We all have learned to look for anecdotal evidence that a mania has hit it's crescendo and is due for a reversal. There are countless stories of people saying or doing certain things right at the peak of a huge price bubble. The above chart is my own personal wake up call from 1999. As that year wore on I became increasingly uneasy with what I saw happening. I had friends who knew nothing about trading making millions of dollars doing all the wrong things. I tried to tell them at some point what they were doing was not going to work anymore, but alas nobody listened. I felt like a complete imbecile watching all these amateurs make all that money while I was plodding along doing ok but certainly not housing it like some of these guys were. I wondered if all the years I had put in meant nothing, and the world had passed me by.
As we got into the fall, I decided for reasons I don't even recall now, that AT&T was a stock I wanted to buy so I bought it where indicated on the left portion of the chart. I had no stop and held it through that big decline like every other idiot who had become a "trader" would have done. I held it because of the ridiculous trend just thinking it would eventually come back, it did as you can see. I bailed it in early December for a small profit thanking the trading gods that this blunder did not cost me any money. It was then I decided to take a week and not trade at all and try and get some type of handle on what was happening. It was during that week that I discovered something I had not realized for some reason. That entire year I did not have one single losing stock trade, not one! I had only made 25 of them and all 25 were winners, every single one. I was trading more commodities at the time, so stocks were kind of an afterthought.
This was not something I felt good about at all, in fact quite the opposite. I had made some dumb ass trades amongst those 25 winners that never should have worked out. This was a sign of something terrible to come was the conclusion I drew. The next Monday I went into every single account I had retirement, 401k's, IRA's and went flat across the board in equity exposure. I knew something bad was going to happen. I did not know it was going to be as bad as it turned out, I wish I had. I just knew that something was terribly wrong with what was happening. I don't care how good of a trader you are, nobody hits every trade, nobody. Needless to say as I watched the rollover happen and got short and made some money, my feelings were justified in spades. I watched some of my friends lose all of their millions and even more buying on the way down.
Why do I bring this up today?
In my Saturday golfing group I talked with one of the best players this past weekend who often brings up the markets with me, he likes to dabble a bit. He told me a story that so eerily reminded me of the AT&T trade I made 11 years ago above. He said he had not been able to get anything right so he decided to just buy something that was going way up while it was rising, QCOM. His logic was that he needed to do something different since he was missing the boat. Of course he bought it right before the Japanese nuclear meltdown, and wound up instantly $8 per share upside down. However, he has been holding it and it is getting back up close to where he bought it. Life is good..... or is it?
This is my anecdotal story for today as to why I think in general we are heading for a significant top in the next couple of months. The one difference which makes this harder to time than the Internet bubble, is that as bizarre as that was, natural market forces were allowed to work. That is not happening now, the market is being completely manipulated by the government. It is really going to be their call as to when the top happens. If they go on with QE3 and 4, and 5 etc, this could go to incredible levels. We have no idea how long they will continue this, and also if they won't just step right back in if a break does occur when they stop. This is very challenging for those looking for this big top. How do you position yourself for it etc..
It really depends on your style, but when you have the trends so strongly up across the board, I really so no reason to be short now anywhere. If this is one of those scenarios where just out of the blue it breaks ( what I think will happen ), there is no way to time that. You are going to run out of money stepping in front of this bad boy in the mean time so do not do it. There are individual stocks that have weekly down trends in them now, so if you must short something play there. Shorting the indexes is not a good idea right now.
I have mentioned Silver recently as a market to stay clear of and today is exactly why you should continue to stay away from this. As I prepare this the daily range today is over $30,000 per contract, that is no typo. This market is on a crash and burn mission that is going to be marked by insane volatility in both directions. I have no idea if the top is here or not, but I do know I have no desire to trade any market that has this type of volatility. This is a once in a millennium occurrence just watch it like a fireworks show on July 4th. It is bound to get even more and more fun to watch. To trade, no thanks. I suppose if you think you know when the top is you could try buying some out of the money options and limit your exposure that way and hope you get it right. I will not be doing that but it is a possible way to take a swing at this. I think the top is near when I see days like this.
I am looking at Cattle on the long side and still looking for bean complex longs. I have been debating and Canuck short if Friday's low goes but do not have any orders in on that. Take a day to celebrate, that scumbag is dead so here is to the SEALS!