When things get extreme.....

As I said many times before, betting against the extreme is usually a winning strategy. A few weeks ago, the general euphoric sentiment is getting wildly extreme to the point it seems there is no fear whatsoever and any tiny bit of drop would be bought up eagerly and swiftly. Then BOOM!, just a short few weeks, the sentiment has turned totally upside down. The depressing mood has reached to the point only seen at the deep turmoil time during the 2008 financial crisis. You may recall that I said before that we human beings have evolved for thousands of years and nearly everything has drastically changed except one thing: the herd behavior and sentiment alteration cycle. If we can learn to be contrary and bet against the herd at the end, it's often a rewarding experience. Two real life recent examples:

Recall my call for the recent topping of gold just a few weeks ago? Here is what I wrote:

I'm sure you will start to hear more headline news about gold and people will start to chase as well. But as a contrarian, I'm not so fast to jump into the FOMOs. While gold has indeed broken out for the 6 years high since 2013, I don't think it is ready to simply go up to challenge its all time highs....at least not yet although it is just a matter of time for sure! Two major reasons:

·       For one, the current $1650ish area is a very strong resistance for gold and technically it is very hard for anything to break out from a strong multi year resistance with the first attempt. I don't believe gold can either. We may see quite a few attempts before it can overcome the overhead resistance.

·       More importantly, the smart money has increased their short bet in the historically high level. As I said before, the smart money for gold, the Commercial Traders, have never been wrong on their bet although they tend to be early and therefore not a market timing indicator but rather a directional indicator. In other words, the smart money is betting overwhelmingly now for a correction of gold. I don't believe they will be wrong this time as well.

Here is the current chart of gold, a quick 15% plunge within days. 

How about the Treasury bonds? While I didn't publicly talk about it lately, I did a short trade on TLT lately that yielded a quick 300% gain within a week. See the chart here:

My point is not to convince you that every extreme point is easy to be pinpointed, but at least try to avoid FOMO in following the large herd to chase in either direction.