So far, 2018 has seen some dramatic panic selling across almost all financial markets.
Metals have tanked. Stocks have become volatile and have declined about 10% from all-time highs. The bond market has taken a hit as central banks have begun slowly raising interest rates (for now). And the total market cap of all cryptocurrencies has fallen by almost $600 billion dollars.
This means that many assets are currently underpriced. While most people perceive catastrophe, successful investors see opportunity.
Q3 2018 might one day be looked back upon as one of the greatest buying opportunities of the decade.
Let’s look at the severity of the recent declines in precious metals,mining stocks, cryptocurrencies, and cannabis stocks.
The quintessential safe-haven bids have provided investors little shelter from the recent market carnage. Rising rates, quantitative tightening, a stronger U.S. dollar and the risk-on trade have contributed to the demise of the metals this year. Gold has broken key support and silver has seen steep declines.
After trading between $1,300 and $1,400 through May, gold has broken beneath support at $1,200. It dipped as low at $1,167 before bouncing back to the current price of $1,195. Gold needs to reclaim $1,250 and ideally climb back above the 100-day moving average at $1,280 to turn bullish again. The RSI momentum indicator was oversold this past week until bouncing a bit in the past few sessions.
After appearing to hold steady above $16 for at least nine months straight, silver has fallen below $15 and is rapidly approaching $14. The $13.50 price level should offer strong support if the dip continues. The silver price needs to bounce back above $16 soon for our outlook to turn bullish.
Silver is the most volatile of all the metals and has been known to make rocketship-like rebounds. Q1 2016 saw silver soar over 50% in little more than a month. Roughly 50% of silver’s demand comes from industrial applications, so the strengthening economy should increase demand for physical silver.
Leverage cuts both ways and GDX has been hit especially hard. The gold miners’ ETF is down 6% in the past week and 14% over the past month. The RSI has become deeply oversold, offering an opportunity for short-term traders and long-term holders alike.
The month of August has seen an even more dramatic decline in GDX than the months that preceded it. Value investors now have the opportunity to pick up shares in quality mining stocks that are deeply undervalued. The GSB portfolio is well-positioned in junior and mid-cap mining stocks. We plan to increase exposure over the next few weeks by purchasing a few of the miners currently on our watch list.
While the marijuana index has seen steep declines over the past six months, a weekly bounce of over 10% from the 6-month low of 224.61 shows how quickly things can turn around. Prior to this bounce, most cannabis stocks had dropped at least 30% from 2018 highs. If this bounce continues a few more sessions, it increases the liklihood that we have seen the bottom for the cannabis sector sell-off.
The cannabis sector is still so young, there’s plenty of time to become an early adopter, even after this bounce. With legalization sweeping the United States and gaining momentum globally, investing in cannabis stocks now could be like buying Microsoft, Apple or Google back when they weren’t yet household names.
Cryptocurrency Panic Selling
The cryptocurrency market as a whole has seen more than half a trillion USD of market cap vanish year-to-date.
Bitcoin, the largest cryptocurrency by market cap, is down more than 60% from its all-time high of over $18,000 in January 2018. XRP, the token of the Ripple network, has collapsed by 90%. Ether, the native token of the Ethereum network, has lost about three-quarters of its dollar value since the year began.
Ethereum has seen very sharp declines amidst this recent sell-off. Panic selling has driven ETH down 75% from 2018 highs around $1,200, all the way to just below $300.
Given that ETH was trading around $7 in Q4 2016, the native token of the Ethereum network still looks to be doing pretty well for early investors.
XRP has tanked through the floor, falling almost 90% from the high of over $3.00.
The XRP token was truly in bubble territory, having climbed from less than half a penny in early 2017 to its record highs just a year later. We view it as a centralized, pre-mined, bankster coin, that will always be inferior to more de-centralized and fairly-distributed solutions.
Bitcoin has been the most resilient of the bunch, being the safe-haven bid of the crypto world.
So far, the BTC/USD ratio has kept in line with my previous prediction of holding a narrow trading range close to the $6,000 mark for some time. This could continue for a few more months before a breakout. Historically, the moon months for crypto have always been in the fourth quarter.
While Bitcoin may be down year-over-year, it still represents the gold standard of crypto and has held its own amidst much steeper declines in altcoins over the past few months. In fact, Bitcoin dominance (market share) has rocketed from 35% in May to 52% currently. Bitcoin is currently worth more than all other coins combined. Altcoins are more speculative, so they tend to suffer sharper declines during corrections, but also tend to enjoy greater gains during bull runs.
Investor Psychology 101 and Panic Selling
The average investor gets washed away in the tides of sentiment. When asset prices rise, people tend to take notice and think they just have to get in on the action right away. When asset prices fall, it feels like the sky is falling and it’s time to panic sell.
It’s no secret that this is a loser’s strategy. To make good decisions in finance, it’s necessary to remain calm and act from a place of discipline and rational restraint.
When it comes to mining stocks, cannabis stocks, precious metals, and cryptocurrencies, people tend to have even stronger emotions than usual. They can become mentally “married” to a particular asset class, stock, or token, meaning they refuse to change their position no matter what happens.
This is the definition of delusion.
1a : something that is falsely or delusively believed or propagated.b psychology : a persistent false psychotic belief regarding the self or persons or objects outside the self that is maintained despite indisputable evidence to the contrary.
The sad truth is most investors live in a constant state of delusion when it comes to their assets. Instead of examining trends and evidence in order to come to a rational conclusion, it’s more common to create the desired conclusion and discount any evidence that contradicts that conclusion.
Panic Selling is Not the Answer
In order to buy low and sell high, you have to swim against the tides of bearishness and bullishness. August of 2018 represents the best buying opportunity of the year so far for almost all asset classes. But do most people perceive things this way? No. The more common view is that the end is nigh and all hope has died.
Like clockwork, once asset prices begin to rise, the bulls will begin screaming that now is the time to buy. But by then it will already be too late. The bottom may already have been reached by the time you read this, whatever asset class you choose.
Keep in mind that trying to time the absolute bottom or perfect peak is also a mistake. While you want to buy at a low, waiting for the very pit of a dip is impossible. It causes you to wait so long that the inevitable bounce comes before you were able to seize the opportunity.
Likewise, selling near a high is great, but waiting for the tip-top of a meteoric rise leads you into the same trap. By the time you take profits, a correction will already have hit.
Easy Ways to Mitigate Risk
For the sake of this argument, we’ve been discounting two ways to get around the typical herd mentality that causes most people to lose money. These include stop-loss orders and buying and holding.
First, you can place stop-limit and stop-loss orders. These give you the option to minimize your losses and lock in your gains without having to keep a constant eye on the markets.
Buy and Hold
Alternatively, you can buy and hold for the long-term. This strategy is much easier for the average person and can lead to the largest gains.
Don’t fool yourself into thinking you’re some master day trader that can make millions trading penny stocks in a couple of months. Arrogance is another fatal flaw in this regard.
Case in point. I once had a friend who lost over $10,000 in less than a year because he kept making massive bets on penny stocks based on news reports or a single technical indicator. This never worked. Using this kind of method is not falling victim to the investor herd mentality, but is pure gambling.
A much better method is to take the contrarian perspective and act accordingly.
Panic Selling and the Contrarian Perspective
Contrarian investing involves doing the opposite of what everyone else is doing. Capitalize on the momentum of the herd instead of being trampled by it.
Consider the following definition of contrarian investing courtesy of Wendy Connick of The Motley Fool:
Contrarian investing is the practice of bucking the herd. Contrarians buy stock when everyone else is panicking and selling theirs, because they know that a flood of stock sales means that the market is near, or at, its bottom and will soon begin to recover. They sell whenever investors become extremely optimistic, because when everyone is buying that usually means the market is at or near a peak and is about to take a dive.
Contrarians take action that contradicts prevailing investor sentiment.
For example, the doom and gloom that this article has so far focused on might make you think that now is not the time to get into crypto, stocks, gold, or anything else. But in reality, nothing could be further from the truth.
A buying opportunity like this will probably not come around again for quite some time. While the broader stock market is still mostly overvalued (particularly tech stocks), mining stocks and cannabis stocks still have significant upside potential going forward.
For those who are betting on much greater U.S. stock market gains ahead, please realize just how overvalued the market is currently (it’s worse than in 1929!). The odds are against much further gains. You need to be realistic. https://t.co/UUu9ltAzyw pic.twitter.com/yHDcYofXID
— Jesse Colombo (@TheBubbleBubble) February 14, 2018
Panic Selling is for Weak Hands
In the financial markets, investors or traders have weak hands when they lack either the conviction to stick with an investing or trading plan or they lack the resources to carry them out. Their are usually small speculators exhibiting predictable behavior. They buy near tops and panic sell at bottoms.
Don’t be the weak hands that panic sell at the worst moment. It’s easy to freak out and feel like you’d better cut your losses before they become even deeper. But what you usually wind up doing is depriving yourself of future gains instead. If you are involved in short-term trading, utilize stop-loss orders to take the option of panic selling near a bottom off the table.
When the world is panic selling, take the contrarian perspective. Buy what you can while it’s still undervalued and wait for the bulls to begin running again. Whether you’re trading for short-term gains or holding for long-term profits, it’s times like these that represent monumental opportunities.
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