In the ongoing battle between liquidity and the rona, liquidity won the day. Although it was evenly poised for most of the round. US markets were flat overnight, until the last hour. Then, all the major US indices surged 1%.
Why the late day surge?
The current market resembles a casino
There are guesses and rumours. But the market resembles a casino right now. On a day-to-day basis, there is no point in guessing why this or that happened.
I mean, Barstool Sports founder Dave Portnoy is outperforming the pros by buying stocks based on randomly selected Scrabble letters.
That tells you all you need to know right now.
It’s why, in this kind of market, risk management is more important than ever.
If you don’t have a system to deal with this chaotic market, you’re going to be in trouble in a few months’ time.
More on that in a moment.
But first, I want to finish off the discussion from yesterday on gold.
In US dollars, gold broke out to its highest price since 2012 this week. New highs are generally bullish. The question, though, is whether gold’s new high is due to excess liquidity or its defensive qualities.
If it’s the former, it’s at risk of declining when the market wakes up to the fact that it can’t levitate forever on top of an infected global economy.
One area of concern is gold stocks. The chart below shows the Van Eck Gold Miners ETF [ASX:GDX]. Don’t get me wrong. It looks strong. But it’s worth noting that while gold itself broke out to new highs this week, gold stocks are still below their May highs.
This situation may resolve itself in the weeks ahead. But for now, it’s one reason to remain a little cautious on gold right now.
What about gold in Aussie dollars? After all, it’s the most important price to focus on for Aussie investors and Aussie gold miners.
Here the situation looks a little less bullish…
Thanks to a resurgent Aussie dollar over the past few months, the AUD gold price has corrected sharply.
This makes sense.
Risk management is paramount
As the market has gone into ‘risk-on’ mode (which supports the Aussie dollar), AUD gold has sold off. My interpretation of the chart is that gold is in consolidation mode. Given the strong rise over the past few years, that shouldn’t be surprising.
As such, I expect AUD gold to trade within a range between $2,700 and $2,300 for some time.
This ongoing tug-of-war between attack and defence (right now, the market is in attack mode) means risk management is paramount.
With volatility so high, making decisions each day on whether to get into or out of a position is highly stressful. If you don’t have a system to guide you, the volatility will break you.
When you are stressed, it means you have excess cortisol in your system. You’re not going to make rational investment decisions in this situation. You will inevitably do something you later regret.
The thing is, over the long term, the stock market redistributes wealth from the emotional to the rational. It really is as simple as that.
The problem is that humans are not rational beings. We are driven by emotions, impulses and biases. That’s why having a ‘system’ to manage these evolutionary shortcomings is so important.
There are two aspects to any system. One is the nuts and bolts of it. The other is having the correct mindset to leave the system be and do its job.
An important part of the mindset aspect is things like humility; knowing that you don’t know, realising that your opinion doesn’t really matter, and that the market is generally smarter than you.
If you have some mental discipline and have your ego under control, this part of things is relatively easy to get a hold of.
The tough part is the nuts and bolts. For example, how much should I put in a stock to better manage risk, where should I set my stop-loss level to get out if things go against me?
These things take years of trial and error to perfect.
Personally, I really struggle with stop-loss levels. I used to set them just below areas of support. The thinking was that if these levels break, there’s a good chance that the stock would head much lower.
But many follow the same strategy. It’s not a winning system.
Is there a better way?
It’s a question I think I may have found the answer to. Over the past few months, I’ve been running the ruler over a tool that helps with this, and much more. We overlaid this tool on my Crisis & Opportunity portfolio since its inception in late 2014.
While I’m pleased to say that my portfolio has beaten the market over that timeframe, I was shocked by the results that this system generated.
It more than doubled the portfolio returns. Not by picking different stocks, but by managing the stock picks better. It’s incredible.
I was so impressed, we’ve decided to run a free event on Tuesday night to show you how this tool works, and what it could potentially do for your portfolio. It’s going to be an info-packed session that I think you’ll really enjoy.
Click here to see what it’s all about.
In this type of market, in my view, such a tool is invaluable.