During the last two weeks the pattern has been that stocks generally go up in the early hours of trading and then the rally fails, with a partial rebound at final hour. TLT and TIP do the opposite. Markets do not reward the crowd or investors who are piled up on one side of the market. This is an historical fact. Currently, the crowd is invested in safe-haven assets. Even in the investment banking arena, the word is to raise money by bonds. They are heavily encouraging their clients to borrow money at these low rates by issuing any type of bond as there is a huge appetite for it by unsophisticated investors.
The keen eye would notice that the risk assets, particularly commodity ETFs, are forming higher lows. This is a bullish pattern formation which has been building for several months. If you are one of our subscribers then you are in good shape if you entered the market during months of June and July. Presently our risk is nil since we have an overall gain of approximately 10% in our long positions.
The majority of traders are positioned to benefit from a stock market plunge. The hedge fund managers are very skeptical of the continuation of the rally in equities. They are some of the most inexperienced traders looking for a quick buck via short term trades. The Put option’s massive premiums are supporting this position.
We reckon that there will be a huge surprise and a big disappointment for the crowd. We are either going to have a gradual reversal or a sudden vertical rise. It is highly unlikely that the market will reward the mass. Either way, we have built in profit to deal with whatever the market brings us.