Listening to the Permabears Is a Great Way to Go Broke

The serial crash-callers have cost their followers millions...

The other day, I had an interesting question thrown my way: What's the single most dangerous investing trend you're seeing out there right now? What could people be doing that's a surefire way to just go flat broke?

My answer is probably not what you would expect - after all, today and every day, I'm "Opposite Guy."

So I'm going to give you the answer you didn't expect. But it's the right answer historically.

It'll help you along your path to becoming a successful, independent, self-directed, and, above all, wealthy investor.

And the best part is, the answer is going to save you a ton of money and heartbreak...

Conventional Wisdom Only Gets You So Far

Here's something else you probably weren't expecting from Opposite Guy: You can always follow the conventional wisdom... if you want.

That, however, will only help you in a bull market, when the conventional wisdom is usually right and can stay right for a long time.

Bull markets are when cable talking heads can set themselves up as mystical profit prophets just by hawking the FANG stocks - Facebook Inc. (Nasdaq: FB), Amazon.com Inc. (Nasdaq: AMZN), Netflix Inc. (Nasdaq: NFLX) and Google/Alphabet Inc. (Nasdaq: GOOG) - to the credulous masses.

permabears

See? Bull markets are easy.

But bear markets do come along every so often, and when they do, the conventional wisdom that's made you bull market gains will lose you a lot of money - fast.

Here's where I'd bet you were expecting me, Opposite Guy, to say that buying the FANGs is the most dangerous trend.

After all, that's what all the bears have been saying - and I have a bit of an undeserved reputation as a permabear. I'm supposed to agree that buying the FANGs at these extreme valuations is insane and a surefire way to go broke.

Trouble is, I'm not a permabear. I'm a trend identifier. I use liquidity and technical analysis to signal, identify, and confirm trends, as well as indicate likely turning points. That's why my analysis has, in fact, been mostly bullish for years. You can follow my liquidity work over at Sure Money and my technical work in the Wall Street Examiner Pro Trader.

Lately, I have been warning that the forces of liquidity that establish market context and drive trends will soon turn bearish, and this week, they started to. My short-term LAMPP indicator, which you can follow at Sure Money, turned red this week.

If you’re not making gains like this… you could be cheating yourself out of tens of thousands of dollars.

That's a big distinction - and an expensive one if you've been following constant doomsayers.

The biggest problem with the permabears is they've been saying that the FANGs are about to crash for years. They've been very wrong for a very long time.

What's worse, some of them have been recommending the purchase of puts or outright short sales of these stocks. Those recommendations have been disastrous. If you followed them, you would have been wiped out over and over.

But, like the proverbial busted clock that's right twice in 24 hours, the permabears will be right one day, and my liquidity analysis suggests that day is probably not far off.

So, for regular investors, the question becomes: Will these stocks crash, or should they be held through thick and thin?

Let's take a look at one stock in particular - a company chronically hated on (and often disastrously shorted) by permabears - one of the FANGs.

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

I mean Amazon.com, of course...

Forget the Permabears - Look at the Data

Amazon was one of the high flyers of the dot-com era (turned dot-com bubble).

It started life in 1998 at a split adjusted price of around $1.50/share. It peaked in December 1999 at $113...

BUBBLE!

In 2001, it fell to $5.51 per share...

CRASH!

Amazon

True, you would not want to have bought it at $113 and ridden it to $6. But let's be real: A simple trend-following system like the one I've developed for Lee Adler's Sure Money readers would have triggered a sell signal around $68.

You'd be wounded, but not dead.

Where is AMZN today? $942.

There are those who argue today that Amazon is another crash in the making. The problem is the boy-who-cried-wolf syndrome. Permabears in general, and Amazon bears in particular, have been complaining about the price of the stock ever since it began to recover in late 2001. The company has never earned a profit, they said, for years.

Now they just say that its valuation is insane.

It's all fact.

But here's another fact: AMZN is still in an uptrend.

Would I buy the stock up here? No. Hell no - we're getting very close to the end of this bull market.

But would I sell it? The simplest tools of technical analysis - trend lines, support, and resistance say "not yet."

permabears

There's an obvious level on this chart that would make me want to at least start taking some of my money off the table if I owned the stock. That's $933, the monthly lows of the range of the past three months. In fact, since I drew this chart, AMZN shares have dropped to that level over the past few days. Closing September below that would trigger my first sell signal.

That level also coincides with a two-year trend line. If that breaks, there could be a lot of selling to follow. The next trend line below that projects to around $800 at the end of this year.

So here's what you should do - and not do...

Don't Try to Fight the Trend

Is there profit potential on the short side there with Amazon? Not much. There's perhaps enough for scalpers who are trading the market full time, but not enough for most people. The potential reward over the short run just isn't worth the risk that the uptrend will resume from here.

I would not even think of shorting AMZN (or any of the other FANGs) on a longer-term basis until the stock has fallen to the second trend line around $800 and then rallied from there.

If the rally failed to exceed the current high around $1080, then I might think about shorting.

But if Amazon shares are doing that poorly, you can be sure that there will be much more interesting opportunities in other stocks.

I would look for stocks that don't have that cult following to drive constant short-killer rallies, a.k.a. "short squeezes." Every time a stock like Amazon drops to a major support, professional short sellers will start to cover, and dip buyers will rush in. Violent, short-term spike rallies are usually the result.

The best advice I can give bears who are tempted to short Amazon, or any of the FANGs, is to go take a nap.

It's a lot easier to nail a 20% decline in a stock that's in a downtrend and isn't a cult stock than it would be to nail one in AMZN.

In general, I never short cult stocks. It's not worth the risk. There are better choices.

Here's why I just don't understand serial crash-callers. First, I've had a long-time rule that seems obvious to me: Never sell short fad or cult stocks.

Secondly, some "fads" turn into real companies. Amazon is the poster boy for that.

Just because Amazon CEO Jeff Bezos has decided on a predatory model where he eliminates profit, or at least minimizes it, to crush all competition, does not mean that the stock is overvalued. Never short a stock just because you hate its "overvaluation."

In the same vein, please don't get me started on the whole concept of "valuation." It's a sham. One man's trash is another man's treasure. That's not just true of old furniture. It applies especially to stocks. Valuation is a useless concept in my view. "Cheap" stocks can stay cheap or get cheaper, and "overvalued" stocks can stay "overvalued," seemingly forever in some cases.

At the very least, don't short fad stocks or "overvalued" stocks when they're above support levels or major trend lines. It's a sure way to lose all your money fast.

Selling short only requires that you put up 50% of the sale price as cash equity. That means that a 25% increase in the price of the stock will wipe you out. You'll get a margin call well before that, of course. So what! You'll be forced out with a 50% loss. Someone else will make the decision for you.

Moreover, if you put up the additional required margin, you're just as likely to lose that. The object of short selling is to make money, not to prove that you're right. Ultimately, you may well be, but you'll probably lose all of your money first if you try to short the FANGs.

Always remember: The trend is your friend and don't fight the Fed! Even with real Fed tightening, now beginning (with the euphemistically named program of balance sheet "normalization"), the market trend hasn't turned down yet. Respect that. Be patient. Don't short fad or cult stocks. Don't buy puts on them. You could still lose it all, regardless of the fact that they are overvalued- or not.

Besides, the time is coming when there will be lower risk opportunities to make money on the short side. Meantime, the safest play is to honor the trend until it's no longer the trend.

Lee Adler's Sure Money readers get his Liquidity & Monetary Policy Profits (LAMPP) updates twice each week. They'll show you exactly where the week's best profit opportunities are... often right where the Fed say's they'll be. Click here for totally free access to Lee's new service. 

An Incredible Win Rate: Since April 28, Shah Gilani’s Zenith Trading Circle subscribers have had the opportunity to make average gains of 44% per day (including partial closeouts) on his recommendations. His win record is insane (in a good way). You’ve got to check this out – just click here.

Follow Money Morning on FacebookTwitter, and LinkedIn.

About the Author

Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.

Read full bio