Storm clouds seem to be hanging over the stock market no matter where you look right now.
But guess what: There’s money to be made no matter what happens next.
I recently sat down for an interview with William Patalon III, and we discussed two scenarios for “Stock Market 2019” – and how to make money no matter what.
Bill is one of the finest journalists, market analysts, and human beings I’ve ever met. Our friendship goes back years, with regular weekly phone calls to chat about the markets and life in general. Every year around Christmas time, we like to transcribe one of those phone calls for both my readers here and Bill’s in his research service, Private Briefing, as we take a look ahead at what could be in store for you and your money during the next twelve months. If you’re not already a subscriber, I would highly recommend his research service, Private Briefing, especially in these volatile markets. Click here to learn more.
I hope you enjoy this conversation as much as we do.
Here’s an edited transcript of our talk …
William Patalon III: Okay … so D.R., I know that you like to work with something you refer to as “The Narrative” – which is essentially the dominant “story” in the economy and the financial markets. I’ve always liked this, because it gives folks a kind of “starting point” in their effort to understand just what’s happening in the economy and financial markets. And because you keep it simple, it presents investors with a means of really “seeing” the factors that really matter in the markets.
This understanding… this comprehension… in turn makes it easier for them to grasp the underlying philosophy behind the trades that you bring them…
D.R. Barton, Jr.: That’s a great way to describe it, Bill.
WPIII: Thanks … so now that folks understand why you always start with a “narrative,” let’s now tell folks what you believe that narrative is right now.
Then we’ll move on to talk about the narrative you believe will dominate at least the earliest part of the New Year.
DRBJr: Okay, Bill, let’s start with the current narrative…
The “Trump Growth Narrative” has been in play since the 2016 election. Two of the three legs of that narrative have largely been fulfilled – reduced tax structure and reduced regulation. The third leg of increased infrastructure spending – which I know you’ve talked a lot about, Bill, since long before the election – is still out there, and is a theme to watch in the New Year. The Fed’s “Great Unwind Narrative” drove the markets strongly in the fourth quarter of 2018, but is now waning thanks to some dovish comments by Fed Chair [Jerome] Powell about slowing interest rate increases in 2019.
WPIII: This is good stuff, as always, D.R. And it leads me to the second part of my question. The other day, as we did our “planning call” for this interview (folks reading this would probably be surprised at how much “prep” work we do to make sure the stuff we bring them is “top shelf”) … you mentioned that we, as investors, have reached a “critical juncture” in the market cycle.
What is this “key juncture?” And what’s the “New Year Narrative” you believe it will bring us?
DRBJr: It’s a new narrative trying to supplant the others at the top of the list – something I’m temporarily referring to as the “Slowing Global Growth Narrative.”
WPIII: This is the real underlying concern when we talk about the tariff troubles/trade war with China, Brexit or the rising interest rate environment here in the U.S., isn’t it?
DRBJr: Yes … and the key juncture – the market’s “tell” – is whether traditional end-of-the-year seasonal strength can overcome the uncertainty that has been in the markets since October.
WPIII: Which, for the record, I predicted …
DRBJr: Yes … and there’s a real confluence of four seasonally strong tendencies that should exert influence on the markets. They are:
- Since 1950, December has been the strongest of all 12 months.
- The “Six Best Months” indicator shows statistically significant strength in the October-to-April time frame.
- The last quarter of 2018 and the first quarter of 2019 are the two strongest quarters out of the 16 quarters in the four-year presidential cycle.
- The “Santa Claus Rally” at the end of the year is another statistically significant strong period … the last five market days of 2018 combined with the first two trading days of 2019.
With that seasonality tailwind – if the market continues to struggle in the bottom of its recent range – I believe we could see the downward trend continue into the New Year. At the very least, we would continue the current and unusual sideways volatile market.
On the other hand, if end-of-the-year seasonal strength wins out, we could get another leg of the Market Melt-Up in 2019.
WPIII: You know … I just hosted a video in our “Lightning Round” series talking about the difference between a “trader” and an “investor.” And you’re one of those rare gurus who is comfortable with – indeed, an advocate for – both approaches.
But in the market you describe … is it better to be a trader … or an investor? And why?
DRBJr: If we get a weak finish into the end of the year, the continued volatile sideways or even down market will definitely favor traders – those who can take advantage of fast moves in either direction.
WPIII: Okay … so what markets, sectors and asset classes do you like for 2019? Let’s run through them one at a time.
DRBJr: I’ve laid out two scenarios here – a recovering “Melt-Up Market” and a volatile sideways-to-down market. Let me chronicle them both…
If the market closes the year with a whimper, I believe the sector rotation that has dominated the fourth quarter of 2018 will continue – the more defensive or “risk-off” sectors will continue to outperform. The sectors I like – in order of preference – are: Healthcare and Consumer Staples. Utilities have been a good play, but I believe they’ve “burned a lot of rocket fuel” and are only a “Buy” after a pullback.
WPIII: And given what you’ve just outlined for us here… what are some specific opportunities you like at this point? Let’s start with trading.
DRBJr: For traders, I think you can continue to buy strong “Mega Techs” on pullbacks – just keep your stop-loss discipline and don’t overstay your welcome when you’re riding a profitable trade. I love trading MSFT right now because of its strong cash flow position; it doesn’t get slammed as much in the neck-snapping down moves as the FANGs do.
WPIII: And for folks who don’t know … the “FANGs” are Facebook Inc. (Nasdaq: FB), Amazon.com Inc. (Nasdaq: AMZN), Netflix Inc. (Nasdaq: NFLX) and Alphabet/Google (Nasdaq: GOOGL).
DRBJr: That’s right …
WPIII: So Microsoft Corp. (Nasdaq: MSFT)…
DRBJr: Right, Bill: Buying MSFT after the market has a few down days has paid off multiple times for my premium-trading-service subscribers… and will continue to do so.
WPIII: Private Briefingsubscribers have also made a ton of money on old “Mr. Softy.” I still like it for the long term… great moves into AI… storage/cloud… and the whole move into the “ecosystem” strategy. Love the firm’s shift toward subscription revenue.
DRBJr: All excellent points, Bill …
WPIII: So, let’s shift away from your “trading” mindset and into the “investing” realm. Do you have one or two favorites for the approaching New Year? Maybe you shift into your “investor” mindset and give folks an idea or two that they can buy now and hold for the longer run?
DRBJr: In healthcare, I like Big Pharma stock Pfizer Inc. (NYSE: PFE) to continue their run. And I really like a tangential life sciences play Agilent Technologies Inc. (NYSE: A). It’s a technology company with a strong presence in healthcare, providing database and research AI for pharmaceutical companies as well as laboratory equipment and re-useable supplies for doctors and other professionals.
WPIII: A moment ago you mentioned the “risk-off” trades…
Risk is an element of the “investing process” that investors too often forget to factor in. You, on the other hand, are always very conscious of risk.
Let’s talk risk …
Do you think risk levels are higher, lower or about the same now as in recent years past?
What should folks be doing to address that?
DRBJr: Risk levels are definitely higher than normal, and I expect them to stay that way for the first half of 2019 – perhaps beyond. We enjoyed exceptionally low volatility in 2016 and 2017.
I think traders and investors got spoiled by that ultra-low volatility.
Today, we’re seeing higher sustained volatility – and here’s why I believe that will last. Traders and investors use the futures market to hedge risk by buying intermediate-term futures contracts in the VIX Index – the index that measures the amount of risk premium that trades are paying.
When markets go down this index goes up. And that “measure of risk” shows traders are expecting very elevated volatility for at least nine months…
WPIII: As we careen toward the end of 2018 and motor into 2019, what are the three or so things investors need to watch carefully… or watch out for vigilantly? What are the biggest threats to the scenario you’ve sketched out and what are the “wild cards” that could make things better than you expect?
DRBJr: The one biggest wild card – the “Sword of Damocles” hanging over the market right now – is the trade war with China (and to a lesser degree, other U.S. trading partners). I believe the market has priced in a positive resolution to that conflict. Otherwise we would be down much more. If we don’t get that result in the first quarter next year, I believe markets could head to bearish territory for the first time in almost a decade. Conversely, a strongly positive resolution that looks like more open trading channels and useful “Intellectual Property” protection concessions from China would trigger the “market melt-up” I mentioned earlier.
WPIII: You’ve employed a lot of the kind of thinking you’ve shared here in your trading services in the past 12 months, correct? What are some of the biggest winners you’ve delivered?
DRBJr: That’s right, Bill. These are trading strategies that I outline in my book “The 10-Minute Millionaire.” And I use them in my services.
Looking back over the past year, big wins while the market was rising included a 390% gain in Wynn Resorts Ltd. (Nasdaq: WYNN) and back to back 212% and 223% wins in GOOGL and Micron Technologies Inc. (Nasdaq: MU). But the ones I’m most proud of are the hits we’ve pulled down in the face of the really tough market conditions we’ve had recently.
Just weeks ago, we scored a 161% win in MSFT when most people were scared of buying. And, at the October lows, we boldly bought QQQ calls for a big 109% gain. And, at the very end of November, we hauled in a 136% gain using “Put” options on Equifax Inc. (NYSE: EFX).
It’s been important to make money on both sides of the market in this environment…
WPIII: Any final thoughts you’d like to share?
DRBJr: There are always opportunities … and we’ll keep looking for them …
WPIII: Thanks, D.R. Happy holidays, buddy.
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Great trading and God bless you,
D.R. Barton, Jr.