Trading the Reverse Pyramid
© Martin A. Armstrong
If you had to reduce the movements of all market and economic activity down into a single solitary influential explanation, the one single word which I would chose to describe such a force would obviously be CONFIDENCE! At first, you might be moved to take exception to this or perhaps simply say “big deal!” But the aspect of Confidence is indeed a big deal. It may even be much greater than you are perhaps willing to consider just yet.
Confidence is the most dominant force within all market and economic activity. Beyond question, Confidence can be historically illustrated as a major force which all markets must contend with right from the days of Rome to the period surrounding the election of Ronald Reagan as President of the United States. Indeed we will look back at the change in guard at the Federal Reserve and one day soon reflect thereupon just how things gradually changed when Volcker left. Greenspan, although highly respected as an economist, lacks the central bank experience which Volcker had attained while rising through the rank and file.
Nevertheless, in this month’s report, we will deal with another form of Confidence which perhaps strikes directly home within us all every time we make an investment decision. It is the Confidence factor which is also the single most critical and dominant force behind each and everyone of our decisions on an individual level. When combined among the multitudes, not only will Confidence move markets, but it can move the very powers of government as well!
Whenever we consider what we might read in a market commentary such as in this monthly report, whether or not we actually take any specific action upon the such prognostications, depends entirely upon our level of Confidence, or the lack thereof. Our own personal convictions as to the reliability of what we have just read forms a part of our level of Confidence as well. If we do not honestly believe in what we read, there is no way in heaven, hell or whereever, that we will act upon it.
In most cases, the average individual will sit back and wait until things have been proven within his own mind before he will be moved to action. This basic human instinct, we might refer to skepticism or a lack of Confidence, governs many various aspects within our lives. Most people have a tendency not to trust someone they have just met to such an extent that they would immediately begin revealing their most secret intimate life’s experiences. Such things are normally reserved for someone whom we might call a friend. A friend of such a stature is normally someone who has gained our personal trust through the passing of time.
Because it naturally takes human beings a longer period of time to give their trust to a stranger, perhaps you can see within yourself that this is a natural trait which perhaps you may never have really thought about very much. Reflect upon your past and think for a moment about this subject. Ask yourself honestly whether or not you tend to give your trust or Confidence at a slower pace than you might have a tendency to withdraw it?
Now ask yourself this question. What would you think if I told you gold would be at $10,000 per ounce by the end of this century? What would your response be?
1) Would you take me at my word and wholeheartedly agree without so much as questioning this forecast?
2) Would you say ok, perhaps; but I want to know why, when, how and where?
3) Would you think that this time I have gone off the deep end and took up residence in the Twilight Zone?
If your response would be to answer number 2, you would have a completely natural tendency to want more proof before simply accepting such a forecast. If you would answer number 3, you would have perhaps some general philosophical doubts about even such a possibility. If you answered number 1, either you have thought things out for yourself and conclude that such things are possible an you need no further proof, or perhaps you might be too gullible if do not have a firm conviction of your own.
I once posed this question to a group in front of which I was delivering a lecture. By far, the majority came up with either number 2 or 3. Only a small percentage answered number 1 and of those virtually all had personal self-convictions which were only supported by such a forecast.
Throughout my many years of research into market activity, I have spent a considerable amount of time studying the commentary which coincided with major trends in a given market. I might be one of the few who has read the vast majority of the New York Times, Wall Street Journal, London Financial Times, and several other publications, from either their inception or at least from the early 1800s until the present.
Throughout the Greatest Bull Market In History, I felt strongly that the reader should be given the same commentary verbatim which I myself read. Besides the hindsight interpretations of those who attempted to explain the bull market of the Roaring ’20s and the crash thereafter, a great deal of knowledge had seemed to slip away. It is always easy to reflect back and say; “Well the market went up because of that or it went down because of this.” But the more important aspect is always overlooked in both cases. Hindsight only exists after the fact, never before! So if you want to truly get at the causes and effects, you must look into the thoughts, dreams, aspirations and interpretations of those who were involved DURING such conclusive events.
When the research for the Greatest Bull Market In History was concluded, several interesting items in fundamental analysis had jumped out of the commentary from the various magazines and general newspapers of the day. The analysis of those during the events were something totally different from the recants of those who had looked back trying to blame a specific group to vindicate either themselves or to purport a specific predetermined political philosophy. Perhaps the most startling piece of historical insight which this research brought forth, was the fact that the press and the “professional” traders had remained BEARISH until 1928! Only toward the very end, did everyone suddenly begin to accept the notion that the stock market was in fact going higher. What then about the previous 7 years when the market generally trended higher? Each new high was interpreted as if it were almost, if not THE final high for the move.
If we look back at the commentary in Barron’s, for example, during 1982, you will be hard pressed to find an analyst who remained bullish on the stock market. Surely few would even think of 2500 just five years in the future. Many remained convinced that depression was going to become a fact of life.
These things tend to illustrate that natural human instinct within us all which leans toward doubt before we are convinced. This subject can be expanded upon in great detail perhaps deserving of a book in itself. But it is this very same instinct within us all which offers perhaps our most formidable adversary when trying to survive our own trading decisions.
Whenever we lose money in an investment or in trading a market from a leveraged position, we may find ourselves placing the blame on someone other than ourselves. In most cases, we honestly have no one to blame but ourselves.
The single greatest mistake that we all tend to make is that we invest or speculate using perhaps the most consistently incorrect method ever invented by mankind. This method I refer to as the Reverse Pyramid.
By coining this phase, I hope to bring your attention to something which is perhaps the greatest of all preventative methods to surviving our own trading decisions. The Reverse Pyramid is a method whereby we have a tendency to buy tops and sell bottoms. Countless investors lose money every year thinking that they are the victim of inside trading or some unseen, unfair advantage as being a small time person in the midst of a professional market.
To start off with, the commentary offered in the Greatest Bull Market In History proved beyond a doubt that it was the small investor who was buying between 1921 and 1927. The professionals were, for the most part, dead wrong all the way up. Far greater sums of money were lost by the small investor not in stocks, but in bonds because they were led to believe that bonds were somehow safer than the speculative stock market. In that respect, it was the small guy who was hurt but along with him, some 3,000 banks bit the dust as well for even they failed to foresee the demise of both the stock market and the bond market as well. But between 1921 and 1928, it was the small guy who bought the market and won!
Another example is gold itself! Until 1980, gold did not make the front pages of any newspaper in the United States since the days of Roosevelt’s confiscation. However, just before the top came into being on January 21, 1980, the headlines spelled out with an undertone of pure certainty that $1,000 gold was not merely possible, but just a matter of days away. The press itself is rarely interested in something before the fact. Such intermediate trends might be found way back on page 32. But when you come to the end of a major move, the news is often the headline for the leading story of the day.
This is in effect an illustration of the Reverse Pyramid. In dealing with clients over the years, particularly those who have been active traders, I have found that the majority tend to trade in a Reverse Pyramid method. When the risk is the lowest, they buy the least if at all! They wait for a trend to emerge or to see if the forecast is going to be correct. When the trend in fact emerges in the direction which was forecast, then they begin to buy or sell. As a result, their positions may look something like this.
Recommendation Price……. # of lots bought
#1 buy gold at $408…………..BUY NOTHING!
#2 buy gold at $412…………. (1)
#3 buy gold at $430…………. (2)
#4 buy gold at $450…………. (5)
#5 take profits on 75%
of current total
positions at $468………………..SELL NOTHING!
#6 buy 1 gold at $470………….(30)
#7 move stops up to $460…….DON’T DO IT!
#8 S stopped out at $465.
Total profits were $159……… (Loss $40)
Perhaps this hypothetical example might be exaggerated; but in general it offers a sense of what the Reverse Pyramid method is all about. We have a tendency to start buying aggressively only when a market is moving sharply in a given direction. Most will not act until after the majority of a move is over. You will find this even among some of the best professionals as well if you listen to their commentary. For example, when gold was storming up in April, the majority of European commentary was to be found calling for $520 on gold but only after gold exceeded $460! Just two months before, however, few could be found on the bullish side at all only as far back as February!
There seems to be a tendency for us all to assume that the laws of physics should apply to market movement. That is that a body in motion stays in motion when in space where friction might not be present. It is an emotional period in time where you might be long and you won’t give up a position for fear of missing out on the move. You might also find yourself lacking the courage to buy silver because it has just closed above $6.01 and, instead, you wait until it reaches $10 before you are convinced of the move. Then silver drops, you panic, and despite perhaps a correct view that the trend was up, you end up losing on an assessment which perhaps was correct for the long-term, but not for the immediate moment at hand.
The vast majority of players in a leveraged position tend to win the battle in their original assessment of the situation, but the lose the war because they have bought more aggressively at the top instead of at the bottom. Inevitably, the lowest risk is always when it appears to be the greatest risk.
Whenever the majority is standing on the sidelines, touting that the body in motion will stay in that same motion, the financial winds begin to shift direction. It is never easy to stand in the face of an oncoming train assuming that it will stop. But if someone is not applying the juice, friction will go to work and eventually cause that train to gradually come to a slow halt.
At numerous seminars over the years, I have demonstrated that the easiest calls that I have made throughout my career such as picking the precise day for the top in gold during January 1980, calling the precise high and the $100 decline in gold within ten days during February 1983, and even the peak in inflation during 1981 as well as the reversal in economic trend during July 1985, were all accomplished when I stood virtually alone looking like a complete fool until after the fact. The best and most extreme calls in analysis have always been the easiest by a long-shot. Perhaps because it was a long-shot that such calls would NOT be correct!
The safest economic forecast which I can possibly make today, is that the perceived deflation is over and that inflation will be proven to be very much alive and well. To assume that a given trend will stay in motion forever is perhaps the most insane of all unwarranted assumptions. To foresee change in the wind when no one else feels the breeze, is certainly not the illegitimate child of luck! It is the chap who cannot see the signs of the changing times who needs all the luck he can muster. For it is this fellow who truly has the odds greatly stacked against him.
The lowest risk is always when it appears the greatest with the least amount of chance to succeed. To buy in the midst of pandemonium when everyone and his twice divorced brother-in-law is doing the same thing, requires the sublime indifference to the reality of the consequences. We are indeed our own adversary in investment strategy. We should review our tendency to question when things when they remain quiet at a bottom lacking any bullish references after a prolonged decline. We should also review our reluctance to be ultimately convinced by market movement itself, before we end up buying the top or selling the bottom. The key to the future is an open mind based upon the past. If we close our mind to the possibilities, we will have closed our mind to the reality of the consequences.
The trend within the world economy has in fact changed hands! You may not believe me until it’s too late. But at least keep an open mind and look around you for the signs. Ask yourself if your cost of living has not increased at a greater rate than that of the official Consumer Price Index? As yourself why is the State of Pennsylvania entertaining a bill to increase the minimum wage from $3.35 per hour to $3.85 “because wages have not kept pace with the real cost of living?”
The signs are truly all around us if we care to look. They are in every aspect of our lives. Our future may depend greatly upon our willingness to stand alone along side our convictions. Before we can prepare for something, we must be convinced of its coming. If we do not BELIEVE in something, we will inevitably be playing by the rules of the Reverse Pyramid. That would be the worst of all possibilities. Such circumstances increases the risk far too great for most to survive their own financial decisions.
In conclusion, it is our own reluctance to believe which has become our greatest single adversary toward success. We must not be afraid of buying or selling when no one else seems to agree. For those will be the times when success maybe least expected while simultaneously offering the greatest odds of a pleasant surprise. Scaling in and out of a market is an art one obtains through experience. The trick is to survive long enough so when the time comes you are still around to use what you have learned.
The Reverse Pyramid is by far the major leading cause for personal investment failure. We should learn to respond, not merely to our sight, but to all of our senses as well. It is hard to standby and jump into silver at $6 after it has just moved up 60 cents. But when all is said and done, what appeared to be buying a top proved to be buying the breakout. If you did not act until much higher levels, then you should reflect upon the mistakes that you made. You may have paid dearly for them, so put them to good use and try to learn as much as you can for the next time around.
An open mind to the future is only possible through the guides of the past. Whatever has happened before, is likely to happen again! It is the nature of the beast and we are that beast! So learn from your mistakes and you will not repeat them. Try not to view yourself as the victim of someone else. The fault is purely your own. The markets are not manipulated no matter who tries to say what. We can master the markets only if we master our own emotional tendencies.
Keep your mind as open as possible. Rule nothing out unless proven otherwise. Remain flexible with the trend of events and reflect upon the common sense which you can see around you in everyday life. If the world is telling you that inflation is down and you see a definitive rise in your personal dealings, you are not wrong, it is the world who has misread the signs. Eventually the reality filters up from the bottom street levels to where the analysts are perched in their ivory towers. The power is always and will always remain among the people. How they use it, is definitely another saga altogether!
