Contents. Gold Stocks Big Consolidation. Gold Stocks to Move Soon...p.11. How to Place Stop Orders.p.12.

Transcription

1 People Too Often Invest When They Should Trade and Trade When They Should Invest Mike Swanson (03/26/2017) Contents The graphic above is something I have put in these PDF updates from time to time to show the psychological shifts that people experience through the various market cycles. You can look at the smaller stage analysis graphic and line them up together. However, there is another probably more important shift that takes place for market players during these cycles that no one has really talked about and that is what people actually do to try to make money in these various stages. I ve been doing this now for over 17 years and have seen bull and bear cycles play Market Internals Continue to Fade in Slow Motion Market Drop...p.6. Gold Stocks Big Consolidation Zone...p.8. Gold Stocks to Move Soon...p.11. How to Place Stop Orders.p.12.

2 out for people and myself multiple times and in multiple markets. Not just the US stock market, but gold in particular. I know what I have done myself and seen what others have done. I have communicated with many people in s, message boards, and even real time chat rooms back in the internet day trading days. I have seen a lot of marketing over the years on the internet and seen shifts in fads. After the 2008 crash a lot of people got out of the stock market in 2009 and then in 2010 and During those years following 2008 more money was taken out of the market by small investors than put into it. At the same time a mania developed in FOREX trading during those years. In google search more people were looking up terms relating to FOREX trading than trading stocks. Then there was a boom in binary options, which is practically a scam. What happened was there was an element in the trading world that lost money in the stock market in 2008 then went into FOREX and lost money there and then went into binary options. Back in 1999 everyone was investing in the stock market and buying big cap internet stocks such as Oracle and Cisco as safe investments. They d try to trade the volatile internet stocks and try to hold these blue chips as investments. And of course those people lost money. I had setup a live real time chat room in 2000 and was shorting stocks myself. But almost all of the people in it had zero interest in doing that. When they sold the stocks they bought most of them decided to try to become internet stock traders, jumping in and out of them. I shut down the chat room, because no one cared in it about shorting and I just didn t want to sit there all day long talking to people. I even got someone else to run it so I did not have to do that. It was a waste of time. Then in 2002 I got into trading gold mining stocks. I tried to short the stock market in 2003 too and would get stopped out and stopped doing that and then solely focused on trading gold stocks up until Then I got into shorting the stock market again that summer. The reason I am telling you this is that most people in the financial markets focus on one idea to make money and one strategy. Then they keep doing it until the big trend changes. Most fail to adapt to that fact and lose money. They then get out of the market forever or move on to looking for another strategy to try to make money with. For those that do that they usually go from being investors who lost to traders. 2

3 I really did not know anyone personally who went into FOREX trading after But I got dozens of s, perhaps hundreds, from people who lost money in 2008 and then decided to become ETF traders, mainly in 2X and 3X short ETF s such as the banking ETF s or in trading gold stock ETF s. What happened was that most of these people were investors before the 2008 crash. They may have been investing and holding gold stocks or DOW stocks or mutual funds. It didn t matter what they were holding they lost. And then they became traders. In 2009 though the stock market bottomed and that was actually the time to buy. I didn t buy on the bottom. I only adjusted that summer. So I m not trying to tell you I m perfect. I m trying to tell you that there is a cycle that the people dominating the action on online brokers go through in which not only their beliefs about the market change, but their actions change too. People got into the stock market in the late 1990 s, because they saw it go up for years and decided they wanted to be a part of the action. They were told that Alan Greenspan would cut rates on any market drop and so it was safe and they saw stocks fly. And so they piled in during 1999 to invest. Many lost in the subsequent bear market to give up on the stock market forever. I know people who owned Amazon and Corning that thought they could hold it in 1999 and get rich who ended up selling later and never buying a share of stock ever again. But now at this moment in time the stock market has gone up for a long-time. It s been years since And when the DOW broke 20,000 the stock market began to go up without pulling back and the risks seemed to be gone forever. And so more money has piled into ETF s in the past three months than in any annual twelve month period in the history of ETF S. At the same time market trading volume is lower now than it was last year. What is happening is that people now are buying ETF s not with the notion that they want to trade them, but to invest! People are once again true believers in the stock market just as they were in 1999 and in The people dominating the market action today are not traders, but investors. They don t think they need to think about risks and they find any reason to believe that the stock market will just keep going up for them, because that is what they want to believe. 3

4 4 And right now the financial media is catering to them, not because market commentators are trying to trick people, but because they believe too. Back in November after Trump won I closed out my short positions and went long and recommended going long ETF s VIS, XLF, and IYT. I sold around New Years and got back in and then sold probably for good a few days before the March peak. In November there was talk that Trump would create tax cuts and infrastructure programs to grow the economy. He looked like he could be a good strong leader the first few days in office, but since then his poll numbers have dropped. He has made statements that have hurt his credibility with the American power elite in DC and with much of the general public. And this past week he suffered a defeat with his health care bill. This puts to doubt his ability to create the type of programs it seemed he was going to be able to do a few months ago - at least to the extent that it seemed possible. However, after yesterday s defeat in the financial media all I saw was talk that none of this mattered. The talking heads and writers either said that Trump programs don t matter and the stock market will go up or that he will still do something later in the Fall or next year and people will just look forward to that. There is a story on Yahoo Finance this morning that sums up what people are saying: Why Heatlcare bill failure won t kill Trump rally: The point is that people were putting their faith in Trump helping make the stock market go up in November and now most of the people in the stock market and in the media who are bullish are simply saying the speed bumps he is hitting don t matter or he doesn t matter himself. In reality news doesn t matter to people in the markets. People do not really buy or sell stocks based on news and in a way they shouldn t. What they really do though is react purely to price action. The reason why people decided to invest in the stock market in 1999 and in the past few months to try to buy and hold forever is because they saw the stock market go up for years. And once in such people continue to believe and find reasons to believe until prices fall so much that they cannot take it anymore.

5 When the stock market goes into a bear market most of these people will wipe out to give up on the financial markets forever, but many of them will decide that investing is bad and try to become market traders. Some will try to short stocks after they see a giant decline and others will sell the ETF s they are buying as investments now and then try to become traders who trade 2X and 3X ETF s jumping in and out. In the end they ll miss the great next bottom buy point when it comes, because they will be trying to become traders when they should then be investors. Right now while everyone in the stock market thinks it s a great investment that will not drop again and almost no one wants to invest in gold or mining stocks. Those that are involved with them are trying to trade them and not invest. There is very little interest among small investors in buying junior mining stocks or buying stocks such as Newmont or Barrick as investments while putting money into marijuana stocks and companies like Nividia and Facebook is the current rage just as Oracle and Cisco were in With gold and miners there is very little interest in the idea of buying and holing gold mining stocks. The interest in the sector is with people wanting to trade, and they typically are attracted to the idea of jumping in and out of triple ETF s. It will only be after gold and the miners go up for a few years and after the stock market causes them to lose money that the masses will get interested in investing in them. Gold stocks are actually hard to invest in, because they are so volatile. Last year they more than doubled from their lows of January, but then they fell roughly 50% when they peaked in the summer. It s pretty much impossible to keep 100% of your money in something that can double an then fall 50%. The only way to be able invest in something like that is not to put 100% of your money in it, but only a portion of your money instead! That s why I have 20% of the model reblanacing portfolio in the GDX ETF and not 100%. If you put 100% of your money into it or even 30% you ll find it impossible to be able to hold it and will get shaken out. In reality the same thing is true for the US stock market too! And any market. That s why when people try to put 100% of their money into something as an investment and it then goes into a bear market they then decide to become traders. But in reality investing is smart. You just don t put 100% of your money into something when you do it. Right now the model rebalancing portfolio is 40% in cash and 20% invested each in GDX, CEF/GLD, and HDGE, which is an ETF to short the US 5

6 stock market. When I look at all of my own accounts together I m about 40% in cash right now too. My plan is to WAIT for the time being for a trade to develop. I may buy more gold stocks through the GDX as a TRADING position or bet against the stock market more in the coming weeks or months as I think there is a good chance we actually have seen the top of many stocks at the start of this month and are making a slow transition into a full blown bear market. But we will know for sure, by watching how the internals of the market act over the next 3-60 days. MARKET INTERNALS CONTINE TO FADE IN SLOW MOTION MARKET DROP 6 Even though the market averages remain well extended from their 200- day moving averages only 66.54% of stocks trading on the NYSE are above those moving averages. We have put in some sort of peak in the DOW and S&P 500 to start this month while the Russell 2000 and DOW Transportation averages are fading fast. The market is likely to drift lower for at least the next few weeks and then put on some sort of bounce. The drop that has occurred has been so slow that no one is noticing it at all. We ll see what happens, but the S&P 500 has support at the 50-day moving average. It basically closed on that Friday. If that breaks next support is the 2300 level and then in the area of its 150/200-day moving averages and the 1/3 retracement level of the entire rally since last February. That s the zone. A move to there could take up to sixteen weeks from here to play out as things are moving in such slow motion. It s impossible to predict exact price movements, but what is going to be the important thing to watch is how the internals act when the market has its next bounce or rally. If the internals lag the market on such a bounce then they will tell us that a major top has been put in during this summer and we can expect a significant decline in the Fall to mark the start of a likely bear market. At the least it would be a drop that

7 7 would bring panic into the market. Stocks are simply highly valued and bear markets are inevitable. We have a market also helped by share buybacks that can end if junk bond yields continue to rise at some point. If the market does fall most people though will blame it on Trump when this is mostly a crazy market situation he has inherited. People always look for reasons to explain stock market moves after they happen. The thing to do is not to get worked up one way or the other with news surrounding Donald Trump (there are so many that worship him as a national savior and many that hate him right now and he is dominating the news cycle nonstop) that you lose track of what real trends of the market, because as investors and traders they are what matter. And classic tops are made with poor internals. If the internals are good on the next rally then we ll know the bull market is going to continue. But I suspect they will be bad and if they are I will increase my HDGE position in the model rebalancing portfolio and take more short positions. I ll probably even make a put options package for people to use in their own portfolio to hedge if they choose also. All of that would likely be several months away from now, but they could end up being one of the most important stock market turning points of our lifetime. Now I also have core positions in gold and mining stocks as I believe they started new bull markets last year. In the first year of big bull

8 8 markets you typically see big fast gains and then you get a consolidation period that can last from three months to up to ten or twelve months. And that s what is still going on with both gold and the mining stocks. GOLD STOCKS BIG CONSOLIDATION ZONE In bull markets and bear markets and during consolidation phases the upper 200-day Bollinger Band tends to act as big resistance and the lower band tends to act as long term support. I m expecting a move in mining stocks to begin soon that will take the GDX up to the upper band or to the lower band, with the first scenario being the most likely. However, I cannot predict that if the GDX rallies here that it would just go through and break the summer higher and just take off from there or if it would pullback from there again or pause in a range around those highs to consolidate for a few months and then breakout. There is just no way to predict the future like that. But I do think if we rally here

9 9 we re going to see the GDX go up faster and further than most seem to be expecting now with gold likely to go above $1,300 into the $1,350 area again this summer. I ve got a chart of the HUI below from , because I want to show you how the 200-day Bollinger Bands acted as support and resistance levels during that bull market cycle. You can see that there were several long drawn out consolidation periods in which they did this. Again it is typical for these Bollinger Bands to act as important levels in ANY market. That s why I think it would be easy for GDX to rally up to the 30 area, which is where the upper 200-day Bollinger Band is and still be in a consolidation zone. Now I took a big lesson from this chart below. I talked earlier about how people go from being investors to traders, because they realize

10 10 they cannot buy and hold with all of their money in a market drop. That is what happened to me with the mining stocks in I put 100% of my money into them that January and saw them more than double and then sold for a 10% or so gain! I lost like 90% of my profits in a few days and only made 10%! So I decided they were too volatile to hold and I traded in and out of them for the next few years. Looking back at it all though I found that if I just put 20% of my money into them instead of trying to trade in and out with all of my money I actually would have made a bit more in the end and would have had a much easier time of it. It s simply impossible to trade something over and over again and get it right every single time. I also learned that if you only put 20% of your money into something that gives you the opportunity to put more portions of your money into other trends and opportunities so you can be better diversified. And when you have less of your money in something you can then be objective about it. When people have 100% of their money in something they then become true believers who just look to reconfirm their positions. That s why all the people who said Trump was going to create a boom in December now are saying that it doesn t mean anything when the health care bill didn t pass last week for the future of the bull market. A few weeks ago I paired back my GDX position before it dropped into the Fed meeting and then put it back to 20% last weekend when wrote that I thought it was lining up to make a big move soon. I said I might also buy more for a pure trading position if the GDX continued to go sideways in the triangle pattern I have drawn on the chart. It s still pausing and doing that. Now the 20-day Bollinger Bands are getting closer together and the width indicator has fallen towards 10. If the GDX continues to pause another day or two and then goes through its most recent resistance point of GOLD STOCKS TO MAKE A MOVE SOON

11 $23.50 then I believe it begin a rally up to the summer higher. If it pauses and breaks out like that I may buy more GDX for a trading position. However, if I buy a trading a position I will likely sell it at some point in the summer and take the profits and hold my core position. I also for a core position in my accounts have been buying individual big cap stocks as an alternative to GDX. I was going to write a report this weekend on these stocks and why I m buying them instead of simply buying GDX with some of my money, but I m going to do that in a two part series with a video today and PDF with the stocks in a few days. There are a few reasons I think this chart pattern can go to the upside. First of all the commercial gold traders barely added on to their short positions last week and the week before as gold rallied they actually paired their positions down to near where they were back in January as gold. However, we may see gold dip $10-$20 first before the GDX breaks out. That could happen overnight on a gap down. And the gold stocks are still doing ok compared to gold, but not substantially. That can change though if gold were to gap down one morning. If gold stocks are going to end up falling instead of going up here it would probably take a couple of days of gold going up while the stocks don t for the GDX/GLD ratio to form a negative divergence ahead of a drop like they did at the end of February. So this pattern should resolve before the end of this week as the 20- day Bollinger Bands are tightening. I like the 200-day Bollinger Bands to understand the larger trends and the 20-day for short-term trading setups. Rarely will you see the 20-day Bollinger Bands get those close together with gold stocks in a triangle pattern like this. It is very similar to a pattern that happened during the long consolidation phase that took place with the mining stocks from the summer of 2001 to the summer of HOW TO PLACE STOP ORDERS Last week someone sent me an asking about where to put a stop loss order if they bought GDX: Assume you buy gdx at these prices" 11 Gdx buy price is 23.2, for a 35 % of your account. What should the stop price? Is too tight for gold stocks? Or $22.11 (1.5 ATR)?

12 I actually think or is way too tight of a place to put a stop loss order. I do think GDX $23.50 is the key resistance point at this moment, but I have no way to guarantee that it won t go through $22.37 before it goes through $ The thing you need to really ask is how much of GDX do you want to buy. GDX is very volatile and I know it s pretty much impossible to buy and hold GDX for years with 100% of your money without getting shaken out of some point. The best thing to do in order to guarantee a gain is to just buy a small enough position where you could put a stop loss order way down at the lower 200-day Bollinger Band at $ That s also near the December low and it would be more of a mental stop than anything else. It s a way of figuring out how much of GDX can you actually buy with your money without risking getting shaken out. That number might be 10% or 15%. If you want to put a stop loss as close as $22.37 or $22.11 what that means is that you are really going to try to day trade it instead of hold it for weeks or months. Perhaps that is what you are looking to do and that is fine. Most people reading this though would be best off just putting a small amount of their money in so they don t need to look at it constantly and try to jump in and out. I know though that few want to do that in our era of Fast Money where everything is hyped up and people want to trade and not invest. But the reality is investing works with smaller positions. With big positions investing often turns into disaster and I fear that is what is going to happen to most people who think they are safely investing in the stock market now. So if you use a small position you don t need a stop loss. Personally I have core positions in GDX and individual mining stocks I m not using stop loss orders on. If I do end up buying a trading position (which may be what you are really asking about in the question) than I ll likely put a stop loss on the lows of the 5-7 trading days on it. BUT I will not consider this an investing position. And the reality is that I m not looking to play gold stocks like this and jump in and out of them trading them for the next few years. I m only considering doing this now because of the way the charts are lined up and don t think situations like this (a sideways consolidation after the first big rally of a bull market) happen but every couple of years. Now the other week I did an important PDF about the mania in ETF s about not only how money is flowing into them like crazy now, but how the ETF s themselves are not necessarily as good as people think they are from an investing stand point, because most of them have 1/3 to even 1/2 of 12

13 their money being put in only a few stocks and you are getting charged management fees when you could just buy these stocks yourself and get the dividends. Read the report I did on to see what I mean in more detail starting on page 4 if you have not read it yet. I have wrote earlier about what people are doing in the market with ETF s and this PDF will show you the information that makes me say those things: Also I did a new video on the topic for you this weekend: Login with Username wsw Password members 13 Here are some charts of note for this week:

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15 15 MODEL REBALANCING ETF PORTFOLIO ALLOCATION The goal of this portfolio is to have five have core positions with no more than 20% invested in each one that together provide an investment allocation with a low intra-portfolio matrix. This makes it so that when one ETF goes down another can go up overtime. Traditionally people do this with using US stocks and Treasury bonds, but in the long-run a mix of more diversified assets can generate superior investment returns and if one day stocks and T-bills go down together then it will be a necessity. To make the strategy work one must also rebalance the positions to maintain the fixed allocation percentages. Rebalancing also boosts returns overtime and lowers the overall volatility of the account. To make this work monthly or weekly rebalancing is best. For more on how this strategy works read my January monthly newsletter from Also see module 7 of my Bear Market Power Pack for several videos and academic papers about this market strategy: Right now my recommended mix of ETF s is the following: 40% - CASH 20% - HDGE: Bear ETF that is short a basket of stocks. 20% - CEF: Central Fund of Canada owns gold and silver bullion. 20% - GDX: Gold Stocks ETF. This ETF allocation creates a correlation ratio of A 50% in TLT and 50% in SPY currently generates a correlation of You can use your own ETF s or funds to play with correlations by going to this website: A correlation of 1.00 would mean that everything in a portfolio is trading together. I have core positions in my trading and investment accounts roughly invested like this model portfolio is with the bulk of my money.

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