The Fed calls for a 2% inflation target, when January core CPI is already 2.3%, with headline at 2.9%. BOE, BOJ, EU bailouts and potential QE3 are all inflationary measures by central banks to prevent dreaded deflation. The hidden plot behind inflation is the fact that China is moving away from export/fixed asset driven growth to domestic consumer driven growth.
GLD is currently at 2012 lows but I've learned, especially in gold, that you buy when it's ugly, not when it's pretty. QE3 is the short-term driver of gold. However, if the economics get better in the US, one would expect inflation to rise higher and the Fed would need to raise rates rather rapidly in order to catch up with inflation (already in negative real rates environment). With the longer term China story intact and potential EU bailouts very likely, really the only plausible way I see commodities not moving higher is if the world moves towards deflation, which every central bank has positioned themselves against.
Wednesday, March 14, 2012
Sunday, March 6, 2011
Oil News
Many believe on the street that this move in oil is mostly news driven, starting with the now successful rebellion in Egypt and the on-going violence in Libya. While many believe that it is the main driver for this strong oil rally, I believe it is nothing but a lucky catalyst for those who were bullish on oil.
To be exact, the protests in Egypt started Jan 25th, where the daily range in USO was only 50 cents. The big moves happened 3 days later, and eventually sold off to even lower levels a couple of weeks after. The protests in Libya started Feb 15th, where the USO had an inside day. The big gap up happened 2 days later. Now if these protests were truly the main drivers of the move, wouldn't one think that once the news came out regarding political unrest and public protests in these Middle-Eastern/African countries, there would be at least a quick reaction? One might argue that it took a couple of days for people to realize that these protests were not one-time acts against the government but I would point to a market truism "Buy the rumor, sell the news."
A true test to see what really is driving oil higher is when the political protests in the Middle-Eastern area die down, will oil plummet back to prices in the $90s, or will it hold above $100? I am betting that this is going to be a nice ride for those who are long long after the violence dies down. The main driver then would be oil inventory numbers every Wednesday.
P.S. If oil weighs on the equity markets, this may be an inflection point in the equity markets and may offer better entry prices for strong stocks in the coming weeks.
To be exact, the protests in Egypt started Jan 25th, where the daily range in USO was only 50 cents. The big moves happened 3 days later, and eventually sold off to even lower levels a couple of weeks after. The protests in Libya started Feb 15th, where the USO had an inside day. The big gap up happened 2 days later. Now if these protests were truly the main drivers of the move, wouldn't one think that once the news came out regarding political unrest and public protests in these Middle-Eastern/African countries, there would be at least a quick reaction? One might argue that it took a couple of days for people to realize that these protests were not one-time acts against the government but I would point to a market truism "Buy the rumor, sell the news."
A true test to see what really is driving oil higher is when the political protests in the Middle-Eastern area die down, will oil plummet back to prices in the $90s, or will it hold above $100? I am betting that this is going to be a nice ride for those who are long long after the violence dies down. The main driver then would be oil inventory numbers every Wednesday.
P.S. If oil weighs on the equity markets, this may be an inflection point in the equity markets and may offer better entry prices for strong stocks in the coming weeks.
Wednesday, March 2, 2011
Remember
Don't let every bit of news sway your thoughts. The ridiculousness of one day pointing to some news bit negatively affecting oil prices and the next day pointing to a rebellion in Libya positively affecting oil prices is sheer randomness and unpredictable. The overarching idea that needs to be crystal clear is that the demand for oil will grow given the continual growth of emerging markets (India, China) and there is only a limited supply of this black gold in the ground. Any other bit of news not concerning the demand or supply or oil only leads to daily fluctuations that are meaningless in the overall trend.
Wednesday, February 23, 2011
Potential Shift
Just a quick blurb. Techs, consumer discretionaries (TIF) and any stocks related to overseas growth (DE, CAT) have led us higher for most of last year. This still may be the case for months to come but there is a potential shift. These sectors have been leading for almost 2 years and their prices have certainly become dear.
Oil has the potential to really outperform and make its run. Every other asset class has either rebounded or lost ground (treasuries) from the 2009 March bottom. However, oil has lagged many of the other asset classes and certainly many of the hot commodities, such as gold, silver, cotton, coffee. The 5% advance from yesterday is just a precursor of things to come as it is still mired in a 5 month range and a larger range from July 2009 bottom. There was a time from the bottom when oil and equities were positively correlated once risk appetite began to come back into the market. But oil has certainly lagged even large cap equities 60% to 80% returns from 2009.
Other catalysts to watch for equities are earnings rather than growth. As said before, small cap techs and growth oriented tech companies have led the way but have come a long way from the bottom. Case in point, AAPL from 85 to 340. If we were to shift, it would be towards underperforming sectors, such as large cap companies with better than expected earnings. GE would fit in that category.
Oil has the potential to really outperform and make its run. Every other asset class has either rebounded or lost ground (treasuries) from the 2009 March bottom. However, oil has lagged many of the other asset classes and certainly many of the hot commodities, such as gold, silver, cotton, coffee. The 5% advance from yesterday is just a precursor of things to come as it is still mired in a 5 month range and a larger range from July 2009 bottom. There was a time from the bottom when oil and equities were positively correlated once risk appetite began to come back into the market. But oil has certainly lagged even large cap equities 60% to 80% returns from 2009.
Other catalysts to watch for equities are earnings rather than growth. As said before, small cap techs and growth oriented tech companies have led the way but have come a long way from the bottom. Case in point, AAPL from 85 to 340. If we were to shift, it would be towards underperforming sectors, such as large cap companies with better than expected earnings. GE would fit in that category.
Monday, March 8, 2010
Educating Yourself and Starting to Trade
As the market is chugging higher without a true "follow-through" day, a 1.5%+ advance with higher than average volume, I have been studying more about the markets through books. I have been preaching about learning by being involved in the markets, whether paper trading or real money, but everyone needs to have a steady foundation of knowledge about how things work first. Otherwise, it'll feel like you are a lone deer amongst a pack of wolves
The first book I suggest to read is Technical Analysis, by Charles Kirkpatrick and Julie Dahlquist. It looks, feels and reads like a textbook, which we are all used to, but does not include any extraneous stuff and gets right to the point. It covers the very basics of technical trading, like properly recognizing trends, short term patterns and the usage of stops, and yet delves into harder topics such as Elliot Wave Theory and Point and Figure charts. It gives a great overview of all these concepts and even makes the case for technical analysis as a viable way to trade by delving into topics such as the the Random Walk Theory and the Efficient Market Theory. It is a well-rounded book, but never bogs you down in details. This should be one of the first books to read if you are new to technical trading.
The most important concept you need to know for technical trading is recognizing trends and once you have mastered that, you can understand successful traders' trading patterns and systems. One of the greats in short term swing trading is Dave Landry, and he has published two books: Dave Landry on Swing Trading and Dave Landry's 10 Best Swing Trading Patterns. His setups, given the right market conditions, are golden. They give you a lower risk entry point and still allow you to ride most of the trend. And the greatest thing about them are that they are simple to utilize and easy to recognize. Keeping it simple in the market is incredibly important, especially since brokerage packages include many shiny bells and whistles that can distract you from what is important. Any other books out there by renowned traders giving away some of their "secrets to success" should also be read.
Afterwards, I would suggest one to start paper trading the market through whichever avenue one wishes. I would suggest using ThinkorSwim, as it is a good platform for technical trading. Be involved in the market, use the patterns that you have learned, try a system of your own, make mistakes. It won't cost you a thing and it provides as real of an experience as one can get save for the real thing. I know I began paper trading by trying my own thing, believing that what was published and given to us through books would already be arbitraged by professionals, since they would have read the book as well. I had to be the genius that comes up with a new pattern because only geniuses make money. Many paper losses later, I've realized that I do not have to reinvent the wheel, I just need to learn how to use it. You should make as many mistakes as you can while you paper trade.
Once you feel like you have left no stone unturned, you should definitely join a brokerage that does not have only web-based trading. Executions are slow and unreliable. The brokerage should have technical tools integrated into the platform. The granddaddy of them all is TradeStation, but others are sufficient, like ThinkorSwim, TD Ameritrade, etc. Make sure you start off small, because no amount of paper trading can supplant the anxiousness one feels when real money is in play. Be diligent, be discipline and follow what you've learned through paper trading. Most people start off with a losing streak so make sure you stop yourself after a certain loss percentage to refrain from ruin. Always be looking to tweak your system if you notice a change that will benefit the bottom line, but make sure you are not distracted by the plethora of oscillators and indexes the platform may provide. Also, I would refrain from using any of the pattern recognition software some companies provide. Patterns are notoriously hard to computerize, as they are mostly visual, and to think that a brokerage firm developed an accurate measure of patterns is hard to believe. Besides, the most important learning phase through one's trading career is the beginning.
Finally, after you have gained some experience in the market, you can read the holy grails of trading books: Reminiscences of a Stock Operator by Edwin Lefevre, The Black Swan and Fooled by Randomness by Nassim Nicholas Taleb. People who have read through these books without experience in the market do not feel the impact of the lessons in these books. Trading maxims and lores come from these books. If Warren Buffet is the greatest investor ever, then Jesse Livermore in Reminiscences of a Stock Operator is the Warren Buffet of trading. Experiencing the ups and downs of the market allows you to relate to the Livermore and Taleb teachings. The teachings are very simple to understand, but they will only hold weight if you can relate to them. Thus, I recommend reading these books not before, but after you have traded to truly learn what both men have to say.
Technical concepts are very easy to learn and do not require a genius to interpret. Through study and some practice, anyone can be well-versed in present day techniques. The hard part is in the implementation, the recognition of when to use what. All these books will tell you that there are no holy grails. Certain techniques are reliable only during specific type of markets, and the recognition of the type of market is more after the fact. Thus, through study alone, no one can be profitable; experience is everything.
Feel free to post comments, I will respond and appreciate every one. Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss. If there are any questions on the lingo used in this post, feel free to ask as well.
The first book I suggest to read is Technical Analysis, by Charles Kirkpatrick and Julie Dahlquist. It looks, feels and reads like a textbook, which we are all used to, but does not include any extraneous stuff and gets right to the point. It covers the very basics of technical trading, like properly recognizing trends, short term patterns and the usage of stops, and yet delves into harder topics such as Elliot Wave Theory and Point and Figure charts. It gives a great overview of all these concepts and even makes the case for technical analysis as a viable way to trade by delving into topics such as the the Random Walk Theory and the Efficient Market Theory. It is a well-rounded book, but never bogs you down in details. This should be one of the first books to read if you are new to technical trading.
The most important concept you need to know for technical trading is recognizing trends and once you have mastered that, you can understand successful traders' trading patterns and systems. One of the greats in short term swing trading is Dave Landry, and he has published two books: Dave Landry on Swing Trading and Dave Landry's 10 Best Swing Trading Patterns. His setups, given the right market conditions, are golden. They give you a lower risk entry point and still allow you to ride most of the trend. And the greatest thing about them are that they are simple to utilize and easy to recognize. Keeping it simple in the market is incredibly important, especially since brokerage packages include many shiny bells and whistles that can distract you from what is important. Any other books out there by renowned traders giving away some of their "secrets to success" should also be read.
Afterwards, I would suggest one to start paper trading the market through whichever avenue one wishes. I would suggest using ThinkorSwim, as it is a good platform for technical trading. Be involved in the market, use the patterns that you have learned, try a system of your own, make mistakes. It won't cost you a thing and it provides as real of an experience as one can get save for the real thing. I know I began paper trading by trying my own thing, believing that what was published and given to us through books would already be arbitraged by professionals, since they would have read the book as well. I had to be the genius that comes up with a new pattern because only geniuses make money. Many paper losses later, I've realized that I do not have to reinvent the wheel, I just need to learn how to use it. You should make as many mistakes as you can while you paper trade.
Once you feel like you have left no stone unturned, you should definitely join a brokerage that does not have only web-based trading. Executions are slow and unreliable. The brokerage should have technical tools integrated into the platform. The granddaddy of them all is TradeStation, but others are sufficient, like ThinkorSwim, TD Ameritrade, etc. Make sure you start off small, because no amount of paper trading can supplant the anxiousness one feels when real money is in play. Be diligent, be discipline and follow what you've learned through paper trading. Most people start off with a losing streak so make sure you stop yourself after a certain loss percentage to refrain from ruin. Always be looking to tweak your system if you notice a change that will benefit the bottom line, but make sure you are not distracted by the plethora of oscillators and indexes the platform may provide. Also, I would refrain from using any of the pattern recognition software some companies provide. Patterns are notoriously hard to computerize, as they are mostly visual, and to think that a brokerage firm developed an accurate measure of patterns is hard to believe. Besides, the most important learning phase through one's trading career is the beginning.
Finally, after you have gained some experience in the market, you can read the holy grails of trading books: Reminiscences of a Stock Operator by Edwin Lefevre, The Black Swan and Fooled by Randomness by Nassim Nicholas Taleb. People who have read through these books without experience in the market do not feel the impact of the lessons in these books. Trading maxims and lores come from these books. If Warren Buffet is the greatest investor ever, then Jesse Livermore in Reminiscences of a Stock Operator is the Warren Buffet of trading. Experiencing the ups and downs of the market allows you to relate to the Livermore and Taleb teachings. The teachings are very simple to understand, but they will only hold weight if you can relate to them. Thus, I recommend reading these books not before, but after you have traded to truly learn what both men have to say.
Technical concepts are very easy to learn and do not require a genius to interpret. Through study and some practice, anyone can be well-versed in present day techniques. The hard part is in the implementation, the recognition of when to use what. All these books will tell you that there are no holy grails. Certain techniques are reliable only during specific type of markets, and the recognition of the type of market is more after the fact. Thus, through study alone, no one can be profitable; experience is everything.
Feel free to post comments, I will respond and appreciate every one. Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss. If there are any questions on the lingo used in this post, feel free to ask as well.
Saturday, February 27, 2010
Watching and waiting... again!
The market has had a pretty uneventful week, without much movement in the past 5 days as you see from the Nasdaq chart (much the same with the S&P). At this juncture, I have no idea what to think of the market. If I was short, I would be quite weary of Thursday's market action (intraday chart seen below):
As you see, the market essentially gapped down to begin the day followed by a high volume morning sell order. However, the afternoon was met with an huge, strong upmove that not only filled the gap but actually closed the market at its highs. While I haven't been around the market for long, I have only seen that type of upmove in oversold conditions or a technical pattern set-up, both which are not the case this week. At the very least, I would feel uneasy if I was short.
Now, if I were long from near the bottom of this so far correction, which is always a no-no in trend trading (you do not catch bottoms or tops, they are the most expensive decimal points you'll pay), I would sit pretty. But if I were more realistic and let's say I wanted to get long now, the market is still quite overbought, moving 7% in the past 2 weeks. This is by no means a suggestion to get long, I am just putting myself in other people's shoes now. What I am trying to say is that in my view, both longs and shorts are in a period of indecision here, as evidenced by the "choppiness" (which is a word to describe markets whipsawing back and forth without much price movement) this week. As rational players, when all needed information is not known, we do not make any decisions and stick to information gathering mode.
It is very important to stay out of the market during dangerous times like these. This is when whipsaw losses happen quickly and often. This is when institutions battle it out with each other, as evidenced by Thursday's action. Imagine you are a captain of a ship, who has set sail in pursuit for long lost treasures, the fountain of youth, or whatever mythical riches one can think of. Now imagine that you are in the middle of the Atlantic, with nothing but ocean around you, and suddenly, thunderstorms start to brew. You brace for impact against the lightning and towering waves, clutching onto anything stationary on your ship. Now replace ship with your trading account, treasures with potential profit, the Atlantic with your trading plan and the lightning and waves with whipsaw losses and you got the type of market we saw this week. The journey is always easier after the storm. Giving up a few percentage points in the entry price and potential profit is worth the confirmation in the continuing of the trend from the market. It'll provide a lot more opportunities and a much easier ride to your fountain of youth.
After my short shorting spree last week, which did not work out, I am in full "research" mode, looking for long and short technical patterns to prepare for whichever way the market will go. I still maintain my view that we are in the beginnings of a new bull market, which does require some "convincing" of shorts and others who still happen to be on the sideline with the money. If this correction is as shallow as the low put in 2 weeks before, it gives me more confidence in my view.
Feel free to post comments, I will respond and appreciate every one. Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss. If there are any questions on the lingo used in this post, feel free to ask as well.
Saturday, February 20, 2010
You never know
On a different note, my longer-term view for the market is that we are currently in the beginnings of a bull market phase. Why would I be "bullish" when I am shorting now? I view this downturn was just a healthy correction for the market, as bull markets usually include at least 2 corrections. I view 2008 to March 2009 bottom as a capitulation for all sellers. Although there was not a single day in which we could point to as capitulation, the months leading up to the bottom saw incredible volume and volatility in the crash, which is characteristic of a capitulation move if it were to be a single trading day. Also, the move since March has been nothing short of incredibly strong. I believe at this time, this current correction may take a while longer to gather enough steam for the bulls because of the force and volume of the downmoves 2 weeks ago. Of course, these are just all musings until it actually happens (and obvious leadership has not emerged yet) but if the market does not become unglued to have another quick and ferocious downmove, I will maintain my long-term view.
Feel free to post comments, I will respond and appreciate every one. Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss. If there are any questions on the lingo used in this post, feel free to ask as well.
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