As I'm learning and developing in my progression as a trader, the number one reason I think people fail is lack of emotional control, not trading knowledge. There is a reason why 90% of people lose money in the stock market. It's not surprising really. The stock market consists of people expressing their hopes, fears, and feelings in all their transactions. Analysis of technicals and fundamentals account for probably only 20% of successful trading. The other 80% is the ability to stick to a disciplined strategy. The reason for that is that losing is an integral part of trading. In fact, losing greater than 50% of the time is the norm. Humans, however, are not wired to accept losses very easily. We are prewired to be loss adverse. Overcoming this is not so easy.
Right now, sentiment is bullish. The Fed has promised QE2 and it looks like the market will never go down as a result. It's situations like this that are ripe for shorting. The USD is way oversold and should a reversal take place, commodities should reverse accordingly.
Thursday, October 07, 2010
Monday, May 17, 2010
Which way to go?
VIX: an index of implied volatility based on the S&P500 index options and is calculated from both calls and puts. Low values reflect complacency, higher values greater levels of fear.
Since May 4th, the TSX has had eight days with 200+points daily range. Some have argued that increased volatility is consistent with market tops. To see the validity of this argument I decided to reference the VIX against the market top in 2008. The last peak of 15073 for the TSX before the series of lower highs and lower lows was on June 18, 2008. On that date, the VIX was 22.24. This overlay provides a reference of VIX levels and the TSX.
Clearly the VIX moves inversely with the market in principle. However, the timing and the range of the moves are not uniform. Most noticeable is the VIX peaked in October while the market did not bottom until March 9th. There was a 1500 point further drop in the TSX between the VIX peak and the final market bottom of 7591. 1500 points is a lot of pain to take if you took a position because of the VIX. What is very interesting about this most recent market drop is the scale of the VIX move versus the scale of the TSX move. The VIX doubled while the market only dropped roughly 5%. I think this is indicative of the tentative nature of this low volume melt up from the March lows. The people that have ridden this market up have had one foot out the door the entire way and when the party looked like it was over, the herd ran for the door. The volume on the selloff days demonstrated that people were ready and willing to bail out at the slightest provocation. With the massacre in 2008 still fresh in the minds of investors, nobody is in the mood to weather another decline of that magnitude again. Given the jittery mood of investors, does this mean a crash is imminent? My personal opinion is no because it is precisely because of the jitteryness of investors that makes a crash unlikely at this point. Which is not to say that further declines are not coming but bear markets are designed to catch the majority of people off-guard. They tend not to come when people are expecting it. And clearly with the volatility index showing the the latent fear in investors, people are not off-guard. Rather, the scenario I see is a sideways consolidation with perhaps some increases up to, at the most, the recent highs before the real cascade comes. Notice that during the topping process, the 50 day ma was level for almost 10 months. Presently, the 50 day ma is still sloping up. So we have some time to go still.
As for trading, the volatility will make it difficult for longer term and swing traders as being wrong will cost more. I plan on holding off on investing anything long term at the moment. The upside is insufficient for the risk involved.
Since May 4th, the TSX has had eight days with 200+points daily range. Some have argued that increased volatility is consistent with market tops. To see the validity of this argument I decided to reference the VIX against the market top in 2008. The last peak of 15073 for the TSX before the series of lower highs and lower lows was on June 18, 2008. On that date, the VIX was 22.24. This overlay provides a reference of VIX levels and the TSX.
Clearly the VIX moves inversely with the market in principle. However, the timing and the range of the moves are not uniform. Most noticeable is the VIX peaked in October while the market did not bottom until March 9th. There was a 1500 point further drop in the TSX between the VIX peak and the final market bottom of 7591. 1500 points is a lot of pain to take if you took a position because of the VIX. What is very interesting about this most recent market drop is the scale of the VIX move versus the scale of the TSX move. The VIX doubled while the market only dropped roughly 5%. I think this is indicative of the tentative nature of this low volume melt up from the March lows. The people that have ridden this market up have had one foot out the door the entire way and when the party looked like it was over, the herd ran for the door. The volume on the selloff days demonstrated that people were ready and willing to bail out at the slightest provocation. With the massacre in 2008 still fresh in the minds of investors, nobody is in the mood to weather another decline of that magnitude again. Given the jittery mood of investors, does this mean a crash is imminent? My personal opinion is no because it is precisely because of the jitteryness of investors that makes a crash unlikely at this point. Which is not to say that further declines are not coming but bear markets are designed to catch the majority of people off-guard. They tend not to come when people are expecting it. And clearly with the volatility index showing the the latent fear in investors, people are not off-guard. Rather, the scenario I see is a sideways consolidation with perhaps some increases up to, at the most, the recent highs before the real cascade comes. Notice that during the topping process, the 50 day ma was level for almost 10 months. Presently, the 50 day ma is still sloping up. So we have some time to go still.
As for trading, the volatility will make it difficult for longer term and swing traders as being wrong will cost more. I plan on holding off on investing anything long term at the moment. The upside is insufficient for the risk involved.
Monday, May 10, 2010
On quantitative easing and the EU bailout.
Quick Overview of Quantitative Easing (aka money printing)
The EU decides to engage in quantitative easing and the TSX rallies 255 points. Are we out of the woods yet? I have my doubts. Like the Federal Reserve in 2008, the EU has commited to money printing to provide a backstop to the debt markets. I'm not so worried about the inflation that many claim is going to be inevitable. Inflation is not going to occur in an environment of falling money supply:
Stats are for the US but the statistics for the money supply in the EU is even lower. For people that don't already know, the monetary base is not the same as money supply. Although the monetary base has exploded,
the money supply is the actual amount to money circulating in the economy. Just because the a Central Bank prints money doesn't mean that the money is actually making its way into the real economy. And for that to happen, people actually have to go to the bank and borrow money, which is clearly not happening in the US, nor Canada:
The EU decides to engage in quantitative easing and the TSX rallies 255 points. Are we out of the woods yet? I have my doubts. Like the Federal Reserve in 2008, the EU has commited to money printing to provide a backstop to the debt markets. I'm not so worried about the inflation that many claim is going to be inevitable. Inflation is not going to occur in an environment of falling money supply:
Stats are for the US but the statistics for the money supply in the EU is even lower. For people that don't already know, the monetary base is not the same as money supply. Although the monetary base has exploded,
the money supply is the actual amount to money circulating in the economy. Just because the a Central Bank prints money doesn't mean that the money is actually making its way into the real economy. And for that to happen, people actually have to go to the bank and borrow money, which is clearly not happening in the US, nor Canada:
Without getting too technical, the issue is that despite all the credit the Central Banks around the world is issuing, the money is not getting into the hands to the Average Joe. I suspect that the reason is that the interest coverage on the existing debt prevents people from borrowing more. The only way for consumer debt to increase again is for debt to be reduced. In previous cycles, lowering interest rates would successfully kickstart the economy because lower rates would allow for increased debt servicing. Now with interest rates at already at effectively zero, the potency of monetary stimulus has waned. When you are maxed on you credit card and the rate you are paying is 3%, lowering it to 1% is going to have a negligible impact on spending. As for the immediate impact of declining money supply in the real world, the result is less money circulating in the hands of people.
If Quantitative Easing won't cause inflation, why are prices increasing?
Some prices are increasing because although the freshly minted dollars are not making their way into the hands of people, they are definitely finding their way into commodity markets. Oil has rebounded from the March lows of 2009 of about $30 to over $80. This is despite the fact that currently, WTI oil storage is at a record high. The end result is reflation of input costs for some producers without the benefit of pricing power. In other words, some producers are unable to pass on higher input costs in their prices. The suppliers that can increase their prices will find that increased prices will have a short horizon before they hit the wall of decreasing money supply and high unemployment. Can you imagine what would happen to the economy with oil prices at $150? Deflation is already occuring in staples such as food, Loblaw pricing power . There is simply no way certain price levels can be supported without increased money in the hands of consumers. Right now, there is a tug of war going on between the avalanche of liquidity Central Banks are providing and the inability of consumers to increase borrowing. I believe that at some point, Central Banks will be impotent to stop the wave of deleveraging that must occur before the fiat system can reset.
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