incredibly useful for isolating that performance is to use Relative Rotation Graphs, which put the strength of a stock price on the X-axis, and the momentum of a stock price on the Y-Axis.
And time, in this case, is depicted by arrows along the line itself.
Put together, it looks like this:
What I like about this is that it turns “the market” into a stationary point at the center of the chart, and plots individual stocks into kind of a “horse race” around it.
As weird as it may look, it’s kind of intuitive.
The faster a stock is moving relative to the market, the higher it goes toward the top of the chart.
And the pricier a stock gets relative to the market, the further out to the right of the chart it goes.
In general, you want to target stocks to buy when they’re in the bottom left quadrant and turning upward, and target stocks to sell when they’re in the top right quadrant and turning downward.
I also bring in sector and industry-specific ETF’s to use it as a qualitative tool that shows me where those banks and hedge funds in question are investing.
And when we look at just today’s results, you can get a snapshot in time of where sectors are currently sitting.
In the top-right corner, we can see the sector ETFs that are outperforming the market at the moment – Biotech (LABU), Utilities (UTSL), Technology, (TECL), Financials (FAS), the broader Health Care sector (CURE), Industrials (DUSL), Consumer Discretionary (WANT), and Consumer Staples (NEED).
As I mentioned above, these are sectors that have already made big moves that we’d be looking to sell or at least pare down positions.
On the other side, however, we have the under performers over the past two weeks – Gold (UGL), Gold Miners (NUGT, JNUG), Volatility (VXX), Bonds (LQD, HYG), and Energy (ERX, GUSH).
Way over there to the left, however, is where I want to draw your attention – to our old friend Proshares Ultra Silver (NYSEArca: AGQ).
We entered our latest stake way back on September 24th, when it had just crossed below the X-axis and was threatening to turn around – depicted on the chart below.
Well, we’re up about 10% on that stake already, and given that silver’s relative momentum is now higher than the broader market despite today’s pullback, I like the idea of picking up another ¼ stake here.
I also plan to take a deeper look at the small and mid-cap gold miners this week, as they’re also beginning to show signs of life.
Because after all, you don’t have to be Einstein to realize that whether Congress decides to print trillions more in stimulus, precious metals are likely to be the biggest beneficiaries.
But I suppose it helps.
All the best,