Everyone's Limiting Risk

Just spotted some news that regulators over in Switzerland are trying to add some new regulation that limits the risk that banks can take. They're trying to prevent the same situation from happening again that we saw when we were staring into the whites of the eyes of the financial crisis. Trader's Narrative puts it best in this summary:

Regulators looking to rein in the sort of risk-taking that caused the last financial crisis reached a compromise in Switzerland yesterday that more than doubles capital requirements for the world’s banks while giving them as long as eight years to comply. The Basel Committee on Banking Supervision will require lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Banks that fail to meet the buffer would be unable to pay dividends. Bank shares gained after the Basel Committee gave firms as much as eight years to comply with stiffer capital requirements, more time than some analysts predicted – Bloomberg - the 7% minimum is a dramatic, but not unexpected, increase from the current 2%. If a bank’s capital ratio falls below 7% or would fall under 7% when the bank is stress tested, then it will be forced to raise capital. If it falls below 4.5%, then it will be put into ‘resolution.’

The biggest problem is that this regulation is coming after the fact. When are people going to start to realize that they need to recognize scenarios that are clearly too good to be true and are going to eventually spin out of control before they actually get to the point that they can derail the entire global economy and take everything down? Until then, we'll just put band-aids on severed limbs and amputate instead of getting to the heart of the matter and providing the correct incentives for people to actually behave properly -- or at least to not behave in a way that is a threat to the entire financial system.

Really Smart Guys That Can't Beat the Market

Saw this article in the Wall Street Journal over the weekend. It talks about how academics have long dabbled in the market. Professors whose thoughts while driving to work in the morning can squash the most intelligent thought of anyone else's. But just because they are smarter than the average bear, doesn't mean that they can consistently beat the market.

Prominent academics long have dabbled on Wall Street, scoring some big successes, such as mutual-fund firm Dimensional Fund Advisors—and spectacular failures like hedge fund Long-Term Capital Management, which imploded in 1998. 

The $800 billion ETF market seems to be especially fertile ground for academics these days. Unlike mutual funds or hedge funds, the vast majority of ETFs track market indexes. That passive investment style meshes particularly well with prevailing academic views about the stock market. 

It also means star stock pickers like Peter Lynch and Bill Miller, on whom mutual fund companies rely as pitchmen, can't play much of a role. In some cases, academics have stepped into the gap. 

For example, WisdomTree Investments Inc., founded with help from Jeremy Siegel, a Wharton School professor, enjoyed great fanfare in 2006 when it launched a roster of ETFs that emphasized dividend-paying stocks, which Prof. Siegel argued were the key to beating the market in the long run. 

Yet WisdomTree LargeCap Dividend Fund has posted negative average annual returns of 8% over the past three years, compared with 6.7% declines for the SPDR ETF, which tracks the Standard & Poor's 500-stock index, and 6.3% declines for the iShares Russell 3000 Index ETF. 

You don't need to have an Ivy League education to make money in the stock market. As long as you have a winning strategy that you have backtested over time, you can find a simple consistent strategy that rewards you with profits. If you would like to learn how to implement a simple trading system online with little time required, you should check out my free video walkthrough of finding good stocks to trade and how to trade them right here. I promise that if you give me 24 minutes of your time, you'll come out learning something valuable about making money in the stock market.

The Cloud Has a Silver Lining?

With all the people lining up to shout doom and glom from the rooftops, I was a little surprised to see Barry Ritholtz's breakdown of the jobs recovery in this "technical" recovery. He says that we experienced the worst jobs loss since the recession, but that we're actually adding jobs from the worst part of the recession (the trough) at a faster rate than the previous two recessions.

If the economy is in recovery — a new cycle –  for the the past 13 (or so) months — “technical” or not — should we perhaps be looking at the employment situation relative to the trough now, and not to the last peak?  To be clear, I am not advocating hard one way or the other (though I will offer some thoughts in closing), simply pointing out that if the recession ended — as many, including the St. Louis Fed (see: Dude, Where’s My Recession Bar, Jan 2010, and St. Louis Fed Tracks Nascent Expansion, Mar 2010) –  perhaps we should now be looking at our experience from the trough?  This is more my offering an item for discussion than taking a stand on the issue — both sides have valid arguments. 

Both of the following statements are true, and neither contradicts the other:  We experienced the worst labor market recession since the Great Depression.  From the trough, the labor market is generating jobs at a faster pace than the previous two recessions.

 This doesn't sound like much of a "less bad" scenario. Coming out from the depths at a faster rate is a genuinely good thing.

One inference (mine, as promised):  Although we experienced the worst job-loss recession since the Great Depression, this has not been as job-less a recovery as many would have us believe.  It is demonstrably better than the past two recessions as measured from the trough.  Put another way, the labor market was in the deepest ditch it had been in for some 80 years and, given that, is actually doing a fairly reasonable job of climbing out, though the pace simply must accelerate if we are to recover all the jobs we lost in any reasonable time frame (and I can’t stress that final point enough).

Maybe we will get out of this mess, after all...

I'm Not the Only One Who Knows that the Trend Is Your Friend

Just spotted a fantastic article over at Forex Blog. He talks specifically about trend following trading, riding trends up and down to exploit price moves in the market and the volatility that we currently face.

“Trend-Style” trading is also known as trend-following, and is just as it sounds. Traders identify one-way patterns in specific currency pair(s), and attempt to ride them for as long as possible. Given all of the big movements in currency markets this year, it’s no wonder that trend-following is the most popular. If you look at the 52 week trading ranges for the six most popular USD currency pairs, you can see that highs and lows are often as far as 20% apart. The EUR/USD pair, for example, fell 20% over a mere 7 months. Anyone who sold in December 2009 and bought to cover in June 2010 would have earned an annualized return of 35% without leverage! Even if you had captured only a couple months of depreciation would have yielded impressive returns. In addition, you could have traded the Euro back up from June until August and reaped a 60% annualized return. Best of all, both of these trends (down, then up) unfolded very smoothly, with only minor corrections along the way.

I’m sure serious technical analysts are rolling their eyes at the chart above, but the point stands that trend-following has never been easier and rarely more profitable than it is now. One fund manager summarized, “Trend-following investors are capturing the momentum in several big currency moves. You have so much uncertainty in the world now with regard to inflation or deflation, which typically makes currency markets and interest rates move. That is good for trend followers as it causes volatility, which typically creates good profits.” In other words, there is a tremendous amount happening in forex markets at the moment, and this is reflected in protracted, deep moves in currency pairs, which can change direction without notice and yet continue moving the opposite way for just as long. If you think this sounds obvious, look at historical data (5-10 years) for the majority of currency pairs: while trends have always been abundant, it was only recently that they began to last longer and became more pronounced.

He makes the point that in this current type of market environment for the currency markets, and any market in general for that matter because of the across the board volatility, trend following is the best strategy to pursue. Now that's what I'm talking about!!

If you're interested in learning about how to use this methodology to make money in the markets, to ride stock trends up and down, to truly profit from the stock market in a way that is consistent and proven, you should check out my free video walkthrough of a trend following trading system right here. I take you on my favorite online stock website, show you how to find good stocks to trade, and then how specifically to trade them. All I ask is that you give me 24 minutes of your time, and I'll show you a proven stock market trading strategy to make money in good markets and bad. Check it out right here.

A Black Swan Event in Gold

Nassim Taleb (or at least I assume that's who wrote the article because it's written by Black Swan Capital) talks over at SeekingAlpha.com about his perspective on gold. He thinks that the rising risk to the Eurozone will knock the euro off its feet and into next week -- thus sending gold into an upward spiral. He shows tons and tons of charts that point to the fact that the recent uptick in interest in the Swiss franc, the US dollar, adn gold point to some serious trouble lying ahead for the Euro. His conclusion?

For now, we sit squarely on the fence, pecking away at seeming near-term opportunities. But, if yield spreads continue to blow out in Europe, a new big trend lower in the euro will likely resume and gold will likely make my esteemed father-in-law a very happy man. 

The SPDR Gold Trust (symbol GLD) is an ETF that makes it easy to play the price fluctuations in gold without delving into the futures market. Perhaps a consolidation is in order as gold challenges its all-time highs; either way a blast through resistance looks to be in order. 

Additionally, if Soverign Default in Europe reignites the risks to the eurozone banking system, as discussed today and more in-depth in yesterday's post, then the easiest way to play it outside the FX market would be through the ProShares UltraShort Euro Fund (symbol EUO), an ETF that gives investors to 2x leverage and allows them to essentially be "short" the euro without having to "sell short" a security.

Quick, a little lesson in trend following! Spot the trend. In what direction is the current trend on the Euro?

Scary stuff going on out there. Only one way to deal with it. Ride trends up and down and benefit whether the stock market goes up to the moon or gets absolutely, positively clobbered. If you haven't seen it yet, you should check out my free video walking you through a trend following strategy that you can use to make money whether a stock goes up or down. Sign up to receive the free video right here.

Danger, Danger Eurozone!!!

Some scary stuff ahead according to Brian Dolan on SeekingAlpha.com. His key points for this week ahead are:

• Consolidation may give way to risk aversion
• BIS capital reforms may hit Euro-area banks
• Eurozone debt concerns resurface
• Democratic Party of Japan’s Election and the JPY
• Key data and events to watch next week

Specifically, he got me a little concerned about what's happening across the pond in the EU. Bond spreads have been widening significantly of late, highlighting a lot of the damage that has been done to the Euro and the tough economic times that lie ahead for the Eurozone region. Here are his specific comments and bonds and credit default swaps danger ahead.

This past week saw a continued widening of Eurozone peripheral bond spreads relative to Germany. The spreads have been widening since the end of July, however recent news helped to push some of the spreads to record levels. A report on Tuesday showed that the European stress test results released by the Committee of European Banking Supervisors (CEBS) may have understated some holdings of sovereign debt. Tuesday saw the 10-year yield differentials between Portugal and Germany rise to record levels around 354 basis points and the differential between Ireland and Germany 10-year yields climb to around 372 basis points – also record highs. This highlights the ongoing sovereign debt concerns in the Eurozone which has weighed on the common currency and risk sentiment. The spreads between Greece 10-year yields and their German equivalents also advanced to levels which have not been seen since the height of the sovereign debt crisis back in May. This highlights that structural issues of the peripheral countries remain present.

At the same time yield spreads are widening between the core and periphery nations, sovereign debt credit default swaps (CDS), which are a measure of the risk of default, are reaching elevated levels for the peripheral-EU. Tuesday saw Ireland’s 5-year CDS reach record highs of roughly 382bps. It is also of note that Greece, Portugal, and Spain 5-year CDS have all increased this past week. The heightened CDS are not a factor of new sovereign issues but rather a reminder that fears continue to lurk under the surface. 

The elevated yield differentials and CDS should keep the euro under pressure in the week ahead. EUR/USD has consolidated over the past few days, confined to a tight range that is supported by its 100-day sma and capped by resistance in its 21-day sma. While the bias is to the downside we would note the risks to the upside as a potential bull flag consolidation pattern is also evident. Key support levels are the 100-day sma and 23.6% retracement level of the move from the November 2009 highs to June 2010 lows which converge around 1.2650. Below here is likely to see to the 1.2400-1.2430 area which is the bull flag support and 61.8% retracement of the rally from June lows. The 21-day sma and Kijun line come in around 1.2750-80 to provide immediate resistance for EUR/USD. Above here may see to bull flag resistance around 1.2850 and then to the daily Ichimoku cloud top around 1.3030.

The Musings of a Discretionary Technical Trader

Here are some excerpts from the commentary of a discretionary trader at Trading Stock Market. Instead of focusing on buy and hold fundamental investing principles, he implements a discretionary technical analysis.

Last week in my "Side-Way Trading" post I mentioned about a possibility of short-term up move, yet, I was skeptical about strong up-move. It appeared to be that I was wrong. We did have a strong up-move. One more time the stock-market has proved that sooner or later everybody makes mistakes in analysis and stop-loss strategy should be used not just to cut losses but to protect profit as well.

During the last four positive sessions the indexes (Nasdaq 100, S&P 500, DJI, etc) have come close to their June's and Augusts' high levels. So far, the odds are good (from technical analysis prospective) we may see the indexes third time at those levels. Twice the stock market (indexes) has bounced down from these levels and most likely we may see slow down again.

Majority of technical indicators continue to be bullish and as I already mentioned, the technical analysis suggests that we may see the indexes moving higher. There are only two negative sings from my point of view.

First thing is high volatility level. The stock market continue to be highly volatile and this is a bearish sign. In such volatile market we could have strong down move in the same short period of time as we had the current 4-day up-run.

Second negative thing, from my point of view is that the market was not strongly oversold, yet it did make strong up-move in short period of time. It is more like some institutional investors came back from vacations, they saw stocks cheaper than a month ago and they started to buy. What is going to happen when their buying power became exhausted?

Because of these two points above, it is still difficult for me to believe in strong recovery (Yet, I could be wrong). Because of that I would not be playing long at this moment. At the same time there is no bearish signals and because of that I would not be playing short either.

One of the rules in my trading strategy is staying in cash until I see a pattern. I missed the last up-move - I did not lose money on that, I just did not make as much as I could. Still, the fact is that I missed this move and now it is better to stay in cash in order to avoid another mistake. My view on the current stock market condition is that I would expect to see indexes at their June's and Augusts' high levels. Then, depending on how those levels are hit (is they are hit) I would built further analysis.

In other words, he's a chart gazer, looking into patterns and trends on charts and searching for good opportunities to get in based on momentum and reversals. This type of trader is closer to the type of strategy that we want to implement. He very likely has a system for determining when to buy and sell in his head, when to get out of a losing position to cut and run before the loss gets too big, and how big of a position to take on.

The only problem is that he doesn't sound like he has a specific set of computerized rules for any of these aspects of his internal mental trading system. So while he has a loose trading system, he might not be able to specifically distill it into set rules in order to backtest it over the past and see how profitable it is before he trades it. He can fudge the numbers one way or another according to his gut feeling about something, which makes it impossible to test over the past. Kind of this cute little comic that I just found: