Every child is afraid of something. The dark, spiders, or clowns are all common fears…Or they may even have less rational fears, like dolls, cartoon characters, or ghosts. However, I’ve never met a child who was afraid of bubbles. That fear tends to develop later in life — usually among traders who have suffered through the “burst” in prices that inevitably follows one. See, popping bubbles may be a popular pastime for kids… But when it comes to the market, bubbles can only lead to one thing: a collapse in prices and a huge loss of fortune. What causes bubbles? One factor above all others: Greed. It’s been the driving force of every bubble, in every market, for the entirety of human history. And today, I’m going to show you how my years of studying greed have brought about perhaps the greatest trading indicator I’ve ever invented. But first, it’s important to understand how greed develops, turns into a larger trend, and ultimately becomes a bubble in danger of popping. For the perfect example of this, I want to look at South Florida back in the 1920s…
Skeptics, Speculators, and Swampland
Florida was mostly farms and swamps at the beginning of the 1920s, until a new highway running the length of the state made beaches in the south accessible.Miami Beach would grow from about 1,000 residents to more than 110,000 by the end of the decade. These new arrivals needed new homes, so developers jumped in to turn the countless acres of swampland into communities. This led to jobs. As jobs grew, people from other states started to rush into Florida. The rush to south Florida eventually became a bubble. There were great profits to be had, for the few who weren’t skeptical of Florida’s potential. One story sums up both the skepticism and the potential: “An elderly man in Pinellas County was committed to a sanitarium by his sons for spending his life savings of $1,700 on a piece of Pinellas property. When the value of the land reached $300,000 in 1925, the man’s lawyer got him released to sue his children.” This man’s land rose in value by 17,547% inside of a decade. That makes even today’s Florida real estate market look tame. These kinds of gains wouldn’t last forever, though. Eventually, the real estate bubble popped and many lost their fortunes. Values collapsed more than 50%. One publicly traded company, the Land Co. of Florida, fell from $93 per share in 1925 to $0.50 in 1930. This boom and bust was driven by the same factor that drives all bubbles: greed. Some people built homes in Miami and simply enjoyed their new lifestyle. But there were also speculators buying land in hopes of selling it at a higher price. That’s when bubbles become dangerous, and prone to popping. I know this, because I’ve studied greed for years. I’ve found that greed drives all uptrends in financial markets. And by spending so much time understanding greed, I’ve found a way to tell when it’s about to accelerate, and when the greediest pigs are about to get slaughtered.
Beat Greed with Greed…
I do this with an indicator I call the Greed Gauge.I developed the Greed Gauge by thinking about how markets react in times of major greed. When traders are greedy, they buy. Their buying pushes prices up. This is the major insight behind the Greed Gauge. And we can use it to predict the next move of any ticker out there. Let me show you how. To find the value of the indicator, I start by dividing a stock’s current price by its 52-week high. The 52-week high shows the maximum level of greed in the past year. If the close is near the 52-week high, traders are excited about the stock. They’re greedy, and looking to buy more. When the current close is far from the 52-week high, traders are selling the stock. Greed isn’t driving the price higher. In these scenarios, greed has given way to fear. This ratio of the close to the 52-week high quantifies the level of greed. But alone, it’s not enough to provide a trade signal. To generate a signal, I calculate a MACD of the ratio. MACD is a popular momentum indicator that uses the close in its calculation. By substituting the level of greed into the formula, I get clear signals like you see in the chart below of the SPDR S&P 500 ETF (SPY):
In mid-March, the Greed Gauge turned bullish right as SPY bounced from $415. As greed declined and the indicator flipped red in April, you would’ve sold SPY at around $450. That’s a gain of 8.4%.Then, just days later, the Greed Gauge turned bearish on SPY. Heeding that signal avoided a loss of as much as 9%. Greed is the ultimate driving force of every bubble and bust we’ve ever seen, in any market. That’s not changing anytime soon, if ever. So to have an indicator that tells you when greed begins to form, peaks, and declines… That’s the most powerful tool one can use to trade the markets, bar none. In just a couple short weeks, I’m releasing a full presentation on the Greed Gauge. You’ll learn more about how it works, how I invented it, and how it’s held up in the recent volatility. Keep an eye on your inbox for more details. But in the meantime, keep reading True Options Masters for any new signals the Greed Gauge flashes.
Michael Carr, CMT, CFTeEditor, True Options Masters
Editor’s note: When markets are volatile, it helps to have an expert at your side…going live on YouTube this Thursday to share his top trading ideas, and analyze your favorite tickers on the fly. He’ll use every tool at his disposal to see what they do next… His Profit Radar. Unusual options activity. Price action. For a one-of-a-kind guiding hand to profits in this crazy market, join Chad this Thursday at 11 a.m., right here.And Chad Shoop has come up with a way to get as close to that as we can possibly get. He’s
Chart of the Day:UST, the Un-stablecoin
By Mike Merson, Managing Editor, True Options Masters
Okay, normally I would limit my quota of crypto charts to just once per week, but yesterday was insane and we need to talk about what happened with the “stablecoin” TerraUSD (UST).I have little doubt we’ll still be talking about crypto 10, even 50 years from now.UST is what’s called an “algorithmic stablecoin,” designed to stay pegged to the U.S. dollar by way of highly technical arbitrage that we don’t have time for. What’s important to know is that it’s effectively backed by Terra (LUNA), another non-stable cryptocurrency that frequently goes through wild price swings. Who would’ve thought that backing a stable asset with an unstable one wouldn’t work out? Well, apparently not the Terra community. The UST broke from its peg in yesterday’s steep sell-off in the crypto markets. From a value of $1, it fell all the way to $0.60 when demand for the asset fell off a cliff. It’s recovered somewhat today, to $0.92. I happen to know a few people who put a portion (or all) of their savings into UST in order to earn a totally sustainable 20% yield in Terra’s Anchor protocol. Imagine losing 40% on the dollars in your bank account… in the span of an afternoon. That’s what they went through. All this is to remind you that crypto is the wild west. It’s probably the freest market in the world right now. As such, expect volatility to abound and for the unexpected to always occur. Yesterday’s sell-off just makes it an even better speculation, in my book. You might think me foolish for saying it, but
Regards,Mike Merson Managing Editor, True Options Masters