Being Early is the Same as Being Wrong?

How many times have you heard that saying from the post title in the world of speculation? A bazillion to be sure and it’s true, but the beautiful thing about that saying is that it only applies to timing. It does not necessarily always apply to analysis. Traders lose all the time. It’s just a way of trading life. That’s why the discipline to cut and run is all important. Just because your analysis may have led you to be early on a move, doesn’t mean you cut and run from the analysis. There could be profit left to squeeze out of it and if you let your emotions get the best of you, then you might leave money on the table…and we all know that’s a trading sin.

Observe the following 2 charts from a June post for a perfect example of this notion in action with the Aussie Dollar Currency Shares.

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Now I lost money on that first trade as the short energy simply had not dissipated yet. I thought the up-turn had occurred, but we had yet to even see a bottom in FXA. Serves me right for playing Mr. Pseudo-currency trader. My wheel-house is equities, but you read enough charts and conduct enough analysis and you just feel like you can trade anything. I kept my eye on the action in the Aussie dollar while also following the RBA decisions, amongst other indicators. As some real heavy hitters were reported to be short the Aussie dollar, it seemed as if the move had reached total extremis and a short covering rally was a distinct possibility. Additionally, the political hijinks of America were going to produce a counter-trend rally for some well-regarded international currencies, and the Aussie was as ripe as any. Observe the current action.

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If I had given up on this trade and just moved on to another asset class, then the profit would have totally been squandered along with the opportunity to reclaim the loss from being originally stopped out. You have to have conviction in your beliefs if you know your analysis is sound. Obviously, it doesn’t pay to fight the market but that doesn’t mean that the market will keep fighting you. Markets capitulate at extremes, providing fantastic opportunities for the diligent. And just for laughs, an ancient chart pattern, The Double Bottom, actually proved its efficacy in this particular instance in portending the trend change. Score one for classic technical analysis against the hyper-algo houses, however, don’t get used to it though. You’ll just lose money with that kind of thinking, that classical patterns will definitely play out in your favor. Have a look at Peter Brandt’s note on the H&S in GOOG back on October 9th. Granted, he did do the full disclosure thing stating that all patterns are subject to failure. Brandt is a true OG in the trading game, but everyone gets it wrong sometimes. Now I may miss out on some more upside in FXA, but I’m cool with recouping previous trade losses and harvesting new profits under my original analysis.

It can’t be reiterated enough how important it is to mind your stops with absolute discipline. You never want to enter your stops into the market because our algo-driven world has the ability to sniff these out and run them. Of course it takes position size for that to occur and an aggregation of sloppy retail holders may provide that size. Although if you simply cannot be disciplined enough to close out the trade when warranted, then do what you have to do by entering the stop. Again, I’m not abdicating for the usage of actually entering your stops into the broker. That’s amateur hour even for amateurs, but it takes time to learn how to cut and run. The primary thought process of the average amateur speculator goes something like this, “Well it’s moved so far below my purchase price that I might as well wait for it to come back and then at least I can break even.” Or if it’s an option, they foolishly allow it to expire with a total loss. Discipline is key and the trailing stop is one of the trader’s best friends.

It’s difficult to touch on this subject and not comment on the gold market. For the gold bugs, faithfully holding onto the precious metal and the precious shares it’s been a nightmare of a dislocation. For the “finanical-assets-are-the-only-place-to-be-and-a-gold-allocation-is-stupid” crowd, then this dislocation is providing the music for them to tap-dance on the hearts of the “sit-tight-and-be-right” hopeful holders of precious metals related assets. But are those tap-dancers early themselves? Are the people who have gathered precious metals related assets going to have the last laugh? Nobody can say or predict with any true credibility. There are credible sources on both sides of the argument for the gold price direction. The short-term extrapolation by the pro-financial-asset side is so glaringly and willfully ignorant of the many historical facts and the current trends that are racking up in favor of precious metals. But on the opposite side of the coin, the assumed guarantee of certain actions in the economy and thus the precious metals by the Hayek/Mises followers can also be labeled as glaringly and willfully ignorant of modern market & monetary dynamics.

Full disclosure: I do lean toward the Austrian line of thinking, but I’m not a blind fool. Let’s be real. You have to be allocated across multiple asset classes. If you have the means, it makes sense to take advantage of real estate values and advantageous financing…even after 1 year run-up’s in values and mortgage rates. The long-term statistics behind holding dividend growing, cash gushing mega brand companies speaks for itself. And nowhere has that been more recently evident than after the 2008 downturn. Fixed income is not dead. There are some sectors within that asset class that are struggling for breath, but fixed income will always be a sound allocation within a well balanced portfolio. Commodities are volatile and to over-allocate based on some historical precedents is unsound money management. As I stated though, maybe the goldbugs end up having the last laugh in that sort of The Big Short kind of way. To ignore the following chart, courtesy of Tom Fitzpatrick at CitiFX, is to think this time is different and mean reversion doesn’t work.

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Can you find a better, more consistent, and tighter correlation to gold than the US Debt Limit? If yes, then please feel free to comment below or e-mail. I’d like to hear other opinions, biased or unbiased. I’ve observed plenty of indicators over the years and this continues to be one of the strongest. Actually, there may just be one that is stronger. For some more ha-ha’s, I’ll include the following gold charts by the consistently insightful Tom McClellan. The gold price runs quite nicely with a certain 13 & 1/2 month cycle.

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You may be thinking that the timeline is so short that this correlation is statistically worthless. Well he provided a longer chart for that, too.

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So if you didn’t read the original note back in August, then you’re wondering what the heck is this fairly tight sine wave correlation to the gold price. The answer as presented by Mr. McClellan:

I mentioned that I don’t know why gold exhibits this very regular 13-1/2 month cycle.  But I do know that there is a very real and important anchor which seems to control its regularity.  You may have noticed that these charts show a rather funny looking representation of a sine wave cycle, with bars instead of a wiggly line.  Those bars have an important meaning: They represent the distance between the earth and moon on the day of the full moon.  So the 13-1/2 month cycle which is evident in gold prices just happens to match up really well with the lunar apogee-perigee cycle.  Or at least it has for a couple of decades, which ought to be long enough to establish it as a real phenomenon.

Seriously! The damn distance between the earth and moon during a lunar cycle. Hard to ignore it whether you think it is laughable or not. Gold has been showing some constructive action since going sub-$1,200 in June. It’s doing the classic higher lows walk right now and everybody can see the hardcore resistance at the $1,430’s and $1,530’s. Those most obvious resistance areas that literally everybody in the world can see makes me suspect that the paper price of gold will be sold off hard at those levels, by whatever entity or entities you want to believe conducts those sorts of operations. What we’ll really want to look for is the buying action off those potential sell-offs that will provide insight into how constructive the ongoing move really is coming out of June.

I don’t usually provide precious metals shares trading recommendations as the action in the shares is predicated solely on the underlying asset. With the volatility swinging so wildly with what appears to be no fundamental reasoning, it can be highly dangerous to speculate in gold or silver miners. Consider yourself duly warned and take another gander at the disclaimer as I’m not an investment professional and readers bear all the risk of trading or investing in these markets off of anything read here. Now that that’s off my chest, observe the following weekly charts of two quality miners. The first is Yamana (AUY) and the second is New Gold (NGD).

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The reason you’ll want to follow these two miners is that you get a top flight major producer (AUY), albeit very small compared to the big dogs, and a high level mid-tier producer (NGD). Both trade at penny stock prices. AUY and NGD share some operational qualities that distinguish them as quality picks in the mining space. They both possess top shelf management. They both possess some of the best all-in sustaining cost numbers for producers their size compared to their peers. They both possess readily available access to funds for project development. A majority of their mining and exploring operations are in respected, safe jurisdictions; especially New Gold. Most importantly they have huge growth already built into their production schedules over the next several years, which if precious metals resume their bull advance, then earnings growth has the potential to be very significant.

As far as a short-term trade to potentially leverage a move in gold over the next several months, I prefer AUY. And look…you can see that classic chart pattern again, The Double Bottom, rearing its head to possibly portend a trend change. There are a multitude of ways to execute a trade on these two. Simply buy the shares and go long. Buy some calls a handful of months out and subsidize part of the purchase with a put sell. Buy some LEAPs by themselves; hedge with some puts on the GLD. The last two times I played LEAPs in AUY, before the beginning of the Precious Dislocation, I was able to liquidate each trade with a 200% gain. The first in just a few weeks; the second in just a few months. Remember to conduct your own due diligence and structure a trade in which you are comfortable and allows you to sleep. Also, a concerted move below October lows will negate any analysis for a positive move upward

As far as a major move in gold pushing the price multiples higher in the years to come, well I’m in the camp that believes it’s probably going to happen. Am I a blind follower who prays to the Precious Metal gods daily and reads passages from the King Lebron James version of the Great Book of Precious Metals? All while rotating my alternating gold and silver rosary beads in my hand to add heft to my precious metals prayers? Decidedly not. In attempting to evaluate all the historical information at hand and objectively assess the current data, my noggin tells me to be positioned for a potential continued advance through this decade. At this point there is still plenty of time to open positions and begin accumulating the actual metals or quality shares, but to absolutely refuse an allocation based on pure ignorance or ego is a shameful act of poor money management. There are a plethora of wealth managers and bloggers whom have bought into their published stances with such conviction and unparalleled vanity, that they can’t truly admit to utilizing an objective or agnostic approach and perhaps are surrounded by one too many sycophants. It all sort of reminds me of the South Park episode where some of the parents start purchasing Toyota Priuses(Priusci, Priusae, Prius’s, or Priussessez) and then loving the smell of their own farts. Thankfully I reside in a country where everyone is entitled to their opinion, but the anti-PM crowd just may be early in their celebrations and wrong in their analysis.

One comment

  1. MNCareerPlanner · February 21, 2016

    Reblogged this on MN Career Planner.

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