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When Psychology Changes


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Jerry Welch, Commodity Insite!
Call me at 406 -682 -5010
Ennis, Montana 59729

Follow me on twitter@commodityinsite

Below is my weekly newspaper column from November 19, entitled, When Psychology Changes. I hope you find something of interest in my ramblings.


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November 29, 2019


When Psychology Changes

Frequently, several times a week actually, I post articles on Inside Futures.com regarding the Big Four: stocks, bonds, currencies and commodities. A week ago I posted an article entitled, Two Sound Bites Today, where I posed this question. How fast can a commodity change a trend? But I should have asked, How fast can any market change a trend? My column this week will touch on the latter not the former question.


In the article from Inside Futures.com I stated the following. Three days ago, coffee futures hit a 13 day low. Today, coffee futures are at a new, 4 month high! Be careful being short commodities, here in the hole. Be careful!" And this week, coffee hit an 11 month high. The point I am making is when the psychology of a market suddenly changes from bearish to bullish (or vice versa) price trends change just as quickly. It now seems the psychology and price trend for coffee has changed to that of a bull after working lower since the fall of 2016.


However, I also argue the market psychology for most all paper markets, stocks, bonds and the dollar have been skewed to the buy side of the ledger for an unusually long period. Since the trade war began 20 months ago,being long paper markets has done well because, if you were not long, you were wrong.


This year, with a month to go before the calendar reads, 2020, being long commodities or hard assets has been the very opposite. And most all analysts believe the same scenario will be seen in the New Year just as it was in 2019. It will be a year where paper markets do well and commodities do not do so well.


Still, history shows clearly that a market can change trend rapidly when it is weighed too heavily on the short (or long) side of the ledger. With that thought in mind, allow me to recap what unfolded this week with the worlds best performing stock, ArtGo the marble-mining company listed on the Hong Kong Exchange that rose 3800% in 2019. Everyone was loaded up to the gills with long positions in ArtGo.


In one wild and crazy day this week, the market psychology for ArtGo changed from manic to depressive. From wildly bullish to wildly bearish. The psychology changed overnight from, Let me in! to, Get me out!

From businessinsider.com; ArtGo shares had formed what some experts viewed as a disconnect from the company's fundamental performance. The share price hit 85 times the company's revenue, higher than some of the world's buzziest tech companies. Marble prices haven't jumped in 2019, and ArtGo's revenue for the first half of the year was half that of the year-ago period. Yet shares soared through the second half of the year.


The discrepancy led the activist investor David Webb to issue a "bubble warning" in September about ArtGo's shares, The Journal reported. Webb also asked Hong Kong's Securities and Futures Commission to investigate the run-up. And the day after that news article hit the wires, shares of ArtGo fell 98%, wiping out $5.7 billion in market value. Yes, the worlds best performing stock in 2019 that rose 3800%, fell 98% overnight!


Historically, such white knuckle declines on the Hong Kong exchange are not that unusual. On the same day that shares ArtGo were decimated, shares of Kasen International Holdings, a small-cap stock dropped 91% before trading was halted. The market psychology for shares of both firms changed abruptly to say the least.


When market psychology changes it is generally because the trade was, too crowded. When a market becomes too crowded with bulls it is vulnerable to turning lower and at times, dramatically so. When a market becomes too crowded with bears, the same thing can happen on the upside. History shows that, crowded trades are fickle, subject to a change of direction in the blink of an eye and should be avoided.


The market psychology today is ice cold bearish commodities because of the trade with China. If the war ends, and it will, those pressing the short side of commodities will face an abrupt change of psychology and quickly discover that a host of entrenched bearish trends have morphed into newly emerging bull trends. And that means, if you are not long, you will be wrong when it comes to hard assets, or commodities.


But for that to take place, a trade deal with China needs to be signed. Or, weather issues have to surface. In my view, this is no place to turn bearish hard assets. No place at all.

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This morning, there is nary a market in the red. Stocks, bonds, metals and most hard assets are trading higher. Coffee is trading at levels not seen since July, 18. And coffee is a perfect example of a market that can reverse course quickly once the psychology changes.

Drop me a line at commodityinsite1@gmail.com if I can be of help. Or, call me at 406 682 5010. And never forget. There is no substitute for timely and accurate information.

There is a USDA grain report due at 11 a.m. Chicago time this morning. If the data comes out as I expect, a low risk, low margin trading opportunity will surface. Let me hear from you!

The time now is 8:15 a.m. Chicago9





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About the author


Jerry Welch has been in the futures industry since the late 1970's and is a true veteran of the markets. He has been quoted often in Wall Street Journal and is author of Commodity Insite, one of the longest commodity futures newspaper columns in history. His weekly column has been published each week since the mid 1980's and is one of the most recognized names in the world of commodities.

Mr. Welch is also known widely as a, "so so" flyfisherman.  

His column is published by the Illinois Agri News in La Salle, Illinois, Cattle Today, in Fayette, Alabama as well as Consensus, in Kansas City, Kansas.

He can be contacted at 406.682.5010 for a view of his, "twice a day" market column that includes price forecasts and trading suggestions.

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