A Fool and His Money

By: Captain Hook | Mon, Jul 21, 2014
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The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, July 7, 2014.


Do you remember the indelible words 'a fool and his money are lucky enough to get together in the first place'? Do you know where this famous quote comes from? The answer is the movie Wall Street - wisdom offered to Bud Fox by Gordon Gekko - an Oscar winning performance for Michael Douglas. And there could be no truer words for many in the stock market today, benefactors of the great reflation (monetization) quantitative easing (QE) has provided since the panic lows in 2009. Unfortunately however, most people have not benefited from this reflation. For the most part, it's been a 'rich man's rally'.

What's more, and in fact, not only has the rally in the stock market not benefited most, it has hurt people due to cost push inflation in the necessities of life far beyond any wage gains - if you are still employed. And correspondingly, because of this, in the end even the rich will not benefit from the games being played to boost stocks, because the economy, consumers, and potential investors have been hollowed out by these exercises in greed, leaving little truly productive capital to fall back on when needed. So many who think they are rich today may be proven fools too - not just the exploiters of a foolish public.

Because it's not a zero sum game. There is not a winner for every loser, as Gordon Gekko would have you believe, because those who don't actively trade would lose in a crash. But there does need to be a population of fools to sell to once prices go up, which are usually the retail trade in stocks. Either that or the top players will get stuck holding the bag, which is not how you stay rich. Based on participation rate measures of various dimensions (here, here, and here), they may have a problem this time. Maybe people are tired of Cramer (think Gekko) front running them - no? Don't let the door hit you on the way out Jimmy.

But seriously, who do these fools (the asset rich) think they are going sell all this stock to - generations x and y? Maybe the Israeli's, or Chinese, or Russians. Certainly not the baby boomers - they must be hoping their kids will be buying. Or do they even think in this regard? Something tells me not, which is why it will fall on the Fed, who will obviously fail due to the numbers and dynamics involved. Harry Dent is correct in his assessment of the situation in my opinion - demographics is the insurmountable obstacle that will matter at some point in the not too distant future.

So make no mistake about it, whether overtly via a long overdue stock market swoon, or by accelerating subversive taxation, one way or the other, it's going to be a lot harder for the average fool (apparently the powers that be think that's you and me) up and down the line to keep their money moving forward, never mind make more. Because every time you turn around there's some scoundrel with their hand in your pocket in one way or another. And again, at some point this is going to matter to the most overvalued stock market in history, where some surprise will be enough to tip the balance.

And again, as pointed out last week, and witnessed on Thursday as stocks surged into light trading associated with the July 4th long weekend, the most important broad measure in the US, the S&P 500(SPX), hit extreme sinusoidal resistance when factored by the CBOE Volatility Index (VIX), with a ratio reading of 192. Again however, while this might be enough to stop stocks temporarily, in order to see a monthly close at this level (at monthly closing basis resistance), either stocks must first push higher and then fall back into month's end, or visa versa. (See Figure 1)

Figure 1

It would not be surprising to see either scenario play out given there's likely still enough short sellers in the market to sponsor more squeezing, however signals that stocks are extended enough to begin becoming concerned are appearing, so who knows - right? One thing is for sure however if the message in the chart below is to be taken seriously, where tech stocks are poised to surge up to another 5% on continued strength, be careful if you are short. If you are using double short funds, the market could hand you a 10% loss (this is probably exaggerating things) in just a few weeks, and then what do you do, hold for the longer term with the dollar($) looking increasingly vulnerable by the day. (See Figure 2)

Figure 2

Due to this risk, one might be better off to wait until month end in order to put a majority of one's positions if you are inclined to participate in this lunacy. Why is shorting stocks a lunacy? While I may be proven wrong in such concerns, what has occurred up until this point, is at inflection points like this one, speculators pay close attention to all the information services (think Zerohedge) that promote such thinking, and indeed, short the market in one way or another, raising put / call ratios and short interest levels even higher - becoming food for the machines. (i.e. think short squeeze.) Again, this is why it may be better to wait until month's end to put on any short positions (so they can get squeezed), even if we see a reaction lower in stocks this week. (See Figure 3)

Figure 3

But if you are alright with allowing a position to go up to 10% offside (which one should be if you believe the fundamentals warrant a hold) then this is likely as good a shorting opportunity you are ever going to come across from a longer-term perspective because corporate profits are collapsing due to debt, crony capitalism, hollowing out of the middle class, inflation, etc. which should all matter at some point. (i.e. when the short sellers become exhausted.) Of course one does not want to be a fool and just throw away money shorting stocks because these things have not mattered for quite some time - not to the machines. So again, caution, which has been our modus operendi all along, is still warranted in terms of position limits at this point, at least until month's end when we hope the picture penned above falls into place.

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Good investing all.



Captain Hook

Author: Captain Hook

Captain Hook

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

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