Nobody Goes There, It’s Too Crowded – PT2

In Part 1 of this blog post I concluded with a lesson to be learned in how bubbles form in markets as small investors begin piling into a rapid growth scenario and that seeing this play out is a good time to back up and take a broader look at what’s going on. Let’s dig a little deeper into how this sort of bubble forms — and finally bursts.

Isolate a quantity of ‘anything’. Buyers buying that ‘anything’ starts driving up the price. Profit-minded investors see opportunity and join in. Prices continue higher. More people notice and buy in. Prices go still higher. More investors see easy money and pile on. This can continue for a long time — as long as buyers keep buying. However, if just about everyone who can buy is “all in” there is no amount of new news, hype, lies, spin etc that can bring any more buying into that ‘anything’. All buyers and all investors are pretty much all in. So what happens? The price stops rising. Investors get bored and decide to exit to chase something else. And only a little bit of selling can start making the price slide. What was once the hottest investment available can appear to sour and then more start bailing out. And more. And more. The price dives for no real fundamental or technical (forecasting) reason. It’s just a simple case of no more buyers to buy and some seller’s selling.

This reminds me of the joke about the woman who asks a friend for her thoughts on the hot, new restaurant in town. The friend responds, “Nobody goes there; it’s too crowded.” Indeed, when a stock or a market or an economy get too crowded, it’s usually a good sign to get out. One never wants to be the last buyer buying or the last seller selling. Especially technical analysis has a very hard time with market turns. Generally technical indicators revolve around the trend so an upward trend technically implies a continuation up and vice versa. This is the quant-driven seduction that eventually motivates the masses to be “all in” or “all out.” Once buying or selling power is exhausted, the trend turns but the systems just can’t foresee that. Instead, it takes the art side of a good trader to “smell” the change based on past experiences in similar scenarios.

And that is the sort of phenomenon we see unfolding before us right now. Behold the record recently set by U.S. investors which no one is talking about: index funds. An index fund is very simply a mutual fund comprised of a collection of stocks from a single index like the S&P 500 or the Dow Jones.

In the first two months of this year, investors dumped a record $131 billion into index funds according to ETFGI, LLP. That’s roughly a third of the total invested in index funds for the entire year in 2016. That, my friends, is what looks a great deal like the beginnings of a bubble. But let’s dig a little deeper and look at why this happens.

Since the election of Donald Trump to the presidency, world markets have reacted sharply and quite positively. Trump’s campaign rhetoric was very pro-business, pro-growth, pro-investment. So naturally, investors and business managers alike responded with anticipation of growth. And investment activity generally follows public attitudes of those at the top of the investor food chain. By another name that might be called “piling in.”

At the bottom of that food chain are individual, “mom and pop” investors. These are folks who might have a few thousand dollars to move around in the market and who, concerned largely with retirement, react very quickly and violently to trends in the economy. So when newspaper headlines are awash with great news about job records and growth, their reaction is quite predictable. If markets and indexes are growing, the easy money is to throw cash at funds which they expect will act like a surf board and ride the wave. That might be called “even more piling in.”

The problem, as I’ve pointed out in previous blogs, is that emotional investors get spooked very easily. There’s a sort of herd mentality among less sophisticated investors who don’t handle money in large quantities on a daily basis. And even the “mom & pop” investors are not so far removed from the last market crash that they have forgotten how quickly record highs can plunge to painful lows. When I talk to such investors — and when readers like you email me — I get a clear sense of lingering skepticism about confidence in this market, the economy, etc. As the unemployment number has fallen back toward a historically typical range, do we really believe that all those people found full-time, (good) jobs? Did all those retail establishments that were snuffed out in the great recession come back or do their slots in local commercial real estate still have “for lease” signs out front?

So here we have a challenging situation of more and more investors piling in to try to ride the new wave (or bubble?) with many of them more sensitive and even lacking trust to do so with confidence. With that in mind, it only takes a small trigger to get folks to consider pulling their money out. And when a few begin pulling, a lot take notice; that’s when the bubble bursts. We’ve seen it before and it is inevitable we will see it again. Markets at record highs don’t keep on achieving higher highs forever and ever. Eventually, they must correct. They always have, and they likely always will.

Per “the trend is your friend”, the trend-driven systems will only project higher highs. Following them means buy, buy, buy. Just as the flip-driven RE bubble encouraged exactly the same. Pile in. Get yours. Don’t miss out. The Jones’ are making a fortune in these markets, so why not you too? Realize those gains. Make it faster. More-more-more! Hurry. Let’s kill the goose and get ALL of the gold at once.

And then the goose is dead. No more gold. No more buyers. Bubble is bursting. Bubble has burst. Run for the exits.

So what to do about this? I’m not arguing that there’s no money to be made on the way to the top. No one knows where the top really is. But rest assured the longer the ride, the closer to the top we are and the sooner the crash will come. That’s why it’s important to be very picky about the stocks and options you keep on the way up and even more strategic about preparing for the ride down. Those require two completely different strategies, but big money can be made both ways.

Prepare yourselves. That means learning how to make money when the markets are falling. Do you understand how to short stock? Do you understand put options? Inverse ETFs? Do you know which is likely to be best for your own risk profile? These are all topics to know or get to know…ASAP. If you don’t know these well, speak up by emailing me and I can cover such knowledge in the near future.

In the meantime, while the fundamentals and technicals continue to encourage “buy, buy, buy” the art-side of my approach is growing caution. I smell a correction. There’s too many higher-highs at record levels for me to believe that records are just going to keep on coming. It never has before.

So do I think it’s time to sell now? No, my long-term views driven by science and art still forecasts DOW 30K in the next few years. But, in the shorter-term I’m more attracted to what might be called defensive or more bullet-proof investing opportunities. For instance, I’ve recently bought into in a very little-known robotics chip manufacturer. This company’s stock is already on pace to double in value in just a few months, and options on this stock are doing far better. No matter what the economy does, robotics technology is here to stay and will grow for the foreseeable future. Bullish plays in that kind of opportunity is where I want to take investing risks now.

If you believe record high markets do not automatically beget record high markets forever (if you lack enough life experience to know better, just take a look at any long-term chart of the DOW, S&P or similar, note record high points and then what follows soon thereafter), you might want to be thinking about those kinds of bear-resistant opportunities too. They facilitate continuing to ride the bull while lowering your risk exposure by focusing in on stocks likely be more resilient when the bear (correction) finally takes a big bite. Corrections tend to be fairly quick, often volatile and typically painful for those that are complacent or are lulled into a belief that bull markets are forever.

Again, if you would like me to delve into portfolio-protecting details, how to profit in bear markets and similar, email me at I write these articles based on reader input & questions so let me know what you want to see or learn.

Nobody Goes There, It’s Too Crowded – PT1

Some of the smartest data crunchers and financial experts in the world have been among the most profoundly wrong when it comes to predicting what the markets will do in the short and long-term future. That’s because investing is as much about art as it is about science…intuition plus facts. If you are familiar with tech concepts like Moore’s Law or just apply some common sense of how the power of computing devices has amazingly evolved over the last 30+ years, one might conclude that a purely quant-based system is unlikely to ever get market forecasting right. I increasingly believe that to be the case.

Why? Because the markets are not purely driven by logic. There is no rigid formula that can always predict if a stock is going to rise or fall. I suspect the hunt for such a system is much like the cosmological hunt for the so-called “theory of everything” — a forever pursuit that never quite reaches a finish line…in spite of how smart our brightest intellects become and how rapidly the very best technology and tools they use evolves. It seems we should be about smart enough and well-equipped enough to solve both puzzles, but both may not be resolved with complex math alone. In short, both probably rely on more than can be deduced in formulaic computations.

With market forecasting, 1+1 can equal 3. Why? Because there is more to where things are going than just math, and even the most advanced AI algorithms have not yet been developed that completely factor in concepts like group emotions, sentiment, and “irrational exuberance”. How do I know this? As soon as anyone would have a perfect forecasting device, how long would it take them to become ruler of the financial world? Answer: almost no time at all. Do we have a sense of any such ruler now?

One may try to argue that the big banks play this role now, but there is competition there — no one bank is thoroughly dominating the others so much that it implies they have perfected a system. Could the owner of such a system hold back? They could, but that would conflict with a fundamental driver of all players in the markets: greed. Could a Goldman Sachs or Chase or Morgan Stanley resist the greed to make more money if all of their investments in cutting edge technology and the brightest brains had actually yielded a perfect system? I think not. Instead even Goldman, Chase and Morgan take their trading lumps from time to time.

Why? Again, there’s more to forecasting profitable plays than just logic-based algorithms. I am a firm believer that the best way to “beat the street” is to blend the fact and quant-oriented science one can apply to the task with the wisdom and experienced-driven art. Those who sell fundamental and technical analysis education products desperately want individual investors to believe that the path to profitable investing is entirely in finding a holy grail combination of technical indicators applied in some unique way. But I believe that’s seeing only a portion of a picture. And the whole picture depends on something as seemingly illogical as good “gut feel.”

Now, I believe there is a huge difference from random guessing, coin flipping, luck and chance and this kind of “gut feel.” For example, I would not encourage all investors to completely lean on their guts to make their investing decisions. This intuition I’m referring to is more about applying experience and leveraging wisdom from many years of observation. What makes a massive number of losers every day in the markets is not a bunch of naive people wild guessing about whether some stock is going to rise or fall. Some of them will have tried their very best, applying technically sound knowledge and leveraging systems to filter their investment selections from all possibilities down to a favored few. And yet, they still lose on some trades. Why? Because there’s more to it than fundamentals and technicals. And this wisdom and experience has its place (I actually believe at least an equal place with the fact-driven quant approaches).

I’m often asked how I would sum up my investing intuition and to what I would most credit my ability to make massive gains when so many are losing their shirts. And I boil it down mostly to a single attitude: watch what the masses do and then do the opposite. Many might tag this as being a contrarian and that basically fits. Make an assumption that the “herd” is wrong and act accordingly. Obviously making financial decisions is quite a bit more nuanced than that, but it’s one good bread rule to trade by — and one you should consider too. Think about the current investment picture. Where is the herd practically stampeding now?

Throughout the millennia as cultures and nations and technologies have changed radically, one thing has remained the same and will never change: human nature. And human nature reveals two driving sentiments in investing, fear and greed, which underpin nearly every emotional decision concerning money. It is eternal and the lessons that can be learned from the mistakes made by those who give in to fear and greed seem to be lost as one generation is replaced by the next.

How many people:

  • Know the ancient fable “The Goose That Laid the Golden Eggs”?
  • Know the moral of that story even from a young age? And yet,
  • Fail to apply it to their investing approach when they are old enough to know better?

So many of the “bubbles” referenced in the financial media reflect that. Just before the dramatic housing market collapse in the midst of the Great Recession, there was a massive bubble in which investors and homeowners wanted to jump in and ride the wave to a financial bonanza. They were not buying a home in which to live. They were not buying a home with an income goal by making it a rental. The game — the intoxication — was to buy a home with the intent to flip it (buy it, hold it for a while, then sell it at a higher price). And since it seemed to be working — even easily — for those early in that opportunity, more and more and more “investors” piled on.

The problem with bubbles is that few people realize, as they get high on the thrill of the ride, that they are in fact in a bubble. So when a bubble finally bursts — as all bubbles eventually do — it comes as a great shock to many of those involved. In short, individual investors see the wave swelling and greed compels them to jump in. As it reaches it’s climax- when they are killing that goose to try to get all of the gold at once- reality sets in. Then fear drives them to run for the hills after the crash, which makes the crash all the worse.

The lesson here is that when we see masses of individual investors and small advisers quickly buying up stocks, funds and ETFs, for instance, it’s probably a good time to stop and take a broader look at what everyone’s so excited about. Fundamentals and technicals may scream to keep riding the trend — just like they screamed to ride the Real Estate “flipping” trend barely a decade ago — but they are only right while more and more buyers keep piling in.

Stay tuned for Part 2 of this blog post as I delve a little deeper into how these bubbles form and ultimately go bust — and what you can do to prevent getting caught up in them. In the meantime, if you have particular questions about bubbles, stocks, options or topics you think I should cover, email me at


Between A Rock and A Hard Place

This week the members of the Federal Reserve Board met again to consider the nation’s monetary policy. And after years of multiple rounds of quantitative easing, rumors of a possible interest rate hike are finally more than mere speculation. The Fed’s decision to hike rates by 25 points is considered to be the first of many, which may lead to a full point.

Unexpectedly, markets responded as though the Fed had actually cut rates as investors, after a short selloff prior to the announcement, began buying again. And, but for some obvious profit-taking, they probably would have risen even further. This signals that the bullish mindset of most investors could stick around for awhile, which plays into my previous posts about a bubble scenario.

The problem with a rate hike by the Fed is that it puts them in a proverbial rock and hard place position. On the one hand, the U.S. is economy is exploding on the heels of the presidential election and the resultant pro-America policies of the Trump administration. And the Fed recognizes that the market is overly bullish and needs to cool down a bit to prevent another bubble like we saw leading up to the Great Recession. So a modest interest rate hike of 25 basis points is the obvious tool in the bag to achieve this.

On the other hand, the Board recognizes that the market generally responds very negatively after a rate hike is announced, particularly in markets that are directly impacted by interest rates such as the housing market. This means that if the Fed continues hiking rates, we’ll almost certainly see a drop in the markets this year. And it could threaten to completely undo the records set in recent weeks by the Dow.

But what’s worse about the prospect of a rate hike is two-fold. First, the Fed recognizes that the U.S. economy is still very much in recovery mode. Imagine a patient just emerging from massive heart surgery. While his recovery is looking great, if he starts rehabilitation exercises too soon, he could cause more damage than good. And that’s the sort of situation in which we find ourselves.

Second, as I’ve mentioned in previous posts, the major contributor to the massive uptick in the American markets are not internal fundamentals (those in many respects still remain weak) but external factors. The growing insolvency of the EU and the struggle of the Asian sectors are driving international investors to the U.S. in droves. This flood of money has fund managers in an unprecedented position where they are having difficulty finding enough investment vehicles to add to their portfolios.

This global instability has added to it the ongoing and increasingly uncertain situation with North Korea and Iran. One minor flare up on the international stage could throw everything off kilter.

Imagine a scenario in which days or weeks after the Fed hikes interest rates for a second or third time, North Korea fires a missile into South Korea. Dominoes in the Asian theater start to fall as allies are pulled into the conflict on either side. Japan cannot escape the conflict, which upsets the trade balance with the EU. China must come to the defense of a fellow Communist nation, and suddenly we have a very large regional conflict on our hands.

The uncertainty that follows such an event will drive the market down as investors seek safer havens for their dollars until things settle down. That’s how quickly a wildly bullish market can turn to the bears.

But this uncertainty also offers unique opportunities with stocks and options provided the key indicators are clear. Catching those opportunities just before a major drop or spike in global markets is what separates the men from the boys. And such a separation is coming very soon, one way or another.

This New Technology Will Change Everything…Again

In global macro-economics there are a million different things that can occur to profoundly affect exchanges around the world and how investors respond in their buying and selling behavior. In my most recent blog I detailed just a few of them as examples for why I believe the historic, record-setting Trump markets are due for a major correction. And now other trading experts are starting to say the same thing.

But every so often I like to pull back a bit and at take a microscope to key developments, usually in technology and processes, which mostly fly under the radar but which have the potential to profoundly change the way the developed world operates. Developments like these, if they ultimately go public, present massive opportunities to get in on the ‘ground floor’ as they say.

As an oil and gas attorney and former landman, I have a special place in my heart for energy development and exploration technology. And it’s not just for drilling and pumping but rather of energy development at-large, whether fossil-fuel based or alternative. And I have maintained for several years now that we’re on the cusp of a breaking point in which the battle for dominance between fossil fuels and alternative fuels will finally be over. And now I believe that point has come.

Global economic statistics demonstrate that as much as 60% of the world’s consumption of oil is due to gasoline production for combustion engines. In short, well over half of the oil used on the planet is for transportation. And with the recent oil glut over the last few years, the oil and gas industry has clawed its way back to solvency in the wake of over-supply and flagging demand.

The question on the astute investors’ minds is whether the oil and gas industry will ever see the sort of boom again with over $100 per barrel. I’ve argued for some time that the answer to that question is an unequivocal ‘no’. The problem is two-fold. First, technology and oil have a love-hate relationship. As new exploration technologies emerge which make oil exploration much cheaper, ever more exploration companies can afford to go into business, drill and pump oil and thus put more oil on the global market.

But therein lies the rub: more oil on the global market presents a classic supply and demand quandary. Greater supply means lower prices and therefore lower profits. And lower profits mean more oil and gas busts. And that’s why investors are looking for alternate energy sources. Not because oil is too expensive but because the long history of the oil and gas industry has been marked repeatedly by the boom and bust cycle like no other industry has.

What could be more stable than oil and gas? Not wind; it’s too sporadic and not efficient broad-based energy production. Salt-water and oceanic energy production is still too expensive and is also not efficient. But with new advancements in just the last couple years, solar energy production is finally reaching the point that was predicted decades ago.

New solar cells being developed in Australia, for instance, will offer the same energy development potential as a roof-top solar panel but in the space of just a few inches square. Similarly new solar roof tiles developed by Tesla cost roughly the same as a traditional asphalt roofing but with the added benefit that they generate electricity.

The greatest challenge, however, to solar energy production hasn’t been merely the efficiency of solar cells…it’s been the inefficiency and lack of capacity in energy storage via batteries. But that problem appears to be solved by the most likely of people.

For decades now the world has increasingly relied on batteries for our ever-growing wireless existence. And the convenience of wireless living rests on the back of battery storage capacity. When the lithium-ion battery was invented by engineer and professor at the University of Texas, John Goodenough, the world took a leap forward in that wireless existence. But lithium-ion batteries brought with them limitations of their own. In addition to having a relatively short lifespan after a certain number of cycles were exhausted, they also presented the threat of catching fire and even exploding.

But now Goodenough has solved the problem with his latest invention which I believe will change the world all over again. Goodenough has reinvented lithium-ion battery now with a solid-state technology which solves all the problems of its liquid-based predecessor. Using solid-state, glass electrolytes, the new battery will charge in a matter of minutes (or seconds in the case of mobile batteries), last longer, are non-combustible and have a much longer lifespan.

Why will this change the world? It’s simple. The greatest impediment to residential and commercial applications of solar energy production is storage and charging. But with Goodenough’s new lithium-ion technology, smaller batteries will store more energy, recharge faster, last longer and be much cheaper. Oil producers beware.

Googenough and his team are currently exploring opportunities to test the technology with companies who have the ability to make commercial applications. Translation: the new lithium-ion technology will be coming to a smartphone, electric car and home near you very soon. And when that happens, companies offering those batteries will see significant increase in related stocks and options.

This opportunity will be not unlike investing early in Ford Motor Company prior to the advent of the assembly line or in Bell Labs prior to the discovery of telephony. It will mark a major turning point in how the developed world consumes energy. And, take it from me, energy is what makes the world go ‘round.

Trump’s Record Market Is Due for A Reality Check

Last week I predicted the Dow Jones would break the record set way back in the Reagan era for the longest winning streak of closes at 13 days. As of this writing, that record is now shattered. And it wasn’t just shattered, yesterday’s Dow average set another record when it crested over 21,000.

With the markets climbing ever higher, I’m even more confident that we’ll hit a ceiling and stocks will come diving down once investors take the cue and start realizing profits. As I said previously what goes up must come down, and the corollary to that investing rule is that the higher it goes the closer we are to a correction.

Last night’s first address to Congress for President Trump demonstrated all the more the confidence investors are putting in his administration’s commitment to protectionism and equally the trepidation of an unbalanced, global free-trade regime.

He also doubled down on his commitment to rebuilding the nation’s crumbling infrastructure with a request to Congress for $1 trillion in spending. That amount would dwarf the appropriations authorized for President Eisenhower’s infrasture program on which we’re still relying more than half a century later.

The commitment to balance trade in the direction of American economic interests coupled with a commitment for massive domestic spending would clearly send investors into a dizzying spell of optimism. And they responded the next morning with a buying spree. But here’s the problem with that…

The higher prices climb the more over-valued they become, and we’ve all seen just a decade ago what happens when a market based largely on paper gets mugged by reality. History has shown over and over again that this is not mere speculation but rather a simple question of when.

Look at it like an airplane that, rather than finding a comfortable cruising altitude, continues to climb… at a rate of ascent that must soon become unsustainable. As a member of the Air National Guard, I can tell you that there is a ceiling beyond which no amount of thrust can keep a plane aloft at extreme altitudes. What happens when it reaches those altitudes? It stalls out and begins a dive…quickly.

That is more or less the same phenomenon we see happening in the stock market routinely throughout history. And it will happen again, and in the not-so-distant future.

What could possibly trigger that dive? There is a near-infinite number of possibilities, but let’s consider just a few. A major terrorist attack on U.S. soil similar to 9/11 could cause investors to stampede for the exits. A medium-sized conflict in the Middle East could flare up constricting oil supplies and, again, spook investors. An announcement by the federal government of stalled first quarter growth and/or lower-than-expected labor participation rates could be a trigger.

The key here is recognizing that a triggering event by itself won’t have any demonstrable impact on actual economic activity. All that is required is that the triggering event causes just a little bit of fear in a proportional number of investors. Once those investors begin selling as a ‘precaution’, other investors will assume there’s something they don’t know and should follow suit. And that’s when the sell-off ensues. It feeds on itself. I could see a 21,000 Dow come crashing back down to 17,000 or less.

Does that mean it’s time for you to run to cash? No. My message here is cautionary… a yellow alert. In other words, be ready to profit whether the ascent has a little more thrust available or if the engine stalls and a short-term plunge takes over. For many investors, it seems easy to make money when the markets seem very biased in only a bullish direction… especially when we’ve become accustomed to a seemingly endless bull market over these many years.

But reality smacks almost everyone when that easy momentum ceases. And every bull market ceases. Paper profits made over many months in the run up to Dow 21K can evaporate quickly for those married to a perma-bull mentality. Don’t be one of those. Complacency can make some just watch their accumulated gains evaporate as they keep expecting a relatively long-term bull market to pick right back up. The catch is that it doesn’t always do that. And short-term fortunes vanish.

Bailing out to cash isn’t an optimal answer either. Instead, it’s a great idea to brush up on how to make money on falling stock prices. One way is what is known as shorting stock. Another way that I favor in most situations is buying put options. Those who understand these bear market tools are the one’s celebrating when the bear reclaims the markets. In other words, while most people are despairing over the erosion of what can be months or years of gains realized in the bull market we’ve all been enjoying, agile investors who position themselves properly can significantly increase their cumulative gains by making money as stock prices fall.

Do you know how to do that? If not… or if you are unsure… email me at and I’ll cover it in a future column. It’s knowledge that every smart investor simply must have. Otherwise, it’s limiting profit potentials to only one market scenario. And why do that? Some of the best profits that investors can make ARE MADE in bear markets. Such markets are usually harsh, making large moves very quickly. The panic spreads and accelerates the fall. Know how to take advantage of such falls and you can make a lot of money very quickly.

I’m expecting just such a correction in the near future… and probably several good ones on route to my longer-term forecast of Dow 30K. Be ready to profit from those corrections and agile enough to buy back in as the bear bottoms out and the bull resumes. If you don’t know how to do that, speak up now by emailing me- – and I’ll cover this topic well in a future column. It’s not a lesson to try to learn as the market is melting down. Be proactive so that you are ready to act with confidence when the time is right. It’s coming. It’s editable. And there will be a great deal of profit in it for those that know how to capitalize on it. Are you one of those of people?