Fear and greed are the forces of human behavior

A dramatic slide of US dollar and Treasuries will be the summer surprise

These days stocks tend to have a big selloff during the first hour of trading, as flock investors sell their positions and rid themselves of any remaining risk assets in their portfolio. Monday July 23 was a perfect example of this. They just cannot tolerate the continued fear of watching their portfolios further erode. Much like their friends and neighbors, as well as media, they are looking to invest their savings in US long-term treasuries (TLT). Are US treasuries, at these unprecedented levels really the place to park investments? We do not think so! Currently the most vulnerable position is being long in US treasuries at these absurd price levels, which, by the way, are higher than November 2008 when investors fear was at its peak and people thought that the stock market would go down indefinitely.

As usual, blindly following the media and momentum traders can be a costly mistake. All they are interested in is short-term trading and they have no concept of the big picture. Investors should be careful not to get sucked into the vortex as the media run around looking for the flavor of the day. According to these folks, the best place to presently park your money is in US treasuries. However, it is important not to lose perspective. Remember that the earning levels of publicly traded companies are far higher than in 2008. The current financial environment is much different.

Competition is fierce out in the world of financial media. There is an unwritten media myth that an asset which has recently spiked higher should keep on going much higher indefinitely, just as any asset which has formed a bottom must be going even lower. But keep in mind: short-term forecasting, by definition, is impossible. The effect of media bombardment, combined with typical human emotional responses to an extended period of gain (greed) or loss (fear) will generate extreme behavior. Remember the best time to buy stocks is when it appears to be most hopeless to do so.

We reckon that a substantial stock market rally this summer will catch all the non-savvy investors, momentum traders and most hedge funds off-guard. This is all to our advantage given our style of trading. Stay tuned.