Back in mid-March when we first talked about The Mistake You Are Dying To Make…specifically the temptation to buy gold shares because they were “cheap” relative to where they had been and “cheap” relative to gold…which somehow meant that buying them was sort of “value investing” for the long term…my advice was, ” Don’t buy a falling market…as Gartman says, when a market is going down you have no idea how far down…down is.” Well the index of gold shares is down ~20% since then, and gold just closed at a new low for the year.
People will have opinions about what a market SHOULD be doing and they will act on those opinions. For instance, they may think that gold SHOULD be going up because the central banks are printing mountains of currency. They think that gold shares are a “steal” because they are “cheap” relative to gold, therefore it makes sense to buy into a market that is falling like a stone. I’ve been short gold since Feb 8 because it seemed to me that the market was going down, not up.
It reminds me of my description of a market strategist: he is a guy who forms an opinion about a market, gives you several reasons why he is right, and will stick with his opinion through hell and high water. When the market goes against him he digs in his heels instead of cutting the trade and says something like, “It’s taking longer than I thought for my view of the market to manifest, but I’m more convinced than ever that I’m right and the market is wrong.”
I look at a market and see where it has been and where it is now. I form opinions about where it might go next, and why…I call that anticipating. But instead of selling a market because I have a bearish opinion I wait for some confirmation that the market is doing what I think it SHOULD be doing before I put on a trade.
I realize that markets often behave differently than I think they SHOULD. That tells me that I didn’t (and couldn’t) know everything about that market when I formed an opinion about where it SHOULD go…something that I hadn’t thought of or wasn’t expecting came along and had a big influence on the price.
As a trader I have market opinions all the time….I’m always looking for an opportunity. But since I’ve seen so many of my opinions (and the opinions of others) turn out to be wrong I don’t want to “bet my life” on any of my market opinions. I’ll wait for a confirmation to put on a trade but if the trade isn’t working I’ll close it out rather than deny the fact that I’m wrong on the trade. I want to clear my mind…be open to seeing what is happening in the market…and find an opportunity to get into a trade that works…rather than wasting time and money on a trade that is not working.
I can’t imagine how much money has been lost by people buying into a falling market thinking that they were getting a bargain because it was cheaper than it used to be…only to watch it fall lower and lower…as they move more and more into denial over their losses. Maybe that’s human nature, but its not a successful trading strategy!
I continue to trade on the expectation that stocks and commodities are headed lower and the USD is headed higher.
