As I’ve said many times, I am an anti-fundamentalist. I do not comb through a company’s financials or industry reports to calculate the “right” price for a particular stock or market. I do not buy when I perceive the market value to be below what I think it should be. I believe all information gets distilled out in the market price, all fundamentals and psychology.
If a “good” stock is down, that’s right. If a “bad” stock is up, that’s right too. The price is right!
Smart people fool themselves quite often. They think they know better than the market. They disrespect the trend and disregard it when it tells them something they don’t want to hear. “Everyone will realize soon enough this stock should be much higher than it is!” Fundamentalist thinking often puts you on the wrong side of the trend — a very dangerous to be in the markets.
I do not think this way. I respect the markets. I’d even argue that the market is most dangerous and opportunistic when it’s acting stupid (i.e. when the trend and fundamentals do not agree). When the trend makes no sense, I get the warm and fuzzies. The odds of a major trend materializing become very very high.
Going With “Stupid” Has Worked Well Recently
In recent years, we’ve seen tremendous volatility and fast-moving markets. Commodities, from a trend-following perspective, were dead for many years. All of that changed in the second half of 2020 following the re-opening of the global economy with trillions of dollars extra flowing throughout the system.
At the time, we didn’t know many commodities would go on to double, triple or more over the next couple of years. All we saw were many commodities breaking out to new highs. As trend-trading anti-fundamentalists, this was all the information we needed to get on board.
If we had waited for more clarity on why commodities were rallying, we would’ve missed the bulk of the moves. Such clarity tends to come to light late in the move — as it did shortly after Russia invaded Ukraine. At that point, everyone “knew” oil would go to $200/bbl and inflation would rage further to the upside. It was shortly after this global a-ha that many markets topped. That’s when we started exiting.
Other Examples of Going With Stupid
A polarizing market tends to provide tremendous opportunity. Here are three examples.
Bitcoin
Bitcoin has its die-hards and critics. I don’t know who’s right nor do I care. I sit outside of the arguing and simply view it like any other market. My job is to get on board and ride the sides no matter the chatter.
Following Covid-19 and the massive stimulus packages rolled out by many governments, Bitcoin prices took off. Naturally, we rode the trend up. We exited in 2021 when the trend stalled out and began reversing.
“But the Fed is printing money! Prices are going to $1,000,000!”
To which my response was: “Maybe, but its going down NOW. It’s not responsible to hold on to declining positions.” Simple as that. Conversation over. The trend tells me what to do, not a bunch of laser-eyed avatars on Twitter.
Bitcoin Futures (Q2 2019 — Q2 2021)
People get so wrapped up in their view that they eschew risk. They think there’s nothing to worry about (because they know what’s going to happen). And even if they get the short-term wrong, they just expand their timeframe. “Bitcoin is taking a hit now, but in 15 years, you’ll see. I’m buying more.” 15 years!? These people aren’t thinking clearly at all. They’re just defending their own egos in the present moment.
Prices have declined ~80% since the top in 2021.
Shorting Stocks in 2007
S&P 500 futures fell to one-year lows in Q4 2007. Not Q4 2008, but a full year earlier. Another example where respecting the trend would have saved people a lot of money. Sadly, many thought it was a buying opportunity. They had been suckered into thinking the bull market that started in 2003 wouldn’t end; that every dip was in fact an opportunity to buy, so it would be no different this time.
S&P 500 mini Futures (2003 — 2007)
Melissinos Trading was not around in 2007, but if it were, we would’ve been selling (even shorting) stocks. Oddly enough, the present day macro environment and S&P 500 chart look eerily similar to that of 2007 and early 2008.
Tesla Inc.
The proof of polarization is simply reading the name of the company. People cannot see “Tesla” without thinking fraud or genius or arrogance or brilliance. The narrative surrounding this stock has been manic for a long time now. The trend, on the other hand, has been simple — a breakout to new highs leads to a massive run-up in prices.
A trend-traders dream. Everyone at each other’s throats. Half the market cannot understand why it’s rallying. People continuously try shorting the stock only to cover it at higher prices later. A polarizing founder and CEO naturally attracts loyalists and enemies. A perfect recipe for a massive trend.
Tesla Inc. Common Stock (Q4 2019 — Q1 2022)
What I’m Seeing Now
Today, everyone knows the global economy is going into a recession and inflation is going to decline aggressively. Everyone knows that interest rates have to come back down; the Fed and other banks will undoubtedly pivot.
I’m not so sure. The trends are suggesting otherwise. In recent weeks, we have begun buying several individual equities and commodities again. Obviously, this could wind up being an incorrect decision but this is what the trends are telling us to do. Plus, it has the added bonus of being the opposite of what many people are thinking.
Time will tell, but I think the fuel for more trends is here once again.
Disclosure: Past Performance is Not Necessarily Indicative of Future Results . There is always a risk of loss in futures trading. This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Melissinos Trading LLC. All information is subject to change without notice. These charts show examples of trends. Inclusion of a chart as a trend example does not imply any kind of recommendation to buy, sell, hold or stay out.