July 23, 2016, Weekly Summary: Beanie Babies and Tulips
A bubble occurs when the valuation of an asset disconnects from fundamental metrics. The Beanie Baby bubble (mid-1990’s) is an extreme example of this; there was no fundamental justification for anyone to pay hundreds or even thousands of dollars for a $5 plush toy. It was a case of group-think, greed, and devious marketing by the toy’s creator, Ty Inc. (Ty Warner Inc. at the time).
The 2007 housing bubble, is another example. It came about thanks to the same group-think and greed, nourished by the government’s encouragement of home-ownership, and dispatched by financial industry over-reach and larceny.
Other famous bubbles, such as the South Sea bubble and the ridiculous (relatively speaking, since all bubbles are ridiculous) tulip bubble, had slightly different technical causes. But they, along with every other bubble that Humans have ever been involved in, have the same Human behavior/emotion of crowd mentality and individual greed as common factors.
Source: www.bostoncharts.com
Some bubbles, like the Beanie baby bubble and the last housing bubble, have wide mainstream participation, while bubbles like the present bond and equity bubbles have a more limited and technically sophisticated participation. It is a narrower slice of the population that can participate in these latest bubbles, mainly because the QE funds that are being used to inflate them are only available to the top of the pyramid. The group-think and greed, however, remain constant.
This narrower participation, may mean that the bursting of the bubble could happen without the characteristic public mania phase that normally occurs just prior to the ‘pop’; the public just can’t afford to attend this FED-fest.
Finish reading this part of the weekly summary for free here
How Are Some of the Patterns Holding-Up?
This week, the investor sentiment came in as follows:
- Bullish, 35.4% (-1.4%)
- Bearish, 26.7% (+2.3%)
- Neutral, 37.9% (-0.9)
The CNN Fear and Greed indicator, which tracks seven market components, is at an extremely greedy 86%, down from 90% earlier in the week.
The Rydex bull funds were down slightly, while the bear funds were up slightly which matches the sentiment trend. The chart below shows both of these metrics continue to build toward a topping pattern.
{This section is for paid subscribers only. Join us and replicate our trades}
The low-bull-sentiment-near-tops pattern, is still viable as the chart below shows.
{This section is for paid subscribers only. Join us and replicate our trades}
Gold
{This section is for paid subscribers only. Join us and replicate our trades}
The commitment of commercial traders shows a reduction in the short position (as they take profits), and the commitment of the large speculators shows an equal reduction in their long positions. Their level of bearishness, and bullishness, however, remained constant at 78% short for the commercials, and 82% long for the large speculators.
If gold continues lower and manages to close below $1300, the large speculators could cause a panic as they try to exit. The long side of the trade still remains close to historic highs and would require the selling of hundreds of thousands of contracts. If this dam breaks, gold could see $1200. We continue to hold our gold-miners shorts.
We wish our subscribers a profitable week ahead and ask that you monitor your email.
Source: Nicholas Gomez
