How to Hear the Whistle Blow at Market Tops

Arguably, the most famous bucking bronco was the infamous Steamboat of Wyoming.

He got the name “Steamboat” after he was hit in the nose by a ranch hand's whip after he continuously failed at breaking the big black horse.

The blow from the whip handle damaged the horse's naval cavity so it would whistle like a steamboat whenever the horse got riled up.

Before the stock market gets all riled up and starts to make a meaningful decline, there is no steamboat whistle unfortunately.

There are starts and stops that look like tops, but then the market just keeps on trucking higher and higher.

At the first sign of danger, investors get bucked off their positions as if they were trying to ride good ‘ol Steamboat.

Or, as happened to me many times early in my career, you hold on too long and your stocks and ETFs enter free-fall.

What I like to do in order to hear the whistle blow at market tops is to go against wrong-way traders.

Guys that trade small positions in the S&P 500 futures market tend to get it wrong.

Conversely, those that trade in the bond market futures tend to get it right.

That's not just wishful thinking — it's a proven empirical fact.

They key being “empirical” or evidence based.

Who holds what in the futures market is readily available every Friday in the government's COT report.

With some programming help, I've designed two strategies: One for stocks and one for bonds.

I call it the Smart Money Indicator (which is closed to new subscribers. No, I'm not retiring just yet, but focusing 100% on our trading platform, Portfolio Boss).

The Smart Money strategy uses what I call Strategy Stacking.

Priority goes like this: Stocks->Long-term bonds->Short-term bonds

You only get into LT bonds if stocks are on a “sell” signal, and you only get into ST bonds if both stocks and LT bonds are on a sell signal.

Stocks have been on a buy signal all year, so the official position is “long SPY.”

Long-term bonds have been on a SMI buy signal for the past 51 trading days (June 19th).

Bonds aren't going to make you wildly rich, but they tend to keep your money safe during a downturn in stocks.

The bond ETF (TLT) returned 13.6% in 2008 (with dividends).

SMI Bonds turned 15.8%, but with lower volatility.

Think of volatility as a bucking bronco.

Lower volatility means you're less likely you'll be thrown off your horse.

Or in this case…less likely to screw up your trading because your emotions got the better of you.

It's not just the fluctuations of your account that lead you to the poor house.

Remember, the news is out for your eyeballs in order to make gobs of moolah.

So they tend to exaggerate — or even lie — using negative news (negative news out-pulls positive by a country mile).

The news media is off the rails these days, so it's better to shove cotton balls in your ears and tune most of it out.

Everyday, you'll hear a new reason to sell your stocks: North Korea, no tax cuts, Marxist insurgency, race riots, terrorism, housing bubble 2.0, death of the dollar, global warming, Trump this, Trump that, Russia, Russia, Russia…on and on and on ad nauseum.

Meanwhile, I'm laying out in my backyard as I type this, enjoying a beautiful day.

I'm thankful that my friends in Houston, Texas are safe when many are in real danger.

I'm thankful that I have both my parents.

I'm thankful my sister found a good guy after kissing a few frogs.

After spending months of on again, off again back pain, I'm thankful I can walk.

I'm thankful for my team members and their hard work and shared vision.

I'm thankful that YOU chose to be a part of my life.

Even though I'm getting out of the advisory business, I'll make sure you're taken care of when we re-release Portfolio Boss in all its newfound glory.

I'm thankful that we share a desire to beat the markets using empirical science, and not half-baked, half-assed cockamamie ideas.

Don't let the Chicken Little's get to you.

It's a time-suck, and causes undo stress and misery.

Here's a step in the right direction…

I've been reading this book today. Very counter-intuitive. It takes a smart, experienced person with some balls to write about the un-obvious.

The Subtle Art of Not Giving a F*ck—+mark+manson

Yes, there's lots of cursing in the book, but I dig it so far.

Cursing can be a good thing if it wakes people from their Groundhog's Day slumber through life.

Trade smart,

Dan “Prince of Proof” Murphy