286 · Jason Shapiro - Overcrowded Trades: What Everyone Else is Not Seeing
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Yeah, you've mentioned in previous videos that it's all fine until there's a recession. What type of news failure and market reaction would convince you that the game is up?

The game is up, up, up, up. Yeah. Like the game is up where we're done all over. Yeah. The, the, the chickens come home to roost and, uh, and people, if we're going to make that argument, right. Uh-huh. I think it starts with the idea of this. This is the bear porn. Okay. You want my bear porn? I'll give you my bear porn. Markets, speculation, and risk. This is the chat with traders podcast. Okay.

Hey traders, welcome to episode 286. It's Tessa, your co-host alongside Ian Cox, the awesome host who interviews awesome guests on the one and only Chat with Traders. There's contrarian trading and then there's consistent contrarian trading. Can you really make money by consistently going against the crowd? Does it take a certain type of personality to be able to trade this way?

Jason Shapiro was featured in Unknown Market Wizards by Jack Schwager. But you know, this market wizard is no longer unknown. I mean, he is the ultimate contrarian trader and we're so excited to have him return to the podcast for an update after two years since we last spoke with him. We get to delve deeper and really pick his brains this time into his counter trend trading philosophy, learning about how he identifies overcrowded trades and how market positioning and sentiment rather than price guide his trades and how he

and focusing on the underlying mechanics that drive market moves. You know, there's so much to unpack here, guys, and I think it's fun. And I would challenge you to see if you can come away with any ideas that may spark other ideas that you may have never considered before. We hope you enjoy this episode. Ladies and gentlemen, we're so pleased to welcome back Jason Shapiro. Hi, Jason. How are you doing? Good, good.

Yeah, it's been a while since we last talked to you. I'd like to welcome you back to Chat with Traders. Good to be here. Yeah, last time we had you on was, gosh, it was like two years ago in episode 245. Just like to remind our listeners, Jason was featured in the book Unknown Market Wizards. So get a chance to get another wizard to learn about.

So since the last time we had you on a few years ago, has anything in the market surprised you during this time? I feel like I've been doing this too long to be surprised by what goes on, which is not to say that sometimes it's not shocking, but at the same time, I've been doing this a long time and

The markets do what they do. And, you know, sometimes we can get a decent idea of why it's happening. And sometimes we have no idea why it's happening. So surprised in that I can't really be surprised anymore because I've seen so many things that have surprised me that it's almost like, you know, nothing surprised me anymore. Uh-huh. Yeah. So could you do a brief review of what factors do you look at to get you to go long or short?

So my fundamental belief is that the market is a discounting mechanism and that the discounting mechanism is, in fact, positioning and sentiment rather than price. So I'm a countertrend trader. I don't countertrend things because of price. I countertrend things because of positioning. So when I see people are way too long something, you know, I'm looking to get short. When I see that participants are way too short something, I'm looking to get long.

Are there any particular trades that really stood out for you in the last few years? They're all pretty similar to me. You know, like I say, everybody gets super short and then I'm looking to get long. So, you know, a couple of good ones, uh, that we were able to catch based on that this year was sort of this currency trade. I went through a period earlier in the year where I really didn't have very much going on at all. And then a few months into it, we started to, we started to get some crowdedness, um,

So we were catching sort of dollar short trade really as early as like early May. We were looking at the Swiss franc and then the yen just before it squeezed higher, got super high.

Record level crowded short right on the lows there. So that was a great one to catch. And in particular, because, you know, that yen trade and that whole carry trade moved everything else with it, obviously. And we did not have anything that got us short the stock market during that period. I didn't see the stock market as being super strong.

crowded long, but it didn't matter because we were able to catch the currency trades. So I would say it doesn't matter where you catch these things as long as you catch it. I remember in 2008, I had an up year. I was neither short stocks nor long bonds, which were kind of the headline trades, but it didn't matter. I had a positive year. My numbers were good and people don't ask

Well, how come you had a good year? Did you get short stock? It doesn't matter. The bottom line is I made money. And that's all that really matters. And that's kind of how it's been this year, too. I really haven't traded the stock market very much this year at all.

Uh-huh. Why is that? Why is that? Again, it just wasn't set up for me. At the lows in the stock market, I saw people, and this is going back a year and a half or so, were very, very short, and I caught some longs there. But when that

data goes back to neutral, that's where my edge is over. So I get out. So it went neutral probably last early summer. It went neutral, which doesn't mean it's then going to go down. It means it's going to go up or down. But my edge isn't there, so I don't trade it. So I haven't really had stock trades. But I've had a few other trades that have worked very, very well. And of course, I've had trades that have lost too. But the currency trade certainly was my

best and favorite trade this year because it really caught the meat of what was driving everything. So like I say, though, I didn't catch the stock market

short trade back in mid-July, I was able to catch the currency trade, which really drove that anyway. So what's the difference where you catch it, right? Are we talking about the yen's making near all-time high or all-time lows actually in sometime in July? Is that? Yeah, right then is when we saw the position get record crowded was right in the beginning of July.

And before that, we saw it in the Swiss franc, which really was showing that same thing back in late May. And that one took a while to work, about a month, but eventually worked and worked very well. In July, when you were seeing the Japanese yen being very crowded, what does that really mean? So you were seeing a disproportionate number of participants being crowded?

Correct. Being short the yen. Correct. Correct. Exactly. I see. And then, so, uh, how it appears to you on the, on the commitment of traders, uh, report, it shows what a very long, um,

Very long bars representing heavy positions from the short side? Correct. It shows the speculators in the Commitment to Traders report being very, very short. And so you're saying speculators and what was the other group? Well, on the other side of the commercials. So they were very long. Speculators were very short. And that tends to be when markets have a high probability of turning and should they turn.

you know, high probability of having a big move because you have all these speculators that are short. And as the market starts to go against them, you know, they start getting stopped out. We start going through moving averages. We start doing all these things that these technical traders use and they start getting stopped out. So I'm really just trying to front run that type of move.

So what was the trigger for the Japanese yen to actually go up? I mean, we hear quite a bit about the yen carry trade. What is that and how does that impact the world markets? I mean, the yen carry trade, the theory is that, you know, interest rates in yen are very low relative to, say, the U.S. dollar. So people will borrow money cheaply in yen and put that to work in risk assets like stocks. So

When that starts to go against them on the yen side, they have to get out of all those trades. So they get out of the yen position and they get out of their long risk assets like stocks position and it all just kind of craters down. That's the theory behind it all.

I'm just wondering, how is it that just a one quarter of 1% rise in Japanese interest rates could trigger such a massive sell-off? I mean, that's not that much of an increase. Why did such a big sell-off occur on such a small interest rate increase? Well, I mean, this is the thing about when positioning gets massively one-sided, right? If everybody that is going to sell yen has already sold yen,

Then when it starts to move the other way, there's nobody left to sell it and they all just get squeezed out. And that's what happens. You know, people will argue that it was about, OK, they raised a quarter percent and maybe they indicated that there's more to come. And, you know, there's some truth to that. But I will always argue that it was all about just way overextended positioning that caused such a outsized move.

So in the COT reports, could you have heavy participation on the short side, but yet the number of play, but that participation is spread out kind of evenly among all the participants and such that each participant wouldn't be exposed too heavily. They wouldn't be too heavily leveraged, but you have broad participation, making it look like it's a crowded trade and

And yet when it goes against them, there wouldn't be this panic to quickly get out of their position because it was, they were relative. Each participant was relatively light. It's possible. I mean, arguably what difference does it make if it's one participant that's massively short or if it's a whole bunch of participants that are, that are short, you know, it's, it's a position that's very, very big out there. And, uh,

doesn't guarantee that the market's going to go the other way but it means if the market starts to go the other way off of some trigger like the japanese interest rate move in this case that you can get a very big move the other way because all this positioning has to has to get out and there's really nobody nobody to you know to buy it from because they're all in it so i i see so just a

just a small number of participants trying to get out triggers what margin calls, because no one wants to take the other side of the position. There's no one left. And so a small amount of dollar buying back in would send these markets or would send the Japanese yen up sharply higher quickly. Yeah. I mean, if you look at the LTCM situation in the late 90s, there was a small amount of participants that were putting on this trade that blew them out. But they

but they were putting it on massive size and when it started to go badly they all had to get out because they were getting margin calls and there was nobody to take the other side so they all blew out i mean literally blew out right and as it turned out the trade wasn't even wrong the trade ended up being correct but um in the middle of that trade being correct it got too crowded

They got squeezed. There was no one to provide them with liquidity on the other side, and they all blew out. I mean, LTCM went out of business. Salomon Brothers went out of business, you know, and all on a trade, by the way, that ended up being totally correct.

Do you have any idea what any of these players might use as an excuse of, you know, when it comes to a market being overcrowded? Kind of what's their rationale? Do they believe that, oh, it won't happen or it can't happen for these reasons? I don't think most people necessarily look at that.

They're looking at the fact that they think that the trade makes a lot of sense. And if it makes sense for a dollar, then it makes sense for $100. So let's go for it. And that lesson seems to never be learned. I mean, the LTCM people were theoretically the smartest people on the street, right? And they didn't get it, right?

you know, people have a tendency to think in terms of greed, you know, and that in the end is what gets them, I think. Uh-huh. So you have the old phrase, uh, this time it's different. Right. I guess so. Yeah. Yeah. Um, how long has the Japanese yen carry trade been going on and in general, what's its level of influence, uh, over risk assets?

I can't really say what its level of influence is. I just know what people talk about and what the theory is. I don't know enough about how hedge funds finance their trades through the yen. I really don't know. It's something that has been going on for a very long time. We hear in Euro-yen as well. Euro-yen has always been sort of a risk on measure as well with the same idea.

If Euro-Yen was going up, then that was positive risk assets and vice versa. So that's been going on for as long as I can remember. So just before the yen carry trade blew up, were there any signs in the U.S. stock market that it was crowded on the long side? No. Not to me, there weren't. Any markets that you're looking at now that are showing you that they are very crowded, both from the long and the short side?

Right now, it's gone. After this whole dollar thing the last few months, which was really where I saw most of the crowdedness, and now that has gone away, I don't see a lot of stuff right now. Arguably, there is some overly short positioning starting to happen in the energy sector, particularly in heating oil and in unleaded gas. It's starting to get there.

And there's a couple of commodities like cotton, things like that, that are getting close to getting there. But as far as stocks, bonds, bonds are starting, just starting to get a little bit crowded, especially the long end of the yield curve for 30 years are arguably getting to a point where people are a little bit too crowded long, which would make sense, I guess, because people are expecting interest rate cuts. It doesn't make sense to me why they would be buying

30 years because they're expecting interest rate cuts, but nevertheless, that seems to be what they are doing. So I think that there's probably arguably some crowdedness in the long end of the yield curve there at the 30 years

But as far as currencies and stocks and most of the commodities, I don't really see anything. Gold is getting close. Gold we saw as pretty darn crowded to the long side earlier in the year, and that went away. And now the market has, again, ripped higher to new highs. And now we're getting close to where they're getting a little bit extreme crowded on that one too. But again, not totally there yet. That's going to trigger a trade for me just yet.

I often hear about central banks, uh, supposedly buying gold. Would central bank show up in a COT report? Could we track what they do? Only if they're doing it in the futures market, will they show up? If they're buying cash gold, then they will not show up in the COT report. Although it could show up arguably the people that are buying it from might be using the futures to hedge or something, you know, we don't know, you know, that whole argument to me is, uh,

You can be bullish gold, and I can make a hugely bullish gold case here on a fundamental basis, and that's fine. But if your argument is the central bank buying, I think personally, I think that's silly. Because I can remember in the late 90s when central banks were auctioning off their gold holdings, right? And that was the low in gold.

So the opposite argument then would have been, well, gee, central banks are selling, so you wouldn't want to be long gold. I remember every month they were holding these auctions to auction off all their gold holdings, the Bank of England and all these places. And that was right at the low. Gold has gone up a massive amount since then. If I recall, that was like in 98. So if you were going to be bearish gold because of central banks selling in 98,

I think it was actually at 99. So, I mean, you were looking at $250 gold. It's gone up 10 times since then. So if you were buying from the central banks back then, then you should probably be selling to the central banks now, right? That's how I would see it personally, but everyone has their own read on how they want to read things. So when a market goes from a crowded position, bullish or bearish, to say a very light position, is

Is that a signal that players have just gone to cash? Well, it's a signal that they've gotten out of those, you know, those massive positions is really all it's a signal for where they've gone to cash or where they've gone somewhere else or wherever they've gone, you know, but for me, when that happens, there's just no trade there, right? For me, because if I'm trading it based on positioning and there's no massive positioning, then, then there's no edge for, for my particular process. So I just sit back and,

And wait for the next kind of low hanging fruit type of situation, you know, which is a hard thing to do for me and for many people, you know, just sit back and wait, you know, but that I've learned over time is the best thing to do. You know, sit back, wait for your process to to give you an edge and then and then pounce. Right. But just to trade around things just because you're bored or whatever, that's over time, I think, a big mistake and a costly mistake.

Yeah. So let's go into what you consider an ideal setup to go long or short. You talked about markets being overcrowded one way or the other. And my understanding is you're looking for a news failure day. Right. So I think no matter how you trade, whatever it is you think, I think that stocks are going to go up or whatever because of this.

That's fine. But you always want to wait for the market to confirm what you're believing, right? Because you don't want to be fighting the tape because you're not going to be over time smarter than the market, right? Fighting the tape is just a very dangerous thing. I'm right. The market's wrong. So I'm going to do this is a very dangerous thought process over time, right? So what is a market confirmation? Well, for me,

If I'm looking at, okay, everybody's short here, I'm looking to get long. What's going to be my confirmation? I do it on what I call a news failure event, which means this market's been going down. Everybody is super short. I'm looking into why that is. What's the fundamental reason that everybody's looking for that? And we can just get into the Swiss franc trade earlier in the year. And it was all about interest rates differentials, right? The-

European central banks, including Switzerland, were cutting rates much faster than the US. The US, to this point, still hasn't even cut rates at all. The interest rate differential is growing, and therefore, that's bullish to dollar versus those currencies. I'm looking for data that is going to support that interest rate differential. In this case, let's say some weaker data in Switzerland, since I'm looking at the Swiss franc, that should support that.

And it comes out and Swiss probably goes down after it. But then it pops back up and closes the day higher for no reason. That's what I call news failure. The news was bearish and the market didn't go down. Why didn't the market go down? Is it that everybody didn't see the news? Clearly not. Everybody sees the news. Everybody's paying attention. To my eye and to my belief system, it's because everybody's already short.

So who's left to go short? Where's the marginal seller? And the market just showed you that. The market just confirmed that. If there was a marginal seller, they would have been selling on this negative news. Well, they didn't. The market closed up on the negative news. So that's my market confirmation, and that is where I will get long. And now I have two things that go on. One,

Despite the fact that it had this news failure today, it might in the next day or the next week or the next couple of weeks go down anyway on new bad news and take out those lows. Well, if it takes out the lows of that day, well, then I'm stopped out. I'm picking a turn. If it makes a new low, then clearly I have not picked a turn. So I'm wrong. So I stop out.

Okay, there you go. I take my loss, I move on. The good side is when it works. So now the market starts to go up. Shorts start to get squeezed, it starts going up, they're getting squeezed, they're getting squeezed. The positioning data goes back to a neutral reading, and that's where I take my profit. So it's one or the other.

And what tends to happen is, say my trades are profitable less than 50% of the time, but the profitable trades make multiple times what the losing trades lose. In the particular case with the Swiss franc, I think we ended up making seven times what I was risking. So that means that makes up for seven losing trades. If I have that one winning trade and I have seven losing trades, I'm even.

Right. And that's really as a trader, I think what you're what you're looking for is these asymmetrical payout situations. Right. You want to make a lot more on your winners and you lose on your losers. And that's to me is what what trading is over time. So how to identify where those kind of situations are. One way to do it, I believe, is through positioning. Chat with Traders is brought to you by Tasty Trade.

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How often are important news releases digested over days and weeks, thus necessitating scaling into the position? No, I don't do that. To me, it's a one-day read, right? If we look at the classic example that I like to talk about a lot, since most people are involved in the stock market, if we look at the low of the stock market in October,

of 2022. The market was getting bashed all through 2022 as inflation was rising and the Fed therefore had to keep raising rates. And this was all seen as very negative for the stock market and it kept going down. October 2022 came, we had a CPI report, which was the big number then.

because everyone was so focused on this inflation thing. And we had a CPI report come out in October that was higher than expectations and was actually the highest CPI number for the entire cycle, as it turns out, for the entire cycle. But we didn't know that then. But what we knew then was it was the highest number for the cycle up until that point.

and higher than expectations that day. So again, given that the stock market was selling off on higher inflation, this should have been a very bearish number for the stock market. And that day, in fact, was, in the morning, a big down day for stocks.

as you would expect. And by the end of the day, the stock market actually closed up. And that was it. That was the low. That was the exact low of the stock market since then. Well, how crowded did it appear on the COT charts? Truthfully, it was crowded, but it wasn't mega crowded at that point. But it got there in about

January of 23. So a couple months later, the stock market rebounded a little bit. It started to have another sell off and then it got super crowded. And then we had some news failure in there somewhere. And that's kind of where I got long stocks was back in January of 23. And that trade lasted for about six months. So do the impacts of the same types of news releases vary over time, depending on the mood of the market?

I ask this because the markets rallied on the dovish July 31st Fed announcement, but then proceeded to go down sharply afterwards. Yes, I think that they change depending on what is the sort of psychology that's driving the markets at the time. Sometimes we're in this mode where good news is bad news, and then sometimes we're in the mode where good news is good news. So you have to kind of

pay attention in a way to what that is, where we are in that cycle so that you can then figure out what actually a news failure is, right? And those things, like you mentioned, have switches, right? We were in this mode for most of the last year and a half where some weakness economically was seen as good because it meant lower rates, right? And that kind of switched, I would say, on CPI day,

in July was the big switch on that. We had a lower CPI and the markets couldn't rally on that anymore. And then everyone started focusing on, well, gee, there's going to be recession and there's going to be weakness. And so we got into that mode. And where we are now, I really

I don't know, because now we're getting both sides of it. Sometimes we'll go up on that kind of news. Sometimes we'll go down on that kind of news. But that, to me, can be explained by the fact that the positioning really is not showing any kind of bias one way or the other. So the markets can just act in like a random fashion, which is what I think is going on here.

Just curious about markets where there is much less news flow, for example, I don't know, maybe say some commodities versus a stock market. Are news failure days more pronounced in markets that don't have a lot of news flow because of the relative scarcity of the news flow?

Yeah, it can be hard to read news flow on some of these markets like coffee and, you know, cotton and that type of stuff because they don't have a lot of releases. Right. But they do have releases, you know, like the grains and all that have a WASDE report every month. And there's some other kind of, you know, supply demand reports that.

that come out, but certainly it's nothing like the financial markets. And I get more trades, I would say, arguably in the financial markets because of that. But I do get trades in these other commodities. And, you know, part of the news flow can arguably be a correlation flow as well. You know, so you're looking at gold and we know that gold tends to

go up when dollar goes down. You get a big down day in the dollar and gold goes up on the back of it and then fails. You can argue that that's a piece of news for gold is that the dollar is weak. I call it a correlation failure, but it's just a subtype of news failure.

you know you don't get a lot of fundamental news on gold right but it reacts in certain ways to other markets so therefore you know you you can use the the correlation moves as as a signal

So do you spend quite a bit of time just observing the various nuances in the news and how each market responds to it while you're waiting for the perfect setup to go in so that you can see the trend of how the psychology is evolving over time? I spend just about all of my time doing that. Okay.

Wow. Trying to figure out what it is that is theoretically making these markets move a certain way so that I can know when that thing happens, how should the market respond? And if it doesn't respond that way, that's giving me my read, right? I'm not here to belong something because I think that the news is going to be positive. I don't have any edge in knowing what the news is going to be. I unfortunately

can't see the future right i don't have inside information into any of this stuff right so i can't trade based on that right so i have to trade based on letting the market tell me what it's going to tell me you know read the tape and to me reading the tape means how does it respond to the input not what is the input because i could never have predicted that

but how does the market respond to the input relative to how it should theoretically respond to the input.

How often do you find yourself coming across a potential trade where to you it seems like the ideal setup and then you go in very heavy on that one particular market? Or do you set limits to yourself, no more than X percentage in stocks, no X percentage in commodities? How do you work that? I don't go in heavy on anything.

All of my trades are exactly the same and therefore my risk is exactly the same. I personally risk 70 basis points on each trade. So I know where my entry is, which is on this reversal day type of thing. I know where my stop is, which would be if I was buying this thing would be the low of that day.

So I put on as much into that trade so that if I am going to get stopped, I'm going to lose 70 basis points on that trade. And I picked 70 basis points because A, through backtesting and B, through 20 plus years of live trading, I know that that 70 basis points is going to come pretty close to providing my portfolio with a volatility of around 7% to 8%, which is what I am targeting, which then brings me to

you know a return of around 15 a year and that's what i do you know some people want to do more they they do more you know it's all a question of your risk tolerance right but that's where my risk tolerance is so that's how i do that i have no edge unfortunately in knowing which one of these trades has a higher probability of working than any other one i have spent

much time with people that have worked for me and quants that have worked for me trying to decipher that. And we have never found anything that has been reliable. What I find is the one, the trades that I hate the most are the ones that usually end up working the best. And the ones that I love the most are usually the ones that end up working worst. So I don't use any bias in that. I just treat all these trades exactly the same.

Anything you attribute to the trades that you dislike the most, sometimes performing the best? I think because I have the same behavioral biases of everybody else. The markets have a way of, you know, of making us look like fools, you know.

It's just kind of the nature of the beast. So, you know, I can sit here and I can justify, okay, this trade should be great because of the macro. I'm seeing the macro look like this and blah, blah, blah, blah, blah. And it's all very interesting. It makes for some fun conversation. But the truth is it has absolutely nothing to do with,

with how I trade it. I put all my trades on exactly the same. I had, just as an example, I had a really nice trade earlier this year where I got short cotton. It was a very nice trade. I didn't think it was going to work at all.

I thought that cotton was, I was in my heart bullish the stock market. I thought that cotton was more of a risk asset, just like anything. If the stock market were going to keep going up, cotton was probably going to keep going up. I didn't like the trade at all. Thankfully, I didn't listen to myself because that trade ended up making, just that one trade ended up making my full first half of the year.

I do not listen to my own bias because I have learned that it's no better or worse than anybody else's. You know, I wish I had some magical ability, but unfortunately I'm just a dude like everybody else. You know, I have no edge in forecasting the future. Unfortunately. Could you give us an example, or maybe you remember that event of the news failure of cotton? Like what,

What would we hear? Oh, you know what? It must have been, it was a report, a green report, a WASI report that included cotton. That came out very bullish for cotton and cotton ended up going up and then closing on the low of the day. And so I got short there against the high of that day.

So whether you like the trade or whether you dislike the trade, you put on the same position size on the day of the news failure and you don't add to the position. Is that correct? I don't add to the position. Okay. So yeah. I put on my risk size and then I just sit. It's either going to stop me out and I'm going to lose what I was expecting to lose or at least close. There's some slippage sometimes, but, and if it works, then it works. I can't control it either way.

And what percentage of the time do your trades work? Over time, the number's been about somewhere between a 37% and 40% winner. So if you get stopped out, do you ever try to reenter that? Oh, yeah. If the crowdedness is still set up as it was, I will reenter on a new news failure event.

Oh, on another news failure. So say if the market's really crowded, you have a news failure event on one day, you go in, you put your position in, and then say a few days later, you get stopped out, but you still see, say, a week or two weeks later, it's still very crowded. Are there conditions that you would reenter that same trade? Yeah, a new news failure. Oh, a new news failure. Okay. It just resets and starts over. I see. Okay.

In one of your interviews you've done earlier, you discussed about Barron's experts and their portfolios. Kind of why do they underperform? And I'm just curious, if they're good enough to get on Barron's, one would think that they have performed well in the past, enough for Barron's to call them on as experts. Do you consider them part of the consensus? And why do you think they underperformed?

I do consider them part of the consensus, and I think that is why they underperformed. You know, to say, oh, well, if Barron's going to call them up, they must be expert. You know, that's arguable. You know, they must have a good marketing team. They must have a good PR team, right? I don't see Stanley Druckenmiller sitting on the –

on the Barron's Roundtable. Those who know don't say, and those who say don't know kind of thing. But given enough people on the Barron's Roundtable, you're going to see consensus. A lot of this has to do with not wanting to lose your job, not wanting to lose your clients,

And the most simple way to do that is to not do anything outside of consensus, right? Because if you lose money when you're in consensus, then you can say, well, gee, everybody lost money. Whereas if you lose money when you're against consensus, people are going to be like, what the hell are you doing? You know, you're fired, right? So I think it has a lot to do with that psychology personally. Some of these people wanting to fit in, right? Yeah. Protect the job, protect their, you know, protect their business, you know.

In other videos, you've mentioned about euphoria and market tops. What are the signs of euphoria that go beyond just the COT report? Well, I mean, A, positioning, and B, you can smell it. I mean, we had what I consider to be euphoria before.

in copper, for example, back in May of this year, where yes, the commitments of traders were showing people were way too long. But you started hearing people, people don't talk about copper that much. It's

maybe one of the more popular commodities with oil and gold and all that, and then maybe copper. But you started getting people on TV, copper became the new AI trade, right? Because a run out of electricity and everyone's going to have to buy all this copper to make all this new electricity. I still have it somewhere in my file where a guy came on and said,

This was the biggest no-brainer trade he has seen in his career. And that was literally a day before the top in May. When you start hearing people, there's no such thing as a no-brainer trade. I'm sorry. Never will be, never has been. So when people start talking about this is the biggest no-brainer trade I've seen. And this is after, of course, he didn't say this when Copper was trading at 360.

He said it was when copper was trading at, you know, 520, right? After things gone from 360 to 520 in three months, now all of a sudden he's on TV saying it's the no-brainer trade. And it's not even just necessarily...

something against this particular person, you have to remember he's getting on TV and saying this. So somebody is making the decision at that time to allow him to be on TV. And they're allowing him to be on TV clearly because copper is making headlines and everybody wants to hear about it. And so they bring the guy on that's going to say that, right? That's what's going to get the viewership. So that tends to be when euphoria happens, right? When all you start to hear about is one thing,

Um, that tends to be when, when the euphoria is happening. So, uh, you pay close attention to what's going on in the news and society and what have you to add to your list of tools, uh, in addition to the COT report to get a feel of, of how euphoric a market is. I do. You said back on June 16th, quote, this is the most hated bull market I have ever seen. Tell us, tell us why.

I traded through the late 90s, as we now know it, bubble. And I also traded through a few other bubbles in Asia and whatnot in my life. And this market has been going up for quite a while now with a little break in 2022. But I did not see and still have not seen for that matter

any of the signs that I saw in those other bubbles. When I was trading in late 99, all you heard about everywhere you went was all these people talking about how much money they were making in the stock market. I don't hear a lot of that going on now. I have been hearing more people tell me how this was a bubble and it's going to crash and all that. You didn't hear anybody

in 99 talking about how this was a bubble when in fact it was right uh-huh i i don't see that now i i see almost the opposite i mean right here again i wouldn't say people are are ridiculously um bullish but uh i don't think that they're as bearish as they have been um for the last year and a half but more neutral at this point but that's what i meant by it's the most hated bull market was i i just don't understand there was no euphoria there was no

Nothing. And I think that's a function of the fact that you had the people who were like my age who did get burned in 2000, 2001, 2002. Right. And I've promised themselves they would never fall for that trick again. And then you had the younger generation and the same thing happened to them in 2022, 2021 post-COVID, 2022.

A lot of the younger generation got involved and was chasing all these momentum stocks. And once those momentum stocks failed, they just sat on them and said, OK, I'll wait till they come back. And they never came back. You know, they lost, you know, all these Cathie Woods type of stocks. Right. They lost, you know, 75, 85 percent. And now they have promised themselves that they would never fall for that again. And so therefore, they have hated this rally for the most part, almost the whole way up. So that's what I mean by the most hated bull market.

I've also heard you say that people love bear porn. And I'm just curious, why would this be when most of the investing public invests or trades from the long side? Wouldn't they love bull porn? You know, it's a deep subject, but I'll tell you this. I made a video, I don't know how long ago, maybe it was a year ago or so. I made two videos on the same day, just as an experiment. I used the same data.

I use the same information. And on one video, I made the bullish argument based on that data and information. And on one video, I made the bearish argument based on that same data and information. And I posted them both within an hour of each other on YouTube. And the bearish one got five times more views than the bullish one. And the bullish one, I called the bull case. And the bearish one, I called the bear case. And the bear case got five times more views.

So why is that? You know, I feel like, you know, the short trade is the hero trade, right?

People want to be the hero. Anybody can say, hey, the stock market's going up and 75% of the time it goes up, but it's the hero that gets the market going down. Everybody wants to be the hero. They make these bearish things. I think that people are, while you say most people are invested from the long side, and that's clearly true,

I think they are underinvested relative to where they in particular wish they had been, right? With the market basically at very close to all-time highs here, they clearly wish they had more money in the market, right? And they don't. And so, you know, it makes them feel a little bit foolish and...

And therefore, if the market came down, they would maybe feel a little bit better about themselves and maybe they could get some of the money to work that they wish they had put to work. So I just noticed that people are very much more interested in hearing the bear case more than they're hearing the bull case. Interesting take on psychology there. I'd like to transition to economics and get back to you were talking about copper. Some say that copper has a PhD in economics. Any thoughts on that?

Yeah, I mean, I get it. You know, the demands for copper should be high in times of strong economic growth.

and obviously low in terms of economic growth. That's why they say that. Why did copper go down? I will argue because people just got way too freaking long and therefore they had to get stopped out, which they did. If we want to make the fundamental argument, we can point to China, which is the biggest user of copper by far.

And the economy clearly has sort of fallen out of bed then and hasn't really recovered very much. You know, Chinese housing and construction obviously uses a huge amount of the global copper supply. And that whole market has just been way overbuilt and has just died.

So, I think that is the fundamental reason why copper has had such a hard time recently. But that's not to say that it necessarily says anything about the US market. People came up with copper's PhD way before China even was a player on the global economic stage, right? Now, they're probably the biggest player for that type of stuff, right?

Maybe the PhD has been lowered to a master's degree at this point. I don't know. Yeah. Have the net longs or shorts reported by the COT grown steadily over the years to reflect all the new money printing? Certainly in the stock market, the outstanding value and the bond market, the outstanding values have gone up. I wouldn't say so in the commodity markets. They've stayed pretty much the same.

So what are your thoughts about the market saying that the, about the chances of a 50 point rate cut? How accurate has the market been in the past in predicting these rate cuts? And is there a way to measure how crowded this type of betting is? I mean, at the beginning of this year, they were betting on seven rate cuts. They were betting on seven rate cuts this calendar year. Oh, wow. So how accurate was that? Right? Yeah. Not very accurate.

The positioning in the COT for fixed income can help in deciphering where people are positioned for that type of stuff. My personal take, which as I've said before, I wouldn't trade off of my life dependent on it, but I personally think it's a little bit crazy. I have no idea why they're cutting rates, why they're even talking about cutting rates. I personally don't get it. I guess they're trying to get in front of something.

But I don't see signs of recession. I guess we're seeing some weakening, but you know what? The unemployment rate is 4.3%. It wasn't very long ago where the theory was that the natural rate of unemployment was 6%, meaning it could never go any lower than that, right? So how a move from 4.1% to 4.3%

is so economically bearish, I don't particularly get. I also think that-- and look, by the time we get to the interest rate cut, as we've seen the last few weeks, the market can move very quickly. This could be different. But I mean, the S&P is within a couple of percent of all-time highs. Gold is within one day. Yesterday, it was on all-time highs. Bonds are within a couple of days of all-time highs.

So why do you need to cut rates? There's clearly plenty of liquidity out there right now to do what you need to do. You're going to cut rates into the stock market on all-time highs and gold on all-time highs? I think it's insane. But who the hell am I? I don't sit on the Federal Reserve Board. I don't know what... Maybe they see something that I'm not seeing. I don't sit here and have...

a team of people forecasting, you know, future economic growth for me, you know, I'm just a stupid tape reader. So maybe they're seeing something that, that I don't see, but to me, I personally think it's, it's insane, but you know, and again, I don't care, let them cut rates. What's important to me is how will the market react to that?

Right, right. So if the Fed gives the market what it's demanding and cuts rates by, say, 50 points, and the market closes significantly down for the day, would that be an obvious news failure and a clear sign to go short? It wouldn't be because it's not set up as a short. It's not set up that they're super long here for me. I personally think that if that were the case, I would be looking to short the 30-year bonds.

which are very close to set up to a short here. If they cut rates 50 and 30-year bonds go up first and then close down, I would be looking for short that. I think that would be the trade. Oh, wow. So you've said in the past- By the way, to me, it makes the most fundamental sense as well, just as an aside. Yeah, you've mentioned in previous videos that it's all fine until there's a recession.

what type of news failure and market reaction would convince you that the game is up? The game is up, up, up, up. Yeah. Like the game is up where we're done all over. Yeah. The, the, the chickens come home to roost and, and people, we're going to make that argument, right? I think it starts with the idea of this. This is the bear porn. Okay. You want my bear porn? I'll give you my bear porn. You know, you,

You start with the argument that this entire thing is nothing but a Ponzi scheme, okay? Where they've been, since '09, they've been doing nothing but printing money, right? And that is what has supported everything, right? 'Cause at the end of the day, more money is what drives the prices of things up, right?

Milton Friedman will tell you that, right? Or at least he would have when he was alive, right? That ultimately is what drives things up. So they print money. And somewhere, I don't know where,

I don't even know if it's close or if it's not close. I have no idea, but somewhere, obviously, there is a limit to that, to how much money can be printed before there is a consequence. Now, we know the US has this special thing that the dollar is the reserve currency of the world. So therefore, the limit to how much money they should be able to print is probably a lot higher than anybody else.

But there is still a limit because there is a limit to everything in the world, right? Physics will tell us that, right? My feeling is if they get to a point where there's some sort of recession and let's say the markets are going down, et cetera, et cetera, and the way that they decide to solve that again is to go back into QE and go back into printing money. Okay, that's fine.

What happens if that doesn't work? And what it will look like, that not working, is they'll print money, they'll announce printing money, whatever, and the markets won't go up anyway. Stocks will go down anyway. Bonds will go down anyway. And the dollar will go down. Now what? What are you doing now? There's nothing left. At that point, it's over. So that's what I would do. Look, we're not there yet.

Um, we could be there within the next six months, you know, let's see where we go. Right. We get the S and P, you know, back down to 3000 and et cetera, et cetera. Um, and shit starts to hit the fan and someone's in trouble and all that.

Then we'll see. Let them print money and let the market react to them printing money and let's see how it goes. To me, that is the shit hitting the fan moment when the Ponzi scheme is over. Again, I'm not here to say that happens in the next six months. It could happen in 60 years for all I know. That's, I believe, what to look out for. I do, in my heart of hearts, believe that that is a real possibility.

simply because of the psychology behind it. When they did it the first time in '09, I worked at a large hedge fund, and I can tell you that the consensus on the street was there was no way that was gonna work, it was super inflationary, it was bad, and blah, blah, blah. And of course it did work, right? And saved the whole system and all that. But now this time around, everyone thinks that is the answer. That time they didn't think it was the answer. Now they think it is the answer. So if they do that,

People are probably going to buy into it this time. And then they're probably going to get burned. That's what I think. But we have to get to that point. Yeah, you know, the difference obviously is that back then, the risk was on the bank balance sheets, right? And now the risk is on the government balance sheets, right? Everyone says, oh, well, the bank balance sheets are all fine now. They're all so well-improved and blah, blah, blah. I'm like, yeah, that's true. Because it's all been shifted to the government balance sheets, right? If you think that, you know, the scenario I'm talking about,

It means that the U.S. government is going to go broke. I mean, you're fighting. You talk about fighting City Hall, you know. These guys will use, obviously, every trick that they could possibly pull out of their bag to prevent that from happening, right?

But if and when that is going to happen, it doesn't matter what tricks they pull out of their back. Right. If it's going to happen, it's going to happen. And at a certain point, the more they try to stop it, the worse it becomes. So that's why I say let them try to stop it by printing money and then let the markets tell you that that ain't helping. You know, let stocks, bonds and the dollar go down on that. And then we got a problem. But, you know, I'm not saying that's happening tomorrow. You know, let's let's let it happen first.

Excuse the last interruption here. This is Tessa. We hope you're enjoying this episode so far. If you love the podcast, please give Chat with Traders the best review you can on whatever platform you're listening from. This will help us to keep the episodes coming. Also, if you haven't subscribed to our email list, please hop on to chatwithtraders.com and click on subscribe so we can keep you posted of information that may be of importance. Thank you. Now back to the chat with our guest.

Uh, so to wrap up, uh, the last question I have for you is, uh, you said about a year ago, the less I know about these markets, the better I am. Tell us, tell us why you wouldn't, wouldn't learning more and getting as much information as possible, uh, uh, be better. Not really. Cause I think sometimes you can overthink it. You know, my, my process has worked for me, right? Um, it's an edge. I believe that, that, that actually has positive return expectations.

So that's really all I want to know is what is my process saying? That's all I need to know. I can sit here and talk about, you know, Ponzi schemes and macroeconomics, blah, blah, blah, just like anybody else can. Right. I went to school for economics. I get it. Right. But I don't think it offers me any edge. So overthinking it is what I'm saying is can hurt more than it can help.

Well, Jason, I'd like to thank you for coming on Chat with Traders. No, I appreciate it, man. It was great talking to you. Yeah. How can our listeners reach you? Oh, you know, I have this crowdedmarketreport.com, which you can check out. On YouTube, I do videos quite often. Certainly once a week, I try to do a video that really focuses more on

trading psychology than anything else. I'm not really on there every week and going, here's what the S and P's are going to do this week. Cause I think that that's stupid. Um, but on YouTube, under crowded market report, I have a bunch of that stuff. Um, and then I'm on Twitter too. I post some stuff on Twitter once in a while too. And then we have a sub stack that's free, but you go to crowded market report.com. You can kind of pretty much find all these things. Okay. Fantastic. Great. Thanks for coming on the show. Yep. Appreciate it.

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