March 20, 2023

Commodity Insight: Don’t fight the Fed and don’t fight the tape

In the world of investments and trading, there are two rules always to be followed and never forgotten that stand above all others. One is “don’t fight the Fed.” The other, “don’t fight the tape.”

But I always toss in another rule which I believe is more important than those two. And that rule is “always use a stop.”

From American Century Investments: “One of the most well-known investment edicts is ‘don’t fight the Fed.’ This obviously means that one shouldn’t bet against the current direction of monetary policy. If the Fed is tightening, then do the prudent thing and don’t pile into risk assets, for example.”

And the reason that old edict came about is because down through history, the Fed gets what it wants — always! So, why fight them?

And from CNN Money entitled “Machines are driving Wall Street’s wild ride, not humans,” Chris Isidore writes: “Wall Street’s recent wild ride isn’t driven by nervous portfolio managers, retirees looking at their 401(k) statements or any other human traders. Instead, machines are making the trading decisions.

“Computer programs execute buy and sell orders based on complex algorithms and formulas, without a human involved in the process.

“On a typical trading day, computers account for 50% to 60% of market trades, according to Art Hogan, chief market strategist for B. Riley FBR. When the markets are extremely volatile, they can make up 90% of trades.”

What Isidore wrote is from 2018, but it holds true today. I touched on the same subject back in the 1980s and several times since.

From my book, “Back To The Futures,” in a chapter entitled “Number Crunchers,” I wrote in 1982: “Computers, computers! That is all I hear about anymore. Computer trading programs and buying and selling stock futures, bond futures and now livestock features.

“Most markets have fallen sharply over the past few weeks and the blame is placed on these electronic marvels and their operators. Today, computer trading programs and their impact on markets is the single most discussed topic in the world of investments.”

In my other book, “Haunted By Markets,” in a chapter entitled “Algo Trading,” from June 2013, I wrote: “FC Stone used the slang expression, ‘algo’ for algorithm trading, which is nothing more than high-speed computers buying or selling stocks or commodities in fractions of a second.

“Here is the Wikipedia definition of algorithms, ‘In mathematics and computer science an algorithm is a step-by-step procedure for calculations. Algorithms are used for calculations, data processing and automated reasoning.’ What Wikipedia failed to mention is that algorithms are now used for high-speed trading, as well.”

Because of computer trading, the algo boys and computers buying and selling markets of all kinds and in just seconds or fractions of a second investors and traders in today’s highly volatile and uncertain environment need to watch the tape.

The tape in this case is price points, chart levels, moving averages and so forth that suggest a new trend is rapidly unfolding — a trend that can make you a great deal of money, or a trend that can cost you a great deal of money.

Not long ago I wrote: “Based on the history of computer trading since the early 1980s, I can say with confidence the funds are generally the ones that push markets and prices to highs that are not sustainable by fundamentals. The funds are also the ones that push markets and prices to lows that are not sustainable by fundamentals.

“The funds are not biased in the least. Understand it is the funds that put the highs and lows in based on their buying and selling sprees.”

I also wrote: “In my view, investing and trading in stocks, bonds, currencies or commodities is an art, as well as a science. I blend fundamentals with a reliable computer trend following system.

“I suggest you do the same because computer trading is here to stay. They ain’t gonna go away.”

This week, a host of markets dropped sharply and violated support levels. This week, the tape spoke loud and clear.

The tape is screaming that a wide array of markets are headed lower and in a big way. I am specifically referring to markets such as stocks, bonds, crypto, grains, metals and commodities, per se.

That is what the tape was suggesting this week. Moving forward, my advice is don’t fight the Fed, don’t fight the tape and use a stop.