The Market's Mysterious Ways...
Each and every week I bring you people some awful disturbing news. From foreclosures, to bankruptcies, to fraud, to you name it, it's a cess pool out there. But, if you think it's as easy as simply lining up the bad news with "going short the market" you're in for a very rude awakening. See, many many years ago, there was a famous quote stated, and it goes like this.."the market can remain irrational, longer than you can remain solvent". Not many realize just how true that is.
Let me give you an example. It was just July 2, and we were at DOW 9600. There seemed to be a lot of reasons for it to be falling. Retail sales were very soft, foreclosures were still roaring, housing was at 50 year lows, initial jobless claims were still coming in at 450K, etc etc. Yet from July 2 to now the market put in what amounts to a 1000 point run. On the surface, you might think.. okay, a lot of investors are convinced that the economy is going to heal so they poured in. Nope.. the fact is just the opposite. Investors have been fleeing the market for months on end. Remember this little tidbit we put out last week?
ICI reports that the week ended July 14 saw another massive outflow from domestic equity mutual funds of $3.2 billion, bringing the July total to $7.3 billion, and year-to-date equity outflows to a stunning $37.5 billionSo what we really have is people fleeing the market, yet "somehow" it managed to run a thousand points. Don't stocks rise because of supply and demand? Wouldn't you think that money would have to come 'into" funds, for the market to run like that?? You would, and you'd be wrong.
So, I'm going to say a few things here that sound nasty, but they aren't meant to be that way. I'm just thinking that I need to put out some "tough love" and get your attention. So, get ready...okay?
I am on record saying we'll see DOW 9K this summer. We got down to 9600, but I still didn't think that was the bottom. Yet I know how this criminal organization called "the market" works, and after being short the market, after being long the volatility index, we covered all that and started leaning long. It was the right move obviously, the market soared. But here's my point...
We run a membership area called the Insiders Club. It's simply a way to look over my shoulder at the things I'm doing. I usually post my morning commentary, and then the stocks I'm looking at to go long or short. Then as the day progresses, I post updates about what I might have bought, the stops I'm considering etc. It's basically a "blog" if you will, where you are free to follow along with the trades I'm making. Because I'm not a registered broker or advisor or what have you, I have designed it that way on purpose. I don't tell anyone what to buy, I don't make the case for any particular investment on the personal level. All I do is talk about the things I'm looking at, what price I might enter, and then if I do, I post it there for all to see... win/lose or draw. Knock on wood we win a whole lot more than we lose and that's the name of this game.
Yet I see something bizarre happen almost all the time, and here's where things get ugly. I constantly get emails from people asking things like " Bob I'm in the VXX and I'm getting killed, and I have margin calls coming etc etc etc. what do I do?" Well my standard response is that I can't tell you what to do I'm not licensed. But I can tell you what I'd do.. that's legal. But here's the part that makes no sense to me what so ever...
If you pay me 159 bucks for a year of looking over my shoulder.. and I sold the VXX weeks ago for big time profits, why are you still in it? Yes the news stinks. Yes the economy is in the toilet. Yes we have tax increases and bizarre healthcare coming. Yes the wheels are falling off and the US is sinking in global economic might. Yes to all that. But if you STAND PAT on that sort of thing you're going to get crushed. THAT is why I sold out. You all saw it. I took in
15 dollars a share on my first set of VXX and
2 dollars a share on my next group. Yet many of you
held it and held it. Hey , I'm not saying I'm great and I know all things, I don't. I'm not saying I'm the best trader, I'm not. But I like to win by not losing, and frankly we don't lose much. I detest losing. But I like making money even more than not losing it. So, when I felt that the market was getting ready to burn the shorts, put on a great bear market bounce, it was time to take profits from the short side and go long. Many didn't. Why?
I'm guessing that it's psychological.. You see the bad news, you see the real mess we're in and just sit and hold the short side. But let me explain something to you so that you really really GET IT.. The market's ONLY function is to take your money. Do you know how it does that? It does it by doing things that just don't make sense on the surface. A logical mind would indeed think that with all the ills the economy faces, the market would have to dump. I understand all that.. and that's exactly when it does something different. That's when it burns you.
When I started "investing" and trading, I wasn't doing as well as I thought I would. I'd add up the economic points, I'd look at earnings and make my move. Then the market would do something I didn't expect. Well it only took a few losses for me to say "hey, this thing's rigged, something ain't right here" and sure enough I was about to learn the real deal. See folks, for 70 years the market was a way to build wealth, a way for the average person to put some money in, get a dividend, and hopefully have a nest egg. But with the advent of mutual funds and 401K's thing started changing. The "market" figured out how to use those big pools of money to make itself fabulously wealthy.
I started noticing the subtleties.. I started noticing that when it felt right to be bullish, the market would fade and when it felt right to be bearish the market would soar. Some will just call it "contrarian investing" and to an extent it is.. but it's evolved to much more than that. Now it's a science that the market has developed to take the most amount of money from the most amount of people at any one time. Does that sound ugly?? Get over it, it's real life. They know the order flow, they know the inside news, they know the funds on hand, they know the buying and selling pressures..they know everything now. Computers, algorithms, programs, high frequency trading and a hundred other metrics are now employed daily to set the "masses" up for fail, while lining their own pockets.
Of course it would make sense a month ago to remain fully short. It's logical. It's the direction that makes the most sense. So what happened? We got a thousand point romp. In the face of fund redemptions, and all the ills in our economy, we get a thousand point romp. Does that make sense? YES.. if you follow our basic investing philosophy. You many know it.. if not here it is... We care not about what a company does, nor it's earnings, we just want to know if the criminals want the market up, or down today". That's it folks. If you can determine which way the market would have to go to impart the most damage on the most people, that's where it's going.
A month ago more and more people were going short. The big names like Richard Russel were talking about a market melt down of epic proportions. The chart slaves were talking about this very rare head and shoulder pattern, then the dreaded "death cross" where the 50 day moving averages plunges under the 200 day. The economic news was simply horrid with housing down 36%, and bankruptcies hitting all new highs. It was logically the most perfect time to remain short one could imagine. And it was exactly why I covered my shorts and went long.
I knew the market wasn't going to reward all those people for using logic. I knew the market wasn't going to let some silly pattern on a chart reward all the chart slaves. Nope, it was going to burn them and burn them it did. In spectacular fashion. This is what it does, this is it's whole purpose for existing. Fleece the sheep. Run up, pull the rug... head lower, reverse and run.. rinse and repeat. Catch the masses off guard. Punish them for using logic. Punish them for selling at bottoms and buying at tops. Use their greed to rape them.
Do you know how it works? When the market just gets done taking a huge pool of money from people, it heads higher. The people refuse to get involved, they just got burned. So it goes higher. Still the people resist. Then it goes even higher and the people are now sweating bullets. They despair over selling out for a loss and now the market is back up so high. So one day they can't take it any more. They can't stand seeing the market "leave the station without them" and they hop right back in. When the market determines it's got as many people back into the fold as it's going to get.. it rolls over and crushes them against the rocks of despair again. Rinse and repeat.
It pains me greatly when people have paid us to watch what we are doing, and then find themselves trapped deeply underwater because they let logic over rule their thinking. In this day and age, you cannot rely on logic. You have to rely on the criminal mind. You have to determine where it's going to go, to "hurt" the most people, because 90% of the time, that's where it's heading.
Disgusting yes, but none the less true. I cannot think of a single thing that would help you all be better "investors" than to understand that point.
Now onto the market..Monday they put in another 100 point up day. That made 3 in a row. But here's an interesting historical tidbit.. the market has never put in 4 triple digit up days. Not once. Not in the 98 - 99 madness, not in the 2007 madness. So I was pretty certain it wasn't going to do that on Tuesday and it didn't, they squeaked out a 12 point gain.
But Tuesday also brought us up against some interesting levels. We were just a few points away from the most recent high, set back in June.Yet it was doing it on very poor volume, as the bulk of the investing community is in gold and treasuries, and it's just the member banks and some hedge funds pushing things higher.
Coming into today, we had some lousy economic reports, as if that's something new. So we were pretty flat heading into the open. Would they once again push us higher, or was it time to drop some? See durable goods fell 1%, even without the transports it was down 0.6%. Then we had mortgage applications fall 4%, another dagger in the heart of housing. With Wed's being famous for "reversing" what ever happens on Monday and Tuesday, you could make the case for a red close.
The one interesting item of the day however would be the Fed's "beige book" report. It was just a week ago that Bernake said we were in an unusually complicated time, so the market was very interested to see what the Fed's report on the economy would be. Well at about 2p,m we found out.. they said the economy was still expanding, but slowly.. They said manufacturing faded off, joblessness was a problem, etc. The usual "hey don't worry folks, we're still growing despite the lousy news". Right.
So, they put on a long grinding session and we ended the day down 38 points. That's interesting to me. Why? Well if they were ready to do the rug pull, they had their excuse. See the market flips to it's own desires. When they want the market up, they can take the most horrible news on the planet and "spin" it positive. But when they want to yank the rug.. they just use any piece of bad news as the reason. It's really not a reason, it's just something plausible they can use as an excuse. With the Fed saying things are slowing.. they had an excuse and they really didn't take advantage of it. Hmmmm.
I have been under the impression that since they burned the shorts.. they might be ready to pull the plug on this run up. I still am to some extent, I still feel we are at the upper end of the run. But the fact they didn't push this puppy down harder, does give me reason to pause. We have to use "levels" at this point. If they get us up and over 10600 it could feed on itself and they take us higher. But if after a few days of knocking on the door they can't make it.. we could fall and fall fast.
We are still "long", but frankly we aren't carrying much. If they pull off a miracle and goose this thing.. we'll lean harder. But I'm quick to sell and go short if things start to break down. It isn't a bad plan!
Have a great night, we'll see you Sunday!
PS.. If you'd like to see the exact stocks/options/metals/ETF's and 401K moves we will be looking at for this week, please consider becoming a member of the "Insiders Club" located here: Click
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