Interactive Investor

Chart of the week: Big profits surprise in 2017

28th December 2016 13:56

John Burford from interactive investor

2016 was full of surprises - and 2017 will be, too

Here we are, having almost survived 2016 and facing the New Year with trepidation - many admit they are anxious about what will unfold in 2017. On the contrary, as a trader I am excited about the possibilities for big profits next year! It's not just a possibility, however, but a high probability!

Many were caught out this year by the earthquakes of Brexit and Trump - and none more so than the various politicians and financial gurus that had party lines and groupthink themes to peddle.

It is well established that forecasts of disaster and doom are much more newsworthy for a pundit - and highly lucrative - than assurances of sweetness and light.

I have been a contrary thinker for as long as I can remember, back to junior schoolMost of the Remainers and Hillarites that took to the streets in protest were young, and I was reminded of the famous non-quote of Winston Churchill:

"If you are not a liberal when you are 26, you have no heart. If you are not a conservative by the time you're 35, you have no brain."

I am assuming most of my readers belong to the latter age group, where the non-quote would likely resonate.

This brings me to what I see as the connection between bureaucracies and the markets in the way they are organised and develop. The connections are there simply because both are constructs of the human mind and involve huge numbers of diverse participants - and are therefore subject to the quirks and manias of a mob that only the human imagination is capable of.

I have been a contrary thinker for as long as I can remember - I was often in hot water at Junior school. I have a natural skepticism of the effectiveness of large organisations and I have recently come across Robert Conquest's Three Laws of Bureaucracies:

1. Everyone is conservative about what he knows best.

2. Any organisation not explicitly and constitutionally right-wing will sooner or later become left-wing.

3. The behaviour of any bureaucratic organisation can best be understood by assuming it is controlled by its enemies.

Law 1 explains why it is the young - unhindered as they are by any reserve from a personal history of major loss from thwarted ambition - that saw the early potential of today's dominant tech corporates such as Facebook, Amazon, Apple and so on. The more mature, who could recall their own past glorious failures, discounted the future then ("Sounds a crazy idea to me!").

I recall thinking years ago: who would buy clothes online? Surely, you need to feel the fabric and try it on first? That must be on a par with my prediction that rock 'n roll would never catch on.

The seeds of a bear market are always sown in the bull phase, and vice versaThe UK and USA are littered with examples of Law 2 at work. Organisations eventually turn into places where the welfare of the employees - and especially the upper managers - take precedence over that of their "customers" (actually a term used by Her Majesty's Revenue and Customs!).

The Church of England and most major "charities" such as Greenpeace, Oxfam and Amnesty International come to mind as supremely hard-left bodies.*

Law 3 is wonderful! Ronald Reagan once observed: "Politics is supposed to be the second oldest profession. I have come to realise that it bears a very close resemblance to the first".

Laws of the markets

So what has all this to do with the behaviour of financial markets?

Simply that groups that become very large - including the public markets - eventually lead to absurdities and a flight from reality. In developed organisations, the end results often are at total odds with their well-meaning founding aims and principles. The UK Foreign Aid department comes to mind.

In markets, the end result is often a mania that ends in the flight from economic reality by the majority.

Now, everyone loves industrial commodities, with the Trump 'promises' icing on the cakeThe seeds of a bear market are always sown in the bull phase, and vice versa. That is a theme I constantly refer to - and helps me identify when prices are getting out of kilter. One of the factors that I monitor is sentiment. When a market gets too popular, I look for a place to take profits on longs and perhaps to reverse and go short.

Of course, a bull market always starts from a place of high bearish sentiment. That is a "golden rule" of markets. This year, we had several examples of this rule at work - the commodity sector being a prime case. In 2015, commodities were in a severe downtrend and reached a low in early 2016 when bearish sentiment was at its height. Very few had a good word for it. But what a time to be a contrarian!

As a good example of a terrific contrarian trade, I followed Glencore from last year's lows where I was a buyer, as highlighted in my COTWs. But now, everyone loves industrial commodities, with the Trump "promises" being the icing on the cake.

From total derision to total embrace in less than a year - and this is the result:

I was a buyer at around 90p (latest 270p) and now this chart is telling me something important: take some profits off the table!

I have a nice A-B-C rally, with the C wave sporting its own five-up with an extended fifth (typical in the commodity sector). Not only that, but at the recent 300p, the market has hit the important Fib 78% resistance.

So no matter what happens from now, there is a juicy profit of at least 180p available - and that is one welcome present to award yourself with which to go into the New Year.

Bitcoin mania

Finally, here is a real mania action: bitcoin.

Thanks to the Indian and Venezuelan governments' bans on high-denomination paper currency, their citizens are piling into unregulated Bitcoin in droves. Also, Chinese and East Asia young seem to be moving from gold to Bitcoin in a flight to safety.

But we are in the final wave five, having risen from about 200 last year to the current 940. I have no idea how high it will rise but, when sentiment changes, the decline will be spectacularly faster than the ascent - and gold will look very attractive again.

Wishing all my readers a most prosperous New Year!

*Any and all opinions expressed in this article are those of the author and do not reflect the view or position of Interactive Investor.

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