"Hey Steve, my old day-trading buddies just called... The market's up... They're back into it again!"
I couldn't believe my ears... "What day-trading buddies?" I asked politely.
"Back in the late nineties, I got into day-trading with some other guys. I turned three thousand bucks into fifteen grand!"
"Then what?" I said... I knew that couldn't be the end of the story.
"Then I lost it all..."
That's a real conversation I had this week. This friend was so mesmerized by the idea that he could turn $3,000 into $15,000 again, he'd put the outcome of his trading a decade ago out of his head.
The stock market's up 50% since March. Apparently, some of the old dot-com traders are getting back in.
Back in March, when I was saying "buy," those traders were nowhere to be found. But now that the market has run farther faster than anyone can remember, they're getting in. They're late to the party... but that doesn't mean the party is over just yet...
If you are nervous, you can bail now. But here's what I suggest instead: Change seats. Move to a seat that's closer to the theater exit.
I believe we'll see a rush for the exits sometime in the next two months. Sentiment is simply too optimistic. The trend is near its end. So we need to position ourselves close to the exits. What I mean by that is, we need to set our trailing stops and follow them... tighten them up if you must.
Do what you can to keep your upside potential here... but ensure that your downside risk is minimized. The best tool for this job is trailing stops.
You might wonder, "Steve, why even bother hanging around in stocks now, when you know sentiment is so bullish... when you know investors are so optimistic again."
The short answer is, you can potentially make a lot of money if a "blast off" stage materializes. You don't want to miss that.
I learned the longer answer from the writings of legendary hedge-fund manager George Soros. Soros says, find "the trend whose premise is false, ride that trend, and step off before it is discredited." That's the goal here. Another thing Soros said (according to fund manager Stan Druckenmiller) is"It takes courage to be a pig." OK, then that's what we're doing, too.
The stock market is up 50%. From this point, the trend is "false" – it's just speculative money piling in from here. We don't believe in it... but we'll ride the trend as high as we can.
Through our trailing stops, we hope and expect to step off without a bit of stress when the time comes, before the crowd runs for the theater exits.
Also, the statistics back up what I'm describing...
My friend Jason Goepfert at SentimenTrader tracks investor sentiment. His data suggests the potential for what I've described.
For example, his "dumb money" confidence index recently jumped above 70 – a very high level... which in itself is a danger sign. And whenever the difference between the "dumb money" confidence and the "smart money" confidence gets wide, Jason gets interested... Right now, both of these are happening.
Jason crunched the numbers for when those two things happen together and found that stock market history shows what I've described... Whenever the crowd gets this optimistic, the market can run higher for awhile... before it gives all those gains back.
Times felt terrible in March. As we said here in DailyWealth, that was the time to buy.
Things feel much better out there now. So the end of the rally is closer.
But don't bail. Have courage. Keep holding your positions, as there could still be significant upside in the next few months... Just make sure you have a close eye on the exit door (through trailing stops), and pull the plug without hesitation when your trailing stops are hit.
We have the potential for a blastoff, before a bust. Position yourself accordingly.
Today, we check in with one of the ultimate "boy, we really did it this time" indicators for the U.S. government...
As we've written about many times, the U.S. government is currently carrying out the largest E-Z-Credit program in history. It's giving what amounts to free money to clunker owners, automakers, bankers, and thousands of mortgage speculators.
Common sense says that there ain't no such thing as a free lunch, so it's reasonable to worry about holding paper dollars and U.S. bonds. If the government keeps handing out free money and credit, it's going to dilute the value of existing dollars... which spooks creditors into demanding higher interest rates to compensate for the risk.
We track this potential problem with several tools. One being gold stocks. When the dollar loses value, gold rises. But the ultimate way to track this problem is through the benchmark 10-year Treasury yield. This is the interest rate Uncle Sam has to pay in order to borrow money. As you can see, creditors have sent this rate into a series of higher highs and higher lows... and the 10-year yield is near a one-year high.
We're About to See a Massive Rally in the Dollar By Tom DysonTuesday, August 11, 2009
When sentiment gets this lopsided, you can expect a massive trend change. For example, between March and July 2008, bullishness toward the foreign currencies and against the U.S. dollar reached similar levels to where it is today...
My Real Objection to 'Paper' Gold By Chris WeberMonday, August 10, 2009
In my experience, I believe that it is the hardest thing in the world for any investor to first identify a bull market in an asset, take a position in it, and then hold on until near the end of that bull market.
Two Lessons I Learned in Pigeon Forge By Dr. Steve SjuggerudFriday, August 7, 2009
We're heading home today. I'm leaving here with two important lessons... two things that will allow me to lead a "richer" longer life...
Here's How China Is Fleeing the Dollar By Matt BadialiThursday, August 6, 2009
Right now, that much gold is worth about $32.6 billion - just 2% of China's total dollar reserves. China's frantic to exchange more of its trillions of dollars for gold.
