How to trade against the doomsday clock

At the close of 1991, the Bulletin of the Atomic Scientists, the group of researchers who created the Doomsday Clock in 1947, made a monumental decision.

The Cold War had officially ended, and the United States and Soviet Union had struck a landmark agreement that saw nuclear arsenals slashed. In the light of this, they did something they had never done before – they wound back the Doomsday Clock by an unprecedented 7 minutes, to the time of 11.43pm.

It marks a happy moment of optimism in the history of a ‘Clock’ that has such a grim image. But since those heady days of 1991, the clock has inched forward, 5 minutes here, 2 minutes there, now standing at just 2.5 minutes to midnight.

In the light of this, it’s not unreasonable to ask why global markets apparently relish the fact that we have …

• a US president who seems intent on stirring up conflict with North Korea … and pushing Iran back onto a nuclear path
• Natural disasters have struck much of the southern US states, as well as other parts of the planet.
• The UK is embarking on an expensive divorce process in Europe
• Missiles are flying over Japan
• Terrorist threats seem to be everywhere

Is the stock market full of companies who manufacture underground bunkers?

It’s easy to mistake stock markets for a measure of how healthy our political systems are … or our moral compass … or our progress towards a utopian future …

But the truth is that they are just about companies making a shed-load of money.

And there are plenty of huge global giants who are doing just that – with Facebook, Amazon, Apple, Microsoft and Google even having their own acronym as the ‘FAAMG stocks’.

And when people are making a stack of money ‘right now’ – they tend not to be interested in listening to the doom-mongers warning them about nuclear winters and global warming.

So, are the market bulls charging over a cliff?

Well, that’s the other thing about booming markets … they can carry on booming long after they’ve smashed through any kind of ‘true value’ level.

The phenomenon that drives these booms is called ‘reflexivity’, and it’s a theory put forward by George Soros. With reflexivity, markets are driven by a positive feedback loop rather than by true value. A positive feedback loop is where the effects add to the causes … so, investor confidence causes stock prices to rise … and rising prices add to investor confidence … which causes prices to rise further … and so on ….

When markets are being driven this way, the naysayer can sit on the sidelines muttering about ‘true value’ for months, or years, while those who’ve chosen to follow the trend rather than their heads continue to make a lot of money!

So, how should you trade at 2 minutes and 30 seconds to midnight?

The reality of trading is that we need to trade what we see in the charts, rather than what the pundits and peddlers of stock-market-crash scenarios are telling us.

We know that markets can carry on rising long after good sense tells us they should.

And we know that markets can drop at any time.

The danger around protracted bull markets like this is that people become over-confident, and they become careless about the risks they’re taking. And that’s what we need to guard against – always, not just now.

In practical terms, this means:

• Always use a stop loss
• Keep your staking levels low and well managed
• Look at hedged trading methods
• Diversify your investments across different markets

And, of course, keeping a healthy degree of skepticism about anyone telling you they ‘know’ which way the markets are heading.

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