"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

Trader Dan's Work is NOW AVAILABLE AT WWW.TRADERDAN.NET



Saturday, February 19, 2011

Some thoughts on Analysts and the Silver market

I have been reading with some amusement the comments of some who seem as if their sole raison d’etre is to provide a perpetual example of folly masquerading under the supposed guise of wisdom.

By this I mean to say the comments of those who continue to deny that there currently exists a shortage of silver in the market. They cite their reasons, and offer their opinions, which I might add here, they are welcome to and should have the opportunity to voice, even when they are consistently wrongheaded and yet apparently feel under no sense of honor to modify even when proven wrong.

Let me first begin by saying that as a trader of more than two decades’ experience, there have been, and I am sure, will be, times when I have been wrong about a market. I feel no shame in admitting that – why should I, as I am a mere mortal and am not infallible. To give a recent example – I have been a bear on the US equity markets beginning back in 2008 and continuing to hold that bearish opinion until November of last year. It was not until that time that I realized that no matter what I thought about the reasons why US stocks should not be rallying, the stock market was going to continue to rally especially now that the Fed had announced a fresh QE program. The old trader’s adage, “You cannot fight the Fed” was proven to be true once again.

I might add here that I had also been wrong about the bond market for some time and was of the opinion that a falling Dollar would result in a falling bond market. That too was not the case during the credit crisis of 2008. I learned a good lesson about all that back then.

I still have my doubts about the veracity of this move higher in US equities or of its ability to endure but the fact is that the stock market is moving higher, regardless of what I think about it.

Now, as a trader I can do one of three things with this.

One – I can continue to stubbornly insist that the stock market should not be going up and take out a huge short position and continue until my trading account is no more, declaring that the US stock market should not be moving higher. At some point in the future, the market will no doubt correct and move lower at which time I will perhaps feel vindicated. The problem is that by that time I will have not made a dime off of my views and very possibly could have lost my entire trading account and with it my livelihood, although at the very end I will have the self-satisfaction of telling myself and others: “SEE, I was right all along. I told you so”. Result – I am broke and busted but feel proud and smug.

Two – I can do nothing and stay flat because while I see the market moving higher am greatly suspect of its lasting power. I will not make any money following this course of action but neither will I get hurt financially either.

Three – I can see the trend and while I greatly suspect its lasting power, can take a long position and attempt to ride that trend higher until such time I see it nearing an end. This course of action, while fraught with peril because of my own views of the market, will make me money as a trader if I employ sound money management techniques and use wisdom and do not get careless or complacent.

Here is the lesson in all this, a lesson I might add, learned the painful way through many years experience. THE MARKETS DO NOT CARE ONE BIT ABOUT OUR OPINION.

The sooner one learns this lesson, the better a trader/investor they will become.

I remember earlier in the past decade reading the reports from a rather well known and respected analyst who was consistently bearish on the copper market. Back in 2006, when copper was trading closer to $2.00, having rallied up from down near $1.40 - $1.50, he kept producing studies adamantly denying any reports suggesting that there was a tightness in the copper supply based on real fundamental supply/demand statistics. He cited reasons such as hedge funds artificially distorting the supply by taking huge sums of copper off the market and storing it in warehouses thereby creating the drawdown in stocks at the LME and in Shanghai that were being registered. He stated that copper was therefore overpriced and was primed for a fall.

This he continued doing while copper rose towards $2.50 - $2.60 pound. He was still bearish while copper went on to hit $3.00. “Still overpriced”; “No real shortage”; “Supply is being artificially reduced – the copper is still there just not in the public warehouses”, etc. all the while the price of copper kept rising.  Before it all ended, copper had moved up to over $4.00 in May 2006 before it finally sold off. It then retreated all the way down to $2.40 before it turned around and went back up again reaching nearly $4.30 in 2008 before it crashed alongside the rest of the commodity complex when the credit crisis erupted.

Maybe this analyst was right; maybe he was wrong; maybe hedge funds were indeed taking copper out of storage in public warehouses and stashing it into private warehouses. Who knows and who really cares at this point? Here is the point in all this recapping. One could have followed the three options just cited.

Option one:  Well Mr. respected analyst says that copper is overpriced and should not be moving higher. Therefore I will listen to Mr. respected analyst and take a short position”.  What would the result have been for the average trader/investor? Answer – the average trader/investor would have lost the entire amount invested on a short copper position if not more due to the leverage effect. Question – was this a good course of action? Answer – obviously it was foolhardy.

Option two: “Mr. respected analyst says that copper is overpriced and should not be moving higher. He is probably right because he knows more than me but I see the price chart is moving higher and therefore I will do nothing because he must be smarter than me and I must be wrong”. Question – how would that have worked out? Answer – no harm done but neither did the average trader/investor make a single dime. He is no richer or no poorer for his choice and is as well off as he was before. He has however lost a very good opportunity.

Option three:  “Mr. respected analyst says that copper is overpriced and should not be moving higher. The price chart however tells me that the market does not care one whit about what Mr. respected analyst thinks because IT IS MOVING HIGHER”. I will therefore take out a long position in copper because I believe that the combined opinions of ALL MARKET PLAYERS is outweighing the opinion of one Mr. respected analyst. Question – how did this choice work out? Answer – the average trader/investor made money and profited from his action. He has increased his wealth and has used a market trend to his advantage.


Let’s now take this a bit further and run it back to silver. We have the same persistently negative analysts who continue to assert that there is no shortage of silver and that silver is overpriced. Maybe they are wrong; maybe they are right. I personally happen to believe that they are wrong but even at that, who am I and why does what I think about this even matter. The key is that the COMBINED OPINIONS OF ALL PLAYERS that trade in the silver market presently believe that there is a shortage of silver.  How do I know this? Simple – the price chart tells me so. Which way is it going, higher or lower? If the combined opinion of the players in the silver market believed that there was more than enough supply around, more so than current demand supported, the price would not be going higher; it would be going lower.

Not only that, but the backwardation type price structure on the silver board is also saying with a clear and loud voice: “Silver demand is currently extremely strong – so strong that buyers are willing to pay up to obtain the metal right now rather than wait for it”.

Now, we have come full circle and are back to facing the same three choices that I have listed earlier in this commentary.

Option one – the trader/investor listens to the persistently negative analysts who tell him there is no shortage, takes out a short position expecting price to be obedient to their assertions and move lower, only to get run over and left for dead on the trading floor with huge paper losses. He not only does not make a dime, he loses all the money he bet against the rise in silver.

Option two – the trader/investor listens to the persistently negative analysts who tell him there is no shortage but he sees price moving higher and doubts his own judgment. Therefore he does nothing. He makes no money; he loses no money either but then kicks himself for following their opinion and second guessing himself.

Option three – the trader/investor listens to the persistently negative analysts who tell him there is no shortage of silver but he sees the price chart and then comes to the conclusion  “ the market is telling me in no uncertain terms that it does not agree with the assertions of the persistently negative analysts because its price chart is telling me so. I will therefore trust my own judgment and take a long position in silver. Question – how did the average trader/investor who followed this course of action fare thus far? Answer – it depends on when they instituted their long positions but let’s just assume that they went long when silver closed above the $30 level and held that tough resistance level refusing to break lower. So far, so good. Now, by employing proper money management techniques, they will be able to lock in a healthy profit if they are a trader or at the very least will have managed a return or gain on the silver bullion they might have purchased.

Here is the final point in this. I have been around this industry for a very long time. Over that time I have seen countless “analysts” come and go. I have also seen some traders who have survived and thrived over that same period. Here is a vital and important distinction that needs to be kept in mind.  

Analysts get paid to “analyze” and give opinions on markets. They make money whether their opinion is right or wrong. In that sense they are no different than the TV weatherman. He gets paid to produce a forecast. Sometimes he gets it right; sometimes he gets it wrong but regardless he gets paid. He suffers no consequence for failure. However, those who rely on his forecast and make business plans based on those forecasts may suffer terribly if they act on his forecast.

Take the example of a guy running a concrete company who plans a big pour for a certain day because the weatherman has given his forecast for no rain in sight. The big day comes, the contractor spends thousands of dollars on material and pours only to have a downpour wash it out. The Result – the weatherman goes on TV the next day, issues another forecast and collects his paycheck at the end of the week. He has no accountability or suffers any consequence whatsoever. The unfortunate concrete contractor, who put his faith in the weather forecast, is entirely a different matter. He has lost his thousands and suffered immense pain as a result. Life goes on for the weatherman but the concrete contractor might possibly have been ruined.

Analysts are the same – they can issue opinions all day long and suffer not the least bit of consequence for their failure. However, those who listen to them and make decisions based on those opinions can suffer immense harm. Life goes on for the analyst, no matter how often he is utterly and completely wrong; life can be extremely difficult however for those who took their guidance from him.

Analysts therefore make their living OFF of the market – not IN the market. This is a vital distinction.

Traders on the other hand, make their living IN the market. If we are wrong, we suffer the consequences of our actions. If we are right, we enjoy the reward. If we are wrong, we are forced by the nature of the business to QUICKLY realize and ADMIT we were wrong. By doing so, we survive and even prosper. Failure to admit when one has erred is not only stupid and foolish, it is ruinous.

Analysts on the other hand generally cannot make a living trading a market. The reason is because many of the ones that I have seen over the decades have had one huge failing that hinders them from ever becoming successful as a trader – their EGO prevents them from admitting error.

Remember this well the next time you read an opinion by an “analyst”.

Good traders are confident but are also humble. If they survive long enough it is because the markets have humbled them and they have learned to respect it above all others. That is why as a trader we let the markets tell us what the COLLECTIVE OPINION of the market players are at any given time. That opinion is always right, even it may happen to be “wrong” in our own minds. Learn to respect only THIS OPINION and you will be successful. Learn to ignore those whose opinion contradicts this COLLECTIVE OPINION, and you will thrive.

The goal in trading is not to be “right” but to make money. Everything else is noise.


24 comments:

  1. T-Dan,

    Man, you nailed it again. I will be 50 next year and this is my 4th time back in the market due to having the market politely escort me out due to "ego induced cash bust" (EICB). I cautiously, humbly say I think I am kinda getting it, have had to build back up from a meager start, but finally have some momentum.

    Anyway, it took me going bust three(3) times to cut my losses quick to be in another day. We appreciate your inputs to provoke our thinking.

    Regards
    Recovering EICB'er

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  2. Salient as ever, your lessons are second only to those dealt out by the market itself. Keep up the great work, it's much appreciated.

    Aaron

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  3. Nicely done, Dan. This blog, though very young, punches well above its current weight. Well done...your insights are much appreciated...

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  4. Indead a thought provoking post ... Appreciate u running your own blog.

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  5. Can I make a request - that you not use bold font to type the posts, it's hard to read.

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  6. Trader Dan,
    Those are words of wisdom. Thank you. I knew you must have been the real deal if Jim Sinclair likes (employs?) you. Your words of wisdom prove that.

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  7. Top class commentary Dan, and thanks for the boldface print for us elder lemons...

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  8. Dan,

    This is an example of why I have admired you for so long. You are not a poser and are able to 'tell it like it is', mostly in terms the average person can understand with less of the 'jargon' that most commentators use.

    The blog is great and you are putting in far more effort than anyone should do for free, even though I see some Google Ads. I can share some insight on that issue.

    Hope you are getting some 'you' time and some quality time with your youngsters. As you know, you don't get that time back once it disappears and they become 'independent thinkers'.

    I certainly hope that all your followers truly appreciate the time it takes you to post to this blog.

    One of my three blogs can be found at:
    http://goldtradercommentsaugust2010.blogspot.com/
    and I would appreciate your followers giving it a glance to see if they can find some value there.

    I am not as active right now due to my personal life being more consumed by some major changes being done, but I try to post articles that you don't find on the internet that give you better insight to the overall picture that is giving rise to the precious metals. I welcome correspondence with anyone who has questions of any kind.

    Just scroll back through my many posting to get a better understanding of what have been doing as I trade the market in real time and posted charts as close to real time as possible.

    I should be more active on my blogs soon after I complete my immediate tasks which are consuming all my time for now.

    Having been a trader now for 35 years, and started out thinking that those in the industry 'knew something' that I didn't, it took me many years (before computers) to finally realize I needed to rely only on my own perception of 'the market'.

    THE MARKET is not a some monolithic 'thing'. As you indicated, it is nothing more than a numerical/graphical representation of the totality of all the players' positions as to the VALUE of a commodity or a share in a business/company.

    None of can see the future completely clearly.

    But it is obvious that disasterous times are just ahead due to the mismanagement of our economy and finances by this recent batch of lying, criminals who have taken over corporate leadership and managed to buy our Congress and Presidency for far too long.

    It's time for each of us to decide what we live for, and especially, what we are willing to DIE FOR, as that is where this is all heading.

    Precious metals are just a part of the tactics you must understand to protect your assets.

    It is no longer about 'making' money, although that is important to us traders, but more about PRESERVING THE VALUE of what you have now before it disappears in the coming hyper inflationary collapse of the dollar and other paper currencies.

    Thank you again for your magnificent contribution to those of us who have found you, and to all those others who WILL eventually find your voice out of sheer necessity.

    Mostly the sharing of your knowledge with the 'less experienced' among us is without measureable value, so your followers should understand that that is your greatest contribution as you 'teach them how to fish, rather than feeding them a fish'.

    My best as always, Cedric

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  9. Trader Dan...
    Please know I look forward to each day on your "hourly action in gold" and for sure, your now weekly comments on King World News. You are such a pleasant sounding person with solid logic behind what you have to say. Many thanks for your work.

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  10. Great work T-Dan. People have realized that the Analyst have a conflict of interest as most work for a Financial Institution or are "sponsored" by one. It has most of the times worked out for me to go the opposite direction of the Analyst's recommendation. So let's hope they remain bearish in Silver.

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  11. Thanks Cedric.

    I do indeed spend a fair amount of time at this and am willing to try to answer questions or respond to comments but I do only have so many hours in a single day so I kindly ask the folks please do not take offense or feel slighted if I cannot respond to every single comment or post or question. I am paddling as fast as I can! The duck appears calm and serene on the surface of the water but underneath its little legs are a kickin'!

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  12. What was the saying, "the market can stay irrational far longer than you can stay solvent!". Yes the stock market rising seems "irrational" I totally agree. I'm glad you figured it out, and have stayed "solvent"! What do you look for, Dan, to help you figure out that the market may have turned down and that we should rethink our positions?

    Here's a google spreadsheet I have put together on silver (and gold) that people might enjoy. It updates realtime during the trading day:

    https://spreadsheets5.google.com/ccc?hl=en&key=tGY3dpFVo5n47YlNmBKQbjw&hl=en#gid=17

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  13. I am very thankful for your priceless insight that many others might overlook. Also for fellow comments that are so wise like Goldtraderrr.

    Looking foward to the action this week.

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  14. Dan,

    re the stock market. Remember that the Markets can stay illogical for a lot longer than you or I can stay solvent

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  15. One of the best, if not the best, articles I have ever seen on trading.

    I will spread the word Dan - and place links to this post, as often as possible.
    As it is simply the gist of trading.

    Although on the other hand - majority of "traders" will continue to just do the opposite - that is "listening" to the gurus. And not the charts and not Mr. Market.
    At least that's my experience - since years. And nothing ever changed in that regard.

    Anyway - congrats on this excellent piece of education!

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  16. This comment has been removed by the author.

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  17. Excellent article by DAN as usual.

    Dan says the COLLECTIVE OPIONION is always right. I am wondering if there is a difference between the COLLECTIVE OPINION and the MAJORITY. Contrarian investors believe the MAJORITY is usually wrong, the MAJORITY may be right while the major trend is intact but certainly the MAJORITY misses major turning points in the market when the trend changes. And as the saying goes, "the market does the best it can to frustrate the largest number of investors." That "largest number" I always assumed was the MAJORITY.

    It looks like the MAJORITY can't be exactly the same as the COLLECTIVE OPINION if Dan is right. I'm guessing the difference in the two might be the COLLECTIVE OPINION is just those investors who actually hold current positions in the market. The MAJORITY includes large number of investors still sitting cash in the sidelines. Am I wrong? Can anybody please help explain what the difference is?

    Lewis Forro
    Virginia Beach, VA

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  18. so hard to simply keep it simple,, measure the market and mimic it, without the "vested ego".

    Even if the "Ego" is right, the market can maintain its "irrational position" far longer than traders can stay solvent, insisting they are right.

    DG www.denaliguidesummit.blogspot.com

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  19. so much knowledge extracted and constrained within relatively so few paragraphs...the people Dan who will heed this guidance will smell many more roses for a much longer period of time...success breeds the ability to allow one to decide to what degree and type of misery or gratification one wishes to pursue...

    I have to say that the shorts are definitely not suffering from ennui during the past few weeks...I wonder how many will contemplate walking the balcony rail...

    brilliantly done, Dan...

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  20. Thank You. Greatest Admiration for YOU!

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  21. Any chartist worth a damn would have been making a fortune in general equities since 2008. Citi a dollar. GE 7 dollars. Ford a dollar. The charts were screaming BUY. DOW's well over 12K now. That's what happens when one let's politics get in the way reality.

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  22. This is great Dan. Would you consider yourself to be a technical trader then? Are there any books to learn more that you'd recommend?

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