Everyone in the investing world focuses on making money. But let's flip the idea on its head...
What's a foolproof way to lose money?
To answer this, think about areas of the market where we've seen major losses in recent years. Two busts from last year probably jump to mind... the crypto crash, and the bust in ridiculously expensive technology stocks.
These two assets might seem very different. But they crashed when they did for the exact same reason...
Everyone assumed prices could only go one way. Everyone who wanted to own them bought in. That meant the trade was crowded. And once no one was left to buy, prices could only do one thing... crash.
Basically, if you want a foolproof way to lose money, you buy assets when everyone else has already piled in.
I don't recommend you use this strategy. But if you're keen on losses, you have the chance to lighten your pockets in the commodity market right now...
A specific commodity is up more than 40% in less than a year. That huge jump pushed prices to a seven-year high. And now, futures traders are going all-in on the boom.
Bullish sentiment is nearing the highest on record. And that makes this a classic recipe for losses.
Let me explain...
The commodity market is one of the easiest places to see sentiment in real time.
That's because commodities are simpler than stocks. They're driven mostly by supply and demand. But they can still get out of whack.
The easiest way to see this is through the weekly Commitment of Traders ("COT") report. It shows the real-money bets of futures traders. These folks tend to make mistakes when they act as a crowd... And that makes the COT report a useful contrarian tool.
Simply put, when the COT report shows wildly bearish bets, prices tend to rise. But when bullish bets pile up, a decline is likely.
That's exactly where we are in the cocoa market right now. This commodity has soared over the past year. Now, it's an incredibly crowded trade. Take a look...
Futures traders hated cocoa last year. We saw a multiyear bearish reading... And, sure enough, prices soared.
Again, the price of cocoa is up more than 40% since last September. Everyone assumes the boom will last forever. The COT report shows that futures traders are the most bullish they've been since 2020. We're darn close to the most bullish reading on record.
This is a powerful contrarian signal. And it tells us prices are about to fall. A quick scan of history shows it...
The last similar setup happened in February 2020. Bullish sentiment peaked. Then, prices began to fall. Within five months, cocoa was down 26%.
We saw another case like this in 2018. Bullishness hit the highest level we'd seen in years. But cocoa didn't keep soaring. Prices reached a top – and then fell 24% in five months.
Before that, we saw bullish sentiment skyrocket in 2014. It took a few months for cocoa prices to peak back then. But once they did, the commodity fell by 19% in just four months.
In short, when bullish sentiment hits these ultra-high levels, it's nearly impossible for prices to keep soaring. When prices can't keep soaring, they stop... And then they fall.
That makes cocoa a foolproof place to lose money right now. Don't rush in with the crowd. This is an example of a classic investment setup... And it's one you want to avoid at all costs.
Good investing,
Brett Eversole
Further Reading
One major global market has been struggling since 2021. But investors are still doubling down on this losing trade. Unfortunately, that's a recipe for disaster... Read more here.
"We're still a long way from the kind of excitement we'd expect at a market top," Brett writes. After a painful bear market, mom-and-pop investors are interested in U.S. stocks again. But sentiment can still get a lot more bullish from here... Learn more here.
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