For several years now, I’ve been skeptical about the stock market and valuations with all the easy central bank policies and QE pushing prices to crazier and crazier levels. With such a view, my long term investments were primarily linked to gold. I held steadfast in my belief that gold would eventually have a substantial rise while stocks would endure a series of ever bigger rallies and busts. This is not a good mindset to play the markets – you have to be open minded to learn about where things are going and why.
I tried a put option play in January, bearish in my own macro-view of where things were headed, and it ended expiring worthless (down $890). I started reading about market timing and technical analysis, and a few months later heard a presentation on a very compelling setup in Wal-Mart. I bought a $355 call option and sold it only 3 weeks later at $1,335. This really piqued my interest. Stockcharts.com became a favorite read for me (I’m not a paid subscriber, though I recently started a free 30-day trial). In the following months of reading articles I’ve had many more trades, typically risking $300-$500 per trade, and staying somewhat market neutral (about an equal number of puts and calls). I’m up $2,650 at the moment for whatever that means – but more importantly I really felt I’d learned more about the markets in the last 6 months than I had in the prior decade.
The other day I saw some compelling reasons for a pullback in Gold. Here was the big one: https://stockcharts.com/articles/tac/2019/09/tim-taschler-why-i-watch-the-c-348.html
This long-time trader in the CBOE explained the behavior of “smart money” commercial hedgers vs traders, and that hedgers tended to be right more often than not. The logic works like this … commercial hedgers have a pretty good idea for the market of the goods they produce. They have a lot of money and a lot of physical backing, so when they are short they often hold the shorts to expiry and settle the contract with physical supply. On the other hand, the big CBOE traders are technical analysts. If they think the direction as switched, they will sell their longs and go short – selling pressure which is better to get out ahead of. To top it off, some of the analysts I followed were getting out, a head-and-shoulders was forming, and there were good technical reasons to expect a retest of lower support. The next day I sold everything from my accounts (except my option plays) and decided to start from scratch. The ISM was low that morning, the market was going down dramatically, and I was selling into a rise in Gold (Tuesday).
After work, I went over all of the gold plays I had, as well as some new ones, to see how they reacted in relation to the rise in GLD this past year. I came up with a list of 10 different gold stocks that went up significantly with the rise in gold – the exposure I was looking for. These are ready for when I get back in.
The next day, the overall stock market dropped significantly. I sold off a couple of my puts – including one (DPZ) which was a loser play but at least the timing got me some money back at that exit point – and went home to get a feel for the signals. What really interested me was this one: https://stockcharts.com/articles/tac/2019/10/mark-young-wall-street-sentime-383.html
Exact quote: “What’s really got me wanting to stay bullish is the never-before seen reading from our Wall Street Sentiment Survey. We had ZERO Bulls in our weekly survey. I’ve been running this survey since the early 1990s and I’ve NEVER seen a 0 reading before.”
Other readings, oversold measures and such, had me convinced and I put $8,500 into MTUM the next morning. I chose this play for two reasons … one is that a reversal tends to go towards the stocks that big investors were already interested in allocating towards, and the other is that in the last stock downturn (last year), MTUM didn’t go down any more than the bulk S&P – which makes sense because it builds on defensive stocks when momentum heads that direction. Decent rallies followed and I’m curious to see where markets are headed. My gut says that this week will launch us toward the 3,000 S&P mark – a significant line of resistance lately – and it may or may not break through. I won’t wait to find out … at S&P 2,980 or so I’m dumping MTUM and waiting to see some confirmation signals. I might get some more put plays going if the price is right at the retest.
Back to precious metals … I haven’t given up on them and I still think next year will be a fascinating one as all the Democratic candidates as well as Trump will be giving investors reasons to be bullish on gold.
Despite the recent gold advance on market worries however, I expect more consolidation in the price. Here’s my logic …
- The dollar is still trending higher for a number of reasons. The federal reserve even re-instituted short-term repo’s (both overnight and 14-day) to allow big banks to overcome short-term cash crunches ( https://wolfstreet.com/2019/10/04/repos-boost-feds-assets-by-181-billion-most-will-unwind-next-week/ ) which shows a significant shortage in US dollars in the system.
- Emerging markets (including China) tend to be focused in much more cyclical industries such as manufacturing, mining, etc. for exports. Gold is much more popular among EM investors – particularly in Asia – and the drop in exports is putting downward pressure on their currencies. I’ve heard the claim that China is manipulating its currency lower to retaliate against tariffs, but I think this is dead wrong. China wants a strong currency and a reserve currency, and it struggles from capital flight. They are trying to shore up their currency with capital controls, including restricting gold purchases. In other words, demand for precious metals will be constrained a bit from this sector.
Here’s a chart showing a definite consolidation pattern:
It looks like a bull flag – a declining consolidation pattern in an overall up-trend which will complete by breaking through the upper resistance line shown. I also drew a line from previous resistance where we would see very strong technical support. If the price reaches to test this level I’ll start to buy back in. If the price jumps the top of that trend channel it would be very bullish and I would buy back in. While it stays in consolidation mode I think I’ll wait.
Last notes …
As part of taking control of my portfolio 100%, I decided to start recording my own weekly balances to get a benchmark performance. No more waiting in out, no more doing it later – Now’s the time.
One thing I’d also really like to say about my current view on markets … it may seem ironic, it’s definitely contrarian, but I strongly believe that the biggest money fleeing active management for low-cost ETF’s comes at a time when active management has more value than ever.
With low and even negative interest rates worldwide, combined with regular expectations of different forms of QE, it is nearly impossible to hold any asset for long term growth in a way that beats inflation. Combine that with more and more trading done by computers (algo’s) and the heavy favoring of stock buybacks over dividends, and I really think we’re entering a period where we’ll see a choppy chart like the decade of the 1970’s except with much lower dividends. Opportunities for trading will be fantastic, as cash flows from one asset class to another will become drastically more important than fundamentals and earnings. The markets are definitely defensive at the moment, having moved from high-risk overall revenue growth as king (think tech unicorns, Netflix, Uber, Lyft, Wework, and so on) to a market which shuns those in favor of defensive sectors like consumer staples and utilities or cash-flow & earnings giants like Apple.
One big word of caution when you invest using technical signals however … technical signals tend to be very short-term. If you bet on any technical signal and wait out a year – or even a quarter – you’re doing it wrong. This is a hands-on approach that requires vigilance, an open mind, and the ability to admit to yourself when a trade has gone wrong.
You need to be sharp enough to cut your losses, re-analyze the market, and try again. I’ve made some great trades lately involving calls in utilities lately, but it worries me that such a defensive sector has been on such a tear, and that many of them aren’t reaching their late-August tops. The outlook is still bullish, but the risks outweigh the rewards for me in this sector at the moment. In other words, what works one moment won’t work the next so you need to stay vigilant.
I’ll end by repeating one of my favorite taglines, used by Carl Swenlin in his posts: “Technical Analysis is a windsock, not a crystal ball.”