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In This Market, It Pays to Wait for Big Opportunities


Check out gold stocks over the past few years and you'll see that patience is a virtue when it comes to riding out a bear market.

I listen to CNBC sometimes, usually when I'm running around or working out or something. Not for the opinions of the traders, which I find more entertaining than useful or informative. I listen mostly for the news: earnings reports, profiles on new products and companies, etc. They do an OK job of covering major financial news stories of the day, even if they tend to be biased toward whatever is hot at the time and overhyped (which also makes CNBC an interesting sentiment gauge).

One of my favorite things from an entertainment perspective is when one of the hosts turns to one of the traders and says, "What trades did you do today?" And usually the trader gets all fired up and gives some glossy rationale for why the trade they just put on is awesome and should make a bunch of money. I find this behavior amusing in multiple ways, but what would be great is if just one day the trader would say, "You know, I didn't do anything today -- there wasn't anything to do."

These people act like the market gives you big opportunities on a daily basis. In reality, the daily opportunities are all about squeezing profits out of minuscule moves in the markets, often using excessive leverage. And when the market gets volatile and choppy, this excessive leverage often works against you and causes you to get stopped out trade after trade. This causes your account to get "chopped up" as the small losses start building up and also affects your psyche in a negative manner.

Markets give opportunities after sell-offs or bear markets and after periods of disinterest generated by choppy, sideways action. The problem is few people have the patience, emotional fortitude, and open-mindedness to wait for these opportunities and take advantage of them. If you think about when the two big opportunities were in the last five years in the stock market, they were in early 2009 after a horrible bear market, and in late 2012/early 2013 after a sideways bear market. During both periods I remember distinctly how oppressive the bearish sentiment was. In 2009 it was the financial crisis, and in late 2012 the fiscal cliff had people scared off the markets.

Coming into 2014, the US stock market had a historically high cyclically adjusted P/E ratio and was coming off of a multiyear bull run, where investor enthusiasm recently hit multiyear highs. That didn't sound like a big opportunity to me when the year started. But if you took a contrarian look at commodities, bonds, and some foreign markets coming into the year, that was where potential opportunities were.

I'd like to emphasize the word "potential," because one of the key things I've learned from the gold market in particular over the last couple of years is the idea of letting bear markets run their course. It's very tempting to call a bottom in a bear market and try and get positioned for a bull run. But bear markets have to run their natural course and will have false rallies on the way down that will frustrate those who aren't willing to accept that they occur.

The opportunity in the gold stocks is that they're trading at low P/E ratios and low P/B ratios, and there's investor disinterest and apathy after suffering such big losses in a bear market. The problem with gold, though, is it's fighting against overhead resistance, as sellers that are locking in losses are about at equilibrium with buyers looking to "buy the dip." This is what creates the conditions for the Stage 1 base that we're in now, as shown in the chart below.


We need to see gold break out of this Stage 1 base on an increase in volume to show that this opportunity is real and not just another failed rally. That's why they say patience is a virtue. As a market participant, it pays to wait for the big opportunities.

Editor's Note: This article was originally published on

Twitter: @nextbigtrade
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