When the Smart Money Loses Its Shirt

When the smartest people in the room are losing their shirts, you know it’s time to batten down the hatches.

I read an article in the Australian Financial Review pointing out the shocking losses suffered by some of the best-known hedge funds in October.

Regal hedge fund returns have already been terrible this year, but October kicked them while they were down.

Regal’s crown slips

Source: Regal

[Click to open in a new window]

Those returns are for one month, not one year..

So if you haven’t lost 10-40% of your money in the last month, you are doing better than them.

Markets are cyclical. There are times when investing is fun, and times when it is nothing but trouble.

Deciding when it’s time to sit on your hands and wait out the tough times is one of the hardest things to figure out as a trader.

The question is usually how many losses you need to take before you decide conditions have changed.

We all want to be busy doing something.

It feels strange to say you are a trader but choose not to trade.

But sitting on the sidelines in cash is a trade.

Last week saw some huge volatility erupt in the US after the Midterms. The Nasdaq dropped over 6% in one session, which is huge.

Then this week, the bounce occurred, and it feels safe to go swimming again.

I’m not so sure.

As a downtrend develops, there are plenty of short squeezes along the way that tempt traders into positions at exactly the wrong time.

Now that the S&P 500 and Nasdaq are in weekly downtrends, I need to see those trends turn up before I will consider being bullish.

That could happen rapidly. But it needs to happen before I’ll switch from a defensive stance.

US bonds are selling off again after the hot CPI print during the week. That has fuelled a major breakout in the US dollar index, pushing it above 102.00.

US dollar strength is placing pressure on gold, bitcoin and other commodities.

Gold and bitcoin in particular look dangerous.

Considering all of the above, it seems remarkable that the S&P/ASX 200 [ASX:XJO] is just 2% shy of its all-time high.

Money is flooding into the banks and other defensive plays while smaller companies languish.

In the video below, I show you a chart comparing the S&P/ASX Small Ordinaries Index [ASX:XSO] with the ASX 200. It ain’t pretty.

But don’t despair, Lachy (Charlie is on holidays), and I’ll finish up with a stock that is bucking the trend and actually going up. So be sure to stick around to the end.

Closing Bell