Capital Moves Markets, Psychology Moves Capital, and You Take it to the Bank (Two New Plays Inside)

Shah Gilani|March 31, 2022

As complicated as the world and markets are now, there are ways to make money on what’s happening, ways to play volatility, ways to trade that will make you a successful investor for the rest of your life.

I know because I’ve been doing it for 40 years, and I’m raking in big gains in this crazy market.

The only surefire way to make money (and a lot of it) consistently is to trade trending narratives – big picture stuff that moves markets. If you break them down into binary parts, you can piece together the greater market trend.

Whether you’re following (and trading or investing in) the market indexes, individual stocks, bonds, commodities, real estate, knowing if the trend is bullish, bearish, or sideways should be everyone’s starting point when you put on a trade.

The biggest profit opportunities lie in those trends, those narratives, and how they push the traders and investors alike to buy-in or sell-off — and I’ve got two for you today.

Continue reading to learn my surefire two-part investing strategy and grab two trade ideas while you’re at it.

A Two-Part Strategy

There are two ways to discern what and how to trade, and they work together.

#1 Narratives

Narratives are mostly headline stories and market-moving news. Whether people are reading and talking about central banks cutting or raising interest rates, corporate earnings, disruptive technology, or geopolitics, narratives are a window into trader and investor psychology. That’s because buying and selling decisions are made on reactions to narratives.

Following narratives is a matter of paying attention to what’s going on in the world, in markets, with your stocks or cryptos. I read a lot, from a lot of different sources, to key in on narratives I want to trade.

#2 Trend-spotting

I always say, while capital moves markets, psychology moves capital. When psychology moves capital, the result can be seen in price patterns. Charts, or technical analysis, isn’t about reading tea leaves – it’s about reading price action resulting from buying and selling decisions. Charts are a window into traders’ psychology, fear, and greed.

This is even easier than following narratives. It’s about reading simple price charts. I prefer bar charts with high, low, and close data on each daily bar. To discern a trend, I first look at a one-year chart of a given asset to see what the price action reveals. One-year charts show recent psychology and buying or selling patterns. I always want more clarity which I get looking through a longer-term window. That’s why after I study a one-year chart, I look at the two-year chart for more perspective.

Apply What You Know to Opportunities Today

Here are the prevailing narratives of today:

• We’ve been in a bull market courtesy of central bank largess – now they’re raising rates to combat rising inflation.
• Supply chain issues persist because of the pandemic, and now the war in Ukraine is impacting commodity, producer, and consumer prices.

We can look at the charts to see how investors are trading them and make our own buy and sell decisions on the narratives, on those narratives changing, and on continuing trends and trend changes.

In the case of U.S. equity markets, one-year charts of the S&P 500, the Dow, and Nasdaq Composite, are indecisive. The two-year charts clearly show they’ve been trending higher but recently corrected abruptly. For a decade now, pullbacks like these in what’s ultimately been a spectacular bull market have been screaming buying opportunities.

But since the narratives are changing, you have to ask yourself: Is this time different?

The big picture market-mover for years has been low and lower, then zero-bound interest rates courtesy of insanely accommodative central bank policies. That made every dip a buying opportunity.

Now central bankers are raising rates.

That’s a monumental trend change and underlies changing investor psychology.

Before Russia invaded Ukraine (itself a geopolitical trend change of monumental proportions), central banks were talking about “normalizing” rates and raising them to address COVID-induced and supply-chain driven inflation. Once Russia attacked Ukraine, oil, natural gas, and energy prices spiked, as did soft commodities like wheat and corn that had already been trending up, then exploded higher.

With inflation spikes now looking more structural than “transitory,” central banks have no choice but to raise rates, and quickly.

The whole exercise of raising rates is to dampen demand to the point where producers and sellers have to lower prices to attract buyers.

Historically, that has never happened without the economy being pushed into a recession. That’s worrying investors and a big reason benchmarks are having a hard time.

Those are the big picture trends, and narratives, and psychology drivers – breaking them into their constituent parts tells you what kinds of positions, in what, to put on.

Two Ways to Play Volatility

Markets aren’t clearly going back up or clearly going down from here, though they’ve just had a spectacular bounce off recent lows, so don’t lean too heavily into buying or shorting index funds of ETFs.

You can use them to hedge or try to buy dips or sell rallies, but those types of trades are hard to time.

Another way to play the changing narratives and up and down short-term trend moves is by playing volatility. Because there’s plenty of that, and you can play volatility easily enough by trading the VIX.

I buy calls on the VIX when it drops to 20 or below, and I buy puts on the VIX when it gets above 28-36, and I buy a lot of puts if it gets to 44 or higher.

Since benchmarks are choppy, you have to find trending plays where you can see the big picture and understand the narratives guiding psychology.

Inflation should be the first thing that comes to mind, and at the same time, if you’re putting all the pieces together, you should be thinking about how to play rising rates – which is easy to do with all the ETFs that track bonds and fixed income investments.

Here’s my recommendation: buy a cheap out-of-the-money call spread on an inverse bond ETF like ProShares UltraShort 20+ Year Treasury ETF (TBT). Based on my experience, you could reap 100% gains, maybe even more. Some of my plays gave me a 900% return.

If you’re not sure what a call spread looks like, or just need a refresher on options, I recommend looking over our report on the topic. Click here to read it.

Making money in volatile markets facing existential threats isn’t hard. You just have to discern the big picture, find where there are well-defined trends, and understand how other investors and traders are reacting to and trading the prevailing narratives.

Welcome to the party.

Cheers,

Shah