Saturday 23 June 2012

Another Weekend Rambling.

Everywhere you look today there is a mention of how Chinese data is fake. Yawnnn! Have they discovered God in the laboratory? Of course almost everything that comes out of any Government is false. China may be faking 90% of what is reported but look closer at home. I think almost everything that USA reports are blatantly false. Be it BLS job data, GDP data, Housing data, Loan data or even serious things like WMD. Colin Powel even lied before the UN and US went to a false war on false pretext. So I fail to understand what the big deal about the false data out of China. Whoever believed it in the 1st place please raise your hand. You must believe in tooth fairy as well!

Europe has been the front and centre of our life for the last few months. But so it had been in these very months of 2010 and 2011. Every June, from 2010, we feel that Europe is coming to an end. The fact is, America will falter before Europe. If Europe is struggling because of its massive debt, if Japan is in depression because of its 200% + Debt:GDP ratio, just wait when the chickens come home to roost in USA. With its $100 Trillion unfunded liability, many more trillions of dollars of Muni Bonds, almost 100% official debt to GDP ratio, destruction is staring at the face of USA. Many of my American friends think that USA is the best house in the bad neighbourhood. Actually, it is the best camouflaged booby-trap in a jungle.   

In a ZIRP environment, the only solution left to the Fed and politicians is to print more money. Already the money supply is running at 9% and yet we see deflation all around. The 10 year yield at the height of the economic crisis in 2008 was 2.10 % and now it is 1.67 %. So the bond market thinks that we are closer to a disaster now than we were at 2008. Every successive QE has demonstrated the law of diminishing return and just to get back to 1400 level of SPX, Bernanke will have to pump another trillion dollar. Even if he does that, nothing will change. And yet he will do it because his political master wants him to do so. The long term 30 year cycle of bond yield has topped now and in a matter of weeks and months, we will see yields rising.  Time to scale in TBT.

The short term target remains as we discussed and nothing has changed. We might see a lower low on Monday before we shoot up one more time. If I think there is a trade worth taking, I will send the information through Twitter. The real damage will come after that which will force the hands of Bernanke. Barring one day, June 4th, there has been no panic in the market so far and just for this reason, I think selling is not over.

Those of you who swear by TA I have a nice article for you from Brian Shannon. Brian wrote a book on Technical Analysis:
The market is tricky, and it seems so even more lately. Technical analysis is often misinterpreted as an exact science, it is merely a tool which allows us to determine potential price based scenarios before we commit our money to a position.
Lately we have seen a lot of technical analysis misused. From a couple of closes below the 200 day moving average being interpreted as bearish, to a couple closes above the 50 day moving average being interpreted as bullish, or believing that one can buy the break above the “neckline” if the inverted head and shoulder pattern and then kick back and wait for the price objective to be met. These examples of ‘failed technical analysis’ are “proof” by doubters that technical analysis is useless. If you are going to succeed in the markets, risk management should be your first priority, regardless of what your timeframe is. I consider technical analysis to be the finest risk management tool that anyone can use if they really understand the psychology of the formation of patterns rather than focusing on pattern recognition alone.
Also from Tuesday’s post — As I often point out, moving averages should not be used as a stand alone tool, but they give us a great reference point to compare price to. We want to objectively observe how price acts around those levels on shorter term timeframes The same goes for trendlines, price patterns, oscillators, Fibonacci, etc We want to be aware of these key levels which motivate others to take action so we can ANTICIPATE the likely scenarios, but wait for price confirmation before we PARTICIPATE and put our money at risk.
Price is objective, we often we are not.

So let us be objective and be aware of the bigger picture. Time is running out.

Hope you are having fun in this beautiful weekend. Stay sharp and filter the noise. Thanks for reading . Please forward / re-tweet / post it on your wall and join me in twitter. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)  


  1. I think you have a good understanding on market psychology, but can you explain more by what you mean here:
    "Barring one day, June 4th, there has been no panic in the market so far and just for this reason, I think selling is not over".

    Do you mean that a bottom is only put in once there has been panic selling? Couldn't selling also be slow and constant as investors get nervous and keep/transfer their money in cash?

    1. Thanks for your possible positive thoughts on my understanding of the market.
      To answer your question, yes a bottom comes when no one wants to touch a share in his lifetime, when folks run in the other direction when they see or hear about equities and everyone wants to get out of the room and the door is too small. There is stampede and blood which is also called capitulation. And then there is no body left to sell.
      Stock market is ruled by only few factors. Prime among them are Greed and Fear.
      We do not have it yet in this season.
      By the way, when you are nervous about the safety of your investment, do you keep selling little by little or you want to get out and save whatever little value is left in your investment. I would love to hear from you on this point.

  2. They were positive thoughts...

    To answer your question, when the market is moving and I am nervous, on a pairs trade I halve the position and decrease the losing side more (i.e. a slight directional bias), on my directional trades I halve, sit back a few days and then exit entirely at a stop loss if I am wrong.

    This is a horrible market where more bad news is good, averagely bad news is bad and volatility high.

    1. You are talking from the point of view of a trader. The average retail investor, who mainly deals in his/her 401k account, have a limited trades available and do not have the opportunity to do as you have said. Even the family offices or hedge funds would get out of a position in a hurry if there is panic.
      But thanks for your feed back. Appreciate.