Tuesday, May 08, 2012


First of all, I would like to thank readers for the nice comments, I guess I am a poor man's Dick Vermeil when it comes to my dogs. Also I got a call from someone, 314 area code, that I could not make out the name or a return number. If you are reading this, thank you and my apologies for not being able to call you back.

I took a day away from the markets yesterday and played in a Pro Am golf tournament with my teacher. I was hesitant to do this since I have not been playing well and I did not want him to feel bad. He is an excellent instructor. I wound up beating him by 5 strokes and played reasonably well hitting 15/18 greens. The other two players thought I was a pro also and were surprised when I insisted that I was not and never had been one. My instructor had a tremendous warm up session as we shared a slot at the range hitting 5 shots at a time then letting the other guy hit 5 etc.. His shot pattern was so tight, his worst and best shots were not more that 10 yards across from right to left. Of course my spread was about 80 yards, hitting the ball all over the place. However, a funny thing happened once we got on the course, which is the lead in to today's post.

I am a very long hitter of the golf ball, always have been going back to my beginning days. There is just something about distance on a golf course that changes how others around you play. I actually drove the ball poorly yesterday, not nearly the distance I normally do because I was not fully releasing being afraid of a left miss which is my nemesis. As a result I hit a lot of high cuts that found the fairway, yet being shorter than where I would typically hit the ball. However, even with that in mind, many drives were still well over 300 yds. I think what happened to my instructor who is a decent length driver of the ball himself but not as long as me, is he starting pressing a bit. I know a fair bit about a golf swing, and I noticed some lower body movement with him on the golf course that I did not see on the range. I did mention it to him once we started talking about him hitting the ball poorly. I think he felt the pressure to just be the best in all phases when playing with us, and he can't hit the ball as far as I do, so he started over swinging a bit and got a bit off.

He is a very good player, and I look forward to playing with him again soon. There is no doubt that he is better than I am, although I doubt he has more talent, he is just much more refined and experienced than I am.  I have seen this happen many times over the years when I have played with people and cranked out a few long drives. After that people seem to start hitting their drivers poorly trying to keep up. This is the lead in to today's topic. 


We sat down for lunch afterwards, and the topic of the markets came up like it always does. One of the guys in the group worked for a company that puts together pools of money and directs it into hedge funds, so he had some knowledge of the markets. He was of the opinion that a huge decline was coming in stock prices, but was not sure when. In situations like this I always have to be aware to stick to my game. Most regular people are not as nimble as short term traders are. They want to make a decision and stick with it for a long time, they are in or out. As a result, if you tell an average investor to get out the big one is coming, and you are wrong, you have really done some damage to him. He will not be nimble enough to go back in once the market starts moving, thinking he missed the low and it will come back. I do know people that are still waiting to get back in on the long side, having missed the 09 low. Ironically it is now time to get out, yet they are looking at getting back in.

I am also of the opinion that the big one is coming, but I do not know when. I have stated many times in here the reason I think a huge decline is going to happen again. I feel that market manipulation on the scale of what we have seen in the last couple of years, sets the stage for the inevitable reversion move. This move will be much larger than it otherwise would have been. The bubbles we have seen happen over and over in different places, are the result of manipulations of market prices. It becomes a blase argument that we should let natural market forces take things to where they should go. It is another matter for us as human beings to stand idly by and watch the world crumble in the near term while the equilibrium is being established. The temptation is just too great for those who have the power to manipulate things, to pass on it. As a result they don't pass on it, and we get bubbles. You cold certainly argue that we have bubbles in stocks, gold and bonds right here.

In the above chart we can clearly see from a COT perspective, we have the makings of a major top. We have a huge Small Spec long position combined with a substantial commercial net short position. This means we have a setup for a decline. There is absolutely no way of knowing if it is a small one or a large one. I think it is a fruitless exercise to go back and find huge tops and bottoms, and think about how much money you would have made had you held the positions for a long time. The fact of the matter is it is very difficult to hold positions for months at a time, especially when you have large open profits. We see so many violent swings in prices, it is hard to be confident enough that your whole huge gain won't turn into a loss.

I like the setup here for the down side, and I will be looking to short rallies in most markets on the next bounces. My golf instructor is a bit worried bigger picture about his retirement portfolio and asked me what he should do. What I am going to recommend to him is index annuities. These products protect against the down side, and let you participate in the up side albeit on a less than full basis. People may have to do some work to find these, and I am sure money managers don't sell these for the most part because of the nature of what they are. The only problem I see with this is if we have a huge meltdown, the re-insurance aspect of these products may be bankrupt and therefore the obligation could be defaulted on. I am not a money manager so I could be wrong about that. In any event, it is about the best way I can think of to protect yourself. I don't think putting the money in bonds or gold is going to be a good idea. The bond yields are too low, and Gold will go down with the ship.

Good Trading


Vikas said...

Hi Chris, sorry again for your dog. Can you please help me a question? I'm thinking of going long Silver here, do you think its a buy here or is it due for a decline with the rest of the market?

Anonymous said...

Hi Mr. Johnston,

I'm terribly sorry to hear about your dog Zeus. However, from the way you described it, you should feel quite proud about what you were able to give him in the years before his passing.

I had a curiosity about something you frequently refer to, that is "the big money". Sometimes you talk about getting the trades that make you "the big money". When you started posting about your bond trading system, I wondered if the profits taken from those trades were considerably less than profits you refer to when speaking about the "big money". But then today, when speaking about holding for months on long trends, you basically said you'd pull your profits out when they reached a substantial size (as most people should do). So I was really just curious about the context, what is "big money"? Is it anything over 2 times margin on a contract?

Also, I've been watching corn and sugar fairly closely, as commercials seem to be getting on the thin side of the net-short, while OI has been dropping. What are your thoughts?

Michael Tredr said...

as I'm commenting, I'm looking at the moves on the indices. it's obvious that they've been bought but a part of me feels like the rubicon has been or is close to being crossed. that being said, i know it sounds so reductionist but there really is solid grounds for which to exercise gamely prudence when it comes to calling tops or bottoms.

Chris Johnston said...

The bond system is small money just short term scalping. I would consider big money to be 3 times your risk on a trade or more. However if you are day trading the es and risking a point and making 3 that is still small money. Just common sense really. I think a trade that makes more than $10,000 is a pretty good chunk for just a short term trade.

Sugar is in such a strong down trend that I don't see a long at the moment and I have not looked at COT much there since the price trend is so strong down.

Silver is a decent picture from a COT perspective but again a very strong down trend so not a long to me here. For all we know the 50% drop has begun in the gold and silver markets, but the commercials have been buying and the critical low levels of support have not broken yet

Michael as far as calling tops, I am always tempted to look at doing this, but fortunately I have been run over enough time trying to pick them that I have been trained not to do it.

Anonymous said...

My condolences for your loss. Give the healing time. Always concern dealing with the markets in time of grief, yet know you are a professional. --Mark