What is hard about investing? It's not the simple mechanics of investing. Nowadays if you have the money, it's easy to open an online trading account and start trading. You don't even have to talk to anyone usually, just mail in a check to the broker and off you go. So the HOW or mechanics of investing is not hard.
Is finding what to trade hard? This is an interesting question. I would submit that finding WHAT to trade is not the hard part about investing either. Studies have shown that selecting stocks at random, aka monkeys throwing darts at a dartboard, have outperformed market averages in a wide variety of years. But this is only because stocks as an asset class tend to move in the same direction, creating bull and bear market trends over time. So picking any random subset of this asset class at any point in time will not improve your chances of success, in most cases, if you're wrong on the direction of the general trend.
So unless you pick a specific company that has a bad business model that is going out of business, picking WHAT is not as important as picking WHEN. I submit that WHEN you buy an asset is the most important question to ask. And that makes sense because that is where the greed and fear reside in investing. That is where the emotion is put in play, that makes it "easy" to make bad decisions, or "tough" to make good decisions.
It's easy to buy when things feel good, when people are excited about stocks or whatever asset class is hot at the moment. Join the herd! Herds feel good to join for most people, they play right into your natural bias to want to be part of a group.
And it's tough to buy when you feel bad, when an asset class is a mess and no one likes it. You feel like a lone wolf, and your behavior might seem odd to your friends. You don't have a group to make you feel good, and you'll usually have people calling you a fool for what you are doing. Or they make fun of you in hindsight, which is actually pretty ironic because often this is the EXACT WRONG POINT at which they should be making fun of you.
Case in point is an interview I posted where a CNBC anchor attacks a prominent gold analyst for suggesting rebalancing into gold at the end of 2013. Stocks were up 30% in 2013, gold was down 30%, so it was a simple case of rebalance and buy low. But the CNBC commentators couldn't resist bashing someone recommending gold due to it's poor performance especially when stocks were up. Ironically though this is proving to be the exact wrong time they should have been bashing gold, as December 2013 is looking more and more like the bottom in the gold market.
My own experience with 2013 had some painful and fearful moments I won't forget, or at least I hope I won't forget for a long time. I like to average into positions, never buy anything or sell anything all at once. And 2013 afforded me some awesome opportunities to add to some positions in the gold sector at great prices. I felt stupid and alone for what I was buying in a lot of cases. But deep down I knew those feelings would end up betraying me later on when the bear market was over, and looking back I would wish that I had bought low. So I did that and took the pain for the time being.
Now that we're well into 2014, some of my buys over the past year in gold miners are up over 100%. This blows away the performance of most of the stocks you see on TV, but no one is talking about this. If you look at the universe of thousands of ETFs in the market, in the top 20 for 2014 are at least 6 ETFs that focus on gold or silver stocks. No one is talking about this outperformance either. Instead they are talking about stocks like Twitter, which is down 30% this year. I can find plenty of gold stocks in 2014 that are blowing away the returns of Facebook, Apple, and other prominent stocks that are all over the media on a daily basis.
The funny thing is the move in gold hasn't even barely started yet, but we're already seeing huge returns in the gold stocks. That's typical of a new bull market, huge returns early when no one is looking or they are still scared or scarred from the previous bear. That's where you apply the principle of buying right (when things are painful) and sitting tight (when everyone else is jumping in) to get yourself positioned to reap the rewards of a bull market trend.
If you look at gold right now it's still sitting in a Stage 1 base, but a decision point is approaching. Gold is either going to make a higher high or a lower low soon and tip it's hand to the bulls or bears. The returns and strength in the miners would lead you to believe the hand should be tipped to the bulls.
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So far in the past 6 months gold has made two important lows, a December 2013 low and a June 2014 low. The June 2014 low was a fake breakdown turned fast move higher. This is very important, since every rally in gold has failed for the past couple of years during this bear market. Now we finally have a breakdown in gold that failed, a bullish omen. But a hidden piece of information that is just as bullish as this failed breakdown is how certain mining stocks are behaving.
Mining stocks come in all different shapes and sizes but one factor that binds them together is the price of gold. Mining is a tough business, and even the best mining companies in the world can't function well with a low gold price relative to their cost of production. So when the gold price is in a downtrend all mining stocks tend to get punished and sometimes severely punished. But one thing to remember is markets are always forward looking. So we should expect that if gold were to finally stop its downtrend, the market would start to reward the "better" mining stocks with higher prices.
This is actually exactly what we are seeing in certain mining stocks right now. We now know that gold made a major bottom in December 2013, because we can look at it in the rear view mirror on a chart. So once gold made that low, pressure started lifting on the stronger mining stocks. But gold made a secondary low in June 2014 that exerted additional pressure on the mining stocks. This actually pushed many weaker mining stocks to even a further new low. But the stronger stocks rejected this secondary bottom in gold, and either traded sideways or continued higher.
Let's take a look at some examples. The first example is Stillwater Mining, a platinum and palladium producer. Stillwater is more tied to platinum and palladium than gold or silver, but since they are all precious metals which are very strongly correlated it's a valid example. Once precious metals made that important December 2013 bottom, the pressure on SWC drastically reduced and it immediately launched into a new Stage 2 uptrend. This is very bullish action. It's even more bullish the way Stillwater rejected the pullback in precious metals from March to June 2014. Stillwater remained in a strong Stage 2 advance during this pullback and took barely any technical damage.
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Gold has failed to breakdown significantly from the tight coil pattern it created over a 2-month period. Failed breakdowns often mark key reversal points in markets, especially after moves that take a while to play out. In a downtrend, the duration of the move produces the angst and disgust that causes most of the selling. Then the final break of support creates the final flush out of the weak holders who didn't sell out earlier in the move.
When there's not enough selling pressure to continue the breakdown, the market often reverses higher in a fast and powerful manner. The selling pressure isn't there anymore and new buyers push the market rapidly higher. The market basically gets caught looking in the rear view mirror, expecting more of the same thing to happen forever. Meanwhile, quickly and with force things change when many aren't paying attention and a new trend develops.
After the coil in gold broke down in late May I noticed that sentiment on gold turned very bearish as if everyone was throwing in the towel. I even heard a podcast that I've never witnessed bearish on gold, say it wasn't a good time to buy gold. But as of yet, the breakdown out of this coil has not produced significant follow through selling. Check out the chart of gold below to see exactly how this has unfolded.
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It's constructive to look at the other side of your positions to see where you might be wrong. If you're long a market a good way to do this is by taking the inverse of the symbol representing your position. At stockcharts.com, you do this by putting "$ONE:" in front of your symbol and it shows you a chart of the inverse of your position.
I like to do this instead of looking at the leveraged ETFs because they tend to decay over time. The non-leveraged inverse ETFs are fine but they don't exist for many markets. Therefore using "$ONE:" gives you the bear market perspective of anything you want to look at.
Let's take a look at the bear market in gold stocks that launched in 2011 by looking at $ONE:GDX. From a Stage Analysis perspective you can see a nice Stage 1 base that developed in 2011 followed by a breakout of the base in 2012. Then the bear market in gold stocks retested the base which happens a lot in early Stage 2 transitions. After the retest the bear market was off to the races in 2013 with the recent high occurring in December 2013. Notice though that in 2014 we are now seeing the 30-week moving average flatten out, and a head and shoulders topping formation has shown up on the chart. This is classic Stage 3 topping action.
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At any given point in time different markets are at different points in their long term cycles. Markets can be anywhere from just starting a new bull market to late in a parabolic top on the bull side. On the bear side once a market tops it tends to go through either a bear market downtrend or a sideways consolidation that frustrates the bulls for an extended period of time, or a combination of the two. As a longer term trader the goal is to try and determine where the market is in it's cycle and to get positioned as early as possible to capture the biggest profits.
Two markets that are at very different points in their cycles are gold and Internet stocks. These two markets don't have anything to do with one another but both are important and have their own following among investors. The key is forgetting about biases towards these markets and focusing on where they are in their long term cycles to determine what, if any, opportunities they hold.
Internet stocks have made a lot of headlines recently because they made huge moves to the upside in 2013. Then they crashed over the last few months. If you go back and look at a long term chart you'll see how this all unfolded.
First let's take a big picture look at where Internet stocks have gone. This chart shows the Morgan Stanley Internet Index going back to it's induction in 2000, coincidentally at a major top which was the tech bubble. After suffering a disastrous bear market from 2000-2002, Internet stocks embarked on a new bull market along with the bull market in general stocks. But one thing to notice is Internet stocks were not a leading sector during the bull market from 2003-2007. This tends to be typical for a sector that led the previous cycle. Internet stocks barely outperformed the S&P 500 during this period.
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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.
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Next month marks the 3-year anniversary of the bear market in silver that started in May 2011. Later this summer we will hit the 3-year anniversaries of the bear markets in gold and gold stocks. We are now psychologically conditioned for pain and punishment in the gold markets and to beware of the next downward plunge.
In reality though gold has been in a basing phase. It's not going down anymore, it's going sideways where the downward plunges are muted and the upward rallies are still fake bear market rallies. What's interesting about this base is that it started right at the height of bearishness in the gold market. That two day massacre in gold back in April 2013 when gold plunged below $1400 actually started the left hand side of the base. So right when everyone was panicking about gold, in reality it was starting to form a major bottom!
Just a couple months later after trying and failing to get back above $1400, gold made the low point in the base in June of 2013 around $1200. Gold then tried once again to get back above $1400, but then failed and retested the bottom of the base in December 2013. So a well established base formed in gold between $1200 and $1400 as you can see in the chart below.