When I was working on Wall Street in 1983, I had two partners who did the trading while I did the analysis. They entered a futures trading contest. Using the Hurst cycle signals I had taught them they turned a $10,000 futures account into $990,000 in a month. They were on fire, and on the way to winning the contest. But then it happened.
They got sell signals one day and reversed their position with the goal of again compounding a massive futures profit into an even bigger fortune. The very next day, the sell signals reversed and went back to the buy side.
It was a quintessential whipsaw.
My buddies had a bit of a bearish bias and didn’t believe that signal, so they hunkered down and held their short position.
One week later their account was at zero. They got the margin call that wiped them out.
I learned an important lesson from that. I’m not smarter than the trading signals. They’re not always right, but they’re right more often than not. So… let’s let probability work in our favor.
In crazy markets like the ones we’ve seen over the past few weeks…don’t second guess signals. Don’t freeze in the headlights like a panicked deer.
Instead, here’s what to do.
In its not infinite generosity of spirit, every week the Fed gives us reams of data. Some of that data is quite revealing, and quite useful for our purposes. The data helps us to understand the current monetary/liquidity environment, which helps us to understand the context of the current market milieu. That in turn helps us to divine where the market might be headed.
But there are times when the Fed thinks its information might be too helpful to us. So what does it do? It eliminates that item from its data. Poof! Something that had been helpful to us for years no longer exists.
It has happened before, and it just happened again, with an item that had been extremely revealing.
Apparently this information had become too useful to us. So, naturally, the Fed made it disappear. Now only the Fed knows about it. Oh, that data is still being collected, but they buried it with several other items into a useless catchall line item.
But fortunately they’ve give us a new line item that may be just as useful.
Viewed in conjunction with the data that disappeared, this new data shows us what’s really going on – a wildly speculative financial asset bubble in its death throes.