There’s much written these days about how one should invest in the markets. Most try to explain the market action as a result of specific reasons. The reality is that reasons don’t matter. For every buyer with a reason to buy there must be a seller who has a reason to sell. The reasons are irrelevant. Furthermore, very few boil their ideas down into simple usable terms. The key to successful investing is buying at a lower price than where you sell. Human nature does not change, and neither does its pattern of behavior. Human nature moves from extreme greed to extreme fear, and back again to extreme greed. If one can measure the extremes based on past history, when these extremes are reached the markets must change direction. Otherwise, human nature would have changed for the first time in 5000 years, something Gann said had never happened, and would be unlikely to ever happen in the next 5000 years.
Here is one of today’s most important charts. It shows the historical swings of commodities relative to stocks. We are clearly back to extreme low levels of commodity prices. Commodities in general would have to triple just to get back to the median level for the last 50 years. Clearly, the risks in owning real assets is very low at this point in time. The CRB Index may be up 100% off the low since this chart was printed, however, there is still a lot of upside left to be had before we reach extreme greed levels again.
This next chart is the second most important chart. Ignoring the cycle analysis, It shows the level of gold and silver stocks relative to the price of gold. It too is at an historical extreme well below the level seen in 1999 when gold sold for $250 per ounce. Clearly the risk in owning gold and silver producers is minimal at this point.
The real question now, given these extremes, is what stocks might one consider for investment ? Why not look at those with the highest probabilities for profit success ? According to Cohen’s book on point and figure charting, the highest probability patterns are the triple and quadruple top breakouts and the bearish signal reversals. A screen for these patterns using material stocks as a chart list yields fifteen stocks as potential candidates.
It is not my intention to offer specific recommendations in this article. My intension is to describe a straight forward method to obtain investment candidates which can provide big gains without incurring big risks. The idea that big gains only come with big risks is a myth. One only needs to know where one is in time, and the pattern the security has outlined. The how and why we got here is just noise and a distraction in the overall market game.