Hands up all those who are sick and tired of Brexit? I thought so. If you noticed, I rarely mention it in my market coverage – unlike the vast majority of financial pundits who believe it is the main driver of many financial markets at present. So I won’t start now. You can thank me later.
But I have one thing to say about it and that is that currency traders have got it right – again. As the political process winds its way towards its inevitable fudge, sterling has been in rally mode as traders anticipated this outcome days ahead of the politicos. And we have joined in that view with our long GBP/USD positions.
Last time, I criticised this news-based approach to market analysis and have over the past provided plenty of proof that this commonly-held belief system simply does not hold water.
And here is just one example from the gold/silver markets (chosen just to get away from the B word). This heads a recent article:
Gold is an unusual market because none is ever intentionally destroyed or ‘consumed’ in the same way wheat is, and the vast majority of newly mined gold gets put back in the ground sometimes in Fort Knox. Sounds nuts, doesn’t it? Because the supply/demand stats are so tenuous, conventional analysts rely on other data to support their analysis.
And because most new gold is not consumed and the global supply keeps rising, it is the ultimate ‘sentiment’ market. If most are bullish, prices tend to rise and vice versa. It’s as simple as that.
For conventional analysts, large macro data such as GDP growth is often put forward as a major price determinant. But is this true? Official US GDP data are released quarterly (with often significant revisions to previous data). Is a serious gold trader going to wait until the next report to make a trade? I very much doubt it, but that’s what the ‘news makes the market’ theory implies.
Also, the US Dollar is said to be a major factor in the direction of gold prices. Dollar up = gold down is the knee-jerk assumption of many. And the majority of pundits believe it. But is that true?
Here is the period Aug/18 to the current month in the Dollar and Gold
In this period, gold gained a very healthy $180 (15%) while the dollar did nothing, with a slight contrary upward tendency. How can the pundits explain that obvious breakdown in their theory?
You would think that anyone with a glimmer of curiosity would want to know why their theory failed. But deep-seated ideas about how markets work seem to be firmly entrenched. Humans have a long history of possessing outrageous beliefs en masse. The eye-opening classic Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay contains accounts of many in history.
In fact, the word ‘delusion’ perfectly fits all conventional ideas of how financial markets work. But do not confuse financial markets with ordinary supermarkets! The latter is an economic market where supply/demand forces are usually at play for items like bread. If bread is suddenly doubled in price – guess what? Demand and sale volumes fall. The opposite seems to be true very often in financial markets. Price up = trading volumes up is a frequent observation.
Evidently, financial markets operate according to different rules. You would think conventional pundits would notice that.
That is why all attempts at explaining stock price movements by supply/demand considerations are doomed to fail.
Long -time readers will know that it is sentiment that moves markets. Time and time again, I have shown that when bullish sentiment reaches extreme levels (as equities have at present), that is when tops are found – and vice versa for bottoms.
Going back to the quote above, the author believes the US trade deficit is a major factor in the gold price direction. My criticism of this mirrors that for the GDP data. And anyway, both data sets are backward-looking and provide zero clues into to the future.
If you trade gold (or any other market), don’t you want something that looks forward? I certainly do.
And his third point is a real doozy. He loses it for me when he uses the words ‘Even though’. That is a cop out excuse that despite the data, the market moved contrarily. That is a clear admission his interest rate theory (another common belief) fails. Rates up = gold down is the erroneous and common belief.
And the final bullet point is another classic. The gold and silver markets seem to attract the zaniest of conspiracy theorists. And that may be because ‘hard’ economic data is sparse, so anything goes! When the markets do not rally (all gold bugs are bullish), it must be because of some dark conspiracy that is manipulating the ‘paper’ market (bull runs are never the result of conspiracy but a natural order of things!)
Just because silver contracts (futures) are on ‘paper’ with no sight of the actual metal does not mean the price isn’t a valid expression of genuine price discovery between genuine buyers and sellers. Just try to buy a silver future at the market price today and hold it until delivery day and you will find out what genuine price discovery is all about!
My trading record with gold and silver is excellent. For instance, last time, I called a minor high this week in my previous blog and as I write, gold is off $15 and silver off by 30 cents. (Thursday afternoon). I put it down to my Tramline Trading methods that I have time-tested over the years – plus estimates of prevailing sentiment..
But there is one other factor involved – an ability to ‘read’ the market. Of course, today we have access to a plethora of technical indicators including sentiment and of course, we all have screens where we can watch markets move tick by tick if we wish.
But in the days of the author of Reminiscences of a Stock Operator – none other than the legendary Jesse Livermore – who had only the rolls of tape spewing out of the clacking ticker tape machine to read, it was slightly different for him. But he became famous nevertheless as a ‘tape reader’ early in the 20th century.
By ‘reading the market’, I mean the ability to note the importance of what I call ‘dashed expectations’. For instance, if the Dow is rallying strongly while the S&P lags, that could be a signal to look out for a reversal. In a healthy bull market, major indexes should move more or less together.
Have the bears finally thrown in the towel?
Have you noted the mass of bearish comments in the MSM especially from prominent commentators that has accompanied the huge rally in stocks off the Christmas lows? Indeed, many hedge funds have positioned short and you can read of their travails elsewhere. One fund in particular is down 20% since the start of the year as it is max short.
The Wall of Worry has certainly been very tall with negative data after negative data emerging.
Yes, I am a long-term bear but at least I know when to lay off major short bets when the tide is against me! But has that time arrived to gird up our bearish loins?
Yesterday, I learn that US institutional investors, who have been major net sellers of equities for some time, finally caved in and last week became massive buyers of the shares they were happily selling earlier!
This chart shows the weekly fund flows into and out of equities by the institutions. Most weeks since the Christmas lows, they were net sellers, but what a sudden change of heart last week! Evidently, they couldn’t stand the pain of FOMO (Fear Of Missing Out) any longer. Their algo systems told them to buy, baby, buy as the S&P pushed above the 200-day MA. It was off to the moon! And they now had the Fed’s back in the Powell Put, don’t they?.
So do you think you should join them and get long equities now? Before you do, you should note that they got it totally wrong on the way up. Their record since the start of the year is 100%. 100% wrong. So my question is this: Is their newfound bullishness a sign of a top, just as their heavy selling three months ago was a sign of a bottom?
Many institutions behave like your average punter – selling at the lows and buying at tops. It’s amazing how some stock-picking funds still attract investors
Sentiment measures are in total alignment with the above picture. Daily Sentiment Index (DSI) reached almost 90% recently. In addition, central banks are still buying equities with Japan particularly hungry. central banks are not known for their great market timing, either.
And as I pointed out last time, the Vernal Equinox is next week and would be an ideal time for stock markets to turn.
The point is this: you know the state of today’s global finance is in big trouble when central banks load up with equities and issue negative interest rate bonds (many trillions of which are outstanding). A few years ago, this would have been unimaginable – a complete fantasy. And global debt levels keep rising.
Of course, negative yielding bonds is a deflationary force – and is leading the way to overall deflation (to come).
I went to bat for BAT in January – and now we are hitting a six!
For my very popular PRO SHARES service, I advised a strong buy for British American Tobacco shares in late January. Yes, we all know cigarette smoking is a no-no among most Western nations – and the BAT share price has reflected this bearish trends in recent years.
On January 25, this was the chart I showed members
and a very pretty one it was! From the 2017 high at £56, it began a bear phase that was in five clear waves to end-January – and that was when I started to take a real interest. It also traversed my beautiful tramlines where the waves made highly accurate hits on both. This is a textbook setup for a reversal off the £23 January low – as the market was hitting the lower tramline on a very strong momentum divergence.
Time to go long! And here is the updated chart
As forecast, we caught the major low and now have a £6 gain – so we have hit a six with our BAT! My major target is the upper tramline which would close the gap.
Note the January set-up was a high prob/low risk scenario as a ‘Buy Low/Sell High’ candidate. These are the well-researched opportunities I specialise in. And this trade was suitable for spread betters and cash investors alike. But you must get in early at the right time – and that is the challenge for most traders.
So is this a bear market rally. soon to fizzle out? One thing to consider is this: the cannabis sector is hot (we hold positions in CANOPY GROWTH) and it would be a natural move for BAT to enter it. A company announcement along these lines would not be out of the question – and give the shares an added boost.