Making money the hard way & losing money the easy way

What do you think is the toughest way to make money in the market? I would say without a doubt it is shorting. Even in a bear market it's very tough to make money by shorting. The reason; timing is critical when shorting. Not to mention the mathematics are working against you as the most one can make with a short is 100%.

Very very few people ever make long term lasting gains by shorting stocks. The ones that do, don't do it by reading charts and trying to time the ups and downs in the market.

Successful short sellers decipher financials. They investigate companies and discover which ones are sick. John Paulson didn't get rich on the short side because he timed the bear market. No, he got rich because he did his homework and decided the real estate bull was a sham. He got rich because he figured out the CDS market would eventually come crashing down. He didn't even time the short sell correctly (he was almost a year too early). But he did hold on till the fundamentals rewarded his position.

I have to wonder how many bears had actually made any significant money during this bear market until the crash last Sept. I dare say the number is probably quite small.

Then we got the crash and a select few bears managed to catch that crash and get rich.

I remember several bears posting at the time bragging about their prowess. I also remember these same bears adamantly defending their heavy short positions as the market proceeded to rally into the Jan. top. I haven't heard from them since.

I've watched for 2 months now as another guru who thought he had the market figured out has squandered most if not all those big gains from last fall by maintaining a bearish position during the second most powerful bear market rally in history.

Folks whenever you start thinking you have the market "wired" I suggest you immediately sell all your positions and go on a 6 month vacation.

Now on the flip side what do you think is the easiest way to lose money?

Let's say you want to deliberately lose money. As long as one isn't trading options or using heavy leverage it's not all that easy to lose money. The reason is; if one went about trying to lose money they would trade exactly opposite of what they thought was going to happen.

However as we all know by now (but are probably still unable to implement) the market almost always does the opposite of what we think it should do. The hardest trade is usually the right trade. So if we were to try and lose money by trading against what we think should happen we would probably end up even or even making money.

I dare say the easiest way for a novice investor to make money is to probably do the exact opposite of what they think they should do. Since novice investors have a win rate of probably about 30%, trading opposite of what they expect to happen would probably mean they would get rich.

Back to losing money. So let's say you want to try to successfully lose money what would be the best way to do it? What would give one the highest odds of actually shrinking ones account?

Without a doubt it would be to short a bull market. So when I see someone say they are short gold or miners I have to wonder if they are deliberately trying to shrink their account.

Trading the bear

Today I want to talk a bit about what one is up against trading a bear market. Why is it so hard to trade a bear market you ask? Well there are multiple reasons.

For one, markets don’t go up the same way they go down. Rallies tend to top out over an extended period of time as the fundamentals eventually reassert and hope slowly fades from the market.

Bottoms tend to be violent affairs as the market runs out of sellers and shorts cover into extremely oversold conditions. So not only is it very hard to spot the top as it happens it’s also very easy to get caught short at a bottom and lose 5-10% in the blink of an eye.

Then we can also throw in the fact that governments hate bear markets. They tend to fight them with the media, money and manipulation. The MMM as opposed to the PPT :)

Of course in a bear market the media is always looking for signs of a bottom. They have a tendency to spin every data point as positive. Let’s face it, they are going to sell a lot more advertising if the market is going up. They have a vested interest in promoting the positive and down playing the negative. At a market top, positive media spin has the effect of extending the topping pattern. We often see false breakouts as bear market rallies top out. These will often catch traders off guard who are trying to trade technicals.

We see incredible amounts of money thrown at bear markets. During the last bear market from 2000-2002 the Fed devalued the dollar by over 20% in an attempt to halt the bear. That, however, is dwarfed by what the Fed is doing this time. When trillions of dollars get pumped into the system it tends to distort things a bit. Let’s face it - money has to go somewhere. Inevitably some of it ends up in the stock market.

Last is manipulation. Now I’m not talking about the plunge protection team. I have to laugh when I see investors blame the all powerful PPT anytime the market doesn’t fall when they want it to. Folks I can say without a doubt that the markets are too big for anyone to manipulate for anything other then the very short term and that includes the US government and the Fed. If the PPT really could control the market then one has to wonder how the S&P went from 1575 to 666 in only 18 months.

That’s not to say the Fed doesn’t pump in lots of liquidity and maybe even at critical times when the market is at an important inflection point. I suspect they do. However those are only going to be temporary stop gaps. The market will finish what it was going to do no matter what the Fed does.

I’m thinking more in terms of changing the rules in the middle of the game. Like banning short sales on financials. Or trying to control long term interest rates. Or cutting interest rates before the open into an options expiration. Or issuing a buy recommendation on a bellweather stock (AAPL) right as the market is about to break an important support level. One never knows what the powers that be will throw at the market next in a desperate attempt to halt the bear forces. This makes for a very volatile investing climate. One that can play havoc with investor expectations and trading strategies.

I’m also quite sure the government isn’t above massaging economic data to achieve their goals. Hell, they’ve been adjusting the CPI and PPI data for years and I’m pretty sure the true unemployment figure is higher than 8.9%

So one can try to trade the bear if they want, just realize you have a lot of obstacles in your path trying to make it as hard as possible.

Now you see why I prefer to just buy into a bull market. If you really want to trade a bear market wait till the commodities bull finally comes to an end. I guarantee the government will be on your side at that point! Of course you may have to wait another 5-10 years.

Targets

I often have investors ask me what my target is for gold, silver or XYZ stock.

I'm not sure how this preoccupation with targets got started. I'm guessing a few bloggers or gurus have gotten into the habit of posting these "targets" as a way to prove their prescient powers.

Hey let's face it, when the market rallies and achieves their objective it does make them look like they knew something that the rest of us mere mortals were not privy to.

Let's dispel a few myths shall we. First off, no one has a crystal ball. That one is written in stone and it hasn't changed in the last 5000 years that I know of.

Now let's take the current stock market climate as an example. Pretty much all gurus recently are posting upside targets. Anyone who has been pumping the bear case has whiffed badly. Those guru's are probably losing followers by the dozens in this climate.

But let's go back to the bull prognosticators for a minute. Since Mar. 9th we have been in the second most powerful bear market rally in history. Seriously, is anyone surprised that upside targets are getting hit? Everything is going up! It doesn't take a genius to figure out most stocks go up in a bear market rally. Hell, one could draw a line at just about any spot on the chart and when it was reached claim "I predicted that".

Just don't break your arm trying to pat yourself on the back. If you really want to get my attention tell me where the top is and how far down the next leg is going to go. Now that would be a nice trick!

I have to ask what's the point of a target? Are you going to take profits if your target is hit? Are you then going to sell short? Tighten up your stops? What do you do if your stop is hit but the stock then proceeds to move higher? How about if your target is hit and you take profits but the stock just continues higher? How does one determine if they should take profits at the first target? Second? Third?

Targets are a great way to impress the masses but I'm not sure how one would go about making money with them.

Folks don't waste your time asking me what my target is, I have no idea.

The Fed's inflationary policies are going to be deflationary

With the economy already struggling with the collapse in housing prices and growing unemployment the Fed in all it's infinite wisdom decided that the cure was to print a lot of money last year.

As many will recall gasoline prices shot over $4.00 a gallon right after the government sent everyone free money in the form of rebate checks. That free money broke the back of the economy so to speak by spiking energy prices at the most inopportune time.

I've been warning for a couple of years that every time the price of oil spikes at least 100% in a year or less it has caused a recession. Recessions are deflationary.

So what was the result of the Fed's misguided attempt to meddle in the markets? That's right one of the most spectacular deflationary events in history.

Now the Fed is at it again (apparently they are unable to learn from their mistakes). Ben is desperately trying to print his way out of the mess he caused by printing too much money.

Amazingly enough he's getting the same result he got last time. (imagine that) Energy prices are spiking again. Gasoline is already up over 100%. Only this time the economy is still reeling from his last dose of cure-all.

The result is going to be an even greater deflationary spiral as high energy prices intensify the economic contraction, causing more layoffs, more bankruptcies and more foreclosures.

I've said it before and I'll say it again. Bernanke can't cure what ails us with a printing press. He can only succeed in doing even greater damage to the US economy. The path the Fed has chosen is destined only to intensify the deflationary collapse.

The Dow:gold ratio is at it again

The Dow:gold ratio completed the 1-2-3 reversal today and is now headed back down.

There seems to be little doubt left that gold's C wave advance is now underway. The last two C waves both lasted over a year. I don't see why this one should be any different.

Granted this isn't going to go up in a straight line (we aren't to that stage yet). Gold will have multiple daily cycle lows and at least one maybe two weekly cycle lows during this wave. However the general direction will be up and the only safe way to trade a C wave is from the long side.

Actually the only safe way to trade a C wave is not to trade. We are still very early in the rally. The safest option is to just take a position and let the bull do what bulls do.

email

Just a reminder to subscribers. I always answer all emails usually immediately unless I'm out climbing. If you haven't heard back from me by evening it's because your spam blocker is intercepting my email. Putting my email address in your adress book will usually cure this problem.

Breakout?

A few days ago I suggested that the miners could break out of the consolidation channel. If they did we could see another violent move higher as the market continues the repricing of extremely undervalued mining stocks.

It looks like the HUI is trying to break out of the channel this morning.

What's in store for miners?

I've posted two charts to give investors an idea of what to expect as the gold bull unfolds. The first chart is First Solar. This company is a great example of what transpired during the final stages of the energy bull (although it's hardly over BTW).

FSLR tacked on over 1100% during the final manic run into the top last year. Now I want you to keep in mind that the public never came into the energy sector. You never heard the guy next to you at the bank bragging about how many shares of XOM he owned.

No, this bull came and went without the participation of the masses and it still managed to take oil up over 1400%.

The second chart is a chart of Dell. This is a perfect example of what can happen when the public goes into an asset class hook, line and sinker. Dell went from a split adjusted price of .27 to almost $60. That's about 20,000%.

Folks there's nothing more emotional than gold. When the public gets gold fever, and they will get it, we are going to see the same irrational moonshot from many of the mining stocks.

I can tell you right now there are going to be some junior miners that are going to have charts that look just exactly like that chart of Dell.

The bull is still in the early stages. I suspect once gold closes back above $1000 the public is going to start to take notice.

Those that can hang on to the bull are going to have the ride of a lifetime. Those that think they can trade something like this are probably going to throw away the opportunity of a lifetime.

Warren Buffett didn't become the second richest man in the world by trying to trade KO or AXP. That's not how billionaires are made.

Billionaires are created by getting in on a secular bull market early and holding on for dear life.

I'll leave you with a quote from Izzy Friedman:

"You can’t make big money, unless you think big money." Others have said it as well – you can’t achieve that which you can’t conceive. In the world of investments, if you can’t imagine something happening, like a stock or a commodity going up many times in value, then it is highly unlikely you would buy and hold such an item if it did, in fact, go up many times."

1-2-3 reversal

I've been expecting a short term low as the market worked it's way into the half cycle low. It seems pretty obvious that low is now in.

I also noted last week in the weekend report that the bounce out of the half cycle low was likely to form a 1-2-3 reversal. That reversal pattern is now in play. Any close back above 930 will invalidate the reversal and suggest the rally still has further to go.

On the other hand a close below 882 would confirm the reversal and put the odds in favor of the counter trend rally being over. It would also make the current daily cycle left translated which would then position the decline into the cycle low later this month or early June to move below the last cycle low of 825.

There is interesting pattern developing in the dollar also.

More in tonight's report.

Fighting with the bear.

The first chart is about what I suspect has happened to most retail investors trying to outsmart the bear. They've made multiple attempts to sell short the market and gotten stopped out. What they are actually trying to do, whether they know it or not, is pick a top. That 's pretty hard to do. Actually it's damn near impossible.

All they are doing by trying to pick a top is whittling away at their cash. Now let me remind you that this is a bear market. As such the second chart probably depicts the most likely future direction of the market.

If that's the case (and I believe it is) any one of those entries in the first chart will most likely end up being a great short entry by the time the next leg down hits bottom .

What’s the point of taking multiple losses trying to time the exact top? I can guarantee you won't do it other than by sheer luck. Any of those entries is ultimately going to be a great trade if one would only let their trade work.

If you are going to be a trader (as opposed to an investor) it's always going to come down to position size. Unfortunately most traders probably had too large of a position and couldn't weather the draw down as the market continued higher.

Now let me show you what else is probably going to happen to the average retail investor (chart 3).

He’s going to be so nervous from the multiple losses taken trying to pick the top that he won’t be able to hang on for the run down into the bottom. Every little pop higher is going to knock him out of his position. Ultimately I expect he will finally have the confidence to hold his position right about the time we get the next major low and then of course he will cover way too late and lose almost all of the profits (if he actually made any) on the way down.

I'll say it again. Bear markets are tough to make money in. If there isn't a bull market then and only then will I fight with the bear. However as long as there is a market that's going higher it's much easier to just jump on the bull and let it do what bull markets do.

Timing mistakes get corrected in bull markets. Profits are unlimited. Timing mistakes in bear markets get amplified and profits are limited to 100%.

This is why I don't waste my time and capital on trying to short the market. I'm not going to get rich by shorting stocks ...well unless I'm willing to use leverage.

Leverage is the reason the global economy is in the shape it's in. Many of the brightest people in the world have now been taken down by leverage. Do you realistically think that you can play with fire and not eventually get burned? I can assure you that you aren't fire proof. You probably aren't even flame retardant.

Think like a value investor

We are an instant gratification society. We want it and we want it now! Most investors are deathly afraid of a drawdown. We want to pick the exact bottom and then watch our stock jump 20% the next week .

The reality is that there are only a few times when one can expect explosive moves higher.

You can get a violent repricing in a sector after an irrational selling climax takes valuations to absurd levels. Once the market calms down and sanity returns smart money quickly jumps in to scoop up great values. This is exactly what happened at the Oct. low in the mining sector.

The HUI jumped 100% in about three weeks.

Another time to look for explosive moves is when the fundamentals are rapidly improving for a sector. It just so happens that the cost of energy is a miners biggest expense. That cost was cut by almost 2/3 when oil crashed.

The third time to look for explosive rallies is during a bear market rally.

Now if one can spot a situation (very rare) when both extreme undervaluation and rapidly improving fundamentals occur at the same time ... look out.

At times like that we don't want to get lost in the technicals. At times like that we need to think like a value investor and scoop up the bargain before it disappears (and I guarantee it will disappear).

We are at an interesting juncture right now with the mining stocks. They have been consolidating the big move out of the Oct. low in a gently advancing channel. However if they can break out of that channel we could see another violent repricing event because lets face it, they are still way too cheap.

The question one has to ask themselves is whether they are going to let the technicals or the myriad bearish opinions talk them out of the deal of a lifetime, or are they going to think like a value investor and take advantage of the half price sale?

Dow:gold ratio turning down again

I'm watching the Dow:gold ratio right now. It's in the process of putting in a 1-2-3 reversal. If this ratio closes back below the initial reaction low it would be a pretty good sign that the longer term trend of stocks down and gold up has resumed.

It would also be a strong signal that gold has indeed entered the next C wave advance. The last two C waves lasted over a year each. I suspect this will be the case this time also.

Follow the money

During the market crash last Fall one asset and one asset only held above the 200 week moving average. That was gold. Despite the impressive rally there is only one sector that has regained the 200 DMA.

With the move last week, the miners have now joined gold & silver as the only other sector holding above the long term average. I'll also point out that the 200 is still moving higher in all three. One can't say that for almost any other sector.

All three remain in a secular bull market. Again, not something one can say for almost any other sector.

One can either fight with the stock market (is this a counter trend rally or a new cyclical bull ?...it's a counter trend rally BTW) or they can follow the money and just jump on board the bull and go along for the ride.

Bull markets...go up!

I see quite a few investors trying to find reasons for why gold will go up or go down, depending on whether they are bullish or bearish.

I've got news for you it's a waste of time. The reason gold is going up is because it's in a secular bull market and that's what bull markets do, they go up!

Here's the latest rational: "Gold is a safe haven and it rallies in times of uncertainty" The reverse of that is of course that gold will drop as long as the stock market is rallying.

Now think about that statement. It's got to be the most ridiculous rationalization I've ever heard.

Let me ask you this, did gold go down from 2002 till 07 when the stock market was in a cyclical bull market? It did not!

Did gold go up when the market was crashing in Sept. and Oct. last year and uncertainty was through the roof? No!

Did gold go down when the dollar was rallying from Dec. to March? Wrong again!

I guarantee no one even thinks twice about what the dollar or stock market is doing when they buy gold. They buy gold for one reason and one reason only. Because it is moving higher or they think it will move higher.

Last summer when tankers were setting in the gulf with no where to unload their oil do you think anyone was paying any attention to that at all? No they were not. They were buying oil for one reason, it was going up.

The only reason anyone needs for buying gold is that this is a secular bull market and secular bull markets don't end until the last buyer has bought. In the gold market that means an unbelievably huge parabolic spike.

We aren't even remotely close yet.

Relative strength

About every 5-6 months the market experiences a major weekly cycle low. These major cycle bottoms almost always involve some kind of panic selling and in this bear market every one of them has taken the market to new lows. At these panic lows the selling is usually great enough to have some effect on every asset class.

I thought it would be illuminating to see what sectors if any showed relative strength as the market fell into the last weekly cycle low in March.

There were a couple of sectors that showed mild relative strength. Semis and emerging markets both held about 11% above their Nov. lows at the March bottom.

China held about 24% above the Nov. lows.

Internet stocks and gold held almost 30% above the Nov. lows.

Not surprisingly the big winners were silver and miners at 47% and 73% above the Nov. lows.

I'll also point out that the entire precious metals sector did not make lower lows at the Nov. bottom. It was the only sector that was already showing relative strength as the market panicked into the bottom of one of the worst crashes in history.

There seems to be a big push into energy as this rally gets underway. That's understandable. Investors always try to return to the sector that did so well for them in the past. Just witness how sharp the rallies were in tech during the collapse of the tech bubble from 2000-2002.

I can't tell you how many friends and acquittance's have asked me if it's time to buy real estate.

As you can see energy showed no relative strength at the last bottom and both oil stocks and solars made new lows. Oil itself was actually weaker than the market and continued to drop into Dec. after the market had already bottomed.

The market has been telling us loud and clear where the big money is going if one will only listen.

Gold not far behind

Today gold followed silver and broke above the down trend line. I think the odds are very good that the B wave decline is over and gold is just starting the next C wave advance.

Gold is now creeping higher and fighting for every point. True bull market action and exactly what we want to see :-)

Silver train is accelerating

On Monday I noted the breakdown of the T4 pattern in the gold:silver ratio. I suggested we could see a violent move higher in the silver market.

Today silver broke through the down trend line. Intraday silver has tacked on over 12% in only 3 days. Like I said, the repricing in silver could get violent as silver moves back to a more historically "normal" price compared to gold.

Even if gold stays at $900 silver would have to rise to $25 to approach fairly valued.

The silver train may be leaving the station

I've been watching the gold:silver ratio form a T4 pattern (the technical rules can be found in the lower right hand side of the home page) for a couple of months now. That pattern appears to have broken today.

Silver, like miners, is grossly undervalued right now. Knowing how volatile silver is, the repricing when it comes could be extremely violent.

The historical average is about 20-30 oz. of silver per 1 oz. of gold. Before today it took 70 oz. of silver to buy 1 oz. of gold.

Agriculture Vs. Precious metals

Commodity bulls tend to unfold in two phases. Whatever under performs during the first phase tends to lead during the second phase.

During the commodity bull of the 70's agriculture led during the first part of the bull. In the second phase it was energy and precious metals.

This commodity bull was the opposite with energy and base metals leading during the first phase. Now it's agriculture and precious metals turn.

The question that many have asked is why I'm not invested heavily in agriculture if this sector should also outperform.

The reason I'm concentrating my investments in precious metals is because we are never going to see the public pile into the agriculture sector. It takes the public moving into a sector to create a bubble. That's what I'm looking for is to ride a bubble to it's top.

It's simply too hard for the average American to buy wheat futures. However it's very easy for anybody to buy gold and silver.

During the last bull market for precious metals gold rose by a factor of 24.28. A similar move this time would take gold to $6214.

To make that kind of bubble type move one needs to be in an asset that is easily acquired by the public. Gold and silver are that asset class.

Crystal ball

I posed this question to subscribers a couple of weeks ago and now I'll ask it again to readers of the blog.

Let's say you have a crystal ball. Yes, an actual working crystal ball. The one catch is that the crystal ball only allows you to see 5 years into the future. It doesn't tell you what's going to happen next week or next year only whats going to happen 5 years from now.

Now let's say that five years from now your crystal ball shows you that the price of gold is going to be $5000 an oz. and silver will be at $150 an oz.

Knowing what the future holds do you take a position in the precious metals market right now and then just start ticking off the days till retirement in Maui or do you worry about where gold is going next week or next month. Do you sit in front of your computer constantly trying to second guess every volatile swing in the bull market?

Now let me ask you this. How many of you think the Fed or any central bank for that matter is going to be raising rates and withdrawing liquidity anytime soon? We all know what happened to the economy when Volker decided to raise rates and fight inflation in the early 80's. It created a double recession and hard times.

Bernanke and every politician in the world is currently hell bent on avoiding pain. How many of you think that we will see the Fed create intentional pain anytime in the future like Volker did? No?

How many of you think they should start ticking off the days to Maui?