By Dr. Steve Sjuggerud | 12 August 2009
"Hey Steve, my old day-trading buddies just called… The market's up… They're back into it again!" I couldn't believe my ears… "What day-trading buddies?" I asked politely.
"Back in the late nineties, I got into day-trading with some other guys. I turned three thousand bucks into fifteen grand!" "Then what?" I said… I knew that couldn't be the end of the story. "Then I lost it all…"
That's a real conversation I had this week. This friend was so mesmerized by the idea that he could turn $3,000 into $15,000 again, he'd put the outcome of his trading a decade ago out of his head. The stock market's up 50% since March. Apparently, some of the old dot-com traders are getting back in.
Back in March, when I was saying "buy," those traders were nowhere to be found. But now that the market has run farther faster than anyone can remember, they're getting in. They're late to the party… but that doesn't mean the party is over just yet.
If you are nervous, you can bail now. But here's what I suggest instead: Change seats. Move to a seat that's closer to the theater exit. I believe we'll see a rush for the exits sometime in the next two months. Sentiment is simply too optimistic.
The trend is near its end. So we need to position ourselves close to the exits. What I mean by that is, we need to set our trailing stops and follow them… tighten them up if you must.
Do what you can to keep your upside potential here… but ensure that your downside risk is minimized. The best tool for this job is trailing stops. You might wonder, "Steve, why even bother hanging around in stocks now, when you know sentiment is so bullish… when you know investors are so optimistic again."
The short answer is, you can potentially make a lot of money if a "blast off" stage materializes. You don't want to miss that. I learned the longer answer from the writings of legendary hedge-fund manager George Soros.
Soros says, find "the trend whose premise is false, ride that trend, and step off before it is discredited." That's the goal here. Another thing Soros said (according to fund manager Stan Druckenmiller) is "It takes courage to be a pig". OK, then that's what we're doing, too.
The stock market is up 50%. From this point, the trend is "false"— it's just speculative money piling in from here. We don't believe in it… but we'll ride the trend as high as we can. Through our trailing stops, we hope and expect to step off without a bit of stress when the time comes, before the crowd runs for the theater exits. Also, the statistics back up what I'm describing.
My friend Jason Goepfert at SentimenTrader tracks investor sentiment. His data suggests the potential for what I've described. For example, his "dumb money" confidence index recently jumped above 70— a very high level… which in itself is a danger sign. And whenever the difference between the "dumb money" confidence and the "smart money" confidence gets wide, Jason gets interested… Right now, both of these are happening.
Jason crunched the numbers for when those two things happen together and found that stock market history shows what I've described… Whenever the crowd gets this optimistic, the market can run higher for a while… before it gives all those gains back.
Times felt terrible in March. As we said here in DailyWealth, that was the time to buy. Things feel much better out there now. So the end of the rally is closer. But don't bail [yet]. Have courage. Keep holding your positions, as there could still be significant upside in the next few months… Just make sure you have a close eye on the exit door (through trailing stops), and pull the plug without hesitation when your trailing stops are hit.
We have the potential for a blastoff, before a bust. Position yourself accordingly.
Good investing,
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Are You The Smart Money Or The Dumb Money?
By Dr. Steve Sjuggerud | 14 August 2009
Corporate insiders are selling… The ratio of insider sellers to buyers reached "the second-highest extreme of the past six years," my friend Jason Goepfert reported yesterday on his website. Who knows more about a business and its prospects than the 'insiders'? Nobody. So when corporate-insider selling hits an extreme, it's a danger sign for the market.
Meanwhile, individual investors typically know less about investing than larger investors. And Jason also reported yesterday that individual investors are particularly excited about stocks again: "The percentage of respondents in the American Association of Individual Investors survey moved to… one of the most extreme [bullish] readings yet of the bear market." The message here is simple… The smart money (corporate insiders) is selling. Meanwhile, the dumb money (individual investors) is excited about stocks. The dumb money is buying.
Which group are you in now? Are you selling stocks, or buying them? Are you with the smart money or the dumb money? Me? I'm with neither group… Here's why: Corporate insiders often sell too early [[actually, they usually sell too early! They invariably sell into rising markets and buy from falling markets— that way they can't be accused of 'insider' trading: normxxx]]. They [may also sell heavily] when they're scared… but the market usually continues higher for a few more months afterwards. As I described two days ago here in DailyWealth [see above], I believe I can catch those few more months (if they happen)— as I know they can lead to "blastoff" type gains. I hope to keep most of my gains by using tightened trailing stops.
Meanwhile, individual investors have been buying… and they've been right so far. Yes, we've now reached an extreme level of optimism for individual investors. But the trend in the market is still up. The trend is a powerful thing that can (and often does) go to a yet more extreme level than anyone imagines possible. The old saying is true… Don't fight the trend. So I won't.
We've had a fantastic bull run since March. And we're seeing the classic signs that it's near its end. The smart money is selling and the dumb money is buying. You shouldn't ignore those facts.
But we do have an incredible situation… The Fed cut interest rates to zero (which helps just about all assets soar in price) and we have a strong uptrend in stocks. You can't ignore those facts, either.
Right now, the Fed and the uptrend are trumping the reality of the smart and dumb money. So I'm staying in stocks. But as I explained two days ago, I'm moving a lot closer to the exit door…
Good investing,
Steve
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The Fight Between Inflation And Deflation Is Over
By Porter Stansberry | 15 August 2009
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For most of 2009, I've had a friendly disagreement with several colleagues who believe a big deflation will be the end result of the 2008 financial crisis. I knew they were wrong. I knew inflation would become a problem sooner, rather than later. And in the past several months, I believe I've been proven right.
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The mortgage and banking collapse of 2007-2009 saw [[the highly inflated: normxxx]] total [[asset— housing, the stock market, etc.: normxxx]] collateral values collapse between $5 trillion and $10 trillion. The response from our politicians and central bankers was massive: the largest creation of "wholly new" money since the Civil War.
The Federal Reserve created roughly $2 trillion in additional credit and lent it against all kinds of dubious collateral, things like Bear Stearns' mortgage book. (There's a handy and simple guide to estimating the Fed's credit quality: The greater the number of acronyms in the lending programs, the worse it gets.)
The Federal government responded with a record annual deficit of at least $1.8 trillion. In the second half of 2008, the outstanding federal debt grew by roughly a 40% annualized pace (24% for the entire year). Thus, in only a few months' time, the roots— the money and credit— underlying our economy expanded at a record pace.
In the second half of last year and the first quarter of 2009, the main question in the world's financial markets was: Can the world's government print enough money, fast enough, to forestall a deflationary collapse?
I knew it was no contest. There is no way for an economy to outrun a printing press. The Fed has the power to create an unlimited amount of money or credit and the power to inject that money into the economy in any way it sees fit.
Let's look at the numbers. Let's assume the total collateral damage of the banking crisis turns out to be $5 trillion. Yes, that's a huge hit— roughly half the output of our economy each year. It's the equivalent of sending every American household a bill for $50,000— due immediately. However, in less than a year, the Feds have already created nearly $4 trillion in new money and credit. The hole in the system has already been plugged. It only took a few months.
The fight between inflation and deflation is over. Deflation was knocked out in the first round.
The big risk is what happens next. Having turned on the presses to save the day, who will have the political clout and the desire to shut them off? Barack Obama's budget calls for annual deficits in excess of $1 trillion for the next eight years. Thus, by the end of this year, not only will all of the damage from the mortgage collapse ($5 trillion) be replaced by new money and credit, there will be significant inflationary pressures in the economy.
The good news in our economy this year, so soon after such a major collapse, means we will certainly have a massive inflation during 2010 and 2011. There's no such thing as a free ride. Bailing out the banks will carry a heavy price for anyone who doesn't have the resources or the knowledge to escape the dollar.
This Chart Is the Simplest, Best Reason to Own Gold
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How can you "escape"? First off, make sure you own plenty of gold bullion. I also recommend owning assets that will run higher in an inflationary environment, like vital transportation and energy assets. Also, own some good farmland. Food and land prices will go higher. Yes, the news is grim… but if you own gold and strategic assets, you'll survive and prosper in the coming inflation.
Good investing,
Porter
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