I hate writing bearish comment. I’m a bull by nature. I like being long; I like being vested and seeing bearish times ahead spoils my game. However, one of the core rules of trading is to “trade what you see.” Like most classic sayings, that doesn’t immediately mean much, until it does.
“Trade what you see.” Of course, we always trade what we see, why would anyone do anything different?
The thing is though, we often trade what we think, not what we see. Our biases get in the way of seeing the obvious and previous environments and positions make us see what we want to see, not see what we don’t want to see.
Let me give an example.
What do you see here?
With QT (quantitative tightening) apparently soon to be over and whispers of more QE possibly on the way, you would think the markets would be ready to hold this level with the possibility of an upside move. Personally, I don’t think a breakout rally is on hand but a lot of people seem to want to hold expensive stocks at these elevated levels and the only reason is to be there for yet another rise into the stratosphere.
However, what I see is this:
This is the dotcom crash. Let’s see them both together:
This is what happened next if these market moves are going to be twins:
So this is what I see, not what I think, because with QT out of the way there is no pressing reason for a crash.
But that is the point about ‘trading what you see.’ What I see is the same pattern as the dotcom crash
So what to do?
No one can exactly predict the future. The best you can do is have a series of scenarios worked out and watch which one of them, if any, unfold.
The U.S. is going into a realm of giant fiscal deficits with a political environment that has seldom been more fragile. The Federal Reserve is experimenting with a new QE/QT NMT environment and the global economy is teetering on recession and we have a trade war.
What could possibly go wrong?
Of all the what-ifs, this is the one to watch.
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Clem Chambers is the CEO of private investors web site ADVFN.com and author of Be Rich, The Game in Wall Street and Trading Cryptocurrencies: A Beginner’s Guide.
In 2018, Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards.
