Take A Look At These Two Trades
The move towards the
upper end of the trading range has been tested, albeit on light
volume. Will this result in a continuation move, or simply slingshot us back to
the lower end of the trading range? I do not know, but the market certainly
“feels” like higher prices are the path of least resistance.
There were a couple of noteworthy trades from
yesterday that I wanted to share with you, mainly just to reinforce the
mechanics of trade selection and entry, but also to illustrate the importance of
perseverance.
The first trade of the day was a long entry in
Goldman Sachs
(
GS |
Quote |
Chart |
News |
PowerRating). The trade had so
much promise, only to flame out horribly within minutes.
Nonetheless, GS setup again to the long side
within minutes — were you too shell-shocked to get back in? If you answered
yes, I can understand, a 40 cent dinger off the opening is no fun. Nonetheless,
we are trading patterns, not emotions, and the pattern dictated a re-entry.Â
You may ask, “If you re-established the position
at support, why did you not just retain the original position?” Well, at the
time it was not quite that obvious, and when the 60 EMA was breached, it was
time to blow it out and move on. Had the 60 EMA not been breached, I likely
would have stayed with the trade.
Advanced Micro Devices
(
AMD |
Quote |
Chart |
News |
PowerRating), which had potential as a Fade The Gap
trade, but never panned out, immediately responded to the upside thrust in the
market and provided a decent move. Sure, it is only 20-30 cents, but with a
stock like AMD you can move around good size without worrying about being
whipped around, like in GS. Position sizing is key.
Turning to the economy the Fed’s recent battle
cry regarding inflation seems to be a bit misguided. The graphic below,
compliments of BCA Research tells quite a
different story:
There is a good deal of debate as to how
inflation can be creeping into the system when there is so much capacity with
little pricing power. Good question, perhaps this comment from Art Cashin may
offer a rather simple, yet spot-on reason:
“Many things have been used as
money. From fishhooks to beads to fur, it was whatever people in that particular
trading circle agreed to. On the YAP Islands, long isolated in the southwest
Pacific, the islanders used 8-foot wheels of stone for money. That may seem
strange to us but that’s what they agreed to – and it worked. Well, it worked
until some Europeans heard of the system and sailed into the harbor with a
boatload of 8-foot stone wheels. It caused a local bout of hyper-inflation that
Alan Greenspan has yet to cite.”
Too much money in a system is always
inflationary. The sad thing, at least in this instance, is that inflation
negatively impacts lenders; hurting lenders is a sure fire way to put the brakes
on a feeble recovery. The bond market seems to have already sniffed out this
potential, although the recent bond rout may be more a function of adjusting the
duration of one’s fund, according to Gretchen Morgenson of the New York Times
(great reporter, by the way):
problem if mortgage traders and managers of big loan portfolios, like Fannie
Mae, did not typically hedge their holdings with Treasuries. Holders of
mortgages hedge by selling short Treasury securities with maturities roughly
equal to the average life of the mortgages in their portfolio.
Â
can swamp the market they tap. This exacerbates moves in interest rates,
producing a snowball effect that can push rates far lower or higher, and
faster, than in previous years.
Â
Mortgage-backed securities respond violently to
moves in interest rates. When rates fall and homeowners refinance, some of the
mortgages in large portfolios held by banks, hedge funds and mortgage
originators are cashed in. That requires the managers of these portfolios to
rebalance their hedges by buying Treasuries. Such buying helped push interest
rates down to ridiculous levels earlier this year.
Â
refinancings drop, and the average life of a mortgage grows. That forces
traders to rebalance portfolios by selling Treasuries. Selling begets selling;
interest rates spike.”
The bond market will likely prove pivotal as we
go forward, although the reaction from the stock market so far has been, “Ahhh,
what is the big deal?”
Lastly, I will leave you
with a quote from one of my favorite market observers, Bill Fleckenstein:
“It’s
plain wrong to justify any silly outcome one wants in the name of optimism, and
likewise, to criticize realistic appraisals of negative outcomes as pessimism.
Analysis is analysis. It’s about being realistic. The conclusion you arrive at
has nothing to do with whether you’re a pessimist or an optimist.”
| Support/Resistance Numbers for S&P and Nasdaq Futures |
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As always, feel free to send me your comments and
questions.