When I first started pebblewriter.com over six years ago bad news was bad news, dips sometimes developed into routs, and there was good money to be made from directional bets. We profited handsomely from shorting in July 2011, September 2012, May 2015, and November 2015.
But, central bankers have become increasingly involved in propping up stocks. As a result of their heavy intervention, “buy the f-ing dip” has gone from a laugh line to a legitimate investment strategy.
Early on, QE, QQE and APP were used to prop equities up — but at considerable cost and with limited ability to fine tune. Between 2011-2015, the yen carry trade provided most of the impetus but entailed significant currency-related side effects. In 2016, a sharp recovery in oil prices fueled algorithms but drove inflation higher. And, post-Brexit and the US election, VIX manipulation has become a force to be reckoned with.
Six months ago [see: Why the Trump Rally is a Fraud] I noted that manipulation had become so ubiquitous that it’s become difficult to profit from directional trades. I needn’t remind members that we frequently had 5-10 false alarms before a plunge was finally allowed to occur — if it was at all.
I’ve mentioned to many clients that it’s become easier to trade USDJPY, CL and VIX themselves rather than equities. As tools, their individual actions are much easier to forecast than their combined effects.
It’s nearly impossible, for example, to know when VIX will suddenly be pounded into the sand. It is much easier, however, to predict when the BoJ will crush the yen, oil will ignore inventory data and spike higher, the US dollar will plunge in response to Fed inaction, and gold will react to the latest machinations.
Last week, in The Case for Active Trading, I presented the results from our oil forecasts. Not that this will ever be repeated, but our 36 calls since Oct 2014 averaged 16%. If one were to have participated in each (averaging one trade/month) and rolled their profits from each trade into the next (compounding), an investment of $100 would have grown to roughly $23,000.
We’ve also had very good results in gold. We’ve been much less active, with only eight calls since Dec 2015. Even so, as of our most recent Update on Gold: Sep 6, we have averaged 9.4% per call, meaning $100 would have grown to $204 with very little trading.
I’ve yet to tally the results, but I believe our track record in USDJPY, DX and RB has been comparable. Why, then, spend a lot of time trying to outwit the algos in trading equities? Why, indeed.
Going forward, I will post the same charts I always post, continuing to provide daily target prices when possible and a mid- to longer-term forecast as it evolves. But, for the time being, I will only make note of specific opportunities in equities when there’s a clear breakout or breakdown (e.g. go long on the breakout past 2490.87, target 2510.87, trailing stops at the SMA5 200.) Traders determined to play the squiggles should have plenty of ammunition.
Those who don’t want to be glued to their computer all day and/or would like to trade much less frequently can follow my thoughts on USDJPY, DXY, CL, RB, VIX, EURUSD, etc. I’ll update each as often as necessary, with the pages dedicated to each serving as info central. Currently, we have trade ideas outstanding in DXY and CL/RB. We recently closed out a profitable trade in gold.
I will dedicate the Current Forecast page to summarizing all the recommended positions so members can get a quick summary of where we are and where we’re going.
As members know, these forecasts and trade suggestions are not made with your particular circumstances in mind. Some of you are quite conservative and merely wish to avoid the next downdraft (not to worry, this will continue to be covered.)
Others of you are quite aggressive and love to trade each recommendation as soon as it’s posted. While you might suffer withdrawal symptoms from the reduced pace of recommendations, I believe this is a more sane approach to trading. In the long run, I expect most of you will favor this shift in focus.
As always, recommendations will be made and results calculated on an unleveraged basis (i.e. cash-on-cash.) If you choose to use leverage to amplify your returns, be aware that you increase your risk at the same time. Anyone who doesn’t understand exactly what this means should not be trading futures contracts. Period.
Although I chart using futures contracts (e.g. CL, which is an abbreviation for Crude Light, West Texas Intermediate Oil futures) there are usually good ETF proxies for those wishing a lower octane approach. I prefer futures only because trading costs are low and they can be traded nearly 24/7. And, remember, you can always trade futures without leveraging your position.
As always, I welcome your feedback. Please reach out with any comments, questions or suggestions.