We've got a lot of new people reading and watching, who really don't understand why stocks move.
Many think that days like Tuesday are random, where it's pretty even if the market will go higher or go lower, but if you buy stocks that are going higher, you will make money. It's almost as if there's a big casino and they have settled at the roulette table, and they are betting red or black, depending on what's going higher going into the day. Twenty-four hour trading is here, and a stock that comes into the session with a head of steam that started at 4 a.m. is one you want to be on.
I am huge believer that you need to find your own style. To me the style just mentioned is too fraught. You need many things to go right and you have to bet that your co-investors aren't going to turn tail and ring the register, wrecking the trade.
I approach the trading profession much like I would when I talk about football gambling. Each day is a game, a battle between the bulls and the bears and you have to bet which side you want. The method, if you can call it that, of investing in a hot stock and hoping that it gets even hotter even though you don't know what it does or is, has become a herd mentality of great force.
My method? I want immediately to find out who is the favorite and then who is the underdog, so I have the wind at my back when I make my trades.
You knew Tuesday from the start that the bulls were the favorites. They had so much going for them. To me, you have to give the bears maybe six or seven points just to be able to attract some short money for the other side.
What made me think the bulls were heavily favored?
First, and most important, the Senate grilled Janet Yellen, the next Treasury secretary, and she's just Tom Brady. What I can I say? I had no worries about her. She was so sure-handed. What did she stand for? Over and over again, you learned that she cared for the disenfranchised, the people who don't have jobs and need to put food on the table. She was unrattled and forceful in her remarks to help the poorer people among us.
That means she wants to spend a lot of money, something that would normally have left her open to a blitzing by Republicans. But she released her answers too quickly that there wasn't a single sack. It also means, like the Federal Reserve chairman, she want to keep rates low.
There are people who think that there are plenty of people who don't want to work, that they just want money from the government. There is no evidence of that. Jobs are part of what makes people have self-respect.
Now this is not "Mad Minimum Wage." But you can't get it unless you have a job and the combination of easy money and low interest rates could inspire people to start businesses and attract workers for the minimum wage, rather than just be getting unemployment insurance. I know there are people with jobs who think that there are plenty of people who don't want to work. They just want money from the government. There is no evidence of that. Jobs are part of what makes people have self-respect and allows them to save for their families. When she says we "need to act big," she's talking about acting big to create more jobs. As I listened to her, I began to see that the bulls had home field advantage with Brady at the helm. Bulls by three, or in non gambling speak: the bulls are so powerful that you have to spot the bears at least three points.
But there's another thing it does, an unintended consequence: People who have money may, indeed, start, new businesses. However, more importantly they may just want to invest in the stock market. There's lots of index money, 50% of stocks are owned by indexes, so If you put money in an index fund you are taking the line up for the bulls. That's not the case for buying individual stocks. Still, though, if done en masses with more than a handful of stocks like BlackBerry (BB) , Palantir (PLTR) and GameStop (GME) stock pickers can adjust the line in favor of the bulls. Whether it's young people jumping on AMC (AMC) or older people buying an industrial, say Honeywell (HON) , these individual buying patterns are strong.
Spot the bears another two points.
If you want to know where games are really won, it's the offensive line. You need that impenetrable wall to push forward. For the last few weeks we have had to watch as successive front line got blitzed after a couple of up days.
Tuesday, though, we had the best front line you could possibly have: Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet (GOOGL) . You can always substitute Microsoft (MSFT) . These stocks have all become to be viewed as lockdown stocks. They are ones you bet on when it looks like the vaccine rollout will be botched. I think this is quite false. No, the rollout has been botched for certain. I mean that these stocks are falsely portrayed as stocks that you sell when the economy opens.
If we get travel advertising to return Alphabet's Google will jump big. You can make as similar case for Amazon and Facebook, as only 8% of advertising is online and there aren't many outlets to advertise on. Apple? I listened to Yellen and she is not a cold warrior. She wants China to behave, but she recognizes that, unlike President Donald Trump, globalism if here to stay. Great news for Apple.
You add them all up and you have to spot the bears another two points.
Finally, you have this remarkable run in the semiconductors, especially the ones involved in 5G. Big spectrum auction? Internet of things rush? Apple business? Could be anything, but it is coloring every screen green.
The bears are not without weapons. We got good numbers from Bank of America (BAC) and great numbers from Goldman Sachs (GS) . Both, however, had moved too far, too fast. Worries about inflation because of the Yellen's prospects? People didn't seem to care much. The bears don't have the weapons. Therefore this game, Tuesday's game, you had to give the bears seven points, meaning that the bears needed intraday help going into the game, perhaps something disruptive from President Trump. Ah, but he lacks Twitter (TWTR) . Or some misstep from Yellen. No holds barred. Big disappointments in bank earnings. Nope. They were terrific.
The great thing about the stock market is that you actually don't need to give the bears any points. It's a level playing field. If you bet against the favorite, though, you better have something that can change the mental line. Tuesday, I saw nothing that made me think that the line was wrong. That was why it was so terrific to see that offensive front line blocking for Yellen.
Now, what the new traders need to know is that you don't want to go home long. With the inauguration Wednesday, you do not know, even with two trillion dollars of stimulus, if the bears will be in charge. But if you can figure out who is the favorite and calculate the "line," you will do a lot better than the gambler who buys hot stocks and bet they stay hot for the duration.
(GS, MSFT, GOOGL, AAPL, AMZN, FB, HON, are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
