I continue to be amazed at the lack of understanding out there on how markets really work – and this is among professional money managers who should know better.
I wrote to my VIP Traders Club members this morning with this quote from AEP in the Telegraph who was quoting an industry insider: There are still vast sums of money on the side-lines, poised to buy on any dip in bond and equity prices. Richard Turnhill, global investment chief for Blackrock, estimates that $22 trillion (£15.7 trillion) of fresh money from sovereign wealth funds, pension funds, companies, and household savings will need to be invested this year.
So the answer to my question is Yes – there is always a pile of money on the sidelines!
When a trade is made, the buyer transfers funds from his account to the buyer’s who is now credited with the same amount (less friction costs of dealing, of course). The total amount of ‘money on the sidelines’ does not change – unless the price of the asset changes, of course. And that price is determined by the willingness of the buyer and seller to transact at the agreed price.
Even with an infinite amount of money ‘on the sidelines’, asset prices can go up or down with ease! It depends on the prevailing sentiment, as my regular readers know. If you are a willing buyer at a price and there is a willing seller at that price, you can deal. The funds from your account go straight into his/her account.
The reason I mention it – not only to highlight the staggering ignorance out there (which the finance industry fully exploits, by the way), but to point to the regular appearance of this line of argument to justify their advice to buy the dip on any significant decline, such as we have seen.
That is always their default position – and it makes solid commercial sense. If an investor panics early and dumps all their shares, they have lost a client perhaps for a very long time.
So with the Dow down a staggering 13.5% to Tuesday’s low and yesterday’s near-perfect Fibonacci 50% correction, volatility has suddenly shot up in a Bitcoin-like fashion. Here is the VIX
In only two hours, it exploded as shorts were forced to cover en masse as shares collapsed. But I prepared Club members well in advance for this and they are reaping the rewards. It has since fallen to the normal Fib 62% support zone in a spike move.
Another market we are trading is the Japan Nikkei. On January 15 or so ago, I spotted a lovely topping pattern and this is the chart I captured on that date;
I have a lovely tramline pair with accurate touch points with a five wave pattern with a very large momentum divergence at the wave 5 top at around the 24,200 area.
I expected a small rally back to kiss the lower tramline before it would very likely head sharply lower. The potential rewards were very high (at low risk) and so I advised members to short on a bounce up into the 23,750 – 23,800 area. A limit sell order was indicated. Remember, much movement often occurs when UK residents are in their bed!
And the very next night, the market followed my roadmap with great precision and this is the current position:
As forecast, we have had a collapse that has taken 2,600 points off the index. Nice work!
The recent bounce should be wave 4 before another leg down in wave 5. But wave 4 should be complex so some profit taking would be prudent.
Here is another Asian index that merits our attention – the China A50
I have another terrific tramline pair and wave 5 hit the upper tramline perfectly before keeling over. It is now testing the lower tramline. I am keeping a keen eye on this one. Bullish sentiment on China is also off the scale but if we get a break of the lower tramline, which I expect, I forecast that negative data will soon emerge, such as a lower GDP growth from the widely-assumed 6.5%. Remember, the economy follows the markets and not vice versa.
Gold and silver have turned
Bullish sentiment is extreme. DSI hit 91% bulls – the highest in six years. Hedge funds are almost 4:1 long – and they added to longs on the recent decline as they bought the dip. Scanning seekingalph.com articles, I see few if any neutral to bearish opinions. Seems everyone is on board the great Gold Rush.
Everyone except us, that is – and here is why
That is a pretty good Head & Shoulders reversal pattern – and the pink neckline has now been broken to confirm new downtrend. If my Elliott wave count is correct, we should see a rapid decline in wave 3. My first target is the measured H&S target at around the $1280 – $1290 zone.
When the decline ends, I expect to see DSI bullish readings well below 50%. If I am correct, this is yet another example of how most traders/investors buy at the highs and sell at the lows. I try to avoid doing that.