Weekly Briefing 7/11/20

Profiting from Behavioral Economics:

Betting against the masses has been a proven method of generating steady returns since the rise of modern markets. Humans are emotional beings, wired and conditioned to think and act a certain way. For instance, those of you who have enjoyed the game of golf have likely sliced countless golf balls and watched them curl off into the woods. The human body is built to throw your golf club at the ball like an axe, not to produce the unnaturally eloquent form of the perfect swing. Unless you're genetically gifted or have taken lessons (more likely), this bad habit is probably still with you. The same principle applies in investing. It is in our nature to have extreme difficulty buying when the world is screaming 'fire' to experience the same difficulty selling when markets reach new highs and every person you meet at the local coffee shop is talking about getting in. To become a consistently good investor, you must be a contrarian. This takes time, training, experience, and the use of a few effective tools which we will cover today. Trading by use of market sentiment is commonly referred to as crowd psychology. It is measured by several things:

1. The breadth of the market, follow the money.

Advance/decline ratios are calculated daily and analyzed. They are a measure of which stocks are making higher highs or lower lows on a daily basis.

The bear/bull ratio is also a useful measure of breadth. It measures investment advisors current feelings on the market.

The ratio of put/call option bets: a forward looking measure of money-flow impact on futures price.

2. Volatility 

The Volatility Index can monitor any security if you have the expertise. It monitors bets on fear and anxiety into the future. Its symbol is VIX.

One resource for the average investor to track many of the things we have discussed and become a successful contrarian trader is the site Sentiment Trader (we are not being compensated for promotion).

Gold is setting up for the second largest drop of the year before the month of July ends. It will most likely stay elevated until the Federal Reserve meeting at the end of the month. The upper chart is price vs the lower chart which is sentiment. One can easily see the correlations over time.

With the Fed pumping trillions into the system, sentiment in the stock market can stay overbought for a longer period of time, but eventually corrections come home to roost with sharp, mini-crash events. This is the current pattern of markets we trade in. Many natural corrections are aborted by the artificial capital inflows into the markets which make the corrections when they do occur faster, harder, and scarier. When they finally occur it's comparable to a dam breaking.

Several contrarian trade set-ups worth a look are the following industries:





Movie theatre


Food production

One of the best contrarian bets we see out there currently is Tyson Foods, one of the world’s largest producers of chicken. The world loves chicken as a good source of low-fat, lean protein. Tyson is here to stay and severely undervalued.

We expect Tyson to regain the lower yellow channel in the short term and trend higher into the Fall.


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Important Disclosures: Investing in the financial markets can involve considerable risk, including loss of principal. Past performance is not necessarily an indication of future performance.  Actual clients may achieve results materially different from the results portrayed.  All material is for informational and educational purposes only and is not investment advice and is not meant to suggest that any securities are suitable investments for any particular investor.  All information reflects our own actions, beliefs, and processes for purely informational purposes. HEDGE FUND Z LLC IS A FINANCIAL BLOG FOR THE SOLE PURPOSE OF EDUCATION.  HFZ does not represent themselves as acting in the position of an investment advisor or investment manager for funds that are not under their direct control and fiduciary responsibility. 


Third party quotes and information may not be representative of the experience of HFZ customers and do not represent a guarantee of future performance or success. Many of the results displayed on our website were achieved using leverage, such as 2x or 3x leveraged ETF's or equity options 


The information included at HFZ and HFZ writing, research, and updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system.  Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. HFZ does not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. HFZ will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter.  


No information, nor any opinion expressed on the Site or in the Services, shall constitute a solicitation or an offer to buy or sell any securities mentioned therein.  The information presented on the Site and in the Services has been prepared without regard to any particular investor's investment objectives, financial situation, needs, capacity, and trading ability or experience. Accordingly, you should not act on any information on the Site or in the Services without obtaining specific advice from your financial advisors and should not rely on information herein as the basis for your trading and/or investment decisions.  HFZ cannot claim or represent that any of our Services are suitable for you. 


By your use of the Site and Services, you're agreeing that you bear responsibility for your own investment research, trades, and investment decisions. Only you can decide whether or not a trade is right for you and you agree to be liable for any trades you initiate at your brokerage using research and/or tools that we provide. If you ignore our advice to do independent research and choose instead to trade solely on information, analysis, alerts or opinions found in our Service or website, you have made a conscious, willing, free, and personal decision to do so. You also agree that HFZ, its directors, its employees, subsidiaries, affiliates, and its agents will not be liable for any investment decision, trade made or action taken by you and others based on news, information, opinion, or any other material published through our Site and Services.  

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