Well, here I sit, almost completely in cash, and pondering. A number of my favorite plays are at lower than usual prices and trending up slightly. Those might include such items as BTE, and FCX for example. The thing is, they're also a lot higher than they were the last time the prices of the raw commodities they drill or dig were where they are now -- and they do correlate well over time most often. So, do we wait and see if the commodity rout is over, and growth (not in USA, but world) resumes on-track, or dive in now? Silver's trying to bounce, but my guess is that this is currently a bull trap. That's a guess, understand. The leverage fueled zoom it took won't be repeated with the new higher margin requirements, so yeah, all the little guys are buying back in but not the biggest players. When the bugs run out of money and are all in -- zam, down it goes again, or so I
think. Copper, the main driver for FCX is down below $4, at which level they still make money (boy do they ever -- their costs are more like $1.25) but -- perceptions rule stock prices...and it seems that the extra 40 cents or so on the basic copper price have a big effect on psychology in the market. Oil, who knows? Demand destruction is a reality at current pump prices, at least here in this country.
But not so much in China it seems, or definitely in the eurozone, where they're already paying so much they've adapted. I see this kind of like the situation with grains in the USA. If the price of the few cents worth of wheat in a $2 loaf of bread doubles -- no big difference in the price if passed through. But in say, the middle east where raw wheat is bought to grind as a subsistence food, yeah, it makes a big difference (see: violence in the streets). Could it be that a similar situation obtains with oil here vs places it's subsidized or taxed so high that the input price doesn't matter so much?
One of the things I do when opening a trade is figure out where I want out in both directions. There's no point in opening a trade for expectations of 1%, even with my unit size -- there's still plenty of risk, but not much expected payoff, and once open, a trade has to be watched when perhaps I might have other things I'd rather be doing than that -- I've got a long list of projects related to the physics to do, which are fun, the usual maintenance of the campus, and a get together here next week that is going to need at least a little prep to make sure it goes well.
So I'm in no big rush to be in, on either side of this market just now.
If one follows William O'Neills rules, one sets a trailing stop on a trade at 8%. And then sells anytime you've doubled or tripled that, say 16% or 24%. With exceptions like silver awhile back, those big numbers haven't been getting it for me for quite awhile now. A possible 8% loss scares me too much, and I'm generally not patient enough to wait for a 16% gain unless it's not going to take very long (SLV, MCP, BTE, FCX have done well in that area at times). But it's crucial as a trader to keep that ratio intact -- if you allow for up to an 8% loss, you'd better be getting double or better that gain at closing time or you simply have to call too high a percentage of trades perfectly, something no one can do (or, has done reliably).
The thing is, if you try to set stops tighter, so you can still use those ratios -- market "noise" will trip you out all too often, and always at a loss of course. I can somewhat overcome this by manually just watching and doing the stops in my head, rather than posting stop orders, of course, but it's a lotta work.
I feel the markets are now at a cusp. We have three choices -- we can go up, down, or sit in a range, miasmically. I can go with any of the three as a trader -- makes not much difference. A good solid trading range is as good as a very well established trend for me. But at this point, I'm honestly not sure what we've got ahead -- there are some interesting things we know are going to happen, but the reactions to them are ???. And there is one big known unknown -- when is China's bubble going to pop? And make no mistake, it will, but that old line comes to mind about the markets being able to stay irrational longer than one can remain solvent if one expects rationality from them.
So for me, it seems time to resume serious homework. I'm watching my usual favorites and a few new ones, trying to figure out what a good entry would be on them all, and the conditions under which I'll pull the trigger (or should). And for once, some of what I'm looking at isn't the high-beta stuff. I'm also looking at large and midcap things that have a lot of exposure to markets that aren't USA or China for example, as a place to park some of this cash for a long, slow, but reasonably safe, gain. The names that come to mind just now are IBM, MMM, PG, and some midcap etfs, as well as the market indices's -- but again, I don't have a call for say, the next three months or more that I trust enough to even do the "safe" things right this instant.
Here's one thing -- QE2 is about to end. The government has been borrowing around 40% of its spending, and buying 70% of that in QE. Who's going to step up and buy all that debt when we stop monetizing it? Haven't a clue. Many of the smarter bond traders are getting out for now. If yields go up (how could they not when manipulation stops?) then maybe they become attractive, and if they become really attractive, then money will flow out of stocks and into bonds. This could be the Fed's exit strategy if they can do it without tanking the markets too badly, but on the other hand, if the bond or stock markets make panic moves, I sort of expect the Fed will step back in -- and yeah, don't fight the Fed.
China is worrying. All those empty malls and cities they've built, high speed rail they can't make money on...mis-allocation of funds to the extreme, and there's nothing magic about their government that will handle the results that much better than any other when the fit hits the shan. An interesting thing I read the other day -- turns out that Chinese tightening was actually what drove copper up so high. Worked like this -- they tell the banks to tighten, they do it (mostly, except for off-book stuff -- same issues we had here before our crash). But, there's various incentive programs still running, ones to help them attempt to control the markets in commodities they know they'll be needing. Like copper. So as it turns out, it was hard to get bank money for other things, and companies used the incentive programs to buy copper as a way to get a loan, then were turning around and selling it on the spot market to get the actual cash -- even at a loss it merely added a little to the loan interest. That just stopped -- copper falls, makes sense. China is important to keep an eye on, as they are the "demand at the margin" as well as the source of most of the increased baseline demand for a lot of things, and a setback there -- which is likely as you analyze where they are -- will cause a very swift and deep correction in the world at least, if not another major recession (but how can I speak of another, when this one ended only on paper to a few analysts?). Can't call a double dip till the first one is done.
In the eurozone, well, we have Greece with almost as much debt as the US (when honestly reported, the US is WORSE off -- unfunded mandates, and off budget entitlements figure big if you're honest). And there's talk of restructuring, though not yet of haircuts (since the guys in charge happen to be the same guys who'd catch those haircuts). Ireland is now saying that if the Greeks get a break, they should to -- they were really stuck with a rotten deal. And so it goes. Can they all hold it together over there, and will it really matter? Most of the bad debt they owe to one another, a recent chart of who owns who's bonds is a maze, and
very interesting as well as incestuous. For example, German banks own a lot of that substandard paper, and will take a loss if it fails -- so the Germans are bailing out their own banks when they bail Greece -- it's funny, if stupid. I guess they realize that they were playing on the high yields because of their weak neighbors and just didn't believe they were as weak as they evidently are. It would be outstanding honesty (and rare) if they really did and took it on the chin for trying to take advantage before things got bad -- but like I said, rare, and/or unlikely.
Austerity measures cut growth, all too much of which has not been in the private sector -- the worlds governments are in a trap of their own creation. By increasing their size and scope to take over all too much of the power and scope, their inefficient ways have reduced total value of work. When they cut back, as they must, for the short term that creates a loss of growth, as all those guys hit the streets in search of jobs and paychecks, but without the knowledge of how to be productive, start companies and so on. Long term, smaller government is probably better, but short term, zowie -- we got issues. And they can't just keep spending like nothing happened, though that is obviously their plan.
The trick is, the inflation that creates means that their debt service is now in devalued nominal currency, so they have a shot of actually paying their debt -- on paper and if you squint enough.
Call it a stealth haircut to all who loaned them money. The thing is, it's a not so stealth haircut on everyone else, as wages stay the same but prices go up. I believe in helping those who need it, but this is more a case of those who were and are responsible helping those who were not. That's neither fair nor really right, as it sends the wrong signals, and increases the ability to be irresponsible while cutting the disincentives to be that way.
I kind of doubt we'll ever reach a level of honesty where we just say -- take the haircut in nominal bucks, rather than getting one anyway due to the bucks being paid back not being worth squat. Humans! (As marvin would say, "Life, don't talk to me about life!")
Those are mostly macro things -- looking out farther than my usual trading window, but relevant. I can't see miles away when walking through the woods full of enemies (from sniper training). But with each step I take, the "wall of green" recedes by one step. So, if I assume others are looking 3-6 months out, at the end of my 3 months, things that people are looking at 6 months from there will affect my trade at the time I close it (or planned to).
So, while this could change at any time -- that pearl of great price may show itself -- I'm planning on waiting about two weeks and watching before doing more than dipping my toe into anything. yeah, if I see a huge overshoot of some sort, I'll dive in for a day or two and catch the mean reversion, but I'm not looking to put on major positions either way for a little while.
It's just easier to see when the dust has settled a bit.
Posting as just me, not as the forum owner. Everything I say is "in my opinion" and YMMV -- which should go for everyone without saying.