J.R. Crooks: There are times in the markets when the perfect combination of indicators, conditions and trends converge.

And then there are those times when the expected price action does a complete 180 from what even the most experienced, disciplined and even well-capitalized traders would expect.

I’m sure we can agree on what state the markets are in now!

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Typically, these times come about when there are many events and interventions that cloud the usual drivers of asset prices.

The markets feel even tougher-than-normal to predict right now … and it’s not just retail investors who are feeling the pressure.

Playing Our Political Economy … as it’s Playing Us

Adding to the difficulty is the fact that we’re now in a “political economy” — and right now, there’s no question that things are certainly more about politics than economics.

Lately, investors have been given every reason to think the markets are tougher than usual … that it’s impossible for the average Joe to make money right now.

It’s no secret: Hyperactive central banks have been intervening directly and indirectly. How can the “little guy” stand up to all the big-money trading action?

Plus, we’re told about all the losses that even the professionals are suffering. Story after story tells of hedge funds severely underperforming the basic averages.

Some tell of big industry names closing their funds after decades of service. That’s because even they — with all their financial and technological resources — just can’t make money in this market.

But just because some of the “big guys” are getting wiped out, doesn’t mean the rest of us don’t stand a chance. In fact, taking out some of the so-called “smart money” can actually be beneficial for us in the short and long run.

Cutting Bets Means Cutting Clients

Naturally, hedge funds tend to always maintain some “long” component because clients don’t want to hear reasons why they shouldn’t be in the market.

In other words, clients don’t need anyone managing their money, if all they’re hearing is “get out.”

A story in Bloomberg on Monday spoke of hedge funds cutting their bullish bets on commodities. Considering the extreme bullishness that has developed in certain commodities, I don’t blame them.

The large speculators — that is, the group of futures traders composed of hedge funds and large financial institutions — are:

• 87% bullish on gold
• 86% bullish on platinum
• 82% bullish on corn
• 80% bullish on silver
• 80% bullish on soybeans
• 75% bullish on crude oil

Additionally, the net long positioning on gold, silver, platinum and crude oil are at extremes.

Does That Mean You Should Join Them?

Not exactly.

That’s because these large speculators are typically wrong at extremes, and the accompanying price rallies are typically shaken out.

Again — while hedge funds may be right to ease up on commodity positions, it’s not necessarily a reassuring sign for their clients. So, where should they put their money instead?

Consider that commodities have generally underperformed stock markets, namely U.S. stocks, this year …

U.S. stocks have been driven by monetary easing and a U.S. economy that’s ailing relatively less than the rest. Each has been supportive for share prices.

Commodities have been driven by monetary easing and a disappointing global economy. While central bank action has been forcing commodity values higher on reflation expectations, global growth trends have instead been weighing down on commodities.

This has the potential to continue, since I don’t see any major improvements coming down the line for the global economy.

But if hedge funds are admitting commodities aren’t the place to be, they’ve got to find somewhere else to direct their clients’ funds.

Money can be Made …
Even in Uncertain Times.

In several protracted periods since the financial crisis of 2008, the markets have undergone distinct ebbs-and-flows … from risk appetite to risk aversion and back.

During these times, risk assets (stocks, commodities, emerging markets and most currencies) moved in tight correlation. Lately, however, the correlations have slowly moved apart.

The mindset has moved back toward being more of a relative game of investing than an all-or-nothing bet on risk.

That means, while it may make sense to be bearish on commodities (especially in the near term), it may not make sense to be bearish on equities (especially U.S. equities).

At a time when ETF investors are taking money away from commodities, save precious metals, they are pumping more money into equities.

From Index Universe:

“Overall, $17.82 billion flowed into U.S.-listed ETFs, as total assets as of the week ended Sept. 20 climbed 1.6% to $1.309 trillion from $1.288 trillion a week ago, according to data compiled by IndexUniverse. The current week’s asset total was just shy of a record of nearly $1.311 trillion.”

While I expect a broader-market correction will materialize in the next four to six weeks, it is possible equity market sentiment recovers smartly and we resume a bullish uptrend in the stock market that takes us into the first quarter of 2013.

It’s been said stock markets thrive during times of uncertainty. It sounds irrational, I know. But markets are not rational. Plus, the last three months are a testament to stocks performing well during times of uncertainty.

Profit While Funds ‘Shudder, Shutter’

So when we hear of hedge funds shuddering and shuttering because of these markets, we shouldn’t be intimidated. My global macro analysis suggests there will continue to be opportunities taking bearish positions on select international plays, namely Europe, and natural resources.

Additionally, I’m working with some analysts in Weiss’ research department to narrow down the best sectors, industries and companies to target going forward.

There will always be new trading opportunities … and no shortage of them. Consider what hindsight shows us about investing in U.S. stocks this year.

You can look to the key averages like the S&P 500 and the Dow Industrials to see they’ve made decent gains over the last nine months.

But had you added shares of select consumer goods and food service companies at the beginning of 2012, for example, you could be sitting on some pretty substantial gains:

• An investment in United Natural Foods (UNFI) since Jan. 5 would be showing gains of 49%.
• An investment in Whole Foods Market (WFM) since Jan. 5 would be showing gains of 36%.
• An investment in Smart Balance (SMBL) since Jan. 5 would be showing gains of 139%.

These are substantial returns on pure share prices — these aren’t leveraged positions like options that can produce consistent returns like this if you do it right.

I think these industries and others, if you can pick and choose correctly, have the potential to deliver even more gains … whether you’re using basic shares or the more-powerful options contracts as I do.

Until then …

Don’t Be Scared, and Don’t Be an Anchor

There are two big fears that enter the mind of every investor:

• Fear of losing
• Fear of losing out

It is said that fear is a bigger motivator than greed. But the fear of missing the bus, of missing out on an opportunity to make money, may be a bigger motivator than the fear of losing money.

Without abandoning consciousness, successful investors and traders mostly eliminate these two big fears from their trading decisions. The key is to keep emotion out of it. Also, don’t be an anchor.

Let me share a quote from “Behavioral Trading” by Woody Dorsey:

The term “anchoring” in behavioral finance describes our tendency to have fixed beliefs as well as a propensity toward inaction.

If we are anchored, it is good because we know just where we are. But at the same time, it means that we can’t go anywhere.

This summer it seemed like, every day, we heard about the lack of participation in the markets, or the low trading volumes, or the lack of volatility, or whatever the headline du jour was.

Many investors have pulled off to the shoreline to avoid the uncertain waters, too concerned about the markets to do anything.

I’m not saying it pays to simply be in the market. But I am saying it pays to take action, one direction or another, even when others are dropping anchor.

Bottom line, you need to fight for your wealth; otherwise you’ll just be letting it slip away.

Best,

Written By JR Crooks From Money And Markets

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss  along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and  Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff  do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance  returns cited are derived from our best estimates but must be considered  hypothetical in as much as we do not track the actual prices investors  pay or receive. Regular contributors and staff include Andrea Baumwald,  John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen  Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker,  Leslie Underwood and Michelle Zausnig.

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