-- Published: Tuesday, 27 October 2015 | Print | Disqus
By Sol Palha
Always do what you are afraid to do.
Ralph Waldo Emerson
We are listing excerpts from past market updates to illustrate how the mass mindset is always wrong. Even big shots like Bill Gross are not exempt from being sucked into this black hole, otherwise known as the mass mindset. Herd psychology clearly indicates that the only time a market is going to crash is when emotions have hit a boiling point. In other words, the crowd is foaming with joy. However, regarding bonds, there is one more factor that needs to be considered. The element of control and that element has a name; it is called the Fed. They are the ones that are going to determine when rates rise, as they are holding it down for an unusually long period. The simple question that comes to one’s mind is why? The answer is equally simple. The current economic recovery is nothing but smoke and mirrors; the Fed understands that the Crowd is aware of this phenomenon, but if the markets are driven up, then a glimmer of hope emerges. Hope springs eternal and even though the masses know that all is not well, this ray of hope that things will get better because the markets are soaring higher is what keeps them trudging along. Lost to them is the fact that the markets are trending higher only because rates are being artificially kept lower, so this hope sets off a chain reaction. More hot money is needed to fuel the illusion that all is well. The only way to pull this off is to keep rates down at extremely low levels. Low rates create an environment that fosters speculation. In this environment, speculators are rewarded, and savers are punished. Unfair. Damn right but that is life. So before you jump on the bandwagon of doom, understand that most of those naysayers are like broken clocks. Even a broken clock is right twice a day. What you should strive to understand is that every disaster is nothing but opportunity dying to plant a big fat kiss on your cheeks. Embrace the bugger, instead of kicking him to the curb as most do. See the world for what it is and not what others (so-called) experts force you to see. March to your drumbeat and not to the drumbeat of the talking heads, whose sole function is to add make a simple development appear to be scary and frightening. If you bought the nonsense the world was going to end; the markets were supposed to crash, blah, blah. You would have lost your shirt, your pant and your knickers in the process. Do not give credibility to people who only employ the tool of fear to sell you a bag of magic bones.
The excerpts listed below together with this chart will illustrate how dangerous it is to follow the doctors of doom.
Bill Gross has been predicting a collapse in the bond markets for quite some time and one day most likely he will get it right. Rates have to be allowed to move a little otherwise it will appear that the Feds are completely controlling everything; even though this is true, the masses do not believe this, so appearances must be maintained. Higher rates mean higher debt payments and higher costs to business and this must be avoided at all costs. Business are always given the best deal. America is bought and paid for by the corporate world. Market Update May 17, 2015
Since we made these comments, bonds have rallied nicely, but we feel that they should (key word should) retest their lows before moving higher and testing their old highs. The trend has not turned negative and the reason bonds sold off is because too many fools had over-leveraged themselves in the futures markets. When there was talk from the Feds that rate hikes would be inevitable, markets pulled back and some of these long positions were so leveraged that some players were forced to liquidate their positions; this turned what would have been an orderly pullback into a short-term blood bath. This pullback allowed the Feds to give the impression that they are not manipulating the markets, some stupid fat greedy bulls were slaughtered, the bears were pushed into opening new shorts, so everything has been set up for a rebound. At this point of the game, bonds are still expected to reverse course and trade higher. Market Update May 31, 2015
Bonds pulled back strongly and not only did they test their lows; they dropped to new lows, fulfilling the illusion the Feds wanted to create that the markets are free. What most have failed to note is that bonds have sold off several times during this bull market that started in 2008? In every instance, bonds recouped their losses. One day, this pattern will stop, and the trend indicator will inform us of this in advance. Until then, let the good Samaritans try to help everyone, and the naysayers sing their infamous song of impending doom. This up and down process will further cement the view that the Fed is impartial. It is the classic story: strong correction, then consolidation (lots of up and down movement) and then a new breakout that leads to new highs. Market Update, June 19, 2015
As the trend has not turned negative, we have to view the current correction (regardless of how strong it might or might not be) as a normal cyclical move, in an otherwise healthy market. Market Update June 30, 2015
After letting out some steam, bonds rallied as expected and by the middle of July, they had recouped almost losses that incurred, confirming that the naysayers were wrong once again. One day bonds will correct strongly and in our opinion bonds are more likely to experience a stronger correction than the Stock market. Stocks are far from overvalued, and the sentiment is not euphoric yet. As long as the trend indicator is bullish or neutral we will view all strong corrections as buying opportunities. Additionally, the Fed is not in a rush to raise rates, and they could play this game of cat and mouse forever. Ultimately as this economic recovery is nothing but illusory in nature, and the Fed will be forced to come out with another QE program.
So, while many well-educated, but not savvy market penguins stated that bonds were going to plunge even more, they recovered as expected. They traded past 152-153 ranges and are now on the way to test the 156 ranges. If they close above 156 on a weekly basis, then they will challenge the old highs or at the very least test them. The weekly trend is up; therefore, all pull-backs have to be viewed as buying opportunities. Market Update July 31, 2015
Bonds traded as high as 159-28 before pulling back, setting up the path for a possible test of the old highs. The weekly trend is still up, so all pullbacks have to be viewed as buying opportunities. We could recite more nonsense, but that would mean wasting good time on a senseless endeavor, so we will respectively decline the offer. Bonds will crash one day; however, we would rather not fixate on one day. We prefer to look at today, and today is not the day they are going to crash. The move by China to devalue its Currency last week could very well be the excuse the Fed needed to leave interest rates untouched, and then slowly build the notion that some sort of stimulus is needed. Market update August 19, 2015
Bonds rallied but failed to trade to new highs yet, as the trend is still up, one can expect bonds to attempt to test their highs again. As equity markets and bonds are diverging, a move to new highs by bonds, would coincide with another corrective wave in the equity markets. . Market update Sept 1st, 2015
Even if the Fed raises rates, and at this point its a 50-50 shot a best, we expect the Feds to come out with some insane form of QE. Perhaps a QE for the people might be the next game plan; It sounds insane, well believe it or not Jeremy Corbun, Britain's new labour party leader has proposed just this. You can read the full story here Note that QE is still going on in the form of share buybacks. Based on the number of share buybacks authorized this year, the total dollar amount is set to exceed $1 trillion, setting yet another new all-time record. There is strong support in the 150-15 to 152 ranges, and the current consolidation should end there Market Update Sept 15, 2015
Try to recollect how you acted every time the markets sold off, whether it’s the bond market or stock market, it’s irrelevant. Did you give into fear, did you panic and Join herd as it stampeded towards the exit. A mind driven by panic cannot act rationally. Therefore, any action is bound to lead to a negative outcome. The best thing to do is to focus on what the crowd is doing and then use technical tools to help determine entry or exit points. It is the masses that produce the extreme moves in the market, and if you understand that fact, then you can use it to your advantage. We viewed every pullback as buying opportunity because the trend was still up.
So what’s next?
First and foremost make sure you never listen to the Doctors of Doom. They are not out there to help you; they will cloud the picture even more. If they knew when the markets were going to crash, then they would be sitting on the beaches of some tropical paradise, sipping Pina Coladas and raking in the millions. Instead, you find them screaming bloody nonsense and doing their best to scare individuals into believing what they very well know to be nonsense. Understanding the psychology of the masses is key to being a successful trader. When you couple technical analysis to the powerful concept of mass psychology, it becomes easy to understand what the masses will and will not do. One can then use the Technical indicators to fine tune one’s entry point.
Overall the bond market is far more overvalued than the stock market, and we believe that for now, it would be best to sit on the sidelines regarding bonds. Ideally they will test the 149-150 ranges, with a possible overshoot to the 147 ranges, at that point one could take a closer look at them. The reason for this view is simple. Stocks are far from being overvalued, and the sentiment is not trading in the euphoric ranges. Therefore, every strong pullback has to be viewed as a buying opportunity. We expect the Dow to experience another pullback, the final strong pullback for the year. It is expected to test the 15800-16000 ranges, with a possible overshoot to the 15500 ranges. If this comes to pass we, will view it as a splendid buying opportunity as the Dow should end the year in the black. Next year, the Dow index is expected to trade to new highs; this was covered in a recent article titled; the Dow is getting ready to soar
Tactical Investor, where mass psychology and technical analysis converge seamlessly
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-- Published: Tuesday, 27 October 2015 | E-Mail | Print | Source: GoldSeek.com