Why These Traders Are In An Enviable Position…

Here’s a question for you…

Could the market crash in the next six months?

There’s really only one answer. Your response must be ‘yes’.

You see, no one has a crystal ball. Stocks may well collapse. They could also skyrocket, or do any number of things. The truth is, there isn’t a soul on Earth who can say for sure.

But don’t let that worry you.

Quant Trader doesn’t take notice of opinions — including my own. The system has no emotions, and no biases. All that matters is the share price data.

It comes down to this: React to what is happening, not what might happen.

Now, I know this is often easier said than done. You probably find it difficult to always act with algorithmic consistency. I know I do…and I’ve been doing this for a long time.

The fact is, we’re all human. And sometimes, external influences affect our ability to trade.

There’s a lot of talk around about a looming crash. I see it everywhere. I’m sure you do too. The voices of concern say the world is heading for another major crisis.

I wrote about my outlook for 2017 earlier this year. The purpose was to give some balance to the many dire predictions. My view is that stocks could go a lot higher.

As I said, no one has a crystal ball. I could be as wrong as the next person. But I want to make sure you have a balance of opinions. Too much negativity can sideline you indefinitely.

I’m going to show you an email in a moment. A member asks if the recent lull in buy signals points to a market downturn. He asks if my bullish forecast is still valid.

But before I get to this, here’s a snapshot of my outlook…

A short recap

Now, I’m going to keep this section short. You can read my outlook in detail here and here.

There’s just one chart I want you to see again. I believe this is currently the most important graph in finance. Yet many retail traders don’t even know it exists.

Have a look at this…

Source: Bloomberg

Click to enlarge

The chart is from Bank of America Merrill Lynch. It shows the average cash balance for 213 fund managers. This group manages over US$563 billion — these are the big hitters.

I’ve added my own lines to the chart. Firstly, I’ve updated some recent data. I’ve also added the green circles and the dashed line with the arrow.

This is a fascinating chart. The cash balances mostly swing between 3.5% and 6%. The low readings are when managers are largely bullish, while higher numbers occur when they’re fearful.

The latest reading is 4.8% — down from 4.9% in February. It’s also a full percentage point lower than last October. This shows large sums of money have been flowing back into equities.

I believe this is the start of a big portfolio adjustment. Further cash reductions would likely be a tailwind for stocks, as money leaves the sidelines and re-enters the market.

Look closely at the cash levels — particularly near the green circles. You’ll see they often move in trends. A new downward trend in cash could potentially drive stocks much higher in 2017.

Now, this doesn’t mean stocks will shoot higher immediately. My outlook is for the next year — not the very short term. And I still expect we’ll get pauses and corrections along the way.

But I believe the underlying backdrop is positive. Despite the fears, stocks are in a bull market.

Crash confidence

OK, it’s time for that email I was telling you about. It’s a long one, so I’ll only highlight the most relevant sections.

Here’s an extract…

…I am a bit perplexed why suddenly there’s no bullish signals. I am starting to think that Jason’s analysis (which I do not necessarily doubt) may now be telling him this market is heading exactly the opposite way of what he said a month ago.

If the market is starting to tell him that those bullish signals do not exist anymore, I won’t blame him as things can sometimes change quickly, but at least he needs to explain the perceived change in direction.


Elardus calls himself a ‘market sceptic’.

And he’s not alone…

The Wall Street Journal called the multi-year rally off the GFC lows ‘The most hated bull market’ on 11 July last year. Many people are on the sidelines. They believe stocks could crumble at any time.

This sort of general concern isn’t new. During an upward trend, people often fear a major peak is nearing. That’s why they say bull markets climb a wall of worry.

I’ve got an interesting graphic to show you.

Have a look at this…

Click to enlarge

The first chart — the Crash Confidence index — is by the Yale School of Management (the graduate side of Yale University). Below it is a graph of the Dow Jones Industrial Average.

Let me tell you about the Yale graph…

The management school has been surveying investors for almost 20 years. Each month, it records peoples’ confidence that there will not be a market crash in the next six months.

Take another look at the Index.

Less than 30% of people are confident there won’t be a near-term crash. Or put another way, over 70% of people believe a crash is a real possibility.

Just think about this for a moment. A lot of people are fearing the worst.

Now, you’ll see a set of vertical lines connecting the two charts. I’ve added these myself. They match the low points in the Crash Confidence index with the Dow.

Can you spot the pattern?

Here’s my take on it: Stocks tend to rise when confidence of avoiding a crash is low.

You see, market crashes typically take people by surprise. That’s why they’re so devastating. The rush to sell causes prices to cascade lower.

But when many people are preparing for the worst, a crash is less likely. The simple reason for this is they’ve already sold down their holdings — there aren’t enough people left to panic.

The Yale survey suggests many investors are on red alert. In my opinion, this makes a crash unlikely anytime soon. As I said, markets rarely crash when many people are fearful.

Now, this is just my opinion. The bears will produce their own compelling charts and arguments. And do you know what? They may even be right. As I said, no one knows.

But I believe you’re in an enviable position — no matter what happens.

You see, unlike many traders, you have a strategy for either scenario.

Quant Trader gives you the ability to buy when stocks are rising, and it has an exit plan for when they fall. I believe this puts you ahead of the bears and the eternal optimists.

And best of all, there’s no need for crystal ball gazing. That’s the beauty of algorithmic trading — it doesn’t all hinge on someone correctly predicting the future.

I’ll leave you with this thought: buy into strength, sell into weakness, and be patient in between. I believe this will make you more money than a roomful of experts.

Until next time,

Jason McIntosh,
Editor, Quant Trader

Editor’s Note: Does fear of a stock market crash hold you back? Don’t worry if it does. You’re not alone — this worry causes many people to miss standout opportunities. But it doesn’t have to be this way.

Here’s something you should do — check out Jason McIntosh’s Quant Trader advisory service. It’s a fully algorithmic trading system for ASX stocks. Quant Trader scans practically every company. It then tells you when to buy and sell. And it does this without any bearish bias.

Try it. See if it makes sense to you. It could change the way you trade forever.

Quant Trader sources all graphs and images above.

From the Port Phillip Publishing Library

Special Report: Vern Gowdie’s Crash Protection Portfolio: Vern has written a new book I believe everyone with money in the stock market should read ASAP. This week, we are mailing hard copies to any eligible reader who requests one. All you need is a valid Australian postal address.

As Vern demonstrates in the book, Australia may be staring down a market crash that could wipe out all the paper wealth created since the GFC. When this market does explode, Vern believes investors are going to see decades of gains blown away in a very short space of time.

If you cannot afford to see your wealth shrink by possibly two-thirds in value, you need to prepare for that potential snap NOW.

To claim your copy, click here.

Money Morning: Your Tax Rate Just Went Up $6.2 Billion

Money Morning: Bad Things Are About to Happen Thanks to the Budget

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia