Remember Gamestop? As long ago as two weeks, it was the talk of the town. What a flash in the pan! From $37 to $482 and back down again for a classic Duke of York manoeuvre. Many traders made and lost huge suns but one thing is for sure – the vast majority of amateur newbies lost big-time
The most basic emotion for newbies in trading is greed. When your trade is going your way at a rate of knots, the default belief is that it will go much much higher. And why not? The ‘experts’ are all saying the sky’s the limit for this baby – everyone is jumping on board and the pent-up demand is huge. And all those hedge funds who shorted must be quaking in their boots – and itching to cover.
But what the WallStreetBets gang failed to understand in their childish simplistic view is that there are many many hedge funds out there – most of whom were not short GameStop (or if they were, it was a tiny part of their portfolio). The savvy ones would have been shorting into the rally with the inevitable result.
More experienced traders would have overcome their basic greed knee-jerk response (they have seen it all before) and told themselves to become more bearish as the price rose. That is the professional (and lucrative) approach.
Down the risk scale from WallStreetBets, investors likewise succumb to this primal urge. As Gordon Gekko almost famously said: “Greed is Good” – but only if you get out in time! Too many traders/investors convince themselves their stance cannot fail – the dollar must weaken – the Fed said so! They essentially marry their position – and breaking up is hard to do.
You often learn the hard way that financial trades are not the marrying type. You need to love them and leave them at the appropriate time – usually when everyone else is buying in.
When I started out in the treacherous world of trading, I made these same elementary errors – and paid the price. That was my tuition fee. The fact is, the stronger you hold an opinion, the harder it is to get out early if it is going against you. You are tempted to trade without stops, and if you do use them, you tend to move them farther away (‘to give it more room to come good’). That way lies disaster.
The dollar is soon on its way northwards.
I have been tracking the progress of the dollar for some weeks and noting the extreme level of bearish opinion among the pundits that has just reached new extremes. And that sets it up for the huge reversal I have been planning for.
For VIP Traders Club, we have been long several commodities and are taking enormous profits from the likes of Crude Oil, Wheat, Corn, Soybeans, Cotton, Coffee and others all of which have seen huge rallies in recent months.
And while that has been in progress, Treasury bond yields have been shooting up in response to the implied inflation that is coming the way of producers and consumers. We are short the T-Bonds.
So the ‘lower for longer’ narrative the stock bulls have been repeating ad nauseam is losing its grip. Thoughts are now turning to credit tightening to combat the looming inflation in prices. And that is starting to frighten the dollar bears. Is it possible the Fed will soon mention the need to bring forward the dreaded raising of policy rates?
Probably – but not yet. Latest Fed minutes this week reveal they will ‘ignore temporary inflation pressures’. Of course, they will – they have to keep the asset bubble inflated at all costs. Anything less than a 100% public commitment to the equity cult would almost certainly crash Wall Street. But markets have a habit of imposing its will on all actors including central banks- eventually.
But with the dollar soon the turn, all bets are coming off major stock gains. Here is my roadmap for the euro (inverse of the dollar). Note the general trend is down since 2008.
The latest surge managed to hit the upper tramline where sturdy resistance lay in wait, If I am correct and this resistance holds, we should expect the solid downtrend to emerge.
I expect my Dollar Campaign to be one of our biggest winners this year. I believe it will develop over many months. As it rises, more and more bears will be converted and the news will be super-bullish at the top. That is where I shall be taking profits. Of course, the path will likely be rocky and many bulls will be shaken out of positions just before rallying again. Don’t let this happen to you.
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Will rising inflation finally pop the equity bubble?
We have been following the incredible bull runs in many commodities – including Crude Oil which has surprised a lot of pundits.
VIP Traders Club members were fortunate to catch a major part of the advance. Out latest trade started life at $47 and last week we have been taking profits at around the $60 area. That was a major target I set weeks ago as it lay on a Fib retrace as well as bang on the major downtrend line off the 2008 $147 high
With that hit, it met major resistance and should now at least enter a wide consolidation phase.
This surge in crude did not go un-noticed by bond traders. The TIPS bonds (inflation-protected) have been surging
which has put a very big question mark over the ‘lower for longer’ mantra that stock bulls have relied on. Although the Fed last week maintained it was ‘not concerned with the temporary bout of inflation’, privately it may well be a different matter.
They have been hell-bent on not frightening the horses by maintaining a bold front on inflation and keeping rates low to keep the bubble inflated. But now with the long bond yielding well over 2% and the 10-yr over 1%, how much longer can they hold out on tightening?
This is the 30-yr bond yield that now yields 2.14%. Given the large percentage increases, the T-Bond price is falling fast.
VIP Traders Club members are short this market.
At the same time, the Dow has reached my upper target zone in the 32,000 area but the star performer is the US large-cap Russell 2000 which has gained 120% in just less than twelve months
That is simply astonishing. The majority of these companies in the index are not the high-flying FAANGS of this world, but real companies of the ‘old’ economy. Investors buying into this index believe earnings will shoot up to the moon when the vaccines are rolled out – and hope/pray the Fed keeps rates low (or negative). That is a huge degree of confidence built in.
But with inflation rearing its ugly head, this is a bubble has may have found its pin.