Sunday, December 13, 2015

How High Is High? How Low Is Low?

Extreme Conditions Do Occur
How high is high? When asking this question it would also be wise to ponder the following, How low is low? Markets are capable of making extreme moves and we should remember trees don't grow to the sky and markets don't go up forever. As someone who has traded commodities for decades I would strongly recommend anyone considering jumping into the super high risk snake pit of commodity trading to steer clear of it. While I have had victories I have also gone through a slew of painful losses and been bludgeoned by markets and price swings that have defied all logic. Adding to a traders pain and woes is that when you are caught on the bad side of an ugly trade the speed that a vicious market can dish out its brutal assault is usually extremely underestimated.  After over 30 years of trading commodities I will flat out state without any reservations that lies and manipulation run rampant. If you think anyone is looking out for the small independent trader in the stock market or commodity market you are wrong.

Who Predicted Oil Would Do This?
A recent article caught my interest, it said; It is always darkest before the dawn. In other words, the energy market could see crude-oil prices tumble further in the coming days after closing near seven-year lows. January West Texas Intermediate crude tumbled $2.32, or 5.8%, to settle at $37.65 a barrel. At least one chart pattern followed by technical analysts is pointing to more pain for the WTI contract as oil tilted below $37 a barrel in early Tuesday's trade. Talk has surfaced of 20 dollar oil at the same time some analyst said it is time for investors to jump in and "pick a bottom" pointing out energy stocks are now a bargain. History has shown that markets defy logic and our opinions are often wrong. Five years ago few market gurus predicted oil would be trade at such low prices today. It is difficult to say where the price of oil will be next month.  

After asking the question of how high is high I must also ask, how low is low? Markets can make extreme or wild moves that charts often are unable to predict. This means it is both dangerous and difficult to pick a market top or bottom. Various technical trading systems while indicating an overbought or oversold market fail when asked to answer these two questions that would make us infallible and legendary investors. Today markets have added a couple new dimensions that will play an interesting role in just how violent and savage price swings are going forward. One of those is that computers now do a great deal of the trading and they are programmed to prey on the weaknesses of human trader using computing programs that exploit where stops are placed, this improves their ability to wash the weak out of their positions. Another factor is many people have grown far to complacent.

The "buy the dip" mentality and the idea that the central banks coupled with the too big to fail financial institutions will keep these distorted markets elevated has become entrenched in the minds of many investors. This has lessened the importance of economic fundamentals and the question of how sustainable this market is. It has also put on the back-burner the question and issue of, how high is high.  I have seen and heard far too many comments by those bullish on higher equity prices and ever higher markets basing their strategy on a policy of  "don't fight the Fed" and "buy the dips." While this has worked since 2009 it is no guarantee that it will continue to produce positive results in the future. The "buy the dip mantra" will prove very costly when a real drop in the market does occur. A saying often used cautions traders they should never try to catch a falling knife.

One problem we face in the current stock market is a lack of traders holding short positions. Several of the stocks that were recently on strong uptrends appear at heart to be fundamentally unstable and may have been driven higher by bears capitulating and buying back their positions rather than market fundamentals. We have witnessed massive moves in several speculative stocks like Amazon, Tesla, and Netflix that are hard to defend by any other reasoning than shorts being squeezed out of the market. It is logical to think the higher a market goes the more vulnerable it becomes to a major violent decline or sudden savage downward price moves. A lack of short positions will bode poorly for the market if it falls rapidly because in such a situation as shorts take profit and buy back their positions they act as a floor under the market giving it support. The floor under this market is questionable and with contagion a growing concern it is understandable that junk bonds have begun to take a beating.

The point of this post is to remind all of us the world of investing is a dangerous place and that much of how people react to events depends on how things are set up or how the cards are stacked when things happen, develop, and unfold. We often see that market reaction has more to do with timing and perception rather than being driven by reality. The economy tends to develop loops that feed back upon themselves, to this market driver we must add cross border money flows, central bank intervention, currency manipulation, and derivatives. This is only part of the list of pitfalls we face when we develop expectations that drive prices . To top things off we should recognize that at any time an unexpected black swan crisis is always lurking in the wings. This reinforces the idea that we should remain humble in trying to answer the questions of, how high is high, and how low is low. I have learned some valuable lessons over the years, one markets don't go in just one direction, values constantly shift, and after you lose your money it is to late.

1 comment:

  1. Hi Bruce,
    Can you please contact me at This is a friendly shout-out from the Seeking Alpha contributors team.