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Market Lab Report - On pyramiding, selling, and risk tolerance

From one of our members:

Dr. K,
If you don't mind, I had a few additional questions regarding JNUG, NUGT, USLV, and GBTC.  I'm curious on your thoughts and strategy managing these trades when the ETF is extended, as well as when to pyramid or close out the trade completely.

  • I read your book that discussed the AGQ trade in 2011 using the SLV chart and pyramiding with every 10% AGQ increase, is this still relevant? Pyramid styles will be influenced by the instrument in question. Volatility must be taken into account so one can fine-tune to one's risk tolerance levels which is unique to each investor. It is a process of self-discovery as we have written about extensively in our books and articles. 

    There is no get rich quick scheme because when money is on the line, one's emotional make up is amplified in both directions. One's personal strengths and weaknesses show themselves in material measure. One can then either work around their weaknesses or attempt to overcome any weaknesses. In the last chapter of our first book, we spoke about how life is trading and trading is life. The chapter really wrote itself as it felt as if I was channeling the words when I felt inspired to wake up around 3 am to write it.

    The legendary futures trader Ed Seykota agrees with this philosophy wholeheartedly. The first time I spoke with him, he immediately asked me personal questions to gauge my character. I was immediately drawn to him. As a consequence of how he assesses a potential trader, he has a second-to-none track record in turning traders into superstars. Ed is known for his blunt no-nonsense manner. He would take maybe 1 out of 20 applicants based on their personal characteristics telling the majority they need to work on themselves first before risking any money.  When I stayed at Ed's when he lived in Incline Village, Nevada I met one of the few who had the characteristics Ed seeks in potential superstars. It was a time I'll never forget.

  • When the 1x ETF (GDX, GDXJ, SLV) looks fairly extended do you look to sell some or all of your position in anticipation of pullbacks to the 10dma or 20ema to re-enter at lower levels?
  • Some traders prefer to trade around a core position so if an ETF gets extended, they sell into strength, then rebuy on a constructive pullback to an area of support. Longer term traders may keep a more liberal sell stop on a partial or full position to minimize getting whipsawed. This works especially well with wide banding ETFs such as the precious metals who have central bank money printing action on their side. This also works at times with the ETFs that mirror the major averages in this Era of QE.
  • Of course, in this situation, one can let leading stocks be their guide as well as monitoring the levels of global central bank money printing. When Fed Chair Powell was tightening the balance sheet in 2018, the markets eventually soured then staged their first Christmas crash. Markets bottomed on Dec 24 when Powell told the markets what they wanted to hear with respect to putting any tightening on hold, then promising to relaunch any monetary expansion if necessary. It was then off to the races again as major US stock indices approached then broke to new highs. Any corrections in 2019 have been contained to roughly -10% or less and have been due to trade war issues between the U.S. and China, the stalling global economy, concerns about record levels of debt in general, concerns about record levels of negative yielding debt which stands at $18 trillion, and how record lows in interest rates are going even lower. 
  • With the long term outlook for these vehicles looking strong, do you allow more risk tolerance for pullbacks to hold for the longer moves?  
  • My style with these ETFs is to allow more leeway as my intention is to hold for big moves. I am okay with allowing a fairly large peak-to-trough drop though of course, the moves higher must be materially larger than the pullbacks. I do this with bitcoin ETN GBTC which at time can be the most volatile instrument relative to even 3x ETFs. As I've discussed in prior reports, bitcoin has numerous tailwinds at play. Bitcoin is a binary event. It will either eventually go to zero or continue to new highs and repeat history once again as it has been doing since 2009. Since bitcoin is decentralized, no government can eliminate it, just as no government, try as they might, was able to stop p2p bit torrenting since the days of Napster in the mid-1990s. While Napster was shut down, numerous other p2p torrenting platforms launched. For every Pirates Bay eliminated by the courts, numerous other Pirates Bay equivalents emerged. 
  • Bitcoin is the first decentralized transfer of value that enables millions of families in countries undergoing massive debasement of their currencies such as Argentina and Venezuela to protect their savings by often converting it first to bitcoin then into a more stable currency such as U.S. dollars. Many governments have capital controls on how much of their native currency can be converted or moved out of the country. Millions of Chinese have converted their yuan into bitcoin to move more than the $50,000 state limit offshore. Wealthy Chinese have found this particularly useful. Bitcoin is deflationary, private, secure, and immutable while its digital DNA is fusing nicely with the ecosystem that is becoming part of the next evolution of the internet, or Web 3.0. To remove bitcoin is to remove the internet. Mesh networks would work around any such moves made by the state. There are always solutions to override any moves made by any governments. Even if electricity were to get shut off, technologies are already in place to address this so bitcoin and the internet would continue onwards and upwards in some form even if forced underground. Of course, these are some of the most extreme examples but the world sits at a singularly unique time in history. The growth of exponential technologies are always underestimated. Massive transformation is coming via virtual reality, augmented reality, and blockchain while Stanford University recently found that artificial intelligence is evolving at a pace that is even beyond that of exponential growth. 
  • If GLD breaks key resistance levels, would you consider this a good time to pyramid additional positions into JNUG/NUGT or do you focus more on the GDX/GDXJ charts only? 

Since the other vehicles tend to correlate highly with GLD, GLD breaking above resistance levels on substantially large volume could be a potential pyramid point. This would be somewhat akin to a buyable gap up as volume would have to be appreciable. That said, when it comes to precious metals which tend to be wide-banding, it is generally a better strategy to wait for GLD to break below support points but on constructively lower volume. I would wait for GLD to stabilize then possibly add on a pocket pivot, undercut & rally, or volume dry up. Indeed, strong tailwinds are at hand with respect to hard assets, precious metals, and bitcoin as central bank money printing continues to accelerate. Renowned investors have been placing bets. Stanley Druckenmiller believes the fed funds rate will hit 0%, Jim Rogers has been vocal as always, and Ray Dalio has written extensively on the matter citing the end of a roughly 75-year long term debt cycle where major paradigm shifts occur in which the old guard is replaced with something different. With the emergence of numerous exponential technologies, this something different is likely to be something new, improved, and evolved.

I know there are many variables and different risk tolerances but appreciate your thoughts and insight.  Just trying to get a better understanding of how you manage and maximize these more volatile trades.

Thanks again, enjoy learning from you and Gil.

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