Warren Buffett, one of the most successful and richest investors of all time, long-time owner of the established conglomerate, Berkshire Hathaway, and mega bull has recently turned bearish on the US stock market. Granted, he has been saying this since the April rebound, but he finally put his money into action.
Although Buffett would probably never short the market, he decided to get rid of his bank stocks by dumping JP Morgan, Wells Fargo, Goldman Sachs and other banks with smaller positions. He sold over 250 million shares, hundreds of billions of dollars worth in total, but that's not all.
The oracle of Omaha had also replaced his stake in bank stocks for a gold mining company, Barrick Gold Corp (NYSE: GOLD).
But why sell bank stocks when the Fed has funded them with trillions of dollars and pushing the S&P passed all-time highs?
Surprisingly enough, bank stocks have largely under performed the market in this latest bull rally. This is due issues regarding credit and debt; Analysts expect banks to be close to $900 billion in losses by 2022, according to CCN.
Here's the indicator Buffett uses to measure the Wilshire Stock index valuation compared to overall GDP. The way it's measured on this site (which is the accurate way) is by taking the annual GDP from Q1 and using that as the denominator throughout the year. So, it is basically the index divided by Q1 GDP.
In most recent numbers, GuruFocus has us at 179%, which they consider 'significantly overvalued' for the market. They also predict a 2.9% decline in stock market returns this year.
It's hard to predict what is going to happen in the market with tons of factors at play. For example, two weeks ago, jobless claims dropped into the 900,000s range, and investors believed the economy was recovering. The market shot up. Last week, jobless claims (which have been driving the market either up or down) reported back over 1 million at 1.1 million. Despite bad news, the market shot up harder than the previous weeks.
The problem investors are running into is that Wall Street will tell you that the economy doesn't reflect the stock market. And when there's bad news about the economy, the market tends to go up. However, when there's good news about the economy, that news matters all of the sudden, and it causes a buying frenzy. As an investor who's got most of their money sitting on the sidelines since April, it's frustrating to try to get an idea of when is the best time to buy. Do we brush off the fact that the US is in a recession? Do we join the hype train and ride with the bulls?
The answer is painfully simple: Bull and bear markets all come to an end eventually before it resets. Look past the trees and view the whole forest. Is a vaccine going to fix the damage already caused by the pandemic? Most stocks on the S&P 500 are showing negative returns expect for a certain few. There is lasting damage to the economy, and if you were forward-looking, it would make sense to see the market reflect that in stocks. Some analysts are talking years of rebuilding before the economy 'normalizes' again.
Here is the US30 on the 4H chart showing long wicks on both the tops and bottoms of several candles. That is a big sign of uncertainty where investors can't decide on what to do. No one really knows what is about to happen in the next week, month or year, not even Buffett himself. It's about being rational and understanding what makes sense in the long run.
Put yourself in an unbiased position and ask, 'should the S&P really be at all time highs right now?' The obvious answer should be no, but again, the market does not always make sense.
What to Look Out For This Week
Watch for vaccine news: This week may see another frenzy of buyers as a successful breakthrough on treatments to the coronavirus will most likely become approved by medical officials.
Watch Big Tech: The stocks like Amazon, Apple, Google, etc have been the main drivers of the market. Analysts are finding long entries on all of these companies excluding Netflix.. Traders are likely to follow.
Watch Technicals: This is definitely a trader's market now. News does affect price, especially good news, but indices are respecting lines of support, resistance, breakouts, wedges, etc. On the 4H chart, the US30 broke above the wedge with a strong green candle. A break in highs could mean that the SPX500 might want to continue its run for now.
Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.
There's a phase most traders reach when they begin learning to trade and it becomes a struggle to get past this first phase. Let’s call it the Analyst Phase. It’s a great place to be however not where you want to stay!
Let me explain.
This is the stage in your development in becoming a trader where you can perform some great analysis. You can break down a chart really well, explain what's been happening in the markets, Understand fundamental analysis, what different levels are showing you on the chart and what may happen next in the markets. In other words your becoming a financial analyst.
The problem with this phase is, that's where the process ends... as a piece of analysis work! People that are stuck in the Analyst Phase aren't using their analysis to complete their trading ideas and actually execute trades.
In other words, they're a great analyst & market commentator, but they're not a real trader yet.
If you're stuck in this phase ( Many traders get stuck here ), it's likely you're there because of one of these points or both of the points I'll be discussing. These two tips should help you to start opening your eyes to what you are doing and take the leap into the real market from analyst on the side-line to a real profitable trader.
Imagine a situation in your life outside of trading & the markets (yes, life outside of the markets does exist! ) where you are looking for something, you are trying to find something .
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Now, think how successful you would be at finding that thing if you actually had no idea what it was you were looking for. It would be like trying to find the pot of gold under the rainbow.
Occasionally you might find the thing just by stumbling upon it and realising that it was, in fact, what you were looking for in the first place. However, in most cases you're going to go through a process of searching and searching until you either go without finding anything or just give up on the search (finally admitting there is no pot of Gold at the end of the rainbow).
That sounds stupid & crazy, but this is what traders that are in the Analyst Phase do. They're looking for trading opportunities & analysing markets but without knowing exactly what a trading opportunity is to them. They don’t have a system! Many traders don't have a trading system and ends up setting themselves completely unachievable goals. To learn more about setting realistic goals read our previous article on goal setting for traders https://a1trading.com/setting-realistic-trading-goals/
Of course, the markets are dynamic and you're not going to get a completely identical situation for every trade set up, every trade is different, but there should be certain characteristics or criteria for what a trading opportunity a real profitable trading opportunity involves.
That should be beyond simply the confirmation points for the entry to go long or go short at a given level, but also the overall situation and movement of the market. How long would you expect to be holding a trade for ,What sort of outcome is ideal for your trading style ? Is it one move in the market, are you trading the structure of a new trend? Do you know what are your exit criteria ? When do you know when to move your stop loss to protect your capital ? Do you know where to set your stop loss?
By understanding what sort of move you are looking for in the market, you'll know what sort of signs you're looking for to show there's an opportunity for you to enter into a trade or to exit a current trade. Now your analysis becomes more meaningful and real as it will be leading to a real trade that you will execute and have specific points of interest in the markets.
If you are a VIP Member, we have many Analysts that they explain the exact reasoning for why they take a trade and why they exit. Also we have plenty of educational videos where we break down how trades are entered and exited. Explaining the process of building a trading system and analysing the market in depth .
OK, so you now know what you're looking for in your trading system... great! So why are you looking in all the wrong places for set ups?
Imagine you're looking for the sink to wash your hands, you wouldn't search in the living room or in the attic just to be 'more comprehensive' would you? No, direct your search in a way that's efficient and is likely to lead to the result of becoming a profitable trader.
This is what we need to keep in mind with our trading. There is no point in having a clear idea of what a trade looks like for you and then doing irrelevant analysis on markets you haven’t studied enough that won't lead you to finding it.
Remember, your time is valuable, use it wisely as the saying goes Time is money. This is especially true when markets move and you just stay watching not having a plan to profit from these moves.
Think of your analysis as a guiding process. You're going from having all the possible markets at the top of the funnel and you're going through a series of steps (your trading system) that takes you from that huge list of potential markets all the way down to finding the trading opportunity that suits you and your system and executing it.
By taking this clear approach, you make every step in your analysis purposeful and meaningful . This will not only make you more efficient, but will also help you to reduce the confusion and so you can actually move from being an analyst of the markets to being a real trader.
It is very common for traders to do a huge amount of analysis and end up confusing themselves or just having a lot of unnecessary work there just for the sake of it and try reassure them of their analysis, rather than directing their efforts in a way that actually leads to them finding a trade set up.
Be more precise, be more purposeful in your actions and your analysis and enjoy the benefits of a more directed trading approach going from an analyst to a trader.
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3 Steps to Trading Successfully
Graphic Design: Alex Singeorzan
The morning of October the 19th, 1987 might have seemed just like any other Monday Morning. It was a chilly day in New York as traders headed to the NYSE, but little did the traders on the Stock Exchange floor know that things were about to change dramatically.
Unexpectedly, The Global Financial Markets crashed like never before. Shock, panic filled the floor throughout the day and The Dow Jones suffered a 22.6% loss, the worst single-day drop it has ever seen! on a day that would forever go down in the history books as “Black Monday”.
Many people heard of this black Monday and historic drop.
Without a single significant identifiable cause for the crash, it’s thought that the huge moves were as a result of panic in the markets. However, not everyone was panicking in the markets. Where one trader sees failure others see an opportunity!
One trader in particular who achieved legendary status thanks to these dramatic events was Paul Tudor Jones. Famously predicted a crash that was imminent and expected net a profit of $100 Million. An incredible trade. This extremely successful trade threw Tudor-Jones into the spot light of the trading world and made him part of trading history. He then became a trader that many people aspire to be, but there was a trader that netted an even greater profit than P. T Jones whopping $100 Million.
There are many lesser-known traders who achieved impressive profits and success, while the rest of the market was in a sea of red. One of these traders was Andrew Krieger (the man in the banner), a trader from Bankers Trust, a New York-based bank that would later become part of the German Investment Bank called Deutsche Bank.
Krieger’s success around the time of Black Monday led to Bankers Trust making an insane profit of $300 Million on Krieger’s trades. Black Monday was not so dull for Krieger and his team. It was this kind of bold and fearless trading activity in the financial markets that gave him the title of “The most aggressive trader in history”. On this occasion, it was thanks to his trading of the New Zealand Dollar (NZD) or also known as The Kiwi Dollar.
The New Zealand dollar, was still relatively a new and untested currency at that time. It had only been introduced in 1985, which was only two years before Black Monday.
Since September 1986 The Kiwi had been rallying against the US Dollar. This rally started to be gaining momentum in mid-1987, sending The Kiwi Dollar up 40% trading at around 112NZD for 1USD from its lows in September 1986 to its peak on the 8th of October 1987.
Krieger identified that The Kiwi had become overvalued and saw this as his opportunity. Typically, an institutional trader in the 1980s would invest $20 Million to $25 Million per trade. But, Krieger was known to invest up to $250 Million, 10 times the amount of average traders! And that’s not all…
1 - Have Sufficient Funding
Following his success at the bank up until that point he became an amazing trader and often they would turn a blind eye to his position sizes, during this time he gained the reputation as one of the most dominant and aggressive currency traders in the world, his capital limit was increased way above the average trade to a staggering $700 Million.
Krieger was determined on using this massive nearly 1 Billion amount to short The Kiwi. In fact, he took it a step further and applied leverage of up to 400 to 1. Meaning his full position size in the market was in fact a jaw dropping $280 Billion. Thanks to the use of derivatives, it’s said that his enormous short positions were actually even larger than the entire amount of money supply of New Zealand meaning he was shorting the currency pair with more money than actually existed in terms of New Zealand Dollars.
2 - Study before you execute & be confident in your analysis
It’s no surprise at all that the currency began to collapse and fall from 112 to around 99. For those trying to figure out how many pips that was the answer is 1,300 pips.
They quickly noticed that someone was taking large positions against the New Zealand Dollar and thought they were attempting to collapse the currency, so without having to further expand it was a huge trade.
The Kiwi Dollar fell rapidly and then yo-yoed back between a 3 to 5% loss, at which point he decided to exit the trade and secure a history-making profit of $300 Million. One of the greatest single financial trades in history.
3 - Let your profits run (Avoid taking profits too early)
John Key, who later became New Zealand’s Prime Minister between 2008 & 2016 was one of Krieger’s co-workers at the time this epic trade took place. He claims that Krieger was a pioneer and one of the few people at the time who really understood the markets like no one else did.
Following the extremely successful trade, Krieger continued to make big buy and sell orders on The Kiwi, around the $50 Million Dollars mark, this led to the New York branch of Bankers Trust to become the number one dealing room for NZD.
4 - Be aggressive in you're trading (but never over risk)
Despite his extremely successful period, Krieger soon left Bankers Trust as his salary and bonus for the year was a minor 1% of the profit from his Kiwi trade. Krieger went on to work for George Soros (picture below), a highly successful money manager. The Hungarian money manager known for breaking the Bank of England who is famous for one of the other single greatest trades of all time and perhaps the most famous example of a currency raid.
Of course, it helps to have the financial weight behind your trades like Krieger had, but this sort of success wouldn’t be possible without being well prepared, understanding markets deeply.
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Graphic Design: Alex Singeorzan
This week I was really proud of this trade. Not just because it was profitable and ended the week well, but because of the lessons learned along the way.
This week I officially added a new system to my strategy portfolio. This system is a breakout system, focusing on catching large moves in the market, and keeping a tight stop in case the trade goes wrong. I've been testing this system for a few weeks now and backtested it rather extensively - and the results seem pretty solid!
So for this week, I took my first few trades. I took 2 trades initially, both of which stopped out for -$100 each. Then this trade came along...
USD/CHF was trading lower throughout the day, and I wanted a piece of the action. I set my sell stop order, thinking that if price was to break this significant low, we could see price slip lower. Sure enough, the order was triggered, and the trade was on.
USD/CHF slipped further and further down, quickly recovering the two previous losses. Once the trade had gone in my favor, as part of the strategy, I moved my stop to break even. From there, I let the trade run.
After a few more hours, USD/CHF had closed for a huge profit of over $600, and the breakout was successful.
The moral of the story though is that taking 1 winner and 2 losses can be psychologically stressful - especially when there are even more losses in a row. But, by letting the winners run and keeping your risk managed, there seems to be some really great opportunities out there.
That's all for now. Happy trading everyone!
The reality of trading forex is much different than the illusion we see on social media. Finding verified results for nearly all these traders is impossible, because they likely don't have the results they talk so much about!
In this video, I share some of my real results. They aren't glamorous, but they're real, and they're public! The power of trading is not in overnight success, but in long term potential using compound growth.
My goal is to continue to grow this account (and my other accounts for that matter) at a slow and steady rate, rather than trading with high risk of ruin.