THE NEXT STOCK MARKET CRASH
The U.S. had printed too much money during the 2008-2009 financial crisis and while the property market was going through a major crisis due to the sub-prime mortgage scheme, the financial institutions' crisis forced the Fed to bail out a number of them. Then, the Fed has tried to encourage investment and spending by lowering the interest rates by force (historically low short-term policy rates, repeated reassurances that interest rates are going to stay low for some time and quantitative easing). The bubble that emerged ever since in the stock market has been characterized by the investment into the blue chip stocks that could be bought and held forever with confidence. The mutual funds have been presented as the safest and the fastest way to get rich for the common man. As the bubble expands, investment managers use aggressive investment techniques in order to generate huge increases in the value of their mutual funds shares. As mutual-fund asset values goes up, new money pours in. Thus, we have a self-reinforcing process which gives the false illusion of a money-making machine for
everyone. But as the value of the assets has reached its intrinsic value, the thin spread between price and value forces the investment managers to take on more and more risks in order to generate adequate returns.
We can say that the next financial crisis will be due to the mutual funds as the decline in prices will inevitably be followed by a drop in the value of their assets. This will be triggered by the expectation that the Fed is about to end its quantitative easing program later this year (expected in October) which in turn should result in a rise in bond yields. Institutional investors are in search of avoiding risk and will start soon to switch from the overvalued equities to the bonds which seem to be overvalued. The current bet in the market is on the extended period of low yields and are willing to invest for longer terms i.e. 30 years but these long term bonds do not offer adequate protection against any future rise in the interest rates.
Consequently, as the investors will get worried by this decline, they will start to cash in their mutual fund shares which in turn will force the investment managers to sell more assets thus starting a downward spiral. This may result in a severe drop in the stock market (say between 30% - 50% range) within a period of two years. But the blow will hit harder the stock markets of the emerging countries where drops in the 70% - 80% area would not be uncommon.
When the market will hit the bottom, a new area will open and we will see the rebirth of the value investment. Following the bottom out of all the main stock indexes, in all cases the recovery may be a slow process. Although some of these markets will recover faster than the others by returning to the original level within a couple of years, in real terms, this will take longer than expected with the inevitable surge in the inflation coupled with the rise of the interest rates.
Thursday, 7 August 2014
Tuesday, 22 July 2014
THE COMPLACENCY SYNDROME IN THE CAPITAL MARKETS
The brokerage firms such as Merrill Lynch have conducted a survey among the global fund managers and all have reached a common conclusion: the investors are afraid the most about "Geo-political" crises. The Geo-political crises are namely the shooting down of the Malaysian passenger aircraft over the Ukraine, Israel's actions in Gaza which could create reactions in the Muslim world. While all these have been realized, the spot market has reacted weakly to them. In the derivative markets which provide an insurance against such risks, a complete insensitivity is raging. This insensitivity is called complacency syndrome and the actual mental state has become the threat number one to the capital markets. Complacency is a windfall for the states such as Turkey which are following nonsense economic policies. Bubbles will soon begin to take shape in the world capital markets. Then what could end this complacency and when will it occur?
The world is crawling. ISID's victories in Iraq and Syria are causing thousands of mujaheddin to come to the region and the actions of Israel in Gaza is causing a reaction in the Muslim world with an increasing pace. In such an environment, if a 9/11 type terrorist attacks repeat, one should not be surprised. Also, the ISID which has repulsed the Iraqi army should be expected to undertake an offensive towards Baghdad and Kirkuk in which case, it will create a panic in the Brent oil market.
According to the Western states, the Malaysian passenger aircraft was shot down by the East Ukrainian separatists with the missiles and tactics provided by Russia. Accordingly, we may see the announcements of new sanctions against Russia which will target the energy and financial sectors. Putin will not stand empty-handed; the world is drifting towards a new Cold War.
But the reaction given by the financial markets to the shocks that could potentially change the history of the world is very weak and transient. When the crises abrupt, the markets sell a day or two, and then continue their journey to the peaks of 2014. This apathy is understandable in the spot market. Even if the large funds understand the medium-term risks, they cannot explain them to the customers to whom they are making sales without the reflection upon the economic parameters. Because the "Geo-political" issues are raising uncertainty about the future, one would expect the investors to purchase insurance in the futures and options markets. Perhaps what is happening in the Middle East and Ukraine did not change my expectations of a positive return on shares but I can say that the uncertainty as to my expected return has increased. I would protect my portfolio by buying puts and by shorting the index futures. Furthermore, the premium to be paid for such insurances is historically low. But the investment funds are not tempted by these insurances, and if they did, we would have seen jumps in the volatility indices, mainly in VIX.
That's what we call behaving as if there were no imminent and obvious risks. There are several reasons for such complacency. First, there is the common perception that the Fed and ECB will preserve the the financial system in case of an occurrence of adverse shocks. Second, financial asset prices other than "junk bonds" are not very expensive.Third, the world economy has an accelerating momentum and the investors think that the Geo-political crises will not suffice to curb this momentum.
It is very easy to predict the consequences of complacency. For a few weeks, the S&P 500 and other global stock exchanges will test new highs with the coming of strong sales and profit figures compared to the past. Then re-acceleration of the world economy will be priced in the marketplace. When October is reached, this complacency will turn into a bubble i.e. speculative pricing in the critical financial markets. In October, with the official start of the Fed's exit from QE and/or the heavily indebted Euro-zone states are such a bad shape that not even ECB will be able to save them is understood, a disturbance will begin. As the prices are too high, panic sales will follow in case of a bad news or a slight shock.
Of course, the markets will anticipate this, thus the panic sales may start in September but may be delayed until the end of the year. But one thing is for sure: the result of any complacency has always been a bubble and a financial crisis and in the process, we are now very close to point of no return.
The world is crawling. ISID's victories in Iraq and Syria are causing thousands of mujaheddin to come to the region and the actions of Israel in Gaza is causing a reaction in the Muslim world with an increasing pace. In such an environment, if a 9/11 type terrorist attacks repeat, one should not be surprised. Also, the ISID which has repulsed the Iraqi army should be expected to undertake an offensive towards Baghdad and Kirkuk in which case, it will create a panic in the Brent oil market.
According to the Western states, the Malaysian passenger aircraft was shot down by the East Ukrainian separatists with the missiles and tactics provided by Russia. Accordingly, we may see the announcements of new sanctions against Russia which will target the energy and financial sectors. Putin will not stand empty-handed; the world is drifting towards a new Cold War.
But the reaction given by the financial markets to the shocks that could potentially change the history of the world is very weak and transient. When the crises abrupt, the markets sell a day or two, and then continue their journey to the peaks of 2014. This apathy is understandable in the spot market. Even if the large funds understand the medium-term risks, they cannot explain them to the customers to whom they are making sales without the reflection upon the economic parameters. Because the "Geo-political" issues are raising uncertainty about the future, one would expect the investors to purchase insurance in the futures and options markets. Perhaps what is happening in the Middle East and Ukraine did not change my expectations of a positive return on shares but I can say that the uncertainty as to my expected return has increased. I would protect my portfolio by buying puts and by shorting the index futures. Furthermore, the premium to be paid for such insurances is historically low. But the investment funds are not tempted by these insurances, and if they did, we would have seen jumps in the volatility indices, mainly in VIX.
That's what we call behaving as if there were no imminent and obvious risks. There are several reasons for such complacency. First, there is the common perception that the Fed and ECB will preserve the the financial system in case of an occurrence of adverse shocks. Second, financial asset prices other than "junk bonds" are not very expensive.Third, the world economy has an accelerating momentum and the investors think that the Geo-political crises will not suffice to curb this momentum.
It is very easy to predict the consequences of complacency. For a few weeks, the S&P 500 and other global stock exchanges will test new highs with the coming of strong sales and profit figures compared to the past. Then re-acceleration of the world economy will be priced in the marketplace. When October is reached, this complacency will turn into a bubble i.e. speculative pricing in the critical financial markets. In October, with the official start of the Fed's exit from QE and/or the heavily indebted Euro-zone states are such a bad shape that not even ECB will be able to save them is understood, a disturbance will begin. As the prices are too high, panic sales will follow in case of a bad news or a slight shock.
Of course, the markets will anticipate this, thus the panic sales may start in September but may be delayed until the end of the year. But one thing is for sure: the result of any complacency has always been a bubble and a financial crisis and in the process, we are now very close to point of no return.
Sunday, 13 July 2014
ARGENTINA'S FOREIGN DEBT: THE TANGO WITH DEATH
ARGENTINA'S FOREIGN DEBT: THE TANGO WITH DEATH.
We see statement ads appearing in the American newspapers. One days the Argentine Government publishes a statement with the following heading: "A handful of vultures is rendering Argentina insolvent and thus threatens the world economy." The following day, you can see a statement coming from the investors who are accused of being vultures as follows: "We are not vultures. This is our investment and there is a court resolution regarding it. We want to have our rights on it; because the Argentina's Government does not accept us as interlocutors, they are risking the world system."
Then what is the problem? Argentina could not pay the bonds maturing in 2001 and became somehow insolvent. Then in 2005, a debt restructuring agreement was made with the bond holders. A further restructuring of the debt had been made in 2010. It was a bond stock worth about 100 billion dollars. And the interest rate was too high. With the first restructuring, an agreement had been reached with 76% of the bond holders in 2005. They took their new bonds and retreated. Then in 2010, the number of investors with whom an agreement had been reached attained 93%. But the remaining investors refused to enter into agreement. These bonds had been accumulated by some vulture funds. Recently, the U.S. Supreme Court announced that the Argentina's Government had to reach an agreement by paying an interest for the period without agreement too as well as for these bond holders. When Argentina saw the bill put before her by the court, she said "that's too much!". And that is precisely when the war of ads begun.
Why did it happen? For a very simple reason. The payments to the bond holders were being done through Mellon Bank of New York in New York. Because the transaction was taking place in the United States, the American courts could come into play quite easily. Because the U.S. dollar was a reserve currency, the American law was valid everywhere.
But another news came forward. The French Finance Minister Michel Sapin gave a statement where he stated in a romantic fashion that the reserve currency characteristic of the U.S. dollar should be brought to an end. The French Minister was quite unhappy about the 9 billion dollar fine given by the American courts towards BNP Parisbas. BNP Parisbas had performed transactions with Soudan and Cuba without respecting the sanction decisions taken by the American Congress. Transactions effectuated against the sanction decisions brought 9 billion dollars fine. BNP Paribas accepted this fine. There was nothing left to Michel Sapin other then complaining. The big French bank blatantly did not respect the American sanction. That was the first mistake. More importantly, the French Government did not determine even on its own the transactions that were contrary to the sanction. And that was the second mistake and it was a severe embarrassment.
The sanction comes out from the American Congress. The American Courts rule for fines to the ones who do not comply to it. And the French bank said "yes" to it. And the only thing that the French Minister can do is to complain about it. As a matter of fact, there is nothing that he can do. Why not? Because the world keeps on working with the U.S. dollar. The world has about 10 trillion U.S. dollar of reserve currency. 60% of it is constituted of U.S. dollars. The remaining is acting like a dwarf: their trading volume do not beyond billions of dollars. China's money is kept in the depositories of the United States. Why is everybody investing in China where there no law? Because its money is kept in the United States. If a problem arises, you open a lawsuit, obtain a freezing of the assets and then make the necessary collection. BNP Paribas is paying its fine. Argentina will try to reach a compromise with the bond holders with whom she did not reach to an agreement. The resolutions of the American courts are going to be applied and Argentina will be forced to comply to them one way or the other...
If successful, all these things could make us think that one should expect a similar development regarding the other populist Latin American countries such as Chile, Venezuela etc. The aim would be nothing more than the destitution of the populist governments and their replacement with liberal governments. Let's see what's going to happen...
We see statement ads appearing in the American newspapers. One days the Argentine Government publishes a statement with the following heading: "A handful of vultures is rendering Argentina insolvent and thus threatens the world economy." The following day, you can see a statement coming from the investors who are accused of being vultures as follows: "We are not vultures. This is our investment and there is a court resolution regarding it. We want to have our rights on it; because the Argentina's Government does not accept us as interlocutors, they are risking the world system."
Then what is the problem? Argentina could not pay the bonds maturing in 2001 and became somehow insolvent. Then in 2005, a debt restructuring agreement was made with the bond holders. A further restructuring of the debt had been made in 2010. It was a bond stock worth about 100 billion dollars. And the interest rate was too high. With the first restructuring, an agreement had been reached with 76% of the bond holders in 2005. They took their new bonds and retreated. Then in 2010, the number of investors with whom an agreement had been reached attained 93%. But the remaining investors refused to enter into agreement. These bonds had been accumulated by some vulture funds. Recently, the U.S. Supreme Court announced that the Argentina's Government had to reach an agreement by paying an interest for the period without agreement too as well as for these bond holders. When Argentina saw the bill put before her by the court, she said "that's too much!". And that is precisely when the war of ads begun.
Why did it happen? For a very simple reason. The payments to the bond holders were being done through Mellon Bank of New York in New York. Because the transaction was taking place in the United States, the American courts could come into play quite easily. Because the U.S. dollar was a reserve currency, the American law was valid everywhere.
But another news came forward. The French Finance Minister Michel Sapin gave a statement where he stated in a romantic fashion that the reserve currency characteristic of the U.S. dollar should be brought to an end. The French Minister was quite unhappy about the 9 billion dollar fine given by the American courts towards BNP Parisbas. BNP Parisbas had performed transactions with Soudan and Cuba without respecting the sanction decisions taken by the American Congress. Transactions effectuated against the sanction decisions brought 9 billion dollars fine. BNP Paribas accepted this fine. There was nothing left to Michel Sapin other then complaining. The big French bank blatantly did not respect the American sanction. That was the first mistake. More importantly, the French Government did not determine even on its own the transactions that were contrary to the sanction. And that was the second mistake and it was a severe embarrassment.
The sanction comes out from the American Congress. The American Courts rule for fines to the ones who do not comply to it. And the French bank said "yes" to it. And the only thing that the French Minister can do is to complain about it. As a matter of fact, there is nothing that he can do. Why not? Because the world keeps on working with the U.S. dollar. The world has about 10 trillion U.S. dollar of reserve currency. 60% of it is constituted of U.S. dollars. The remaining is acting like a dwarf: their trading volume do not beyond billions of dollars. China's money is kept in the depositories of the United States. Why is everybody investing in China where there no law? Because its money is kept in the United States. If a problem arises, you open a lawsuit, obtain a freezing of the assets and then make the necessary collection. BNP Paribas is paying its fine. Argentina will try to reach a compromise with the bond holders with whom she did not reach to an agreement. The resolutions of the American courts are going to be applied and Argentina will be forced to comply to them one way or the other...
If successful, all these things could make us think that one should expect a similar development regarding the other populist Latin American countries such as Chile, Venezuela etc. The aim would be nothing more than the destitution of the populist governments and their replacement with liberal governments. Let's see what's going to happen...
Wednesday, 9 July 2014
ECONOMIC PREDICITIONS UNTIL THE END OF 2014
ECONOMIC PREDICITIONS UNTIL THE END OF 2014
Following the declaration of Bernanke in previous May stating "I think we may exit QE", the emerging markets faced two small crises. Since the middle of March, the risky assets, i.e. stocks, emerging markets' F/X, and the bonds across the world have witnessed a strong rally. What will happen for the remaining of this year? Will the emerging markets face a major crisis or will they continue to see a rally?
The rally may continue until the end of September in the risky markets. In order to have a change in the guidance of the Fed which fuels the risk appetite in the markets, one needs a rise of 3% in the wages which in turn cannot materialize in the short term. The ECB may perform an additional QE during the period of September-October. Thus, we have a substantial liquidity present in the markets. The world economy has left behind the state of hibernation and the overall recovery has spread. 3Q profits from companies are expected to exhibit good performance. Valuations are expensive, but the "fury" or "bubble" stage is not present for the time being. There is still a large amount of cash present in the global funds. Volatility indices are in the bottom of the latest 5- to 7 years and with the exception of geo-political crises, there are no reasons for its rise for the time being. The momentum is very important in the financial markets: the momentum of the rally of 2Q is expected to continue in 3Q.
What is going to happen in the last quarter of the year?
Risks will increase geometrically as the end of the year nears. In October, asset purchases of QE of the Fed will stop. Markets will inevitably ask the questions as to the increase in interest rates once again as well as the time of the dose and how long it will last. While market players will be searching for the answers for a while, a profit taking is quite possible. How much inflation will cause the global growth? With the looming rise in food and oil prices while the output gap is closing around the world, central banks constituting the reserve currencies may be forced to withdraw the previous optimistic discourses. At the end of Q3, the financial assets will see a bubble in their prices and even in a small shock wave will set the stage for a hard sell.
The most fortunate of financial assets:
The Japanese and the emerging markets' shares are among those highly recommended. Both have historically low P / E averages.
What are the most hated assets?
U.S. and Euro-Zone (EU) "neighboring countries" (Greece, Portugal, Italy, Ireland and Spain) government securities premiums are excessive. The very low returns cannot be explained by economic or political developments. These assets are kept afloat with the generosity of the central bank and the carry-trade.
Euro, gold, and oil prices will trade how?
No one will earn any money in 3Q. It is likely that the EUR/USD will decline in the short term. But there are formidable barriers to the rise of the Euro; ECB does not want it. Thus, the EUR/USD will trade in the band of 1.35-1.40 during 3Q. This situation will provide a partial support to the gold and oil. The retreat of the gold till 1.000 USD/ounce has become a sort of a dream now. The gold is expecting the inflation to surface in the United States after which it will make its major move. The biggest support for the gold stems from the fact that the United States' real interest rates will remain very low for years to come. The reasonable goals for the gold in 3Q would be a trading zone of 1.350-1.400 and a year end target of 1.450. The decline in the oil prices is caused by the supply dynamics; for example, the United States has risen to the position of number one producer of oil after Saudi Arabia within two years. The world economy will never reach its previous power which sent the Brent barrel's price to 140 USD. The Brent oil may trade 100-110 USD but one has to consider the geo-political risks. The scary scenarios would be the failure to achieve a peace agreement between Iran and P5+1 and ISID's jihad in Iraq inspires terror and sabotage in the oil-producing centers of the Arab world.
Sales in the emerging markets will begin in October:
The Presidential election in Turkey do not cause a threat but the economic policy that Erdogan is going to apply in this position will look more like a time bomb. Professionals such as Babacan and Simsek will not be present in the new cabinet. The government will undertake a rapid economic growth campaign by forcing the Turkish Central Bank. We shall see a renewal in the rise of the current account deficit and inflation. With the Fed going out from the QE which will ignite the escape of the speculative funds, the Turkish Central Bank will be forced to raise its interest rates again. Turkey's dream will end by the end of this year and the nightmare will begin.
What are the greatest dangers facing the world?
Clear risks are no longer seen on the economic front. Dangers such as the failure to improve the economic growth and the transition to the deflation in the EU are present but they will evolve very slowly and the investors will adjust their positions by anticipation. But the political arena is a brewing pot. The war in Iraq may soon become a battle ground encompassing the whole Middle-East. Does Russia have another objective after the defeat in Ukraine? Will Argentina and Venezuela, which are the problematic countries of Latin America, have a balance of payments crisis which in turn will shake to the ground all the emerging countries? Will the dispute between China and the other regional countries over the continental shelf turn into an armed conflict? And the most important question: will the fundamentalist Islamic terror that took roots again in Afghanistan and Iraq, undertake a new tragedy of 9/11?
Following the declaration of Bernanke in previous May stating "I think we may exit QE", the emerging markets faced two small crises. Since the middle of March, the risky assets, i.e. stocks, emerging markets' F/X, and the bonds across the world have witnessed a strong rally. What will happen for the remaining of this year? Will the emerging markets face a major crisis or will they continue to see a rally?
The rally may continue until the end of September in the risky markets. In order to have a change in the guidance of the Fed which fuels the risk appetite in the markets, one needs a rise of 3% in the wages which in turn cannot materialize in the short term. The ECB may perform an additional QE during the period of September-October. Thus, we have a substantial liquidity present in the markets. The world economy has left behind the state of hibernation and the overall recovery has spread. 3Q profits from companies are expected to exhibit good performance. Valuations are expensive, but the "fury" or "bubble" stage is not present for the time being. There is still a large amount of cash present in the global funds. Volatility indices are in the bottom of the latest 5- to 7 years and with the exception of geo-political crises, there are no reasons for its rise for the time being. The momentum is very important in the financial markets: the momentum of the rally of 2Q is expected to continue in 3Q.
What is going to happen in the last quarter of the year?
Risks will increase geometrically as the end of the year nears. In October, asset purchases of QE of the Fed will stop. Markets will inevitably ask the questions as to the increase in interest rates once again as well as the time of the dose and how long it will last. While market players will be searching for the answers for a while, a profit taking is quite possible. How much inflation will cause the global growth? With the looming rise in food and oil prices while the output gap is closing around the world, central banks constituting the reserve currencies may be forced to withdraw the previous optimistic discourses. At the end of Q3, the financial assets will see a bubble in their prices and even in a small shock wave will set the stage for a hard sell.
The most fortunate of financial assets:
The Japanese and the emerging markets' shares are among those highly recommended. Both have historically low P / E averages.
What are the most hated assets?
U.S. and Euro-Zone (EU) "neighboring countries" (Greece, Portugal, Italy, Ireland and Spain) government securities premiums are excessive. The very low returns cannot be explained by economic or political developments. These assets are kept afloat with the generosity of the central bank and the carry-trade.
Euro, gold, and oil prices will trade how?
No one will earn any money in 3Q. It is likely that the EUR/USD will decline in the short term. But there are formidable barriers to the rise of the Euro; ECB does not want it. Thus, the EUR/USD will trade in the band of 1.35-1.40 during 3Q. This situation will provide a partial support to the gold and oil. The retreat of the gold till 1.000 USD/ounce has become a sort of a dream now. The gold is expecting the inflation to surface in the United States after which it will make its major move. The biggest support for the gold stems from the fact that the United States' real interest rates will remain very low for years to come. The reasonable goals for the gold in 3Q would be a trading zone of 1.350-1.400 and a year end target of 1.450. The decline in the oil prices is caused by the supply dynamics; for example, the United States has risen to the position of number one producer of oil after Saudi Arabia within two years. The world economy will never reach its previous power which sent the Brent barrel's price to 140 USD. The Brent oil may trade 100-110 USD but one has to consider the geo-political risks. The scary scenarios would be the failure to achieve a peace agreement between Iran and P5+1 and ISID's jihad in Iraq inspires terror and sabotage in the oil-producing centers of the Arab world.
Sales in the emerging markets will begin in October:
The Presidential election in Turkey do not cause a threat but the economic policy that Erdogan is going to apply in this position will look more like a time bomb. Professionals such as Babacan and Simsek will not be present in the new cabinet. The government will undertake a rapid economic growth campaign by forcing the Turkish Central Bank. We shall see a renewal in the rise of the current account deficit and inflation. With the Fed going out from the QE which will ignite the escape of the speculative funds, the Turkish Central Bank will be forced to raise its interest rates again. Turkey's dream will end by the end of this year and the nightmare will begin.
What are the greatest dangers facing the world?
Clear risks are no longer seen on the economic front. Dangers such as the failure to improve the economic growth and the transition to the deflation in the EU are present but they will evolve very slowly and the investors will adjust their positions by anticipation. But the political arena is a brewing pot. The war in Iraq may soon become a battle ground encompassing the whole Middle-East. Does Russia have another objective after the defeat in Ukraine? Will Argentina and Venezuela, which are the problematic countries of Latin America, have a balance of payments crisis which in turn will shake to the ground all the emerging countries? Will the dispute between China and the other regional countries over the continental shelf turn into an armed conflict? And the most important question: will the fundamentalist Islamic terror that took roots again in Afghanistan and Iraq, undertake a new tragedy of 9/11?
Sunday, 1 June 2014
EQUITY TRADER: THE DECK OF CARDS
Any equity trader could improve its portfolio's growth by considering two decks of cards which have in total only 108 cards. The normal procedure will be to consider 52 cards to represent all the investments done in one single company at a time during the lifetime of the portfolio. For example, if the trader opened a position for a single company by betting the ranch, he will put away one card from the deck of cards. And he will repeat this process for the remaining investments. The red ones will represent the investments which resulted in a loss while the black ones will represent the investments which resulted in a gain.
Once the deck of cards is out cards, the equity trader can not make any more investments at all. Under those rules, he will be forced to think carefully about what he is going to do and thus, in the long run, he will do much better.
One will ask himself why such an approach? Quite often, the traders overemphasize the concept of portfolio diversification while their initial capital is low. Then, they have a tendency to think of placing their limited capital here and there, and then wait for the results while hoping for the best. Instead, they should concentrate upon one company at a time and set to themselves a take-profit level; once reached, they will transfer the grown capital into another company and this will continue until a satisfactory level is reached. Thus, with the use of a deck of cards, this will simplify the matters and put some discipline into the affairs.
This approach is very simple and is very efficient in changing the life of the trader. It will help him quite a lot in beating the market by a wide margin over a long period of time.
Once the deck of cards is out cards, the equity trader can not make any more investments at all. Under those rules, he will be forced to think carefully about what he is going to do and thus, in the long run, he will do much better.
One will ask himself why such an approach? Quite often, the traders overemphasize the concept of portfolio diversification while their initial capital is low. Then, they have a tendency to think of placing their limited capital here and there, and then wait for the results while hoping for the best. Instead, they should concentrate upon one company at a time and set to themselves a take-profit level; once reached, they will transfer the grown capital into another company and this will continue until a satisfactory level is reached. Thus, with the use of a deck of cards, this will simplify the matters and put some discipline into the affairs.
This approach is very simple and is very efficient in changing the life of the trader. It will help him quite a lot in beating the market by a wide margin over a long period of time.
Tuesday, 27 May 2014
THE EQUITY TRADER: FIGHTING THE BATTLES AND NOT THE WAR.
When I operate in the stock market, I prefer to use technical analysis instead of fundamental analysis because I am, basically, a visual person. I always question the validity of the fundamentals as the news pour in regarding a particular stock. As an individual trader, I have to make some decisions as to whether to buy, to sell or to stay by the sidelines. Thus, I do not rely upon the fundamentals as much as others do, especially when they have under their command. a group of analyst who do the research and present the reports. Technical analysis is a tool that permits me to make investment decisions for myself. That does not mean that technical analysis is superior to fundamental analysis; it merely helps me in taking my investment decisions such as going long or short in certain positions or to do nothing at all. Of course, the main focus is the money management aspect of the trading which permits me to be profitable. In my investment decisions, the fundamental analysis represent only 5%-10% in terms of weight whereas the remaining is technical analysis. When there is a big news that is going to come out, I just stay away from it and I avoid trading it. And if I have positions that are going through while the big announcement is made, I have clear cut rules as to what to do which are based upon the importance of the news that is coming out.
Fundamentals are always important in the equity markets but I prefer to use technical analysis. Certainly, every trader is supposed to know very well the markets he will operate and I have preferred to concentrate on equity markets rather than F/X markets, despite I have an eye on it. And I concentrate on two major stock groups: S&P 500 and S&P/TSX Composite. I keep abreast about what they are doing and the interrelations between them. If I were to follow the fundamentals alone, I would not be able to keep up with all of the stocks. As far as the fundamentals are concerned, they are simply to know when the news are going to come out, to know what are going to be the interest decisions which are going to affect all the markets and to look at the technical picture in order to time my entry.
I use a limited number of screens in order to follow the markets. When I did my military service, I was taught to use several screens at the same time in order to have a snapshot about the events, to understand what was going on and then to shape them in my mind in order to arrive to a conclusion which in turn would set the base of my decision. The vast majority of the traders are facing too many screens and the information that is being pumped in is far too much. And this leads to excessive analysis which in turn becomes analysis paralysis. The trader gets confused and starts to mash up keys as he is overloaded with data and becomes an impulsive trader.
Basically, I prefer to use a single laptop with a few pages open and I don't need any fancy recent high tech features which I believe as to be useless. If you are not able to trade on your laptop, then having a dozen screens will definitely not improve your trading.
In terms of great trading profits that can be made in trading great trends, the vast majority of the markets have a well defined trend only 30% of the time and the remaining 70% of the time, the markets spend their time in the range bound environment by moving between the support and resistance levels. If one follows trend following method and the market is in the range bound environment, he will get chopped into pieces. When a market is moving in a very nice and smooth trend, one may take profits too soon. For example, if the trader had a period of losing trades and sees some profit on the table, he immediately takes it and sees afterwards the market going up. Consequently, the traders have to find a simple way to determine that there is trend, then join and stay with that trend in order to acquire the good results.
There are for M's of trading: Markets, Method, Money and Myself.
Markets:
There are several thousands of different instruments that one can trade and which are offered by various brokers across the globe and they are grouped under the following headings: equities, commodities, F/X and bond markets. Within these groups, one has thousands of instruments that can be traded. Thus, it is very important to know in what type of market and instruments you are going to trade based on your risk profile, your lifestyle, your character, your size of trading capital, your goals and outcome. In short, you have to know the right market that you are going to trade. The other thing that the trader has to know is whether the market is in trending or is in band consolidation. The trend markets go up or down in a consistent fashion with very small pullbacks. The other type of market is the range bound where the price is bouncing between the support and the resistance levels. The vast majority of the traders love trading in a trend environment but in the vast majority of the case, it is the range bound consolidation that prevails. One has to know which type of market he faces in order to decide what to do.
Method:
Every investor loves to hear about strategy and they surf the internet for it and talk to other traders/investors on the matter. One can find a lot of these strategies on the internet alone but the reality is that it is far less important than one thinks it is. What is important is when to exit a position. The trader has to know whether his method works better in a trend environment or in a range bound consolidation. Basically. if the trader's method is following the trend but the market is operating between a given support and resistance level, the chances of making money are slim. Alternatively, if the trader is using the range bound strategy and the market starts to trend, the trader has to struggle a lot. Consequently, the trader has to trade the right method in the context of the right market environment.
Money:
It involves money management and risk management. All new traders have to focus on this area first before looking to other areas. The trader should ask himself whether he is well capitalized for the market, for his method and also for his trading goals and outcomes. For instance, to aim to grow 1.000 USD into 1.000.000 USD in three months has very little probability of realization despite the fact that in the markets, everything is possible. So, the trader has to ask himself whether he is capitalized rightly and adequately for the thing he wants to do. Once this is solved, the trader has to work on his risk profile. The risk profile ranges from extremely conservative to extremely risky. This, in turn, will determine how much the trader is going to bet in one individual trade and how he is going to bet it. For this, the trader must never trade without a stop loss and must trade only a fraction of his capital for when he faces a loss, he will be able to come back.
Myself:
Many traders often forget that managing myself is the fundamental key to the managing of the remaining 3 Ms. When talking about the Myself segment of the trading, I mean the physical health and to be in a good position to handle the stress. It also means understanding the emotional health. When engaged into a trading, one faces risking his financial capital as well as his emotional capital, especially in day trading activities. If the trader is trading in order to pay down debt or meet its monthly expenses, he is already in a bad position. There is also the mental health where the trader looks at himself, how he sees himself as a trader, what kind of an image he has about himself. A negative mental health will impact negatively upon the trades. The trader has also to build a support structure around him for he is also a social human being. When sitting alone at home as a trader is frustrating and the trader has to go out and meet other traders. The trader should share his trading adventures with other traders and this will help him to manage better himself.
Back testing:
Back testing forms an important part of the trading strategy but sometimes people take it too far. I have developed some very good ideas just by looking at the charts, noticing how the market or the stock has moved. Most of the time, I have back-tested the chart configurations manually in order to assess whether the idea is valid enough in order for me to start to test it with real money in the market. What I have discovered was that one gets rapidly to the area of curve fitting. The markets change all the time and I have tried to forward-testing my ideas with real money and that when I started to see really was whether it worked or not based on a sample size of trading. If it works, then I start to consider the size of the betting. It's a part of a process and just by simply basing real money trading upon the back-testing is dangerous.
Growth or Income?
You must determine whether you are a growth trader or an income trader. Unfortunately, most of the traders' accounts are not big enough to generate income and thus they become growth traders. Realistically, they can only be growth traders until their account become substantial at which point they can become income traders. Another option would be to have two separate accounts in which one would serve the income aspect and the other would serve the growth aspect. But the trader must have a clear mind when doing this. The trader should not consider seriously his money on the account but instead should concentrate upon his trading. If he starts to consider his money on the account, then his mind will be blurred and his trading activity will be adversely affected. The money is just the outcome of the trading activity and as the trading are all recorded, a mere study of them will be sufficient to evaluate one's trading approach as a whole.
Trading exit strategy:
After I have done the technical analysis of the stock, I determine the stop loss level in case the position goes wrong thus cutting my losses in order to live another day. But when the stock behaves as expected, I have to devise an exit strategy. If you want to be a successful trader, you have to develop your own analysis style. Part of the routine to get into the game is to analyze the chart, to put the relevant support and resistance levels as well as the trend, to determine the probable course of the stock and to place on paper the possible stop loss levels as well as take profit levels. I set the entry point slightly above the support level and the exit point slightly below the resistance level; whereas I set the stop loss level slightly below the support level of the stock price. As far as the trend based trading is concerned, I use the trailing stop in order to catch the bulk of the movement. Basically I don't listen to the news and I just focus on doing my own analysis, planning my own trade, trading my plan and manage my own risk. This approach makes me a better trader for I am taking responsibility on how the trade fared. If the trade fails, the responsibility is mine and I don't blame anyone on this matter.
What to do when successive trades went wrong?
When I recognize that I am in a losing game, I stop trading. Then I go out for a walk or take some days off. After that, I study my losing trades, organise my thoughts and then proceed again. I review my basic points and keep a good diary of all my trades whether they are losing or winning trades which serve me as a compass for my future trades. Together, they will constitute the basis of a successful trader. When a trader has a slump, by going back to his notes and the point formulated above, he can recover quickly. For example, if a trader finds out from his notes that 50% of his losses were generated in the trading performed on Mondays and Fridays, then when he stops trading on these days, his results will improve dramatically. The traders always ask themselves whether it is possible to recover from catastrophic trades? I suggest yes because I have seen individuals achieve that. It has to do with context. If you have lost a sizable fund, it will have a catastrophic blow upon your emotional as well as your physical health. The crucial question will be how they respond to that? For some people, it will be too much for them. Other may get into a spiral of revenge trading in order to get that money back but that seldom works and actually they compound their losses. Some others take a few days off in order to assess what happened, what went wrong and then work upon a plan that will permit them to turn around the situation. It may take a year to recover the loss taken in a foolish day; it can be done but it has to be done in a right way. To recognize is a part of the trader's journey.
Trading badly or being unlucky?
As soon as I see someone who is managing badly his risk, not keeping good records, diverting from his method or strategy, not preparing for the trading day, I can surely say that this person is trading badly. It definitely tells me that there something that is going wrong with that person; it could be his life or his health. The best thing to do is to redefine what success means. If I plan my trade and manage my risk, then that trade is a successful trade, regardless of its outcome. Planning the trade and managing the risk are the only ones that I can control. And this provides me to take away the pressure I feel in the trades. By focusing on what I can control, my performance got better thus having a better confidence on myself, a better belief in what I was doing as a trader. This does not happen overnight; it's a long process with a turning point. Plan your trade, trade your plan and manage your risk; that's all you can do. You may have an excellent chart of a particular stock; you plan your trade and place your bet. Then suddenly, an unexpected news hits the trading floor and your stock heads south and takes you out from your stop loss level. Anything can happen in the market and the best thing to do is to plan the trade and implement it; that's all that a trader can do. Once the bet is placed, the only thing that the trader can do is to watch things happen.
Fundamentals are always important in the equity markets but I prefer to use technical analysis. Certainly, every trader is supposed to know very well the markets he will operate and I have preferred to concentrate on equity markets rather than F/X markets, despite I have an eye on it. And I concentrate on two major stock groups: S&P 500 and S&P/TSX Composite. I keep abreast about what they are doing and the interrelations between them. If I were to follow the fundamentals alone, I would not be able to keep up with all of the stocks. As far as the fundamentals are concerned, they are simply to know when the news are going to come out, to know what are going to be the interest decisions which are going to affect all the markets and to look at the technical picture in order to time my entry.
I use a limited number of screens in order to follow the markets. When I did my military service, I was taught to use several screens at the same time in order to have a snapshot about the events, to understand what was going on and then to shape them in my mind in order to arrive to a conclusion which in turn would set the base of my decision. The vast majority of the traders are facing too many screens and the information that is being pumped in is far too much. And this leads to excessive analysis which in turn becomes analysis paralysis. The trader gets confused and starts to mash up keys as he is overloaded with data and becomes an impulsive trader.
Basically, I prefer to use a single laptop with a few pages open and I don't need any fancy recent high tech features which I believe as to be useless. If you are not able to trade on your laptop, then having a dozen screens will definitely not improve your trading.
In terms of great trading profits that can be made in trading great trends, the vast majority of the markets have a well defined trend only 30% of the time and the remaining 70% of the time, the markets spend their time in the range bound environment by moving between the support and resistance levels. If one follows trend following method and the market is in the range bound environment, he will get chopped into pieces. When a market is moving in a very nice and smooth trend, one may take profits too soon. For example, if the trader had a period of losing trades and sees some profit on the table, he immediately takes it and sees afterwards the market going up. Consequently, the traders have to find a simple way to determine that there is trend, then join and stay with that trend in order to acquire the good results.
There are for M's of trading: Markets, Method, Money and Myself.
Markets:
There are several thousands of different instruments that one can trade and which are offered by various brokers across the globe and they are grouped under the following headings: equities, commodities, F/X and bond markets. Within these groups, one has thousands of instruments that can be traded. Thus, it is very important to know in what type of market and instruments you are going to trade based on your risk profile, your lifestyle, your character, your size of trading capital, your goals and outcome. In short, you have to know the right market that you are going to trade. The other thing that the trader has to know is whether the market is in trending or is in band consolidation. The trend markets go up or down in a consistent fashion with very small pullbacks. The other type of market is the range bound where the price is bouncing between the support and the resistance levels. The vast majority of the traders love trading in a trend environment but in the vast majority of the case, it is the range bound consolidation that prevails. One has to know which type of market he faces in order to decide what to do.
Method:
Every investor loves to hear about strategy and they surf the internet for it and talk to other traders/investors on the matter. One can find a lot of these strategies on the internet alone but the reality is that it is far less important than one thinks it is. What is important is when to exit a position. The trader has to know whether his method works better in a trend environment or in a range bound consolidation. Basically. if the trader's method is following the trend but the market is operating between a given support and resistance level, the chances of making money are slim. Alternatively, if the trader is using the range bound strategy and the market starts to trend, the trader has to struggle a lot. Consequently, the trader has to trade the right method in the context of the right market environment.
Money:
It involves money management and risk management. All new traders have to focus on this area first before looking to other areas. The trader should ask himself whether he is well capitalized for the market, for his method and also for his trading goals and outcomes. For instance, to aim to grow 1.000 USD into 1.000.000 USD in three months has very little probability of realization despite the fact that in the markets, everything is possible. So, the trader has to ask himself whether he is capitalized rightly and adequately for the thing he wants to do. Once this is solved, the trader has to work on his risk profile. The risk profile ranges from extremely conservative to extremely risky. This, in turn, will determine how much the trader is going to bet in one individual trade and how he is going to bet it. For this, the trader must never trade without a stop loss and must trade only a fraction of his capital for when he faces a loss, he will be able to come back.
Myself:
Many traders often forget that managing myself is the fundamental key to the managing of the remaining 3 Ms. When talking about the Myself segment of the trading, I mean the physical health and to be in a good position to handle the stress. It also means understanding the emotional health. When engaged into a trading, one faces risking his financial capital as well as his emotional capital, especially in day trading activities. If the trader is trading in order to pay down debt or meet its monthly expenses, he is already in a bad position. There is also the mental health where the trader looks at himself, how he sees himself as a trader, what kind of an image he has about himself. A negative mental health will impact negatively upon the trades. The trader has also to build a support structure around him for he is also a social human being. When sitting alone at home as a trader is frustrating and the trader has to go out and meet other traders. The trader should share his trading adventures with other traders and this will help him to manage better himself.
Back testing:
Back testing forms an important part of the trading strategy but sometimes people take it too far. I have developed some very good ideas just by looking at the charts, noticing how the market or the stock has moved. Most of the time, I have back-tested the chart configurations manually in order to assess whether the idea is valid enough in order for me to start to test it with real money in the market. What I have discovered was that one gets rapidly to the area of curve fitting. The markets change all the time and I have tried to forward-testing my ideas with real money and that when I started to see really was whether it worked or not based on a sample size of trading. If it works, then I start to consider the size of the betting. It's a part of a process and just by simply basing real money trading upon the back-testing is dangerous.
Growth or Income?
You must determine whether you are a growth trader or an income trader. Unfortunately, most of the traders' accounts are not big enough to generate income and thus they become growth traders. Realistically, they can only be growth traders until their account become substantial at which point they can become income traders. Another option would be to have two separate accounts in which one would serve the income aspect and the other would serve the growth aspect. But the trader must have a clear mind when doing this. The trader should not consider seriously his money on the account but instead should concentrate upon his trading. If he starts to consider his money on the account, then his mind will be blurred and his trading activity will be adversely affected. The money is just the outcome of the trading activity and as the trading are all recorded, a mere study of them will be sufficient to evaluate one's trading approach as a whole.
Trading exit strategy:
After I have done the technical analysis of the stock, I determine the stop loss level in case the position goes wrong thus cutting my losses in order to live another day. But when the stock behaves as expected, I have to devise an exit strategy. If you want to be a successful trader, you have to develop your own analysis style. Part of the routine to get into the game is to analyze the chart, to put the relevant support and resistance levels as well as the trend, to determine the probable course of the stock and to place on paper the possible stop loss levels as well as take profit levels. I set the entry point slightly above the support level and the exit point slightly below the resistance level; whereas I set the stop loss level slightly below the support level of the stock price. As far as the trend based trading is concerned, I use the trailing stop in order to catch the bulk of the movement. Basically I don't listen to the news and I just focus on doing my own analysis, planning my own trade, trading my plan and manage my own risk. This approach makes me a better trader for I am taking responsibility on how the trade fared. If the trade fails, the responsibility is mine and I don't blame anyone on this matter.
What to do when successive trades went wrong?
When I recognize that I am in a losing game, I stop trading. Then I go out for a walk or take some days off. After that, I study my losing trades, organise my thoughts and then proceed again. I review my basic points and keep a good diary of all my trades whether they are losing or winning trades which serve me as a compass for my future trades. Together, they will constitute the basis of a successful trader. When a trader has a slump, by going back to his notes and the point formulated above, he can recover quickly. For example, if a trader finds out from his notes that 50% of his losses were generated in the trading performed on Mondays and Fridays, then when he stops trading on these days, his results will improve dramatically. The traders always ask themselves whether it is possible to recover from catastrophic trades? I suggest yes because I have seen individuals achieve that. It has to do with context. If you have lost a sizable fund, it will have a catastrophic blow upon your emotional as well as your physical health. The crucial question will be how they respond to that? For some people, it will be too much for them. Other may get into a spiral of revenge trading in order to get that money back but that seldom works and actually they compound their losses. Some others take a few days off in order to assess what happened, what went wrong and then work upon a plan that will permit them to turn around the situation. It may take a year to recover the loss taken in a foolish day; it can be done but it has to be done in a right way. To recognize is a part of the trader's journey.
Trading badly or being unlucky?
As soon as I see someone who is managing badly his risk, not keeping good records, diverting from his method or strategy, not preparing for the trading day, I can surely say that this person is trading badly. It definitely tells me that there something that is going wrong with that person; it could be his life or his health. The best thing to do is to redefine what success means. If I plan my trade and manage my risk, then that trade is a successful trade, regardless of its outcome. Planning the trade and managing the risk are the only ones that I can control. And this provides me to take away the pressure I feel in the trades. By focusing on what I can control, my performance got better thus having a better confidence on myself, a better belief in what I was doing as a trader. This does not happen overnight; it's a long process with a turning point. Plan your trade, trade your plan and manage your risk; that's all you can do. You may have an excellent chart of a particular stock; you plan your trade and place your bet. Then suddenly, an unexpected news hits the trading floor and your stock heads south and takes you out from your stop loss level. Anything can happen in the market and the best thing to do is to plan the trade and implement it; that's all that a trader can do. Once the bet is placed, the only thing that the trader can do is to watch things happen.
Tuesday, 20 May 2014
THE KAISERSCHLACHT OF THE CAPITAL MARKETS
The investors keep waiting for the imminent market correction that has taken place since the summer of 2013. And yet, the chances for this to happen are growing stronger ever since. Then the question that comes to their mind is: when?
To be sure, the bear market that should characterize such a decline is taking place partially. The well known North American indices have a hard time to go further despite being near their all-time highs. But this event hides a different reality: many average stocks present within these indices have already started to drop significantly thus entering to the bear market phase. And these average stocks will inevitably force the large-caps to follow suite by the time the actual indices start to show some signs of weakness.
This situation is due to the divergence between the rise of the index in question through the price hikes of large-cap stocks and the decline in price of the mid- and small cap stocks. The market breadth, or the number of advancing stocks versus declining stocks had a tendency to fall since last summer and has accentuated its pace since January 2014.
All major indices have either set a new record or were close to it and this event has led the investors to believe that everything was fine, at least on the façade. But the number of stocks that are pulling up the indices has a tendency to drop. The late declines point to a major correction which may last until August before the traditional rally starts. Consequently, I don't say that the investors should liquidate their stock portfolio but they should recognize that the performance of these stocks, despite being in some cases spectacular, is overdue and they should think of placing stop loss levels in order to limit possible losses in case of a severe market downturn. And they should also think of taking their profit in some of their stocks and place the balance into the bonds, just for the sake of being in the safe zone.
Investors are currently blinded by the large-cap stocks that have performed quite well until recently and consequently, they do not see yet the signs of a major correction lying ahead when considering the broad market benchmarks; the performance is masking the price weakness of the majority of the mid- and small-caps. This is mainly due to the shift toward the larger caps, other than large caps.
Up today, the bull market, which has entered to its sixth consecutive year, is characterized by the traditional broad participation of the majority of the rising stocks. And from a historical perspective, one could say that the large-cap outperformance as seen this year is a feature of the market tops. This may not be a sign that the stocks are going to reach the peak or have reached it already but the declining market breadth suggest that a major correction is on its way. Sooner or later, the large-cap stocks will not be in the position of supporting the underlying trend of the late bull market. Thus, a point will soon be reached where the market will reverse its course.
The behaviour of such stock markets have some consequences for the investor. The future prospects are not as good as it used to be and thus, it will become more difficult for the diversified portfolio to perform well. This market favors the intuitive stock pickers and currently the major picks are large caps. One can see this in the portfolio rotation of the institutional investor who shift their positions from risky growth stocks into large and safe companies. The logic is that large stocks drop less than the others when the market declines significantly. Also, such an environment should force the investor to think cautiously about possible buying opportunities during the market pullbacks for a point will be reached when such an approach will not work. A possible avenue of investment could be to switch to some sectors that tend to do better during the mid or later stages of a bull market.
Finally, this situation will last until August 2014 at which point, the market should start its rally lasting until late this year. But. beginning next year's spring, the expected rise in the interest rates will affect adversely the stock markets and one may expect a severe correction that may last a couple of years and then a slow recovery with wild fluctuations, coupled with rising inflation and interest rates environment. The consequences for the economy may be a slower growth and a mild stagflation. As far as the market correction is concerned, a drop by 1/3 of the major indices would not be met as a surprise but will also set the ground for the rise of small-cap stocks while the large- and mid- cap stocks will be trading sideways.
To be sure, the bear market that should characterize such a decline is taking place partially. The well known North American indices have a hard time to go further despite being near their all-time highs. But this event hides a different reality: many average stocks present within these indices have already started to drop significantly thus entering to the bear market phase. And these average stocks will inevitably force the large-caps to follow suite by the time the actual indices start to show some signs of weakness.
This situation is due to the divergence between the rise of the index in question through the price hikes of large-cap stocks and the decline in price of the mid- and small cap stocks. The market breadth, or the number of advancing stocks versus declining stocks had a tendency to fall since last summer and has accentuated its pace since January 2014.
All major indices have either set a new record or were close to it and this event has led the investors to believe that everything was fine, at least on the façade. But the number of stocks that are pulling up the indices has a tendency to drop. The late declines point to a major correction which may last until August before the traditional rally starts. Consequently, I don't say that the investors should liquidate their stock portfolio but they should recognize that the performance of these stocks, despite being in some cases spectacular, is overdue and they should think of placing stop loss levels in order to limit possible losses in case of a severe market downturn. And they should also think of taking their profit in some of their stocks and place the balance into the bonds, just for the sake of being in the safe zone.
Investors are currently blinded by the large-cap stocks that have performed quite well until recently and consequently, they do not see yet the signs of a major correction lying ahead when considering the broad market benchmarks; the performance is masking the price weakness of the majority of the mid- and small-caps. This is mainly due to the shift toward the larger caps, other than large caps.
Up today, the bull market, which has entered to its sixth consecutive year, is characterized by the traditional broad participation of the majority of the rising stocks. And from a historical perspective, one could say that the large-cap outperformance as seen this year is a feature of the market tops. This may not be a sign that the stocks are going to reach the peak or have reached it already but the declining market breadth suggest that a major correction is on its way. Sooner or later, the large-cap stocks will not be in the position of supporting the underlying trend of the late bull market. Thus, a point will soon be reached where the market will reverse its course.
The behaviour of such stock markets have some consequences for the investor. The future prospects are not as good as it used to be and thus, it will become more difficult for the diversified portfolio to perform well. This market favors the intuitive stock pickers and currently the major picks are large caps. One can see this in the portfolio rotation of the institutional investor who shift their positions from risky growth stocks into large and safe companies. The logic is that large stocks drop less than the others when the market declines significantly. Also, such an environment should force the investor to think cautiously about possible buying opportunities during the market pullbacks for a point will be reached when such an approach will not work. A possible avenue of investment could be to switch to some sectors that tend to do better during the mid or later stages of a bull market.
Finally, this situation will last until August 2014 at which point, the market should start its rally lasting until late this year. But. beginning next year's spring, the expected rise in the interest rates will affect adversely the stock markets and one may expect a severe correction that may last a couple of years and then a slow recovery with wild fluctuations, coupled with rising inflation and interest rates environment. The consequences for the economy may be a slower growth and a mild stagflation. As far as the market correction is concerned, a drop by 1/3 of the major indices would not be met as a surprise but will also set the ground for the rise of small-cap stocks while the large- and mid- cap stocks will be trading sideways.
Subscribe to:
Posts (Atom)