FYI | Nov 29 2006
Has anyone else noticed this week’s sell off in US equities was preceded by a bearish turn in sentiment towards the US dollar?
The reason why this fact will have been picked up by hedge funds and speculators (and no doubt by some cautious long-only fund managers as well) is because of the general perception in the market global share markets might be due for a pullback.
“It has been quite a run since August” seems to a regular feature in stock market reviews here and there.
In response to this share market commentators and strategists have come out in droves over the past week to reiterate the near term prospects for equity markets remain positive – just in case anyone had accumulated some serious doubts.
Our friends at GaveKal are certainly no exception. GaveKal’s ongoing positive view on equities is based upon the fact that the yen carry trade is still intact and very unlikely to trigger much forced selling in today’s markets.
This does not seem to be the case for the US currency, however. Another series of rather weak economic data has further increased the selling pressure for the greenback and experts here and there are already talking about next stop 1.35 for the euro and then 1.40.
Part of this renewed market pessimism vis-à-vis the US dollar is because of increasing market expectations that US interest rates will be cut sooner rather than later. However, warns GaveKal, such a view might turn out a too easy approach for the coming year.
GaveKal believes Ben Bernanke’s speech this week should serve as a clear warning to those investors currently betting on an impending rate cut as the Fed chairman said, among other things: “Although the available indicators give somewhat different signals, it seems clear that labor costs–which account for roughly two-thirds of firms’ total costs–have been rising more quickly of late.”
GaveKal does distance itself from the current Fed focus, however, stating to be “somewhat surprised by this continued focus on inflation”. It is GaveKal’s view that “pretty much all the market indications point towards falling prices everywhere”.
Markets are not always correct in their anticipations, and neither are central bankers, with GaveKal reminding us all “in 2004 all the market indicators were pointing to accelerating inflation, and yet central banks were very easy or not tightening enough. Are they doing the inverse of that mistake now?”
GaveKal believes the Fed will remain on hold for longer than what is currently expected by the markets. Whether this view is correct, or whether this will trigger a reversal of the current market movements, will be proven in the year ahead.
Another of our highly appreciated friends in the market, Dennis Gartman, updated his Rules of Trading this week. He called it “Dennis Gartman’s not-so-simple (but materially fewer) rules of trading”.
At FNArena, we are often in awe because of the wealth of experience and market intelligence Dennis can tap from while publishing his daily market commentaries and trading decisions. When he got caught on the wrong foot by the recent takeover bid for Phelps Dodge, Gartman had no problem in explaining in public how he had lost money. Apparently his friends and contacts inside the industry found this an odd thing to do. Why step forward into public humiliation?
Gartman has another view on the matter, as he later explained in his newsletter. It is important to show that even the most experienced and knowledgeable professionals in the market can have it wrong every now and then, he argued. By showing his vulnerability, and his willingness to face the facts and cope with failure, Gartman believes he has given investors worldwide some valuable insights and investment lessons.
We agree with his view. Nobody is right all the time. And when it comes to investing in the share market, the difference between success and failure -“pain” and “pleasure”- is often determined by how an investor deals with less profitable decisions.
I asked Dennis whether I could reprint his trading rules this week. His response was “I am honoured”. I can only add that it is me who feels honoured to be granted the opportunity.
So here they are, 16 rules of trading you should always bear in mind, stick to and tell others to follow. They come from one of the masters in the industry himself. (You may want to re-read my opening paragraphs after you’ve read these rules).
1. Never, Ever, Ever, Under Any Circumstance, Add To A Losing Position… not ever, not never! Adding to losing positions is trading’s carginogen; It is trading’s driving-while intoxicated. It will lead to ruin. Count on it!
2. Trade Like A Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.
3. Mental Capital Trumps Real Capital: Capital comes in two types; mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.
4. This Is Not A Business Of Buying Low And Selling High; It is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or Neutral , and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.
6. “Markets Can Remain Illogical Far Longer Than You Or I Can Remain Solvent.” These are Keynes’ words and illogic does often reign, despite what the academics would have us believe.
7. Buy Markets That Show The Greatest Strength; Sell Markets That Show The Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.
8. Think Like A Fundamentalist; Trade Like A Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand, them run in tandem.
9. Trading Runs in Cycles; Some Good; Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!
11: In Trading/Investing, An Understanding Of Mass Psychology is Often More Important Than An Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! and when they are yellin’, you should be sellin’!”
12. Bear Market Corrections Are More Violent And Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient With Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.
15. Do More Of That Which Is Working and Less Of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; Cut back, or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.
16. All Rules Are Meant To Be Broken…. but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.
Good luck and good trading! (I borrowed this from the Gartman Letter as well).
Till next week!
Your humble and honoured editor,
Rudi Filapek-Vandyck
(As always supported by the Fab Three Terry, Chris and Greg)