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Stop it Already!
I am writing this from the airport lounge in Los Angeles on my way to teach in Singapore. Tuesday Feb 26th 2008 was an interesting day for the market. Oil hit yet another high with gold rising as well. IBM seemed to save the day after terrible inflation numbers hit the street early. Big Blue announced that they were buying back $15 Billion of stock. Sure they may have some money to throw around but should we be grasping at straws. The fact is that IBM buys back stock every year. The fact the market shrugged off all the bad inflationary news to rally around a little good is strikingly familiar. Remember what we did in 2000? The markets have become so desensitized to bad news about credit and housing bubbles and bond insurers that many are looking for any scrap of good news to signal the bottom. Some even point to the recent announcement of the Visa IPO of signs that the worst is over. Well first of all, Visa is not a credit company, they are a transaction company. The credit risk falls squarely on the shoulders of the banks who issue the Visa cards. Interestingly enough, the FDIC is hiring in anticipation of more bank failures!
On my way to the airport on the parking lot known as the 405 (Southern Californians know what I mean), I was listening to CNBC. There was much debate about what direction the economy was headed. I think it is rather amusing that the Fed seems to think that a recession outweighs the threat of inflation. What about stagflation? For those of you who may not be familiar with the term, Investopedia.com defines stagflation as a condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation. Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects.
A few of the pundits suggested that the Fed stop cutting interest rates. That's right, I said STOP cutting. Any students who have been in my class for the past several months have already heard me ranting about how Big Ben's cutting actions are like a band aid on a large gash. The Fed needs to stop cutting rates… but alas they won't. Wholesale prices experienced the largest yearly rise since 1981! Oh, did I forget to mention that the dollar made record lows again as well?
So, you may ask, "Mr. Doom and Gloom, what can I do about it?" Well I am not a pessimist, I am optimistic about the opportunities that are in front of me. The first thing you need to do is get defensive. Make sure you are practicing proper risk management on all positions. Do not risk more than 2% of your trading account on any one position. Keep your stops no more than 1/3 your potential profit. You may also want to shorten your holding times. By being in the market for less time, you will reduce your risk during this volatile time.
Then go on the offensive. Oil, gold, and foreign currencies are thriving in this market. If you do not have access to commodities or a forex account, fear not. You can still participate via ETF's. Investopedia defines an ETF or Exchange Traded Fund as a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold. And guess what, there are ETF's for oil (symbol USO), gold (symbol GLD), and even Currency Shares so you can trade currency without a forex account. A great resource for learning about ETF's will be my new CD ROM to be released soon for Online Trading Academy, "Instant Diversification, Exchange Traded Funds." Look for it soon.
I'm getting ready to board my 19 hour flight so I must say bye for now. I'll be speaking at the Asia Trader and Investor Conference this weekend in Singapore. On March 8th I'll be off to Florida for back to back Pro Trader classes in the sun of Orlando (8th to 14th) and Tampa (15th to 21st). From there I head to Los Angeles on the 24th to teach an options class and finally I'll head North to see the Cherry Tree blossoms in Washington, DC for an Options and Pro Trader class April 5th thru the 20th. I round off the spring with a trip to the Big Apple to teach the Active Investor and Broad Market Analysis classes April 21st. Until next time, that's all from the Traveling Trader!
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As a former stockbroker, brokerage trader, and hedge fund trader, Brandon brings various market views and insight to his classes. A wealth of knowledge, he has held NASD securities series 7 and 63 licenses. An OTA graduate himself in 1998, Brandon has been trading his own account since. Brandon taught for OTA in 1999 to 2001 before becoming a Realtor and Mortgage broker holding licenses in 15 states. Returning to the OTA family late 2005, he now balances trading, teaching and a real estate career.