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Nailing the ‘Goldilocks’ Trade

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By Ryan Dinse, Monday, 24 July 2023

In today’s Money Morning…the pain trade for the past few months has been the market going ever higher. The longer it continues, the higher the pain for those locked out the market, waiting for falls that didn’t come. But what’s the next pain trade? And how should you play it? Read on for my base case scenario and the sector I’m most excited about…

Four weeks ago, I wrote that:

‘…I wouldn’t be surprised if the next pain trade will be for markets to keep surging higher as everyone waits for a pullback that never comes.

‘When those sitting on the sidelines finally capitulate and invest, then, and only then, will we get the pullback everyone is waiting on!

‘Don’t blame me, I don’t make the rules…’

Since then, the ASX 200 is up 1.3%, the Dow Jones is up 3.91%, and the tech-focused exchange Nasdaq is up 4.06%.

The bears are getting nervous. They’re rationalising the market action; trying to find new reasons why they’re still right.

Some are even close to capitulating and turning bullish.

For example, I noted one long-time doomsayer wrote last week that:

‘So, do we give in and participate in the upward momentum or give the market enough rope? Believe me, I’ve been giving (pardon the pun) this a lot of thought.’

As I noted four weeks ago, it’s when this kind of conviction wanes that you’re probably more likely to see markets turn down in the short term.

Market psychology is the one constant in our fast-changing world.

Though, perhaps we need to see the market rally last a few more weeks to really put the boot into the sidelined bears.

Timing the markets is never easy.

Luckily, here are Fat Tail Investment Research, we have a few trading experts that can help with such things…

What are our pro traders saying?

I’ll be very interested to see what our pro trader Murray Dawes has to say about the market this week.

He’s got a really good system for analysing shifts in market trends and uses ‘pivot points’ to determine the best times to get in and out of the market.

He’s navigated the topsy-turvy markets of the last 18 months better than anyone I know.

And I’ve heard on the grapevine he’s got a new presentation coming out soon, so keep your eyes peeled for that.

Another one of our trading gurus, Peter Bakker (Chewy), uses a computer (quantitative) model to work out how best to position your portfolio.

It pinged a signal last week to move from 100% cash to a 60% stocks-40% bonds mix.

Chewy noted in response to the signal that:

‘In summary, the increasing copper-gold ratio points to a bullish economic period. Central banks still face the challenge of controlling inflation, preventing a recession, and dealing with political pressures…but we seem to be nearing the end of this phase of high inflation and low growth with a tight labour market.’

I, myself, keep a very close eye on the small-cap market and have a number of price alerts set.

That way, I only pay attention to stocks and sectors when the price is telling me something may be up (see my Money Morning article from 10 July for more information on how I do this).

Last week, for the first time in a long while, I had multiple buy alerts ping in areas as diverse as biotech, oil juniors, uranium stocks, and even a helium miner!

And one of my strongest crypto recommendations — a larger one, not some obscure, dubious one — surged 20% in just one day.

That kind of move hasn’t happened in a while.

To me, these are all clues more money is starting to come back into the riskier end of the market.

With inflation coming down fast and interest rate rises set to be nearing an end, this is usually how these things go.

But it’s still very early days.

That means you’ve still got time to plan your moves…

An opportunity in small caps?

Interestingly enough, despite the broader market gains, the small-cap market has been fairly lacklustre this year.

Check out this chart of the ASX Small Ordinaries, an index of small-cap stocks in Australia, for example:


ASX small ordinaries chart

Source: Market Index

[Click to open in a new window]

As you can see, small caps have basically done nothing over the past 12 months.

And despite all the big-picture drama, an optimist like me would say it seems to have found a bottom.

If that’s the case, it could mean it’s time to start diving back into a few well-chosen, small-cap stocks.

Of course, if markets have taught us anything, it’s to expect the unexpected.

You need to be alive to the fact some piece of bad news could come out of nowhere and derail things.

Plus, with broader markets up so strongly over the past few months, it’ll only take one chink in sentiment for things to fall back down fast as people lock in profits.

My gut, for whatever that’s worth, says this will happen soon.

But that’s the advantage you have as a small investor over the big funds.

You don’t need to make big predictions.

You can stay nimble and get in and out of stocks a lot easier than a big fund can. Which means if you get it wrong, you can get always back out again without too much damage.

But the following is my ideal scenario…

My Goldilocks scenario

As I said at the start, the pain trade for much of 2023 was markets going higher.

But as ‘good news’ is starting to outweigh ‘bad news’, we’re seeing some bears start to capitulate and move back into the market.

Tha’s a sign to be wary about.

And it’s why I think the next pain trade will be rapid falls — either due to an external shock, like a problem with refinancing in a higher interest rate environment, or simply a pause for breath as people work out how the start of 2024 is going to look.

My colleague Greg Canavan has noted many times that monetary policy works with a lag, and it’s now about 14 months since the RBA started raising rates in the most rapid tightening in history.

That’s bound to start having some effect on things.

Anyway, my base case is that we’ll probably start to see some profit taking soon and the market will shift lower over the next month or two.

If that happens, I think this will set you up for the ideal buying opportunity.

As I noted before, my pro trader colleague Murray Dawes has a time-tested system for gauging such things, so look out for his upcoming presentation.

But even simple rule of thumbs can work.

When the bears start to crawl out again and call for Armageddon, that’s when you should start to make your moves.

And I think the juiciest opportunities will come from the small-cap sector.

Let’s see how this pans out…

Good investing,

Ryan Dinse Signature

Ryan Dinse,
Editor, Money Morning

All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

Ryan Dinse

Ryan is a former financial advisor who over seven years helped more than 600 clients and had more than $150 million under management. This experience taught him that the mainstream investment industry has no interest in helping clients strive for greatness. He was told to make ‘safe’ investment plays and settle for average returns. It wasn’t good enough for Ryan.

In 2016, he embarked on a renewed mission: to help ordinary people lock onto extraordinary trends before they go mainstream. He’s an experienced small-cap trader and an expert in cryptocurrencies. He first bought Bitcoin [BTC] in 2013, when it was around US$600.

His crypto advisory is a must for anyone looking to make digital assets a part of their long-term portfolio. Check it out here. His tech advisory Alpha Tech Trader aims to identify and latch onto strong emerging opportunities in the tech sector, wherever they are in the world. Get more info here.

Ryan’s Premium Subscriptions

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All advice is general in nature and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

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