Perceived safe havens like gold futures and bitcoin aren't yet ready for a trade, even as they show signals of a potential contrarian setup.
Jason Shapiro, founder of Crowded Market Report, tells Investor's Business Daily's "Investing with IBD" podcast that he looks for opportunities that form when speculators and commercial traders diverge.
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Spotting The Divergence In Gold Futures
Instead, the key is to find a wide divergence between speculators and commercial traders. "I won't short it just because of this (signal)," said Shapiro. "It's not any kind of magical indicator, and I like to say it's not necessarily a great predictor of where the market's going to go, but it is a great risk manager."
In the case of gold futures, he points to the last several months beginning in May. Speculators went long while commercial traders were short. He considers commitments of trader data from the Commodity Futures Trading Commission (CFTC), which shows trader data movement through the market.
But Shapiro says finding a gap just indicates a potential opportunity. It only becomes tradable after confirmation from the market. He looks for triggers that will cause markets to react contrary to what the market expects in what he dubs "news failure events."
For gold futures, Shapiro looks toward interest rate news from the Federal Reserve. The Fed has signaled its intention to lower rates this year as economic indicators show inflation is being brought under control. Gold tends to perform inversely to the equity market since it's perceived as a safe haven by investors. The precious metal generally sees inflows when stocks slow and outflows as stocks improve.
In this case, gold's overall rise after the Fed's recent announcement indicated to Shapiro there was no news failure. This means there was no viable trade at this time.
Bitcoin's Neutral Dilemma
Bitcoin, meanwhile, presents a different contrarian dilemma. While there has been recent pessimism from large speculators over bitcoin, commercial traders have not indicated enough optimism over bitcoin to create a divergence. "How do you go contrarian to neutral? That's still just neutral," said Shapiro.
Bitcoin and other cryptocurrencies briefly got a boost as the election prospects of former President Donald Trump in the 2024 race rose. The former president's reelection run saw optimism in the wake of President Joe Biden's poor debate performance and eventual drop from the race. Trump has also recently embraced bitcoin and other crypto assets more directly. The former president promised to have the U.S. hold some bitcoin as a strategic reserve.
However, those hopes are in flux as presumptive Democratic nominee and Vice President Kamala Harris rises in polls. Meanwhile, markets are overall facing general pressure on the back of accelerated selling.
Correlations And Finding True Portfolio Diversity
But despite the lack of follow-through in bitcoin and gold futures, Shapiro says keeping an eye on contrarian trades can help establish a truly diversified portfolio. He says diversity comes not necessarily from having money in different industries, but from determining if there's correlations between your holdings.
"If you're sitting on a portfolio, the market's going up and all your stocks are going up, then you're not diversified," he said.
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