I listen to CNBC sometimes. Usually when I’m running around or working out or something. Not for the opinions of the traders, which I find more entertaining than useful or informative. Mostly for the news: earnings reports, profiles on new products and companies, etc. They do an okay job of covering major financial news stories of the day, even if they tend to be biased towards whatever is hot at the time and over-hyped (which also makes CNBC an interesting sentiment gauge).
One of my favorite things from an entertainment perspective is when one of the hosts turns to one of the traders and says: “What trades did you do today”? And usually whoever the trader is gets all fired up and gives some glossy rationale for why the trade they just put on is awesome and should make a bunch of money. I find this behavior amusing in multiple ways but what would be great is if just one day the trader would say: “You know I didn’t do anything today, there wasn’t anything to do.”
These people act like the market gives you big opportunities on a daily basis. In reality the daily opportunities are all about squeezing profits out of little minuscule moves in the markets often using excessive leverage. And when the market gets volatile and choppy this excessive leverage often works against you and causes you to get stopped out trade after trade. This causes your account to get “chopped up” as the small losses start building up and also effects your psyche in a negative manner.
Markets give opportunities after sell-offs or bear markets, and after periods of dis-interest generated by choppy, sideways action. The problem is few people have the patience, emotional fortitude, and open-mindedness to wait for these opportunities and take advantage of them. If you think about when the two big opportunities were in the last 5 years in the stock market, they were in early 2009 after a horrible bear market, and in late 2012/early 2013 after a sideways bear market. During both periods I remember distinctly how oppressive the bearish sentiment was. In 2009 it was the financial crisis and in late 2012 the fiscal cliff had people scared of the markets.
Coming into 2014 the U.S. stock market had a historically high cyclically-adjusted P/E ratio, and was coming off of a multi-year bull run where investor enthusiasm recently hit multi-year highs. That didn’t sound like a big opportunity to me when the year started. But if you took a contrarian look at commodities, bonds, and some foreign markets coming into the year that was where potential opportunities lay.
I’d like to emphasize the word “potential” because one of the key things I’ve learned from the gold market in particular over the last couple years is the idea of letting bear markets run their course. It’s very tempting to call a bottom in a bear market and try and get positioned for a bull run. But bear markets have to run their natural course, and will have false rallies on the way down that will frustrate those that aren’t willing to accept that they occur.
The opportunity in the gold stocks is that they are trading at low P/E ratios, low P/B ratios, and there is investor dis-interest and apathy after suffering such big losses in a bear market. The problem with gold though is it’s fighting against overhead resistance, as sellers that are locking in losses are about at equilibrium with buyers looking to “buy the dip”. This is what creates the conditions for the Stage 1 base that we are in now as shown in the chart below.
We need to see gold breakout of this Stage 1 base on an increase in volume to show that this opportunity is real and not just another failed rally. That’s why they say patience is a virtue and as a market participant it pays to wait for the big opportunities.
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