No Fear In This Market

Discussion in 'Strategy Building' started by Rickshaw Man, Jul 22, 2005.

  1. Just buy any dip and you will be rewarded, and if it dips further than you thought just average down because it will go up. This has been the pattern all year long. Must have something to do with Greenspan going out with a bang and a strong market.
  2. foe


    When using dip buying with leverage be very careful.

    <a href="">The Trader Log</a>
  3. Neodude


    Isn't "averaging down" one of the worst sins a trader can commit? What if it doesn't go back up? What happened to cutting your losses?

  4. keep averaging. eventually it will come back.

  5. you dont have to average when you buy the indexes or index futures....

    dip buyers are handsomely rewarded every day..



    shorts reload= market goes up on short fuel

    "NO FEAR"
  6. To put it in other words, the "moral hazard" has spread to all asset markets.

    VIX in stocks lowest in 20yr (except some days in 1994), credit spreads in fixed income, suggest that people perceive no downside risk whatsoever. No risk, either in valuations or economic / geo-political.

    Could the "Carribean pirates" actually be Fed/PPT/ESF ? Buying bonds (and perhaps stocks too)? Even in addition to the $320bn monetizing that BOJ did on behalf of Fed in late 2003 until March-2004.

    I think it's a probable scenario.
  7. trader99


    Greenspan Points to Dangers of a Volatility Trap: Chet Currier

    July 22 (Bloomberg) -- As he answered one vexing question about the financial markets this week, Federal Reserve Chairman Alan Greenspan posed another that looks even more troublesome.

    In his semi-annual report to Congress, Greenspan laid out a series of explanations for the great bond market enigma of 2005: Why bond interest rates fell even as short-term money market rates rose.

    Investors are less worried about inflation, for one thing. They are more confident about the stability of the economy -- and less bothered by the prospect of sudden swings in prices of bonds, stocks and other securities.

    Beneath that last change, benign as it appears, lurks a dragon. ``Risk takers have been encouraged by a perceived increase in economic stability,'' Greenspan said, as evidenced by ``significant declines in measures of expected volatility in equity and credit markets.''

    He added: ``History cautions that long periods of relative stability often engender unrealistic expectations of its permanence and, at times, may lead to financial excess and economic stress.''

    One implication of this, simple to infer, is that a calm and orderly atmosphere in the markets breeds complacency, which leads to insufficient attention to risk. Noticing no cracks in the ice on the surface of the pond, the skaters venture further and further from the safety of the shore.

    Plot Thickens

    The problem goes beyond that. To the extent that some participants in the markets depend on volatility for their livelihood, they may see little choice but to take bigger chances if they want to stay in the game.

    How do short-term traders in the Standard & Poor's 500 stock index react as the VIX index, a measure of expected volatility, falls by about 75 percent, as it has in the past three years? They might raise the stakes by switching to some riskier vehicle. Or they might double up on their bets using leverage, or borrowed money, to try to keep the returns flowing.

    Speculators operating only on their own behalf may have the choice of simply throttling back their risk-taking, settling for smaller potential payoffs because the risk-reward tradeoffs have turned less enticing. But what about a professional -- let's say, someone who is trying to establish himself in the growing realm of hedge funds?

    Boxed In

    For such a person, going to a simpler, more conservative strategy may not be an option. He can't take refuge in Treasury bills and keep his clients, who can do that for themselves.

    One all-purpose explanation for surprising behavior in the markets lately -- e.g., the drop in bond rates as the Fed raised short-term rates -- is simply that there are more smart, well- informed people playing the game than ever before. Like the Fed, they have learned a lot in the last 20 or 30 years.

    The paradox is, this increased sophistication -- let's go so far as to call it heightened efficiency -- doesn't necessarily create a safer financial world. Markets, made up of people, change shape and form as those people adapt.

    No matter who knows how much, the cycle keeps turning. Prosperity creates risk, containing what amounts to the seeds of its own destruction. Low volatility may set forces in motion that lead to high volatility later.

    Way Out

    A calamity isn't inevitable. The last time the VIX got this low for an extended period, in the mid-1990s, the stock and bond markets weathered a series of jolts in 1994 and then embarked on a great run for the next five years.

    Big growth stocks did especially well. Now, according to many students of comparative value in the markets, those same stocks may be nicely positioned for something similar.

    Fine, but the simple hope of history repeating itself is a pretty slender reed to cling to. Many times, what is most convenient for the markets to do isn't what they wind up doing.

    Greenspan's Fed, which is in the business of meddling with those markets, must stay abreast of all this. No wonder low volatility has him worried.

  8. All that from the man who lowered rates to 1%.