Jake Bernstein’s Weekly Commodity Trading Letter

The More it Changes…The More it Stays the Same

During the 40+ years that I have been involved in the stock, real estate and commodity markets I’ve seen many tops and many bottoms. Of these tops a few have been memorable. Of these bottoms a few have been memorable as well. When I look back at the tops and the bottoms, as I often do in order to search for behavioral correlates, I find that the French expression “plus ca change plus ca meme chose” (the more it changes the more it stays the same) is particularly apropos. Why? It’s all really very simple. No matter what the underlying fundamentals are, traders all over the world tend to react and respond the same way every time. That being said, I do not mean to imply that every top and bottom are accompanied by the same factors but the underlying and overriding investors are similar. To most of us these correlates will be very familiar. In spite of their familiarity let us not ignore them. Here is what I have seen at every significant market bottom since I started trading in the summer of 1968.

NEWS: The news will always be the worst, the most negative and the most hopeless at the bottom or near the bottom. The news tends to be its worst when the market makes its lows. The average trader and investor believe that things can only get worse because the news is so bad. Remember that markets anticipate. The market right now is reacting to news that it has already anticipated or, as they say, the news is already “baked in the cake”.

BEARISH NEWS DOES NOT HAVE A LASTING IMPACT: One of the key things I have noticed is that when the bearish news only has a fleeting impact on a market the odds are that the news is already accounted for and that only the weak traders are reacting to the news as if it was new information. A market that either ignores bearish news or actually goes higher on bearish news is a market that has likely bottomed. Consider the opposite situation that is now developing in gold prices. The financial Armageddon that so many alarmists have been predicting has finally arrived. And in spite of the dire forecasts gold prices can’t hold on to gains.

EXPERTS PANIC and almost every day their forecasts become more negative. They have moved from mild recession to serious recession to protracted recession to mild depression to serious depression and today, CNBC reports on an expert who is predicting the Greatest Depression ever. That, in and of itself is worth watching. That, in and of itself, is a clear sign that the bottoming process is likely upon us. But I hasten to add that within the SETUP, TRIGGER and FOLLOW THROUGH structure that I use, the news is merely a SETUP. We still need triggers and that’s what I’m watching for and waiting for. A setup without a trigger is like smoke from a broken gun. As an aside you might be interested in knowing that two of the few stocks making new highs for 2009 are Sturm Ruger and Smith and Wesson – firearms manufacturers, each up over 100% in a relatively short period of time. People will ask – what does it mean?

THE SMALL TRADER and the average investor are scared. They tend to be the most scared at the bottom and the most optimistic at the top. The majority of traders and investors are now firm in their belief that the worst is yet to come, that we are headed for an economic Depression or worse. Investors have lost confidence in the system. They see cheating, lying, manipulation, tricks, gimmicks, and worse. They are looking at gross errors by the SEC, horrible mismanagement by bankers, executives and the government.

There is virtually nothing that the average investor can look at these days and feel confident. Even the old and supposedly solid stocks have been hit hard. This is exactly when professionals step into the market and this is when the average investor gets out of the market. It’s a classic change of ownership situation.

THE HEADLINES on popular magazines and in almost every front page of every newspaper are negative. But here’s the interesting thing. Unless the markets are soaring or plunging you won’t see headlines or stories about the Dow Jones or S&P numbers. You may see that the Dow was up or down but you will rarely see the level. For example, a headline like “Dow Jones Trades Below 7000”. When the public starts looking at the averages then you know that it’s time for a change in trend.

THERE SEEMS TO BE NO WAY OUT of the bad situation. This attitude is also prevalent at major bottoms. It seems that no matter how or what we try or where we look it all seems to be a dead end. It seems that no matter what we try to fix it will cause something else to break. This is a very common attitude at market lows and economic lows.

THE BLAME GAME becomes very popular as investors and the government try to point the finger at anyone who might be used as the scapegoat. There always has to be someone to blame because it makes people feel better about the losses. And the finger pointing gets worse as the bottoms get closer.

INDICATORS AND CHARTS LOOK “TERRIBLE” when lows are being made. This holds true for the traditional indicators (i.e. the common ones that most people look at). In the meantime, the best indicators such as momentum and MACD divergence are beginning to give set ups and even triggers. There are literally hundreds of timing and trend indicators but in my experience only a few of them actually provide meaningful information. You need to use the right indicators to get the best information.

YOUR OWN PSYCHOLOGY BEGINS TO DETERIORATE and you may begin to lose your self-confidence. Why? Simply because you see all the negatives around you and you become affected and/or infected by it. You see your friends and family or associates lose their jobs or their homes or their money. You begin to feel that you are dead wrong and that this time your comfort level in the minority is wrong. You doubt your abilities. You look at the few recent losing trades you made using your methods and you begin to feel that the methods are flawed or that they won’t work in the current environment. I respectfully submit that the lower your confidence goes the closer we are to a turn in the markets.

YOU BEGIN TO ACCEPT THE EXCUSE THAT “THIS TIME THINGS ARE DIFFERENT”. What’s worse is that may actually begin to believe that things are different. Rest assured that they are not. Rest assured that, as the headline of this article has stated, “The more it changes the more it remains the same”. As long as people trade markets and as long as people are not machines, as long as people have emotions and reactions and perceptions then there will be tops and bottoms that develop in the same way. This is one of those times. I respectfully submit to you that there is nothing different happening right now. It’s all the same stuff. It’ all about emotions and reality. Reality and emotion are the antithesis of each other. Rarely is reality as positive or as negative as emotion and fantasy would have you believe.

If you find yourself beginning to believe in the extreme then you are likely to be wrong in what you are telling yourself. Take a few steps back. Think clearly. Seek out historical correlates and then make your decisions on long, set ups and triggers. Do not make your decisions based on what the television says, what the experts say or what the prevailing sentiment may be. This is not the time to be a sheep but rather a contrarian.