Follow The Hot Money

One of the ways to make money in the market is momentum trade.  Plenty of people try it.  Richard Driehaus built an empire momentum trading. It’s not easy. In this age of computerized trading, even tougher to execute.

Commodities trading
(Photo credit: London Commodity Markets)

However, there is such a thing in the market called “hot money”.  Hot money is in all markets, equities, securities, commodities, startups.  Sometimes it’s smart money, sometimes it’s just following the herd.

For example, in the startup world, you’ll hear about new paradigms.  Or, one company like a Facebook ($FB) will be highly successful and a hundred me too companies will start up looking to get funded.  “My app does this, and it has a social network.”  In the mid 2000’s, there was a lot of hot venture money pouring into clean solar and wind tech.  Today, it’s photo apps and Uber Airbnb look alikes.

If you can guess where the hot money will flow before it gets there, you can ride a trend and make some easy money.  Enter too late, you are buying a top and you get slammed.

Looking backward, we can see where the hot money flowed in the American economy.  In the mid nineties, it began to flow into the NASDAQ ($NDAQ).  The $QQQ still hasn’t hit it’s all time high, even in this artificially juiced up market.  When the internet busted, money exited.

It made it’s way into real estate.  Everyone thought that the sanctity of a home was worth something.  Government incentives hyperfueled that demand.  Then 2008 happened-which really became apparent in August of 2007.  Money flowed out of real estate into?

Commodities.  Corn, wheat, meat, oil.  Commodities became regarded by some money managers as an “asset class”.  Some sold blocks of commodity funds calling them “investments”.  Other pieces of the hot money crowd ignored the commodity boom and instead made direct investments into farmland.  Farm land value increasing is sort of a derivative of the commodity boom.

The only thing that didn’t go up in the commodity boom was the price of the largest trading firm in the world of commodities, $CME.
CME Chart

CME data by YCharts

The other path hot money wound it’s way was into the US Treasury market.  Bill Gross has famously called bullshit on this movement.  But, hot money is also wounded money right now and thinks it’s found a safe haven in the United States government.

The market is just starting to see hot money leak out of commodities.  Volume of trade is down.  Jon Corzine put a lot of artificial risk into the market.  Prices of commodities are down as well.  That “investment” thesis doesn’t work out so well when prices fall on a buy only fund.

Recently, I have seen certain farmland prices begin to drop.  It’s a sign to me that speculators aren’t buying property.  Farmers are selling smaller parcels, 20, 30, 40 acres at a crack.  Higher capital gain rates are also contributing to the drop.

The hot money is running into the stock market. The S&P ($SPY, $ES_M) is up over 14% this year.  Yet, yesterday at the Ira Sohn conference, I didn’t hear a lot of happy talk or rosy outlooks for the world economy.  The Fed has devalued the national currency and so the risk to buy stocks has dropped.

Don’t get caught when the merry go round stops.

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