Retrospectively, I try to list down some of the most common mistakes in my trading process especially after a difficult 3 months from May to Mid August. Despite my years of trading experience, I still fall into these traps. I have to remain vigilant to ensure that I avoid these mistakes.
Trade without a plan
This is starting a trade without waiting for the right opportunity and entry signals. It is always better to wait for a trade to come to you than to force yourself to make a trade.
A good plan will have fundamentals aligned with technical indicators and clear entry signals.
You need only to trade when there is a high probability trade with minimum risks
Do not follow your plan
There is a plan but you failed to follow it especially the secondary exit. Many times, it is counter intuition and against your belief. A secondary exit implies that you are wrong and you cannot accept it.
This can be a very expensive mistake.Most big losses are incurred because of a failure to follow the plan.
Over trade.
I try not to spend too much time on the market when it is on.If I stay to watch the market tick by tick, I am almost for certainty make some mistakes.
My typical schedule is I wake up 1 hour before the market opens. I review the news, any reports that come in and my portfolio. I get a feel of what my expectation for the day will be like.
When the market opens , I watch it for a about 1-2 hours. After that, I am off for a tennis game, the gym or do some errands. I am normally back 1.5 hours before the market close.
In the afternoon, I spend a 3-4 hours reading up, listening to reports, participate in chats, going through my portfolio trying to anticipate any change in trading conditions and record all my trades in details. Yes, once in a while I sit down to write my blog.
The common mistake is to over trade or become a trading junkie. It can be very expensive mistake.
I have 3 separate trading accounts and 1 paper trading account. Interestingly, the account which I am least active has the best performance. This result has been verified for many years!
So remember, trade for profit, not for activity; trade for points, not for ticks.
I am attempting to do an overview of my trading process. Most of the ideas are scattered on postings made during the last three years.
This is an effort to organize it properly for those who are interested to have a deeper idea of the whole trading process.
How do I choose a stock?
This write-up gives an idea of my watch list, some of the reading materials, favorite websites to keep up with what is going on in the market. There is definitely no lack of ideas floating around.
When I found a suitable stock for trading, I will move it either to my bullish or bearish list.
In summary, I am an investor. But I am not a buy and hold investor. I trade. I align market sentiments and technical indicators with the fundamentals. Technical are used to confirm my beliefs on the fundamentals of a company.
An entry signal is given if the fundamental and technical indicators are in alignment, I will decide on various strategies.
The strategies used are very straightforward and simple.
If the market is bullish, I will start with the stock, or stock with put ( married put ) or stock with a short call ( Covered call ). From here I manage the trade as the market changes. It is like a game of chess. You adjust your positions to win. It is written in this post.
The reverse is done if I am bearish. I have also articulate the approach quite clear in this write-up.
About 10% of my trades are pure options play. My favorites are credit trades ( verticals ) , Calendar and straddle / strangle. Normally, I will wait patiently before entering a pure option trade as it requires a lot more maintenance and good timing. Because of my cautious approach, I am 90% successful on most pure options trade. The secret is to wait for the trade to come and forcing myself to do a trade.
In a posting, I have also written some rules for entering a credit trade.
Many times, there are opportunities to do a very short term trading to capitalize on volatility crush. Usually, most of the trades go well. But I have to wait for the right opportunity or timing to come along.
After all trading to a large extent is a game of probability although there is also a substantial part of it are determined by proper understandings of the fundamentals.
In this blog, you get a good idea of the whole trading process. I have to admit that many parts are not written with a lot of details or clarity. However, there are lot of real trade examples. One day, when I decide to write a book, all the ideas will be expanded with details.
Below is my latest updates on my favorite sector for the last 5 years.
I remain bullish but believe that current price is parabolic and may undergo a correction to 1650 or at the maximum 1500.
However, it really depends on the economic news in the world especially from Europe. Currently, the economy is extremely fragile. While the credit squeeze is not like 2008 but the situation could explode into something more serious. Instead of mortgage default, it is now potential sovereign debt default.
I do not see any improvements in Greece. Bond yields continue to climb. The ECU is trying its best to mend the situation. Today there is the announcement of big Greek mergers - Eurobank and Alpha bank. The combination would create Greece's largest lender, with assets of €150B, but a market cap of just €2B. EU and Greek officials have pressed for such alliances, believing pairing struggling entities can create one strong institution.
But does it solve the problem. The answer is clearly no. There is no fundamental improvements Italy, Portugal, Ireland and Spain continues to be fragile and on life support. In my weekend update, I stated that a default of Italy will be equivalent to Lehman's default in 2008 or bigger.
GDP data for France, Germany, Hong Kong,China and USA released in the past 2 weeks were weak. France is on the verge of being downgraded.
Politically, there was little support for Germany to continue to buy ECB bond. Survey results show that 4 out of 5 is against the idea. If there is an election, Merkel will be out.Just received the following report from the Telegraph ( Aug 29) " German Chancellor Angela Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe's revamped rescue machinery, threatening a constitutional crisis in Germany and a fresh eruption of the euro debt saga
Seething discontent in Germany over Europe's debt crisis has spread to all the key institutions.
So there will be a continuation of money printing, bailout and desperate measures of bailing banks and sovereign debts. No way this is going to end soon. It is a wicked spiral. Countries are forced to take austerity measures hindering growth, greater unemployment, bigger interest and debts.
So, gold is the ultimate currency now. Gold went up the last few weeks because it was a "fear" trade. It was flight for safety. Gold went up with the market because it was a "currency" trade. As money gets devalued through stimulus, increased money supply, money printing and bailout, gold goes up.
However gold is a manipulated market. There are commercial traders and large speculators. It goes through wild swings and huge volatility.
Although over the long term, the trend is up but in the short term, I suspect there may be one more leg down to $1700 or even $1600. But it will bounce back fast. Fundamental conditions support it.
There are talks of gold being in the bubble. Examining the bubble of various sectors and market, gold is still far from being a bubble. But probability is that it should correct.
Seasonally, it is going to be positive for gold. For the last few years, gold goes up after labor day. Thus if gold goes down this week, I will add to my holding
New shorts of commercials drop last week from 249 K to 240K. Net shorts of large speculators were also down. These are short term positives. I suspect the commercials are reducing their huge short positions now.
So gold is NOT in a bubble. If it is in a bubble, it will be verified by weak fundamentals and over euphoria. Jim Cramer mentioned that the typical holding of gold is 5% of total portfolio but not it is about 1.5% of total portfolio.
So the only reason for gold to be down will be some fear and manipulation done by speculators and commercials.
Mining Shares
In this blog, I had commented on some of my favorite mining stocks and also on how I managed the juniors.
Whatever, I had written is still valid and more so now.
With the rise in gold price, mining shares is at historic cheap valuation.
Over a period of nearly 20 years, BMO’s group of global gold stocks has never been this
inexpensive. Only twice—during the Tech bubble in 2000 and the financial crisis of 2008—has
the internal rate of return compared so closely with the price of gold bullion.
RBC says gold companies currently have margins that are at record highs and it believes margins could be approximately $1,200 an ounce for the next 12 to 24 months. This is substantially higher than the 10-year average of $320 an ounce. Comparatively, many current projects were economically sound at $700-$1,000 per ounce gold prices, creating $300-500 an ounce margins.
Right now, BMO calculates the total cost to produce an ounce of gold at roughly $900 an ounce, while the company can turn around and sell that ounce for upwards of $1,400. This puts margins near 40 percent, roughly twice what they were in 2007 and four times higher than in 2000.
I believe gold mining shares are now valued at gold price of around $1200.
From a historical perspective, gold miners also lagged gold price in 1973 and 1980 by about a year. After that it charged up despite the crashing market. Investors have to believe whether the current high price of gold is for real. As a results the miners are undervalued.
Besides GG and SLW, my new favorites for gold stocks are AUY, NGD and RGLD
Also price actions in mining shares are positive. It looks like going for a breakout in a reverse head and shoulder pattern after more than 6 months of consolidation. Also, the 50 MA is cutting the 200 MA soon. Upon confirmation, I will move to increase my holdings of mining shares providing gold held to its strength.,
Finally, just a warning. Although I do not see a breakdown of the trend in gold soon, I am not a gold bug. It will go down one day.
Throughout a fantastic decade-long advance that saw the metal easily outperform gold’s almost 25-fold price increase into 1980, silver bulls loudly and repeatedly trumpeted the fact that consumption – for coinage and industrial use – annually outstripped total supply by a wide margin. After January 21, 1980 silver lost $10 in a day from a still-standing all-time high in excess of $50/oz. By late March the price had crashed to $10.80 on the way to a final low of $3.50 in the early 1990s. Only this year did silver again make a run at the $50 level.
History will repeat for gold and silver. But I do not believe the time is here yet - not even in the distant future. Gold could see $3000 or even $5000. The world will be in a big mess if it gets to these prices. My projection is gold will be at least $2000 before the end of this quarter. Until it shows signs of bubble like the dot.com in 2000 and housing prices in 2007, I will be holding on to my positive bias on gold.
While there are people who has been very successful with calendars, I am not one of them.
But calendar does yield greater profit potential in a shorter time frame. Also, calendar with timing adjustments is less risk and when the market is stagnant, calendar can be profitable too.
I decided to enter a call calendar. I am leaning slightly bullish short term for 2 reasons:
1. The market decline has gone parabolic and the index is showing some signs of bottoming process on the price action. There is a double bottom formed and some consolidation.
2. The index has reached a correction of 78.6% since its decline. Most correction ends at least temporarily at 78.6 %. The probability is high here supported by some price patterns.
Trade
I entered the trade in the first hour of the morning when the index confirmed my expectation. If the index was not up this morning, I would have refrained from putting in the trade
BTO Oct 116 call at 5.65
STO Aug 26 ( weekly ) 118 call at 0.95
NPD = 0.17 when I entered the trade. It was not 0.2 which would be ideal. But considering this is a weekly, I will benefit from the accelerated theta decay.
% of SC credit / Long call = 16.8%. This is a pretty good credit considering that I need only wait for 4 days!
PE : Get out at target of 20%.
If market is bullish, I may just let the trade run and add another SC
SE: Roll the SC to down and out or even reversed the trade if the index drops below 113 which is deemed to be a very important support. I will go bearish.
If the market goes very bullish above 120, I will roll the SC up and out for a credit.
Looking at the analytic profile, if it trade between 115 and 122, I will be making money for this trade.
Update: Aug 26th 2011
Today is the expiration of the weekly short call.
In the morning, the trade had reached my target of 20% ROI.
But I decided to wait till 3 pm to close the trade. It was interesting watching the volatility crash and the theta accelerating during the last few hours. It was trying to pin at 118.
Finally, I closed the trade at with an additional 9% profit from the target because of the accelerated theta decay and volatility crash.
As I had written during the weekend, I am very bullish on silver. I expect it to be in the triple digit eventually. However, the metal could see a correction to 30 and even 28.
Currently it is trading in a nice channel with 41.5 as resistance and 36 as support.
Trade:
BTO 500 shares = 38.4
BTO Sept 37 P = 1.39
PE: Let the stock run
If ETF crosses 40 - add a 35 Sept SP to make it a put calendar below.
If price held at 40-41 and show some short term reversal, add a near term SC - 1 or 2 strikes OTM
SE: I intend to trade this bullishly longer term. So if the price drops below 36 - roll the SP down. If it goes bearish, I will take profit on the Put when it is close to expiration and buy a lower strike longer term put while adding more shares. Alternatively, I can let the SP be assigned with shares.
I have purchased only 500 shares. I am prepared to buy more if there is a correction to around 30.
Longer term, I expect to make at least 50% in 6 months.
I have been shorting the education sector successfully a few times over the last 12 months. I shorted APOL and covered. Recently, I shorted it again. The entire sector turns negative again when DV announced its results showing a drastic slow down in students enrollment.
The education sector belongs to what I called the "fraud" category when it comes to candidates for shorts. Other could be a poor or obsolete business model and blalance sheet that is too highly leverage especially current possible credit squeeze.
EDMC is a new candidate identified for a short trade.
While you could make essentially the same arguments against the enter for-profit education sector, EDMC seems to stand out.Its employees are its accusers.
Recently, there is a lawsuit against the company that alleges false statements to qualify for the Pell program totaling $11 billion. Additionally, the lawsuits alleges the company structured its compensation program for recruiters based on the number of new students enrolled, which if true, would make the company ineligible for the PELL program. The accusations were filed by two ex employees.
Trade
If EDMC trades below $17.7 on Monday, I will enter a bearish trade. I will post separately on the trade. If not I will wait for it to show some reversal signals like a candle stick reversal or the stock hitting some resistance.
If it moves up on Monday, it is not time to enter the trade.
Update: Aug 15 2011 - Monday
EDMC moved down today. According to plan, I enter the trade:
STO 1000 shares 17.35
STO Sept 12.5 SP .75
This is a synthetic put.
PE: Let the short SP be assigned for a profit of 35% by september expiration.
If very bearish, may decide to roll the put down
SE: If stock moves above 18 - either add 18 call > 45 days or get out of the trade.
Update August 18th
I was notified by my broker that I have to buy back my stock as they could not borrow security to short the counter.
BTC 1000 shares @ 16.339
BTC Sept 12.5 SP @ .7
Profit = $1351 for 1500 shares or 5.23 % for a 3 days trade.
It does not always move with fundamentals. It was John Maynard Keynes that said “The market can remain irrational longer than you are solvent”.
I have found that it is useful to take profit regularly although I maintain a fundamental bias for the trade whether it is bullish or bearish.
Yes, there are trades every year that I let the profit run and closed the trades with a few 100% gains. But this has been difficult. It must apply only a minority of positions where I have clear certainty and some luck. It also takes a much longer time. If I add up all the short term trades, I will probably achieve the same results.
So I have been taking profit more regularly. When a trade hits a >30% ROI, I should seriously consider closing the trade and start a new one.
Overall swing trading seems to be more profitable. I have known traders who trade more than 100 trades a year without losing a single trade. Besides the ability to gage the momentum accurately, the key is to keep the gains to a very modest level. Also, when there are losses, the focus is on how to get back to profitability or just cut loss and get out.
There are few positions like gold and silver where I keep 30% as a core position which I will not let go unless fundamental begin to change. I trade the remainder.
I entered a number of trades last week. Many of them are for a short term ride but some for ownership. Some trades are entered to take advantage of the volatility.
All the trades entered assume that the market is going to be bullish for the next few days or even a few weeks.To enter trades with market condition as last week, it is imperative that secondary exit are clearly defined and promptly executed.
As long as the stock reverses close to last week low, a put will be added to the covered call. To make sure that it catches my attention, I have added alarm to the stock to alert me. If the stock continues its bearishness and exhibits an acceleration to the down side, I will roll down the SC and it will turn the whole trade into a bearish trade with a negative net position delta.
WYNN - a momentum play
BTO 200 stock at 144.2
STO August 145 SC 4
PE = 3.33 percent in 5 days by Aug option expiration
SE= add LP ATM and longer term SC if trade goes close of below 135
Update: Closed the trade on August 17th booking a profit of 708.92 or 2.5%.
I noticed that momentum has changed. I have made about 80% of the maximum profit in 5 days. I am not going to wait . So I got out. It was a good decision as the stock feel to 136 today. If I have not exited I would have to continue to add SC or collar it and wait for it to be profitable.
VXX - a volatility play
STO 1000 shares at 33.39 on Aug 8th
STO Aug 34 SP at 3.3
This is >10% premium for a slightly OTM synthetic put. Because of the the volatility and thus the fear in the market, the put premium is extremely high.
It is meant to be a very short term trade.
I closed the trade on Friday August 12 with
BTC 1000 shares at 32.9
BTC Aug 34 SP at 5
This is 3.38% profit in 4 days with minimum risk.
AAPL - a value play
I have been waiting to buy AAPL again. I decided not to wait. I am willing to hold on to the shares.
BTO on August 8th 100 shares at 365
STO Jan 390 SC = 24.65
PE : Let the SC goes in ITM and profit of 13.6% in 4 months.
I decided to add a protective put on Friday because of the uncertain market. It may be too early but I believe I will need the put at least through October.
BTO Oct 360 P = 18.35
SE: if bearish, roll the SC down once APPL hits below 355 at the same month or further. Sell the LP once the bottom is almost established.
Update: I got out of the trade on August 12th with a profit of 1.5% in 4 days.
IOC - a natural gas play
I am bullish on natural gas longer term. When IOC dropped to around 50 on August 10 establishing a double bottom, I decided to get in with a collar.
BTO 500 shares at 51 - on Aug 10
STO Dec 57.5 SC for 4.05
BTO Sept 50 P for 4.05
IOC reported results on August 11th and it was positive. I added a August 50 SP for 0.8 establishing a put calendar.
PE: Let the SC goes ITM or called out by Dec for 18.5%.
My profit will be a little higher if I can manage the put side better by selling another SP for sept or getting rid of the put if the stock goes bullish.
SE: Roll down the SC if the stock drops below 50.
Also, consider rolling down the Aug 50 SP if it accelerates down next week before option expiration.
Update on August 18th.
o Sold a August 50 SP on August 11th to make it a bear put calendar.
o The stock continue to shoot up and the Dec 57.5 SC was ITM. There was a huge correction today. So I sold another Sept 45 SP to reduce the cost of my protective put.
VZ - dividend play
VZ is a fundamentally sound company. It pays a good dividend.
Technically the stock has hit a very strong support.
BTO 1000 shares = 34.01
STO Jan 35 SC = 1.54
PE = SC goes ITM and stock called by Jan for profit of 7.4 % excluding dividend gains.
SE = add an ATM put if stock goes below 33. Roll the SC down if the stock continues to go down and any signs of acceleration.
I entered quite a few trades last week. I was not afraid because I know I am ready to turn this into a neutral or bearish bias trade once the trend changes.
The volatility is so high and thus it was good time to capture premium on some good fundamental stocks especially when it is deemed to have reached important support.
This is going to be a long post and it is definitely one of the more important postings I have made so far.
In view of the historic volatility experienced last week, I will be adding a number of postings this weekend.
It is important that I crystallized my thinking and strategies via writing on the blog. It helps others but most important it helps me!
Technical Review
I like to start with an overall technical review of the market.
Technically, the market has decisively turned bearish. A lot of technical damage has been done. Volatility was very high. VIX reached the mid 40s last week and I shorted VXX for a quick trade to make use of the volatility. I will discuss this trade in a separate post.
The market did find some support last week. The price actions of last week points to a short term bottoming, consolidation in the last few days and the indices moving higher.
The DOW indices show similar patterns. However, the NASDAQ or QQQ clearly shows a bottoming process but hitting resistance. If it can break 53.6 next week, it should be short term bullish.
I opened some covered call trades on Friday rebound for WYNN – which has high momentum. But I must be willing to add puts or get out if turn bearish if it fails in this rally.
There are a number of possible future scenarios for the current situation. Usually, the market will test the low last week again. If hold, it will probably be bullish for the rest of the year. If not, the bearish trend will accelerate. Any accelerated downturn will be most probably triggered by some major economic event like a default in Italy, downgrade for France indicating the European contagion goes out of control.
I will show more details of this in my trade on a separate posting for WYNN. As a matter of fact, I opened a number of bullish trades last week which I will discussed separately. Prompt execution of secondary exits become extremely critical that I set alarm on each trade on my trading platform.
NYSE Advance Decline Index
The NYSE cumulative A/D index looks like a double top. It is a little overextended short term but it could go up, hit resistance and come down or just come down straight in the next 2-3 weeks
Fibonacci Retracement
The S&P 500 has already pierced the 38.2% retracement level, which was 1,238. The next key is 50% which implies 1,200 — almost where we are now. A complete reversal, which is 61.8%, points to very critical technical support around the 1,162 area. This is a point where the indices will usually hold for a while. Technically, we could see downside pressure.
The Bullish Case
So far earnings has been strong. 75% of companies reported earning beat their estimates - many of them includes top line revenue and bottom line earnings.
Corporation are holding >$1.4 trillion of cash. Companies are cash rich.
The Conference Board issues a LEADING indicator which comprises ofmanufacturing weekly hours, claims for unemployment, manufacturer's new orders, supplier deliveries, new orders of nondefense capital goods, building permits, stock prices, money supply, interest rate spreads, and an index of consumer expectations.
Overall the LEI is still climbing. There are no signs of a recession.
Industrial Production if flat and it shows economy steady so far. But it can change quickly
One of the common complaints is that with QE 2, banks are not lending. They are keeping it to strength their balance sheet. But the date recently shows that lending is on the increase. Although with the recent events, banks may slow down their lending.
Consumer sentiments are still overall positive.
Jobless claims are in the positive direction.
Bearish Case
Debt
In 2008, it was a mortgage crisis. In 2011, it looks like it will be the sovereign debt crisis. It will be more severe than 2008.
Fundamentally the 2 years’ rally is build on straws and not bricks. It is mainly driven by big liquidity provided by the FED.
USA credit rating was downgraded last week. To finance USA debt, you need about $7 Trillion and that is 50% of GDP.
In Europe, the 90 largest banks must finance $5.4 to 7 Trillion in the next 24 months. If you include the sovereign debt, it is another $1.5-$2 Trillion. So a tip over like a downgrade of France credit rating will immediately create a domino similar to 2008 mortgage crisis.
So far, some optimism was in Europe with the creation of European Financial Security Fund ( EFSF ) which will be able to provide funding for Greece, Spain, Portugal and even Italy till 2013 although this Germany unprecedented economic power and control over Europe without going through a war. The EFSF no longer works as planned since the facility’s AAA rating is critically dependant on France and Germany obviously maintaining their pristine rankings. French banks will almost certainly be downgraded, following which other European banks will face the same destiny. Such a scenario has the potential to cause calamity across Europe. The 90 European banks which recently went through the (so-called) stress test organized by the European Banking Authority need to roll a total of €5.4 trillion1 (!) of debt over the next 24 months.
Also does Italy deserve a A+ rating now? How can France be higher credit rating than USA now?
When the subprime crisis started, we were told by numerous authorities (including Ben Bernanke) that the problems would be "contained." But by 2006 it was clear to anyone who studied the toxic instruments that the losses would be in the hundreds of billions. I estimated $400 billion, which just goes to show that I'm an optimist. That crisis spread to banks all over Europe and then back to the US
Eerily, this is so similar to 2008 when Lehman Brothers fall. It triggers the start of the crisis. Similar, if Italy falls or France receive a downgrade, it will definitely accelerate the decline of the overall market and causes a collapse. The probability is still frighteningly high.
The whole world is printing money including China and Japan. It is a matter of time we reach the end game. When it comes, it will be sudden and shocking. It will come with a big bang! I watched an excerpt from youtube on the Movie “Rollover” made in 1981. All the seemingly exaggerated situation could very well be real if the situation is out of control. For the time being, the probability of this happening is still low in the short term.
Price action is positive ended last week. Indications are the market will move higher. But there are lingering questions in my mind:
Has the U.S. suddenly gotten it's budget balanced?
1.The failed auction last week by the Treasury was a BAD sign. Bonds fell. It is a sign of loss of confidence despite the government and many analysts trying to run down S&P for downgrading USA. China bought more treasury recently despite their complaints. They have no choice. But other holders of treasury are selling.
2.Are Italy and Spain suddenly solvent? Italy's debt-to-GDP is still 118%, isn't it? It's still going to take upwards of $3T euro to "bail them out".
3.Last I checked, several big, European banks are teetering on the edge of insolvency due to their government bond and CDS exposure. Has this changed?
4.In the U.S., Bank of America is insolvent due to a terrible book of mortgages and an even more awful book of CDS exposure. Is that even fixable?
Economic
Although 75% of companies reported earnings so far beat their estimates. Even the revenue increased. We need to remember this is a lagging indicator. . According to research cited in the FT, nearly 70% of the few (76) that have provided guidance have reduced it, and in the most cyclical names as well (Tyco, Illinois Tool Works, Netflix, Texas Instruments). David Rosenberg also cited this in his latest economic report.
Q2 earnings season had been stellar, but the lack of guidance —two-thirds of reporting companies did not provide any — points to reduced visibility.
There was a string of lower economic indicators. GDP has dropped below 2%. It is noted that every time GDP dropped below 2% - a recession followed.
In his speech on Tuesday Fed Chairman Bernanke points to a difficult times ahead thus will maintain zero interest rates till 2013. I speculate that it must be really quite bad for him to admit that and extend a zero interest environment to stimulate the economy or force investors to move funds to stock instead of treasury.
The ‘six-month outlook’ subindex sagged 20% to 31.7, undercutting the December 2007 low (the first month of the last recession). Nearly 30% of respondents reported having someone in their household who is unemployed —the highest ever and well above July’s 24% showing. This was the weakest reading on record, going back to 2001. This is grim. Fully 45% of folks with just a high-school diploma cannot find a full-time job, and that metric is disturbingly elevated at 25% for college grads.
Consumer credit soared $15.5 billion in June, three times as much as projected and the biggest monthly gain since August 2007. That this was the same month that consumer confidence slid to an eight-month low strongly suggests that credit was not being tapped for spending as much as to meet the unpaid bills. During the last 3 recessions, it began with similar high consumer credit and subsequent defaults.
OECD leading indicator fell to 102.2 in June — the lowest since November 2010 — from 102.5 and is down now for three months running and the declines were broad based across the G7 and emerging Asia.
Friday, we saw German industrial production decline 1.1% Italy showed 0.6% slide. The reserve Bank of Australia cut 2011 growth outlook to 2% from 3.5%. China industrial production was weaker than expected and Indian car sales fell 15.8%.
Yes, we receive a good employment report that results in a rally of >500 points in an oversold market. But is it really that good. To me it is like getting “D” instead of “F” for the report.
Seeing all these, are we still expecting a year end rally? It looks like it is no longer a replay of mid 2010. The global economy is slowing down much faster and problems surrounding sovereign debt are far more acute.
The next hope is QE 3. Will it really help? It has failed twice! Also, does the FED has the ammunition now politically and financially.
GOLD and SILVER
I have been a gold and silver bull for many years. There are no reasons for me to change my views until the sovereign risks and currency printing points to some possible slow down and solution.
Gold hit new high last week and corrected about 80 points. With the low COT commitments or shorts by the commercials, there is high probability that this correction will be shallow. I should be adding to my gold positions with this correction.
During the 2008 crisis, I was caught with gold dropping 30% and gold stocks dropping more than 50%. I got out of 40% and held on to the rest. My portfolio was down 30% by the October of 2008. However, I added to my positions by beginning of 2010 and many positions were closed with >100% gains at the end of 2009. By end of 2008, my portfolio broke even.
Similar scenario can happen this time. Except I hope to be more nimble to be able to get in and out. I have to admit it is a very difficult game especially with juniors where there are no options available for me to hedge. My strategies remains the same as I wrote previously in my blog for trading junior stocks.
Gold miners are extremely cheap but it could get cheaper if there is a credit crisis and liquidity squeeze. Longer term, there is no doubt in my mind, gold miners will get much higher. The question now is whether any liquidity crisis will drive all the gold miners a lot lower.
Situation is a little different this time. Gold continues to rally. In 2008, gold fell 30%. It may still fall. If it does, it will be a great time for me to add to my positions again.
If I see some acceleration in the crisis, I will probably cut my gold miners positions by 50% or more and waiting to get back again when the situation is stabilized. Where there is panic, gold miners ( especially juniors ) falls fast.
Having said this, it may not happen this time as gold has exhibited a lot of strength so far. As long as gold does not turn bearish and breaks the trending channel, I will keep the miners.
Silver is looking interesting after the recent correction. There is little doubt in my mind silver will go a lot higher – more than what many people can imagine. It can easily move to triple digit price. But it may drop from current $30 to even $30 or $25. If that happens, I will definitely load up.
I am actually looking to add on my silver position next week with some hedges. If it goes up, I will add to my positions. If it goes down, I will increase the hedge until it stabilize and double my positions.
Fundamental factors are very solid. But the volatility make it very difficult to trade. Retrospectively, if I had held on to my gold and silver, I would have made a lot more money. I had held on to my core positions of silver and gold in the last 4 years and it has made me >300%. I wish that I had not been an active traders for these positions. But this is part of my risk control.
Concluding Remarks
Obviously, I am more bearish than bullish.
Last week’s rally actually gave me some glimpse of hope. It must have follow through. It will come down but must hold and be followed by some strong upside with reports of stability of Europe financial situations without breaking its low.
If it breaks the low, the downside will certainly be speedy and brutal.
Although data are overwhelming bearish for me, I still ride the trend last week. I bought AAPL, WYNN, TQNT, IOC and VZ – all covered calls positions. I will be converted some to collars ( like AAPL ) or just take profits if there are signs of bearish. I will add more puts to turn this positions in a neutral or bearish once there are technical and sentimental signals that points to an accelerated downtrend.
What I am trying to do is more difficult than it seems. The market is very unpredictable. So, all my strategies are based on probabilities but with an anchor on longer term fundamentals and guidance from short term technical indicators and sentiments.
Because of my bearish bias, I will certainly add on to my shorts using strategies that I wrote earlier. I will look for segments and companies with weaker fundamentals. I look for companies with high debt,
questionable accounting practices, weak fundamentals and in an accelerated downturn, even high flyers with huge P/Es like LNKD, NFLX and CRM should be shorted. For the latter, it should be done only if the downside acceleration is triggered. For now, the financials and “for profit “ education sectors look like good shorts. I should be posting some of bearish bias trades next week
There is still a probability that market can turn bullish after the severe downturn recently. Will it be a repeat of August 2010 where there were so much negative sentiments? I also remembered the Hindenburg Omen which predicted the market would fall apart. The market went on to a strong rally with the announcement of QE 2. I made a lot of money by the end of the year.
Will it repeat like last year? My gut feel is that this time that the market will fall. I will let the market tell me what to do.
An engineer by training graduated with B.Sc (hons) and MBA from Strathclyde university in Glasgow, Scotland. Started as an engineer in R&D for 3 years with Philips. Then, worked with DuPont for 13 years. Last job was VP, Marketing for Asia Pacific. Left to start a number of companies in various segments which include a large electronic distribution, a VoIP provider, an internet trading portal in Australia,and an executive training consultancy firm. Have listed companies in NYSE, Australia Stock Exchange, Singapore Stock Exchange Main Board. I was on the Board of Directors for 1 company listed in Thailand, 1 in Singapore and 1 in Australia. Was in the senior management of a company listed in NYSE. Still holding major share positions in the VoIP and Executive training companies. Both are private companies.
These articles merely reflect the opinions of this author and are by no means a guarantee of future economic conditions, market or stock performance. Though the author strives to provide accurate and relevant data, he sometimes relies on external sources and cannot assure the reader of the accuracy of these external sources. Additionally, these articles are provided for INFORMATIONAL PURPOSES ONLY and are NOT MEANT to provide investment advice to anyone. For investment advice, please consult your professional adviser.
Posts
