Since about the middle of August, we’ve seen a rare thing re-enter the markets.
You couldn’t exactly call it fear.
But it’s definitely caution.
Much quieter now…quieter than they’ve been in a long time…are those belligerent speculators, willing to bid up even the riskiest assets.
As Eric Fry of InvestorPlace observes:
‘Most stocks are struggling to make headway, even when they deliver positive surprises to the market. Worse, stocks that disappoint in any way are receiving a swift and severe reckoning from investors.
‘“Risk-off” phases like these are normal parts of stock market cycles, but that doesn’t make them any less frustrating… or anxiety-inducing.’
Is this just a normal ‘risk-off’ phase?
Or something else?
One thing for sure is: the mood now is skittish.
As was the mood — if you look back — in the months preceding past great crashes in the market…
If you’re nervous about the prospects of a really big correction in 2022 — or something bigger than that even — we’re releasing something tomorrow here at The Rum Rebellion that will be of great value to you.
It’s called Four Code Red Investments to Sell Now.
In this never-ending bull market, there’s a line at your door and running three blocks down the street telling you what to BUY.
Financial journalist, broker, newsletter writer.
It’s the easiest (and in some cases laziest) job in the world.
If you’re wrong, the blowback is minimal.
‘Oh well. That’s the speculation game! Here, I’ve another hot tip for you. It’s a robotics stock!’
Issuing solid sell calls…right before a potential peak in the market…?
THAT takes balls
If you get it wrong, hell hath no fury.
If you’re right…
You’ve saved more people more money, wealth, and heartache than any single lucky buy tip can make up for.
Virtually no one issues peak of the market sell calls in this business.
But we’re going to do so tomorrow.
Vern Gowdie will zero in on four key ‘Code Reds’ that are signalling the loudest and clearest.
According to the industry spruikers, there will NEVER be a bad time to be invested in these assets.
This, says Vern, is pure, self-serving nonsense.
You’ll see what he means tomorrow.
But, in short: now is the time to learn how dangerous these four Code Reds really are.
And to consider scaling back…or liquidating your positions entirely.
If you decide to do that, you’ll be going against your brain.
I know about this topic. I even wrote a book on it called You, Your Brain and the Stock Market.
We often say it’s central banks that have driven this bull market to historically high valuations.
And that’s true.
But equally to blame are a cluster of neurochemicals in your noggin.
They drive you to succumb to groupthink and buy at the worst times…
The bull market chemical
Dopamine is one of them.
Previously, researchers believed that the brain produced dopamine in response to obtaining a reward. Now, it’s thought that dopamine comes from the expectation of a reward.
It’s a motivating chemical.
Consider how Dr Loretta Breuning puts it in her book, Habits of a Happy Brain:
‘Our ancestors didn’t know where their next meal was coming from. They constantly scanned their surroundings for something that looked good, and then invested energy in pursuit. Dopamine is at the core of this process.
‘In today’s world, you don’t need to forage for food. But dopamine makes you feel good when you scan your world, find evidence of something that felt good before, and go for it. You are constantly deciding what is worth your effort and when it’s better to conserve your effort. Your dopamine circuits guide that decision.’
Translated to the game of investing, that’s what happens in a bull market when you’re planning to buy a stock.
You might have already made some gains on a particular stock. If you see a similar situation unfolding in another stock, its potential excites you. That’s the dopamine flowing.
It provides the motivation for you to take the risk and place the trade.
Motivation = decision = action.
Dopamine especially flows when the reward you get exceeds your expectation.
Say you buy a stock expecting steady price appreciation. But a takeover announcement sees it soar 50% instead. At that point, you get a surge of dopamine as a reward and motivation to do it again.
Unfortunately, unexpected rewards are hard to replicate. That’s why they’re unexpected.
The craving for dopamine leads you to take increased risks to try and obtain your past investment high. Such a pursuit generally leads to trouble. In a NORMAL world.
But this investment world has not been normal for some time
It’s a dopamine-dominated world, which has us constantly searching for the next big winner.
That’s why people love punting on tiny resource stocks, cryptocurrencies, or subscribing to small-cap investment newsletters.
The offer of a big reward gives us a dopamine high.
This is fine if it’s controlled.
If control is lost, however…
And something happens in the wider markets to tip the scales…
The results of masses of investors can turn very badly, very quickly.
Is this going to happen in 2022?
Or even sooner?
I don’t know. And neither does Vern.
But what we DO know is that almost every valuation metric going is stretched FAR beyond all historical averages.
That’s an indisputable fact.
We also know this:
The best time to sell is right before a market peaks.
Bull markets make us addicts.
Consider the following, from Your Money and Your Brain.
At Harvard Medical School, neuroscientist Hans Breiter has compared activity in the brains of cocaine addicts who are expecting to get a fix and people who are expecting to make a profitable financial gamble.
The similarity isn’t just striking; it’s chilling.
Lay an MRI brain scan of a cocaine addict next to one of somebody who thinks he’s about to make money, and the patterns of neurons firing in the two images are ‘virtually right on top of each other’, says Breiter.
That’s why making easy money is so dangerous.
So you continue to chase the feeling by taking bigger and riskier punts.
But being with the herd generates feel-good neurochemicals.
That’s why it’s not easy to break away. When you do, you feel vulnerable and threatened.
As such, Four Code Red Investments to Sell Now, which we publish tomorrow in The Rum Rebellion, will likely make for uncomfortable reading.
It will likely stimulate the stress hormones adrenaline and cortisol in response to the idea of ‘being alone’ or ‘being the first’.
That’s why being bearish in the midst of a bull market or bullish in the depths of a bear market is often described as a ‘lonely’ place to be.
It doesn’t feel good.
Even though the rational part of your brain knows that it’s the right place to be, your mammal brain makes it exceedingly difficult for you to occupy this space.
It simply goes against your evolutionary wiring.
But, at certain points in market history, this uncomfortable decision can turn out to be the most beneficial one you ever make.
Tomorrow, we put your neurochemicals to the test.
Editor, The Rum Rebellion
PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.