Saturday, April 18, 2015

4/18/15 Red House

The average investor in China has to be asking himself how he plans to navigate Monday's open.

My least successful trade on Friday is also the most instructive, at least when applied to the above scenario.

(a) Let's say the Shanghai Composite opens down -5% (as suggested by Friday's futures).  Do you sell?
(b) Should the index fall further, let's say to -7%, will you have a stop level in place?
(c) Should the index then gap down hard to -9%, will you decide to capitulate, or will you add to your positions?
(d) Do you have the capital to add to positions?  If not, do you plan to raise capital by cashing out?  At what point will you cash out?

Let's replay Friday's action in RSX (Market Vectors Russia).  Not unlike the Shanghai Composite, RSX had also risen (prior to Friday's selloff) about +20% since March.

(a) RSX gaps down -3.8% at the open.  Do you sell?
(b) It continues to slide to -5.5%, which coincides with technical support levels.  Do you stop out, or do you add to the position?
(c) A large sell order appears midday, taking RSX to the -8.7% level in the blink of an eye.  Do you capitulate, or do you buy/add?
(d) Have you the capital to buy/add?  Was it raised by cashing out @ -3.8%, to be deployed at lower levels?

All good questions for investors in the Shanghai Composite to ponder this weekend.  Of course, it's unlikely that investors in the DJIA/SPX will need to ponder these questions immediately.  Unlikely, but not out of the question.

Thursday, April 16, 2015

4/16/15 Commodities

Commodities have taken a beating since April 2014. I think the entire sector (along with related Emerging Markets stocks) is about to roar back.

(a) Opening a position in miners (GDX) @ 19.79 (in addition to a position in RYPMX opened last night).
(b) Opened a position in Petrobras (PBR) this morning at a cost basis of about 8.50. Note the stock is already +73% off its 52-wk low, but remains -60% off its 52-wk high. The company has been mired in scandal, but is due to release its delayed earnings report within the next week. Once investors are able to assign hard numbers to corruption-related charges, the stock should be free to trade at its true market value. Of course, they may assign a market value below its current price. Hence the risk.
(c) Opened a position in Brazilian miner VALE @ 6.14.
(d) A related position in RYWBX (basically a short of the $USD, which is itself related to a long position in the Euro) was opened Wednesday night. A decline in the dollar is inversely correlated with commodities prices.

Thursday, April 9, 2015

4/9/15 The Next Bus

The markets are reliable in one sense- if you're left behind by one bus, another one will arrive in due time.

(a) If you've been watching the liftoff in the Euro from the sidelines the past three weeks, no worries.  FXE is retesting the mid-March lows today.
(b) Conversely, if you regret not having bet against the $USD in mid-March, RYWVX (Rydex 2x Weakening Dollar) should retest its own mid-March lows today.
(c) TLT (the long bond) is off a remarkable -1.4% this afternoon.
(d) Miners are off an additional -1%.  Gold itself is back below 1200.

What's it all mean?  I don't know.  In my opinion, volatility is likely to spike soon.  However, volatility doesn't necessarily mean a correction- it could just as easily mean shorts get taken to the woodshed.  My experience has also been that the initial move(s) prior to any trend change will likely be a head fake.

It's a good time to remain patient. 

Friday, April 3, 2015

4/3/15 Fear is Good

Back in the Eighties, I arrived home one evening to find a handwritten message which read, 'Fear is good.'  I had asked around about an oral surgeon (Dr. Fear) who had taken over a local practice, and one DDS had responded with that simple statement.  Obviously, a statement in the 'multiple entendre' category.

Fear is in fact a good thing.  It's an emotion associated with growth, one that signifies we're making progress.  Do you recall the day your Mom dropped you off at Kindergarten, and then walked away?  The year you were the new kid in town?  What about the first time you asked someone for a date, or signed off on the loan 'docs' for a home purchase?  When we're inside our comfort zone, nothing's happening- the same old same old.  Fear arises when we reach beyond the limits of the comfort zone.

A certain degree of fear when opening a position is expected, more so when we venture into higher risk levels or take 'the other side' of crowded trades.  Yet seeking higher rewards demands that we drive beyond the 'city limits.'

Fear comfort.  Embrace fear.

Thursday, April 2, 2015

4/2/15 Petrobras

PBR (Petrobras) has now recovered about +37% off its 52-wk low of 4.90.  Opening a position at this morning's high @ 6.72.  Not my usual trading 'style,' but neither is the strategy.  The company announced yesterday (additional) financing of $3.5b by the China Development Bank Corporation.  The stock is -68% off its 52-wk high of 20.94 (last September), not to mention -90% off its all-time high of 70.83.

(a) I believe the company will ultimately recover from its corruption scandal.
(b) Brazil will ultimately recover from its recession.
(c) Oil prices will eventually recover to the $100 range.

The stock appears to have reversed its down trend.  It's still a high-risk trade, so size appropriately.

Thursday, March 26, 2015

3/26/15 Fear

If there's one 'secret' to trading success, it's the ability to manage fear.  There are two components to managing fear: (a) refusing to act on it (the fear of missing out on gains, the fear of losses), and (b) managing risk to avoid placing yourself in a position of fear (managing trading risk, size, and frequency).  Successfully managing fear then allows you the composure to buy when others exhibit maximum fear (ie, panic).

(a) Following Wednesday's rout in global markets, additional fear played out overnight in market futures.  DJIA futes were down as much as -200 points, and have now recovered to -87.
(b) INTC (Intel) has slid further to 29.50.  Note that scaling in yesterday with a quarter position now allows me to consider adding on further weakness.
(c) EEM (Emerging Markets) off -0.3%.  SPY (S&P500) off -0.5%.  Anyone who bought last Wednesday's post-FOMC breakout (fear of missing out) is likely at the point of stopping out around here (fear of losses).  In contrast, by reopening partial positions on yesterday's weakness, I'm free to either add or give the positions more time.

Ramping up position size (which increases position risk) can easily introduce fear.  I plan to simply exit positions on further weakness (for a minor loss), or close positions on strength (for a minor gain).  No point in 'doubling down' in this environment.  Neither do I believe we bounce back quickly, so no point in hoping for more than minor gains.

Wednesday, March 25, 2015