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Yeah, you've mentioned in in previous videos that it's all fine until there's a recession. What type of news failure and market reaction would convince you that the game is up?
The game is up, up, up, up.
Yeah, like the game is up where um
We're done. All over.
Yeah, the the the chickens come home to roost and uh and people
If if we're gonna make that argument, right? Uh-huh. I think it starts with the idea of this this is the bear porn. Okay. You want my bear porn? I'll give you my bear porn.
🎵 Music
¶ Introduction to Jason Shapiro
Welcome to episode 286. It's Tessa, your co-host, alongside Ian Cox, the awesome host who interviews awesome guests on the one and only chat with traders. There's contrarian trading. And then there's consistent contrarian trading. Can you really make money by consistently going against the crowd? Does it take a certain type of personality to be able to trade this way? Jason Shapiro was featured in Unknown Market Wizards by Jack Schwager.
But you know, this market wizard is no longer unknown. I mean, he is the ultimate contrarian trader, and we're so excited to have him return to the podcast for an update after two years since we last spoke with him. We get to delve deeper and really pick his brains this time into his counter trend trading philosophy, learning about how he identifies overcrowded trades and how market positioning and sentiment rather than price guide his trades.
and focusing on the underlying mechanics that drive market moves. You know, there's so much to unpack here guys and I think it's fun. And I would challenge you to see if you can come away with any ideas that may spark other ideas that you may have never considered before. We hope you enjoy this episode. Ladies and gentlemen, we're so pleased to welcome back Jason Shapiro.
Hi Jason, how are you doing?
Good, good.
Yeah, it's been a while since we last talked to you. Uh like to welcome you back. To chat with traders.
Good to be here.
Yeah. Gosh, it was like two years ago, uh, in episode two forty-five. Just like to remind our listeners, uh, Jason was featured in the book Unknown Market Wizards. Uh so get a chance to get another another wizard uh to learn about. So since the last time we had you on a few years ago, has anything in the markets surprised you during this time?
Uh, I feel like I've been doing this too long to be surprised by what goes on, which is not to say that sometimes it's not uh shocking, but uh at the same time been doing this a long time and
The markets do what they what they do and you know sometimes we we can get a decent idea of why it's happening and sometimes we have no idea why it's happening. So surprised i in that I can't really be surprised anymore because I've seen so many things that have surprised me that it's almost like, you know, nothing surprised me anymore.
¶ Contrarian Trading Philosophy Explained
Uh-huh. Yeah. Um, so look could you do a brief review of what factors do you look at to get you to go long or short?
So my fundamental belief is that the market is a discounting mechanism and that the discounting mechanism is in fact positioning and sentiment rather than price. So I'm a counter trend trader. I don't counter trend things because of price. I counter trend things because of positioning. So when I see people are way too long something, you know, I'm looking to get short. When I see that participants are way too short something, I'm looking to get long.
¶ Recent Standout Currency Trades
Are there any particular trades that really stood out for you in the last few years?
They're all pretty similar to me, you know, like I say, everybody gets super short and then uh I'm looking to get long. So, you know, a couple good ones, uh That we were able to catch based on that this year was sort of this currency trade. I I went through a period earlier in the year where I really didn't have very much going on at all. And then a few months into it we started to we started to get some crowdedness. Um So we were catching sort of dollar short trade. Um
Really as early as like early May. We were looking at the uh at the Swiss franc and then and then the yen um just before it squeezed higher, got super record level crowded short um right on the lows there. So that was a great one to catch. And in particular because, you know, that yen trade and that whole carry trade moved everything else with it, obviously. And we did not have anything that got us short the stock market during that period. I didn't see the stock market as being super
crowded long, but it didn't matter because we were able to catch, you know, the the the currency trades. So I always say it doesn't matter where you catch these things, you know, as long as you catch it. Um I remember in 2008 I had an up year. I was neither short stocks nor long bonds, which were kind of the headline trades. Um, but it didn't matter, you know. I I had a positive year and my numbers were good, and people don't ask.
You know, well, how come you had a good year to catch short stock? You know, it doesn't matter. The bottom line is I I made money and and that's all that really matters. And that's kind of how it's been this year too. I really haven't traded the stock market very much this year at all.
Uh huh. Why is that why is that? Um
I guess it's It just wasn't it just wasn't set up for me, you know. Um at the lows in the stock market, uh I I saw people and this is going back, you know, a year and a half or so, were were very, very short. And I I caught some longs there, but when that data goes back to neutral, that's where my edge is over. So I get out. So it went neutral, you know, probably last early summer. Um, it went neutral, which doesn't mean it's then gonna go down. It means it's gonna go up or down. But
Uh you know, it just doesn't my edge isn't there, so I don't trade it. So I haven't really had stock trades. But I've had a few other trades that have have have worked very, very well. And of course I've had trades that have lost too. But uh the currency trade certainly um was my Best and favorite trade this year because it really caught the meat of what was driving everything. So, like I say, though I didn't catch the stock market.
Short trade back in mid July, I was able to catch the currency trade, which really drove that anyway. So what's the difference where you catch it, right?
Are we talk talking about uh the yens making near all-time high or all-time lows actually, in sometime in July? Is that uh
Yeah, right then is when uh is when we saw the uh the positioning get record crowded, was right in in the beginning of July. And before that we saw it in in the Swiss franc, which really was showing that same thing back uh in late May. And that one took a while to to work, took about a month, but um eventually worked and and worked very well.
¶ Decoding Overcrowded Yen Positions
in July when you were seeing seeing the Japanese yen being very crowded. What what does that really mean? So you were seeing a disproportionate number of participants being Short or being short at the yen. Correct.
Correct. Exactly.
I see. And then so uh how it appears to you on the on the commitment of traders uh report, it shows what? Uh very long um very long bars representing heavy positions from the short side.
Correct. Shows the speculators in the community trade's report being very, very short.
And so you're saying speculators and what was the other uh
group. Well on the other side of the commercials. So so they were very long, speculators were very short. And that tends to be when markets uh have a high probability of of turning and and should they turn You know, high probability of of having a big move because you have all these
Speculators that are short, and as the market starts to go against them, you know, they start getting stopped out. We start going through moving averages, we start doing all these things that these technical traders uh use, and uh they start getting stopped out. So I'm really just trying to front run that type of move.
So what was the the the trigger for the for the Japanese yen to to actually go up? I mean we hear quite a bit about the yen carry trade. Uh what is that and how how does that impact the world market?
I mean the yen carry trade, the theory is that, you know, interest rates in yen are very low relative to, say, the US dollar. So people will borrow money cheaply in yen. And put that to work in um in risk assets like stocks. So when that starts to go against them on the yen side, they have to get out of all those trades.
So they get out of the yam position and they they they get out of their their long risk assets like stocks position and and it all just kind of craters down, you know. That's the theory behind it all.
I'm just wondering uh um how is it that just a one quarter of one percent rise in Japanese interest rates could trigger such a massive sell off? I mean that's Not that much of a an increase. Uh why did such a big sell-off occur on such a small interest rate increase?
Well, I mean, this is the thing about one positioning gets massively one sided, right? Mm-hmm. If everybody that is gonna sell yen has already sold yen. Then when it starts to move the other way, there's nobody left to sell it and they all just get squeezed out. And that's what happens, you know? Um, people will argue that it was about
Okay, they they raised a quarter percent and and maybe they indicated that there's more to come. And you know, that that's there's some truth to that, but I will always argue that it was all about just way overextended positioning that that caused such a outsized move.
So in the C O T reports, could you have heavy participation on the short side, but yet the number of pla but that participation is spread out kind of evenly among all the participants and such that
uh each participant wouldn't be exposed too heavily, they wouldn't be too heavily leveraged, but you have broad participation making it look like it's a crowded uh trade. And yet when it goes uh against them, There wouldn't be this panic to quickly get out of their position because it was they were relatively each participant was relatively light.
I mean, arguably what difference does it make if it's one participant that's massively short or if it's a whole bunch of participants that are that are short, you know? It's it's a position that's very, very big out there. And uh doesn't guarantee that the market's going to go the other way, but it means if the market starts to go the other way off of some trigger, like the Japanese interest rate move in this case.
that you can get a very big move the other way because all this positioning has to has to get out. And there's really nobody nobody to, you know, to buy it from because they're all in it. So
¶ Lessons from Historical Squeezes
I I see so just a Just a small number of participants uh trying to get out triggers what margin calls, uh'cause no one wants to take the other side of the position. There's no one left. And so it uh a small amount of Dollar buying back in would send these markets or it would send the Japanese yen up sharply higher quickly.
Yeah, I mean if you look at the L T C M situation in the late nineties, there was a A small amount of participants that were putting on this trade that blew them out, but they were putting it on in massive size. And when it started to go badly.
They all had to get out because they were getting margin calls and and there was nobody to take the other side. So they all blew out. I mean, literally blew out, right? And as it turned out, the trade wasn't even wrong. The trade ended up being correct. But um in the middle of that trade being correct.
It got too crowded. They they got squeezed. There was no one to provide them with liquidity on the other side and and they all blew out. I mean, LTCM went out of business, Solomon Brothers went out of business, you know, and all on a trade, by the way, that ended up being totally correct.
¶ Why Traders Join Crowded Trades
Any uh do you have any idea what any of these players might use as an excuse of of uh you know when it comes to a market being overcrowded? Kind of what's their rationale? Do they believe that uh oh it it won't happen or it can't happen for these particular
Most people necessarily look at that. They're looking at the fact that they think that the trade makes a lot of sense and uh If it makes sense for a dollar, then it makes sense for a hundred dollars. So let's let's go for it, you know? And that lesson seems to never be learned. I mean, the LTCN people were the theoretically the smartest people on the street, right? And uh
And they didn't get it, right? You know, people have a tendency to think in terms of greed, you know. Uh-huh. Uh-huh. And that in the end is what gets them.
Uh-huh. So you have the old phrase, uh this time it's different.
All right. I guess so, yeah.
Yeah. Um how long has the Japanese yen carry trade been going on and In general, what's its level of influence uh over risk assets?
I can't really say what this level of influence is. I I just know what people talk about and what the theory is. I don't know enough about how hedge funds finance their trades through the yen car you know, I really don't know, you know. It it's something that has been going on for a very long time. We hear it in Euro yen as well. Euro yen
has always been sort of a risk on measure as well, with the same idea, you know, if Euro yen was going up, then that was positive risk assets and and and vice versa. So that's been going on for as long as I can remember.
So ju just before the uh Yen Kerry trade blew up, were there any signs in the US stock market that it was crowded on the long side?
Not to me there weren't.
¶ Current Market Crowding and Setup
Any markets that you're s looking at now that are showing you that they are very crowded, uh both from the long and the short side?
No, right now it's gone after this whole sort of dollar thing the last few months, um, which was really where I saw most of the crowdedness and now that has gone away. I don't see a lot of stuff right now. You know, arguably there is some overly short positioning is starting to happen in the energy sector, particularly in heating oil and in unleaded gas, is starting to get there.
And there's a couple commodities like cotton, things like that, that are getting close to getting there. But as far as stock, bonds. Bonds are starting just starting to get a little bit crowded, especially the long end of of the yield curve. The thirty years are arguably getting to a point where people are a little bit too crowded long. Which would make sense, I guess, because people are expecting interest rate cuts. It doesn't make sense to me why they would buy be buying
30 years because they're expecting interest rate cuts, but nevertheless, that seems to be what they are doing. So I think that there's probably uh arguably some. some crowdedness in the in in the long end of the yield curve there at the thirty years. But as far as currencies and stocks and and most of the commodities, um, I don't really see anything. Gold is getting close. Gold we saw as pretty darn crowded to the long side um earlier in the year.
And that went away. Um, and now the market has again ripped higher to new highs. And now we're getting close to where they're getting uh a little bit extreme crowded on that one too. But again, not totally there yet. That's going to trigger a trade for me just yet.
I often hear about central banks uh supposedly buying gold. Would central banks show up in a COT report? Could we track what they do?
Only if they're doing it in the futures market. Will they show up? If they're buying cash gold, then they will not show up in in the COT report. Although it could show up arguably the people they're buying it from might be using the futures to hedge or something, you know, we don't know. You know, that whole argument to me is uh
You can be bullish gold and and I can make a hugely bullish gold case here on a fundamental basis and that's fine. But if your argument is the central bank buying, uh I I think personally, I think that's silly. Because I can remember in the late 90s when central banks were auctioning off their gold holdings, right? And that was the low in gold.
Right. So the opposite argument then would have been, well, geez, central banks are selling. So you wouldn't want to be long gold. Right. I remember every like month they were holding these auctions to auction off all their whole their gold holdings, the Bank of England and all these these places. And um that was right at the low. Gold has gone up a massive amount since then.
Right. If I recall that was like in ninety eight. So if you were gonna be bearish gold because of central bank selling um in ninety eight, I think it was actually ninety nine. So I mean You were looking at$250 gold. It's gone up 10 times since then. So if you were buying from the central banks back then, then you should probably sell to the central banks now, right? That's that's how I would see it personally, but you know, t everyone has their own their own read on how they wanna read things.
So when a market goes from a crowded position, bullish or bearish, to say a very light position, is that a signal that players have just gone to cash?
Well, it's a signal that they've gotten out of those, you know, those master positions is is really all it's a signal for. Whether they've gone to cash or whether they've gone somewhere else or wherever they've gone, you know. But for me, when when that happens
There there's just no trade there, right? For me. Because if if I'm trading it based on positioning and there's no massive positioning, then then there's no edge for for my particular process. So I just sit back and and wait for the the next kind of low hanging fruit type of situation, you know, which is a a hard thing to do for me and and for many people, you know, just sit back and wait, you know, but that
I've learned over time is is the best thing to do. You know, sit back, wait for your process to to give you uh an edge and and and then and then pounce, right? But just to trade around things just because you're bored or whatever, that's over time, I think, a big mistake and a costly.
¶ The News Failure Trading Strategy
Yeah. So l let's uh go into uh what you consider an ideal setup to go long or short. Uh you talked about uh m markets being overcrowded one way or the other. And my understanding is you're looking for a news failure day.
Right. So I think no matter how you trade, whatever it is you think, I think that stocks are going to go up or whatever because of this. That's fine. But you you always want to wait for the market to confirm what you're believing, right? Because you don't want to be fighting the tape, because you're not going to be over time.
smarter than the market, right? Um, fighting the tape is just a very dangerous thing. I'm right, the market's wrong, so I'm gonna do this is is is a very dangerous thought process of time, right? So what is a market confirmation? Well, for me, if I'm looking at okay, everybody's short here, I'm looking to get long. What's going to be my confirmation? I do it on what I call a news failure event, which means
This market's been going down. Everybody is super short. I'm looking into why that is. What's the fundamental reason that everybody's looking for for that? And we can just get like into the Swiss franc trade earlier in the year. And it was all about interest rates differentials, right? Um the European central banks, including Switzerland, were cutting rates.
Much faster than the US. The US to this point still hasn't even cut rates at all, right? And so the inf interest rate differential is growing. And therefore that's bullish the dollar versus those currencies. So I'm looking for data. That is going to support that interest rate differential. So in this case, let's say some weaker data in Switzerland, right? Since I'm looking at the Swiss Frank, um, that should support that.
And it comes out and Swiss probably goes down after it, but then it pops back up and closes the day higher for no reason. That's what I call news failure. The news was bearish. And the market didn't go down. Well, why didn't the market go down? Is it is it that everybody didn't see the news? Well, clearly not. Everybody sees the news. Everybody's paying attention. To my eye and to my belief system, it's because everybody's already short.
So who's left to go short? You know, where's the marginal seller? And the market just showed you that. The market just confirmed that. You know, if there was a marginal seller, they would have been selling on this negative news. Well, they didn't. You know, the market closed up on the negative news. So that's my market confirmation. And it is that is where I will get long. And now I have two things that go on. One.
Despite the fact that it had this news failure today, it might in the next day or the next week or the next couple of weeks go down anyway on new bad news. and take out those lows. Well, if it takes out the lows of that day, well then I'm stopped out. I'm picking a turn. If it makes a new low, then clearly I have not picked a turn. So I'm wrong.
So I stop out. Okay. There you go. I take my loss. I move on. The good point side is when it works. So now the market starts to go up. Shorts start to get squeezed. It starts going up. They're getting squeezed. They're getting squeezed. The positioning data goes back to a neutral reading. And that's where I take my profit. So it it's one or the other. And what tends to happen is, you know, say my trades are profitable less than 50% of the time.
But the profitable trades make multiple times what the losing trades lose. You know, in the particular case with the Swiss franc, I think we ended up making seven times what I was risking. So that means that makes up for seven losing trades, right? If I have that one winning trade and I have seven losing trades, I'm even.
Right. Um, and that's really as a trader, I think what you're what you're looking for is these asymmetrical payout situations. Right. You want to make a lot more on your winners than you and you lose on your losers. And that's to me is what what trading is over time. So, how to identify where those kind of situations are? One way to do it, I believe, is through positioning.
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¶ Market Psychology and News Response
How often are important news releases digested over days and weeks, thus necessitating scaling into the position?
No, I don't do that. To me it's uh it's a one day read.
Right.
If we look at the um Classic example that I like to talk about a lot since most people are involved in the stock market. If we look at the low. of the stock market in um October.
Of
twenty twenty two. Okay. Um, the market was getting bashed all through 2022 as inflation was rising and the Fed therefore had to keep raising rates. And this was all seen as very negative for the stock market and it kept going down. October twenty twenty two came. We had a CPI report, which was the big number then. Um, because everyone was so focused on this inflation thing. And we had a CPI report come out in October that was higher than expectations.
Um, and was actually the highest CPI number for the entire cycle, as it turns out for the entire cycle, but we didn't know that then. But what we knew then was it was the highest number for the cycle up until that point. And higher than expectations that day. So again, given that the stock market was selling off on higher inflation, um, this should have been a very bearish number for the stock market. Um, and that day, in fact, was. in the morning, a big down day for stock.
as you would expect. And by the end of the day, the stock market actually closed up. And that was it. That was the low. That was the exact low of the stock market since then.
Well, how crowded uh did it appear on the COT chart?
Truthfully, it wasn't it was crowded, but it wasn't mega crowded at that point. But it got there um in about January of twenty-three. So a couple months later, the stock market had rebounded a little bit. It started to have another sell-off. And then it got super crowded. And then we had some news failure in there somewhere. And and that's kind of where where I got long stocks was back in January of 23. And that trade lasted for about six months.
So do the impacts of the same types of news releases vary over time depending on the mood of the market? Uh I asked this because the markets rallied on the dovish July thirty first Fed announcement, but then proceeded to go down sharply after.
Yes. I I I think that they they change. Uh, depending on what is the sort of psychology that's driving um that's driving the markets at the time, you know. Sometimes we're in this mode where good news is bad news, and then sometimes we're in the mode where good news is good news, you know. So you have to kind of pay attention in a way to to what that is um and where we are in that cycle so that you can then figure out what actually a news failure is. Right. And those things like you mentioned.
have switches, right? We were in this mode for most of the last year and a half where some weakness economically was seen as good because it meant lower rates, right? And that kind of switched, I would say Um on CPI day, um In July was the big switch on that. We had a lower CPI and the markets uh couldn't rally on that anymore.
So and then everyone started focusing on well, gee, there's gonna be recession and there's gonna be weakness. And so we got into that mode, right? And where we are now, uh, I really I don't know because now we're getting both sides of it. You know, sometimes we'll go up on that kind of news, sometimes we'll go down on that kind of news. But that to me can be explained by the fact that the positioning really is not showing any kind of bias one way or the other.
So the markets can just act in like a random fashion, which is is is what I think is is going on here.
Just curious about markets where there is much less news flow, for example, um, I don't know, maybe say some commodity. Yeah uh versus a stock market. Uh are news failure days more pronounced in area in commod in uh markets that don't have a lot of news flow because of the gr relative scarcity of the news flow?
Yeah, it can be hard to read news flow on some of these markets like coffee and, you know, cotton and that type of stuff, because they don't have a lot of releases, right? But they do have releases, you know, like the grains and all that have a WASI report every month and there's some other kind of, you know, supply-demand reports that
that come out, but certainly it's nothing like the financial markets. And I get more trades, I would say arguably in the financial markets because of that. Um, but I do get trades in these other commodities. And, you know, part of the news flow can arguably be a correlation flow as well, you know. So you're looking at at gold and we know that gold tends to go up when dollar goes down, right?
So you get a big down day in the dollar and gold goes up on the back of it and then fails. You can argue that that's a news, you know, that's a piece of news for gold is that the dollar's a week, right? So it I call it a correlation failure, um, but it's just sort of a subtype of of news failure. you know you don't get a lot of fundamental news on gold right but you it reacts in certain ways to other markets so therefore you know you you you can use the the correlation moves as as a signal
Mm-hmm. So do you spend quite a bit of time just observing the various nuances in the news and how each market responds to it while you're say while you're waiting for the perfect setup to go in so that you can see see the trend of how kind of how the psychology is evolving over time.
I spend just about all of my time doing that.
Wow.
I'm trying to figure out what it is that that is theoretically making these markets move a certain way so that I can know when that thing happens. how should the market respond and and if it doesn't respond that way you know that that that's giving me my read right I'm not here to belong something because I think that the news is going to be positive. I don't have any edge in knowing what the news is gonna be. I I unfortunately
Can't see the future, right? I don't have inside information into any of this stuff, right? So I can't trade based on that, right? So I have to trade based on letting the market tell me what it's going to tell me. You know, read the tape. And to me, reading the tape means how does it respond to the input? Not what is the input, because I could never have predicted that. But how does the market respond to the input relative to how it should theoretically respond to the input?
¶ Consistent Risk and Position Sizing
How often do you find yourself coming across a potential trade where it to you it seems like the ideal setup? And then you go in. very heavy on that one particular market? Or do you set limits to yourself, uh, you know, no more than X percentage in in stocks, no X percentage in commodities? Um, how do you work that?
Yeah, I don't go in heavy on anything. Um, all of my trades are exactly the same and therefore my risk is exactly the same. I personally risk 70 basis points on each trade. So I know where my entry is, which is on this reversal day type of thing. I know where my stop is, which would be if I was buying this thing, would be the low of that day.
So I put on as much into that trade so that if I am going to get stopped, I'm going to lose 70 basis points on that trade. And I pick 70 basis points because A through back testing and B through 20 plus years of live. Um, I know that that 70 basis points is going to come pretty close to providing my vol my portfolio with a volatility of around seven to eight percent, which is what I am targeting, which then brings me to
you know, a a return of around 15% a year. And that's what I do. You know, some people want to do more, they they they do more. You know, it's all a question of your your risk tolerance, right? But that's where my risk tolerance is. So that's how I do that. I I have no edge, unfortunately, in knowing which one of these trades has a higher probability of working than any other one. I have spent much time um with people that have worked for me and quants that have worked for me trying to
decipher that and we have never found anything that has been reliable. Uh what I find is the one the trades that I hate the most are the ones that usually end up working the best. And the ones that I love the most are usually the ones that end up working worse. Um, so I don't uh use any bias in that. I just treat all these trades exactly the same.
Anything you attribute to the trades that um you dislike the most, sometimes performing the best, uh
I think because I have the same uh behavioral biases of everybody else. You know what I mean? Um, the markets have a way of uh you know of making us look like fools, you know. It's just kind of the nature of the beast. So, you know, I can sit here and I can justify, okay, this trade should be great because of the macro. I'm seeing the macro look like this and blah, blah, blah, blah, blah. And it's all
Very interesting and makes for some fun conversation. But the truth is it has absolutely nothing to do with. with how I trade it. I I put all my trays on ig exactly the same. I I had just as an example, I had a really nice trade earlier this year where I got short cotton. It uh was a very nice trade. I didn't think it was going to work at all.
Um, I thought that cotton was I was in my heart sort of bullish the stock market. I thought that cotton was more of a risk asset, just like anything. So if the stock market were gonna keep going up, cotton was probably going to keep going up. So I didn't like the trade at all. But thankfully I didn't listen to myself because that trade ended up making just that one trade ended up making like my full first half of the year. So
Unfortunately, I I do not listen to my own bias because I have learned that uh it's no better or worse than anybody else's. You know, I I wish I had some magical ability. Um, but unfortunately I'm just A dude like everybody else, you know. I I have no edge in in forecasting in the future, unfortunately.
Could you give us an example or maybe you remember that event, uh, of the news failure of cotton? Like what what would we
Don't remember exactly. Oh, you know what? It must have been uh it it was a report, a green report, a wazi report that included cotton. That came out very bullish for cotton. And cut and ended up going up and then closing on the low of the day. And so I got short there against the higher that day.
So whether you like the trade or whether you dislike the trade, uh, you put on the same position size on the on the day of the news failure and you don't add to the position, is that correct?
I don't answer the position.
Okay.
I put on my risk size and then I just say it's either gonna stop me out and I'm gonna lose what I was expecting to lose or at least close. There's some slippage sometimes, but and if it works then then then it works. Uh I I can't control it either way.
¶ Win Rate and Consensus Traps
Mm-hmm. And what percentage of the time uh do your trades work?
Over time, uh, the number's been about somewhere between a thirty seven and forty percent winner.
Uh so if you get stopped out. Uh, do you ever try to re-enter that uh
Oh yeah, if the if the crowdedness is still set up as it was, I will re-enter on a on a new news failure. Okay.
Oh, on an on another news failure. So say if the market's really crowded, you have a news failure event on one day, you go in, you put your position in. And then say a few days later you get stopped out, but uh you still see, say, a week or two weeks later, uh, it's still very crowded. Are there conditions that you would re-enter that same trade?
Yeah, a new news failure. Just the whole
Oh, new news failure. Oh.
The whole thing just resets and starts over.
I say In one of your uh interviews you've done earlier, uh you discussed about uh Barron's experts and their portfolio. Kind of why do they underperform? Um, and I'm just curious, uh, if they're good enough to get on Barons, they one would think that they have performed well in the past, enough to enough for barons to call them on as experts. Do you consider them part of the consensus and why do you think they underperform?
I do consider them part of the consensus and I think that is why they underperformed. Yeah. Um, you know, to say, oh well if Barent is gonna call'em up, they must have ec they must be expert, you know. That's arguable. You know, they must have a marketing team. They must have a they must have a good PR team, right? Um, I don't see Stanley Druckenmiller sitting on the uh
on the Barons round table, you know. You know, those who know don't say and and those who say don't know kind of thing, right? But given enough people on the Barron's round table. Um, you're you're going to see consensus. You know, I mean a lot of this has to do with Not wanting to lose your job. not wanting to lose your clients. And the most simple way to do that is to not do anything outside of consensus, right? Because if you lose money when you're in consensus.
Then you can say, well, gee, everybody lost money. Whereas if you lose money when you're against consensus, people are going to be like, What the hell are you doing? You know, you're fire, right? So I think it has a lot to do with that psychology personally.
Mm-hmm. Yeah, the some of these people wanting to fit in.
All right.
Yeah, protect the job, protect their you know, protect the business, you know.
¶ Identifying Market Euphoria Signals
In uh other videos you've mentioned about um euphoria and market talk. What are the signs of euphoria that go beyond just the COT report?
Well, I mean A positioning and and B you you you can smell it. I mean, we had what I consider to be euphoria, um In copper, for example, back in uh May of this year, where yes, the commitments of traders was showing people were way too long, but you started hearing people, you know, people don't talk about copper that much, you know. Maybe one of the more popular commodities with oil and gold and all that and then maybe copper.
But uh, you know, you started getting people on TV, you know, it was the A copper became the new AI trade, right? Because we're gonna run out of electricity and everyone's gonna have to buy all this copper to make all these new, you know. all all this new electricity and you know, had a I I still have it somewhere um in my file where a a guy came on and said, uh This was the biggest no-brainer trade he has seen in his career. And that was literally a day before the top in May.
Um, when you start hearing people's that there's no such thing as a no-brainer trade. I'm sorry. Never will be, never has been. Okay. Um, so when people start talking about this is the biggest no brainer trade I've seen. And this is after, of course, he didn't say this when copper was trading at 360.
He said it was when Copper was trading at you know 520, right? Uh-huh. After things gone from 360 to 520 in three months, now all of a sudden he's on TV saying it's the no-brainer trade. And it's not even just necessarily Something against this particular person. You have to remember he's getting on TV and saying this. So somebody is making the decision at that time.
To allow him to be on TV. And they're allowing him to be on TV, clearly, because Copper is making headlines and everybody wants to hear about it. And so they bring the guy on that's going to say that, right? That's what's going to get the viewership. So that tends to be when euphoria happens, right? When all you start to hear about is one thing, um, that tends to be when when the euphoria is happening.
So uh you pay close attention to what's going on in the news and society and what have you to add to your list of tools, uh, in addition to the COT report to get a feel of of how euphoric a market is.
I do.
You said back on June sixteenth, quote, This is the most hated bull market I have ever seen. Tell us tell us why.
I traded through, you know, the the the the late nineties, as we now know it, bubble. Um, and I also traded through a few other bubbles in in Asia and whatnot in my life. And this market has been going up for quite a while now. Um with a little break in twenty twenty two, but but I did not see and still have not seen for that matter.
any of the signs that I saw in those other bubbles, you know, when I was trading in late 99, all you heard about everywhere you went was all these people talking about how much money they were making in the stock market, right? Um I I don't hear a lot of that going on now. Um I have been hearing More people tell me how this is a bubble and it's gonna crash and all that. You didn't hear anybody. in 99 talking about how this was a bubble when in fact it was right
Uh-huh.
I I I don't see that now. I I I see almost the opposite. I mean, right here, again, I wouldn't say people are are ridiculously um bullish, but Uh, I don't think that they're as bearish as they have been um for the last year and a half, but we more neutral at this point. But that's what I meant by it's the most hated bull market. Was I I just don't understand. There was no euphoria. There was no Nothing. A and I think that's a function of the fact that you had the people
who were like my age, who did get burned um in two thousand, two thousand one, two thousand two, right? And have promised themselves they would never fall for that trick again. And then you had the younger generation have the same thing happen to them in 2022, 2021, post COVID. Uh a lot of the younger generation got involved and was chasing all these momentum stocks. And once those momentum stocks failed,
They just sat on them and said, Okay, I'll wait till they come back and they never came back. You know, they lost, you know, a lot of these Kathy Woods type of stocks, right? They lost, you know, seventy five, eighty five percent. Um, and now they have promised themselves that they would never fall for that again. And so therefore they have hated this rally for the most part almost the whole way up. So that's what I mean by the most hated bull market.
¶ The Psychology of Bear Markets
I've also heard you say uh that people love bear porn. And I'm just curious, why would this be when most of the investing public uh invests or trades from the long side? Wouldn't they love uh bull porn?
You know... It's a deep subject, but uh I'll tell you this. I I made a video, I don't know how long ago, maybe it was a year ago or so. Um I made two videos on the same day just as an experiment. I used the same data. I use the same information. And on one video I made the bullish argument based on that data and information. And on one video I made the bearish argument based on that same data and information. And I posted them both within an hour of each other on YouTube.
And the bearish one got five times more views than the bullish one.
Thank you.
And the bullish one I called the bull case and the bearish one I called the bear case. And the bear case got five times more V. So why is that? You know? Uh I I feel like, you know, the the the short trade is is the hero trade, right? Uh and people want to be the hero. Anybody can say, hey, the stock market's going up and 75% of the time it goes up, right?
But it's the hero that that that gets the market going down, right? So everybody kind of wants to be the hero. So they make this these bearish things. And I think that people are, while you say most people are invested from the long side, and that's clearly true.
Um, I think they are underinvested relative to where they in particular wish they had been, right? With the market basically at very close to all-time highs here. They clearly wish they had more money in the market, right? And they don't. And so, you know, it makes them feel a little bit foolish and uh
And therefore, if the market came down, they would maybe feel a little bit better about themselves and maybe they could get some of the money to work that they wish they had put to work. So um I just noticed that people are very much more interested in hearing the the bear case more than they're hearing the bull case.
¶ Copper's Economic Insights and COT
Interesting uh take on psychology there. Uh like to transition to uh economics and get back to uh you were talking about copper. Some say that copper has a PhD in economics. Um any thoughts on that?
Yeah, I mean I get it. You know, uh the demands for copper should be high in in in times of strong economic growth and and obviously low in in times of weak economic growth. So that's why they say that. They you know, why did copper go down? I will argue because people just got way too frickin' long and therefore they had to get stopped out, which they did.
Um, but you know, if we want to make the fundamental argument, you know, we can point to China, which has had a, you know, was the biggest user of copper by far. Um, and the economy clearly has sort of fallen out of bed then and hasn't really recovered very much. You know, Chinese housing and construction obviously uses a huge amount of the global copper supply. And that whole market has just uh been way overbuilt. And has just died.
So I think that is the fundamental reason why why copper has had such a hard time recently. But that's not to say that it necessarily says anything about the union. The US market, people came up with Copper's PhD way before China even was a player on the global economic stage, right? Um now they're probably the biggest player for that type of stuff, right? Um Maybe the PhD isn't uh has been lowered to a to a master's degree at this point. I don't know.
Yeah. Uh have the net longs or shorts reported by the COT grown steadily over the years to reflect all the new money printed?
Certainly in the stock market the the the outstanding value and the bond market the outstanding values have gone up. I wouldn't say so in the commodity market, but they've stayed pretty much the same.
¶ Fed Rate Cuts and Market Predictions
So what are your thoughts about the market saying that the about the chances of a fifty uh point rate cut? Uh, how accurate has the market been in the past in predicting these rate cuts? And is there a way to measure how crowded the t this type of betting is?
I mean at the beginning of this year, they were betting on seven rate cuts.
Mm-hmm.
They were bidding on seven rate cuts this calendar year. Oh wow. So how accurate was that? Right? Yeah. Not very. The positioning in the COT for fixed income can help in deciphering um where people are positioned for that type of stuff. my personal take, which as I've said before, I wouldn't trade off of my life dependent on it.
I I personally think it's a little bit crazy. I have no idea why they're they're cutting rates, why they're even talking about cutting rates. I don't I personally don't get it. Um, I guess they're trying to get in front of something, but uh I don't see signs of recession. I guess we're seeing some weakening, but you know what, the unemployment rate is 4.3%.
Um it wasn't very long ago where the the theory was the natural rate of unemployment was 6%, meaning it could never go any lower than that, right? So how four point through how we'll move from four point one percent to four point three percent? is so economically bearish, I don't particularly get. Um, I also think that and look, by the time we get to the interest rate cut, as we've seen the last few weeks, the market can move very quickly.
This could be different, but I mean the SP is within a couple percent of all-time highs. Gold is within one day yesterday, it was on all-time highs. Bonds are are are within a couple days of of all-time highs. So why do you need to cut rates? There's there's clearly plenty of liquidity out there uh right now to do what you what what you need to do. You you're gonna cut rates into the stock market on all-time highs and gold on all-time highs? Um, I think it's insane. But
The who the hell am I? I don't sit on the Federal Reserve Board. I don't know what you know. Maybe they see something that I'm not seeing. You know, I don't sit here and a team of people forecasting, you know, future economic growth for me. Uh you know, I'm just a stupid tape reader. Um, so maybe they're seeing something that that I don't see, but to me, I I I personally think it's That's insane.
But you know, and again, I don't care. Let them cut rates. What's important to me is how will the market react to that.
Right, right. So if the Fed gives the market what it's demanding and cuts rates by, say, fifty points, and the market closes significantly down for the day. Would that be an obvious news failure and a clear sign to go short?
It wouldn't be because it's not set up as a short. Um it's not set up that they're super long here for me. Um I personally think that if that were the case. I would be looking to short the thirty year bonds. Um, which are very close to set up to a short here. If they cut rates 50 and 30 year bonds go up first. Um and then close down, I would I would be looking to short that. I think that would be the trade.
Oh wow. Uh so you've said in the past
Which by the way to me makes the most fundamental sense as well, just as an aside.
¶ The Ultimate Game Over Scenario
Yeah, you've mentioned in in previous videos that it's all fine until there's a recession. Uh what type of news failure and market reaction would convince you that the game is up?
The game is up, up, up, up.
Yeah, like the game is up where um
We're done. It's all over.
Yeah, the the the chickens come home to roost and uh and people.
If if we're gonna make that argument, right? I think it starts with the idea of this this is the bear porn. Okay. And you want my bear porn? I'll give you my bear porn. Um you know.
Yeah.
Y you start with the argument that this entire thing is nothing but a Ponzi scheme. Okay. where they've been since oh nine, they've been doing nothing but printing money, right?
Mm-hmm.
Um, and that is what has supported everything, right?'Cause at the end of the day, more money is what drives the prices of things up, right? Um, Milton Friedman will will tell you that, right? Or at least he would have when he was alive, right? Um, that ultimately is what drives things up. So they they print money. And somewhere, I don't know where.
I don't even know if it's close or if it's not close. I have no idea, but somewhere, obviously, there's a limit to that, to how much money can be printed before there is a consequence. Now we know the U.S. has this special thing that the dollar is the reserve currency of the world. So therefore the limit to how much money they should be able to print is probably a lot higher than anybody else.
Um, but there is still a limit because there is a limit to everything in the world, right? Physics will tell us that, right? My feeling is if they get to a point where there's some sort of recession. And let's say the markets are going down, etc. etc. And the way that they decide to solve that again is to go back into QE and go back into printing money. Okay, that's fine.
What happens if that doesn't work? And what what it will look like that not working is they'll print money, they'll announce printing money, whatever. And the markets won't go up anyway. Stocks will go down anyway. Bonds will go down anyway. And the dollar will go down. Now what? What are you doing now? Right. There's nothing left. At that point it's over. Right. So that's what I would be looking for. We're not there yet.
Um, we could be there within the next six months, you know, let let's see where we go, right? We get the SP, you know, back down to 3,000 and et cetera, et cetera. Um, and shit starts to hit the fan and someone's in trouble and all that. You know, then then we'll see. Let let them print money and let the market react to them printing money and let's see how it goes, right?
But to me, that is the the the shit hitting the fan moment when it when the Ponzi scheme is over. And again, I'm not here to say that happens in the next six months. It could happen in 60 years for all I know, right? But that's, I believe, what to look out for. And I do in my heart of hearts. believe that that is a a real possibility. simply because of the psychology behind it. When they did it the first time in in oh nine.
I I worked at a large hedge fund and I can tell you that the consensus on the street was there was no way that was going to work. It was super inflationary. It was bad and blah, blah, blah. And of course it did work, right? Um it saved the whole system and all that. So but now this time around, everyone thinks that is the answer. That time they didn't think it was the answer. Now they think it is the answer. So if they do that,
people are probably gonna buy into it this time and then they're probably going to get burned. That's what I think. But we have to we have to get to that point. Yeah. You know the the difference obviously is that back then
The risk was on the bank balance sheets, right? And now the risk is on the government balance sheets, right? Everyone says, oh, well, the bank balance sheets are all fine now. They're all so well improved and blah, blah. I'm like, yeah, that's true, because it's all been shifted to the to the government balance sheets, right? Um if you think that, you know, the the scenario I'm talking about.
means that the US government is just going to go broke. I mean, you're fighting, you talk about fighting City Hall, you know. Uh these guys will will use obviously every trick that they could possibly pull out of their bag to prevent that from happening, right? But if and when that is going to happen, it doesn't matter what tricks they pull out of their back, right? If it's going to happen, it's going to happen. And and at a certain point, the more they try to stop it, the worse it becomes.
So that's why I say let them try to stop it by printing money and then let the markets tell you that that ain't helping. You know, let stocks, bonds, and the dollar go down on that. And then we got a problem. But you know, I'm not saying that's happening tomorrow. You know, let's let's let it happen first.
Excuse the last interruption here. This is Tessa. We hope you're enjoying this episode so far. If you love the podcast, Please give Chatwith Traders the best review you can on whatever platform you're listening from. This will help us to keep the episodes coming. Also, if you haven't subscribed to our email list, please hop on to chatwithraders.com and click on subscribe. So we can keep you posted of information that may be of importance. Thank you. Now back to the chat with our guests.
¶ The Power of Knowing Less
Uh so to wrap up, uh the last question I have for you is uh you said about a year ago The less I know about these markets, the better I am. Tell us, tell us why. You wouldn't wouldn't learning more and getting as much information as possible uh uh be better?
Not really, because I I think sometimes you can overthink it. You know, my my process has worked for me. Right. Um it's an edge, I believe, that that that actually has positive return expectation. So that's really all I want to know is what is my process saying? That's all I need to know. I can sit here and talk about, you know, Ponzi schemes and macroeconomics and blah, blah, blah, just like anybody else can, right? I went to school for economics. I get it, right?
But I I don't think it offers me any edge. So overthinking it is what I'm saying is uh can hurt more than it can help.
Mm-hmm. Well, Jason, I'd like to like to thank you for coming on uh Chat with Traders.
No, I appreciate it, man. It was great talking to you.
Yeah. How how can our listeners uh reach you?
Oh, you know, I have because crowded marketreport.com, which you can check out. On YouTube I do videos quite often, certainly once a week, I try to do a video that really focuses more on trading psychology than anything else. I'm not really on there every weekend going, here's what the SPs are going to do this week because I think that that's stupid. Um but on YouTube, under crowded market report, I have a bunch of that stuff.
Um, and then I'm on Twitter too. I post some stuff on Twitter once in a while too. And then we have a substack that's free, but if you go to crowdedmarketreport.com, you can kinda pretty much find all these things.
Okay. Fantastic. Great. Thanks for coming on the show.
Yep, appreciate it.
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