The One Chart You Need To See

My favorite story about my life as an investor is of asking my father how he had made so much money in the markets. I was about 11 years old and had done okay myself investing in gold shares by applying a rudimentary observation, care of the Financial Times share price page, that all shares at that time had lows and highs that suggested the stocks halved and/or doubled every year and that if you bought at a low you would win big when the process repeated.

So I asked my father what was his secret to success in what was the commodity boom of the 1970s.

He told me, “All you have to know is which direction the market is going and act accordingly. If you know it was going up you would be long, if down then you would go short.” That was the secret.

It took me a long time to realize how true this was because my 11-year-old mind felt it could not be that simple. It is of course that simple, but the problem comes with the word “know.” How do you know it is going up?

The answer is you cannot for certain, but it is the job of the investor to be firmly sure they know the direction of the market. That takes skill, tools, work and focus.

So let me show you one of my tools.

Take a long-term chart and make it as simple as possible.

Take this chart of the Nasdaq 100:

When I look at this I see the future holding the Nasdaq below 10,000 and even 7,500. You may see a whole different future, but the simplification of this chart gives a clear picture and underlines the bearish calls I’ve been making.

Attempts are being made to stop inflation from running away and the market falling in itself is a tightening of money supply that QT is set to create. As such, the Federal Reserve can tighten and achieve its goals by moderating stock prices, while appearing to be gentle on Main Street by not appearing to be too draconian. As the Federal Reserve applies QT and interest rates to hold back inflation, a fall in investment assets like stocks and real estate multiplies the effect but keeps it within the boundaries of less illiquid assets that are used as collateral for credit.

Keeping it simple is always a good protocol for life and investment and if you ask the question, which way the market is going in the U.S., the answer is down. Until participants start crying “uncle” that direction will not change.