In a regular cyclical downturn (caused by over-investment, high capacity utilization and resulting excess inventories) unemployment is a lagging indicator -- since the initial trust of recovery is financed not by new marginal household and corporate income but simply by corporations and households upping consumption and investment financed by debt. Unfortunately, IMO that doesn't work out very well in a global economy (households, corporations, banks) trying to reduce debt. Central banks can print all the money they want, it doesn't help the dozens of red zeros in many bottom lines. Banks do not want to lend, consumers can't and do not want to borrow -- they want to up their savings rate and get out of the sh**hole they maneuvered themselves in over the last 10 years.
The market discounts what it thinks will happen, not what will happen. When the market is totally wrong about what will happen (e.g. 99-2000, early 2001, 2006-07), you get a large price move totally at odds with what accurate forecasters & analysts think will happen. The latter get caught because they underestimate the degree to which the market can be totally wrong for quite some time. If you can forecast changes in market expectations, but not what will happen on a fundamental basis, then it makes sense to play the market move, even if it will ultimately reverse and go lower. Your general approach should be to have on a position consistent with your long-term view most of the time, but to book profits and make counter-trend trades when market expectations are due for a shift (e.g. at price/sentiment blowoff extremes). If you cannot forecast changes in market expectations, but you can forecast fundamental developments, then you need a strategy for situations like the last 2 months, where market action and likely future fundamental action diverge significantly. It was just the same in early 2001 - tech staged a spectacular rally after the nasdaq had halved in a few months. That rally failed and the market ultimately had another huge fall to new lows. Ditto for the Nikkei during the 90s, there were many significant rallies despite ultimately going much, much lower. Anyone trading purely on fundamental forecasts, who does not have any timing ability, needs to be aware that at any point there could be a 50% counter-trend rally in the index, *even though they are right about it going lower*. 1929-32 had a 50% sucker rally, Nikkei 1990-2003 had more than one 50% sucker rallies. Asia 1997-98 had a big sucker rally late in 97/early 98. Brazil 2000-2002 had a 30% sucker rally. That means you either need to develop some timing skills, trade small size, be willing to take gigantic drawdowns, or purchase out-the-money options to limit your losses in the event that a large counter-trend rally takes place. One important implication of all this is that when market expectations are going to shift significantly, then (if you can forecast this) it makes sense to flip your positions from short to long, *even if you know you are right in the long-term*.
Phily Fed Manufacturing Prices Received from dec to may -32.8 -26.2 -27.8 -32.6 -41.4 -33.8 Prices Paid -25.5 -27 -13.7 -31.3 -31.5 -22.8 Erosion -7.2 +0.8 -14.1 -1.3 -9.9 Looks like manufacturers are getting their asses squeezed, and the second derivative got worse m-m The only thing that is really improving and making this survey not miss huge is manufacturers 'expectations', yet one more case where the green shoot points to itself as a reason why there will be some great recovery In the last recession these forecasts proved way too rosy http://www.phil.frb.org/research-an...business-outlook-survey/2009/bos0509chart.jpg
There is the other side of the coin, what if I tried to 'time' the market in fed funds futures back in Sep Oct?The stock market was going down relentessly, VIX was in the stratosphere everytime there was a major stock rally fed funds would tumble(including a large one in the short ban day), but I knew I had to just hang in there, added more and I made my most profitable trade ever(and the trade is still on). The brief moments that I tried to hedge that back then cost me money so I stopped Who predicted a 37% rally in a couple months with financials breaking the 100% mark?Virtually no one, I knew that was a 20% type rally coming, if you look back in the journal I went long SPY as a hedge in late Feb, it didnt work because I was too early, the net of the hedge was 0 as I sold into the rally too soon. Now mind you that wasn't just me trying to time the market like an amateur, I subscribed for a timing service where the guy backtests everything under the sun going back 50 years in the S&P, he was too early and sold too soon as well After the S&P broke 20% I was destined to lose some money no matter what my timing skills where because there was sell offs where I would have gotten in(Like in the GM BK threat, XLF down 12%) because every rally of this bear market was weak and I had little reason to believe it would be different, my skepticism cost me money but in the end of the day you will be trying to predict stuff that nobody gets it right
With regards to risk management, I dont use hard stops but if I dont like the news flow I would hit every buy button that comes in my way. I actually had a long in TMA from $12 in Jan 08(Long SKF as hedge) as soon as they announced they had a margin call, I sold ALL my shares in the pre-market for $8. If this economy started to post great numbers I will be the first to cover everything I got and regroup
I know, that's why I gave 3 other alternatives to timing. I don't have a magic bullet any more than anyone else, but just pointing out the risk even when a view is (or may be) 100% correct, along with some potential ways to handle it.
I think it is all about total profit/max (including unrealised) drawdown. Trying to maximize the ratio looking only for low risk entries but at the same time leaving (usually the best) trades on table works = you get better ratio. But one need to balance this with time factor as well. if there were low risk signals available daily would be easy decision but if one signal in half a year i agree with daal approach. Need to miss good trade enough times to realise. Ideally one should have several systems all playing around the fundamental view. Enjoying this thread! Thanks daal for exposing your thinking proces.
I agree, one mistake I made was not pilling in commodities back in mar, I posted here that I was making that mistake and my portfolio was too one sided yet I still made it, I should have bought 20-30% of my networth in commodities, if they tanked I could be pretty sure employment was terrible and bank stocks were going to $0 and on net I would be cashing. What happened is that I run out of bullish ideas, I bought C/ILFC corp bonds and a had a few stocks but that was not enough. I should have gone into simple commodity ETFs, I wont make that mistake again(I'm holding off purchases now because of the green shoot bid, I will wait for the dip when people lay off the green shoot bong) Having a larger double portfolio will help me keep my 'brunson' style of trading, the reason I dont spend much time worrying about large unjustified moves against me is because his theory of "you cant fear the nuts if you run into the nuts you will just going to have to lose money" This is a huge squeeze, I think my drawdown was modest compared to the odds of events like this. Sometimes you just got to bet big to win big, and if wrong or early, swallow the drawdown
I'm growing convinced that currency trading in this credit crisis is a crapshoot. Thing are volatile, the markets change their mind often, what matters change, central bank announcements when you dont expect, interventions, rating actions etc. Things are not trending the way they supposed to be, at least not in a multi month basis Right now I'm hedged for my USD exposure and have a small net short(mainly the result of not having changed the hedge as stocks rose) but I wont be playing this game, I will let other people pick up the money
I do not trade currencies but I follow them for my overall trading. In the last 2 to 3 weeks a clearer trend has been emerging. One by one, currencies from commodities' countries have been trading stronger against the dollar and currency pairs started to break down/break up, also one by one. This, together with the strength of gold and oil leads me to think a longer term, steady dollar devaluation is already in place as a trend... or about to be confirmed. An inflation trade.