The air is getting thinner up here
It’s the dog days of summer alright. August is the traditional month for holidays – and light trading volumes – but this year, traders are probably on their laptops at home joining in the fun provided by the Robinhooders. I see one of their hot stocks – Kodak – has come an even bigger cropper last week as it fell to $9 off its $60 high set just two weeks ago. Are they doubling up here in the classic gambler (losing) strategy?
Complete amateur traders are attracted to this policy after they have taken a big hit in an effort to ‘re-coup their losses’. They reason that if it was a buy all the way up to $60, it must be an even better steal lower down. And it must come back up as the Law of Averages must kick in, surely?
I recall my very first visit to a Las Vegas casino around fifty years ago. I wandered over to the craps table – fascinated by its arcane rules – and a player walked up beside me sweating heavily and set down what was almost certainly his last pile of chips and then threw the dice.
Naturally, he lost that bet and I still remember the look of utter devastation on his face as he skulked away. I vowed to never be in such a vulnerable position and to learn to separate pure gambling activities from disciplined trading where calculated risks can be evaluated.
I consider many who are drawn to trading are really gamblers. They have no rational system for determining the odds of success and operate on a whim or a tip from someone else (usually the guru du jour).
I have met some successful punters in horse racing. They have all devised a system that they religiously follow. And they know when to not place a bet. But the vast majority are merely fodder for William Hill and Co. It’s a similar story in spread betting.
The air is really thin up here
The rally off the March 23 Corona Crash low has far exceeded what I thought possible five months ago. Yes, I know everyone points to the Fed’s money hose that supports just about everything that moves. But that is not the real story.
As I have shown time after time, it is sentiment that drives markets – and that kind of sentiment is internal and not news dependent. OK, when a s’surprise’ data point is released. the markets can move that way for a short while. But the main trend is determined by the underlying sentiment swings as described by the EW model. That is why I spend so much time analysing the wave patterns – and sentiment.
And when bullish sentiment becomes extreme, that is when tops are made. That is a universal law. The problem for market timing is that sentiment can remain elevated for some time and it is easy to be sucked into a promising shorting setup only for it to be a false alarm.
And that’s why it is crucial to have a solid risk management programme in place to limit losses, such as my VIP Traders Club rules. These are absolutely necessary in any traders’ bag if tricks. This is what separates the professional trader from the rank amateur.
Here is one other measure of waning momentum in the high-flying Nasdaq
This is the % of Nasdaq Comp shares that are above their 50-day MAs. In a broadly strong bull market, that figure should be rising., just as it did in late March off the lows. The generals are getting thinned out as investors pile in to fewer leaders. This is not a sign the bull market has legs.
We have been waiting for almost five months off the Corona Crash low for stock indexes to rally to a high before falling in a third wave. It is severely testing our patience. But the latest action has convinced me even more that when the turn arrives, it will be exceedingly violent – and if we are not onboard early, then it will be like trying to catch a tiger by its tail.
It was the same in February where I nailed the Dow ATH. We shorted in a bounce just before the crash got under way.
We had a glimpse of that in Gold last week when one just one day, it dropped by $200 in a flash, wiping out the late-comers.
But Gold had also reached way beyond what I thought possible. The recent high at $2,075 mat be the final high, or it may have one more pop just above it, but at these over-stretched levels, it assures me that when the decline sets in, the plunge will be historic.
Hedge funds remain massively long with latest COT showing a 5/1 net long position. This was the roadmap I posed a week or so ago just before the $200 swoon
The historic 2011 high was made in August – and so was this year’s. A coincidence?
This roadmap calls for a new high when the current corrections runs its course. We shall see.
Of course, with Gold and stocks unusually in synch, the MSM narrative has changed from gold being a ‘safe haven’ story (clearly not) to a ‘Fed liquidity’ slant. So what will they say when they both decline together?
Despite all the talk of inflation, we remain in a deflationary environment, despite all of the bail-out money being thrown at consumers (and businesses). In the US (and probably here in the UK), these Covid benefits are being used to pay down an Everest of credit card debt (and buy more electronic gadgets) – which is the pattern I forecast in early March.
Paying down debt? That’s a switch. Before the pandemic, it was rack up the balances to the limit! Now, consumers are in a much more sober deflationary mood.
I have accurately followed most of the twists and turns of many markets this year. I have just started VIP Traders Club members on a bear campaign in the stock indexes which I expect to run for weeks/months. The profit potential is massive.
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Volatility about to surge
The VIX is a common measure of implied S&P stock index volatility derived from option pricing. Usually, when VIX is depressed, stocks are rising to highs as put options are cheap.
But when stocks decline, VIX rapidly rises as suddenly put options become a lot more expensive. We have seen two period of this since the Corona Crash low, when VIX zoomed up as stocks crashed.
The form of the corrections is a wedge which almost always lead to sharp rallies. With DSI bulls at a lowly 8%, the scene is set for another surge.