How To Make Money In This Market
Below is an excerpt from a regular commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, October 5th, 2006.
Top of the morning to you all. That's my Irish blood at work this morning. I'm not feeling much better than yesterday, but there are a couple of charts I want to show you. And a big warning about shorting the stock market during 'manic moments'.
The news just keeps getting worse and worse according to the US propaganda machine. There is never a shortage of bad news, but some times are worse than others. Now, the potential wars in Korea and Iran are the big worry. And in the economy, it's the collapsing housing bubble, and the consumer. Theses are the reasons options / risk salesman from the major brokerages site to fund managers when they phone on sales calls to meet their quotas. The brokers need that premium to meet earnings goals. Next year they will not be so successful in selling volatility insurance, which is why one can expect more of it.
But this year the squeeze is on, where no sooner do brain dead hedgers have their insurance on when they are faced with yet another melt-up due to the 'who me - no fear' 30-year old proprietary traders at the same brokerages selling them the insurance. This ensures they will never collect on it buy jamming stocks higher prior to options expiries. What a racket, no? Anyway, knowing this is occurring, and that it could go on for some time, unless you are suicidal, do not step in front of this train, because stocks could keep going up until spring of next year, or longer, who knows.
We can speculate that a seasonal inversion looks possible, because unlike the '99 - '00 sequence, where stocks corrected from the summer into mid-October, this year they rallied through this period. But hey, that's only speculation. What's more, if we do see a downturn soon, they'll blame it on the Republicans losing both houses (i.e. Democrats are tax and spend as opposed to borrow and spend), where the market will not like the prospect of higher taxes being paid by an already over-burdened consumer. But hey again, won't that cause speculators to buy more puts, because its bad news. Or, perhaps they are doing that right now in anticipation. What a mess, no?
All such speculations aside for now however, do we not have a way of determining probabilities associated with possible tops? Yes, in fact we do. As you know, open interest put / call ratios will tell us when it's safer to short the stock market from a sentiment perspective. And then there are short ratios. And we also have technical analysis to aid us as well. For example, here is a chart that suggests trade is approaching the pinnacle of a defining risk adjusted rising wedge in the S&P 500 (SPX), derived by dividing it by it the CBOE Volatility Index (VIX). (See Figure 1)
And who knows maybe this will be a significant top, but please notice momentum in the parabolic move is just going vertical, so the SPX could go all the way back to form a double top before it's all over. What's more, because the Dow is now extending 5-waves of Primary Degree with the price action from yesterday, it should be recognize that the SPX running back up to previous highs to accomplish the same becomes a statistical probability on a wave related basis. The fact tech stocks, as measured by the NASDAQ, suffered a Super-cycle Degree blow-off and correction only a few years back, means the SPX will likely not extend much of a move past previous highs because of cross populations (at a minimum more time is required to recover after such a sequence), but based on the current set-up, a double top sure looks possible. Thusly, anybody getting short here, even if using LEAPS, runs the risk of a total loss of investment capital in the venture.
THUSLY, DO NOT SHORT THE STOCK MARKET NOW.
And as for precious metals, who needs them right? At least that's the attitude kids in charge of all that money over at the brokerages have right now. Junk paper of all varieties sure is in demand though. That being said, not everyone is foolish with their money, whatever that means today, where it appears precious metals, and their related equities, are attempting to bottom here. Just take a gander at this chart of Newmont (NEM: NYSE). It appears poised to reverse some important diamond breakdowns that could give it life. Could this be the defining moment in the Primary Degree B correction? (See Figure 2)
While one never knows until much later, as you can see above, it's always possible. Again however, if you are buying here, as per our suggestion yesterday, please do not buy call options. Not only do you run the risk of complete losses if stocks take a dive in coming months, but it should be understood you actually increase this possibility from a sentiment perspective by doing so because put / call ratios will remain low if too many do the same, cementing a likelihood of a negative outcome. Therein, if some of our recommended juniors do not have enough upside potential and volatility in the trade for you, then I suggest you seriously consider finding another way of trying to get ahead in this game, because options generally work out only 10-percent of the time. And it would be a shame to see this outstanding opportunity in gold in front of you, but because of a reckless and greedy investment policy, not be in the game at the end to collect your rewards.
THEREFORE, DO NOT BUY OPTIONS IF YOU ARE GOING LONG PRECIOUS METALS OR RELATED EQUITIES.
To continue past this point in our analysis here today would be a disservice to our subscribers considering they pay for our thoughts on such matters. For this reason then, we must cut things off here. But we invite you to visit our site and discover more about how we approach market analysis and investing. The above is only a small example in this regard. If you wish, you can check us out by either scanning our free material, or subscribing to our service of course. It all depends on how far you want to look down that rabbit hole, where we would be very happy to welcome you on board.
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Good investing all.