Timing & trends

Trading is War

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Posted by Tyler Bollhorn of StockScores

on Monday, 09 July 2012 00:00

The stock market is a forum for debate between buyers and sellers on the values of companies. That is the nice explanation. The reality is that the stock market is a war between buyers and sellers, who each want to take the others money. The stock market is rough, and if you don't approach it with the disposition of an irritated general, you will lose. In the stock market, nice guys finish last.
Sun Tzu's, The Art of War serves to highlight many aspects of trading, since trading the market is much like warfare. Here are some quotes from the book, and their application in trading:
"All warfare is based on deception." 
Suppose you are a large hedge fund, and you want to accumulate a stock. You know that taking a sizeable position will move the stock higher, and you will end up paying higher prices as day traders jump in to the frenzy. With shares on the books already, you can afford to sell a little bit and paint the chart with a negative technical set up that should entice some selling pressure from nervous retail investors and overzealous short sellers. That selling pressure will help you fill your larger buy order.
You may also bring your buying in phases. Let the stock fall back and trigger stops, shake out nervous investors and free up stock to build the position. You may post fake orders in the Level 2 screen to make traders believe that there are large sellers and add further worry among the uncommitted buyers.
As a trader, you have to be able to differentiate between deception and the true intention of large investors.
Further words from Sun Tzu:
"Therefore, in your deliberations, when seeking to determine the military conditions, let them be made the basis of a comparison, in this wise:
(1) Which of the two sovereigns is imbued with the Moral law?
(2) Which of the two generals has most ability?
(3) With whom lie the advantages derived from Heaven and Earth?
(4) On which side is discipline most rigorously enforced?
(5) Which army is stronger?
(6) On which side are officers and men more highly trained?
(7) In which army is there the greater constancy both in reward and punishment?"

Let me translate this in to stock market terms:
Among buyers and sellers, the side who will gather the greatest profits will be determined by:
(1) Which side believes that the stock market is always right?
(2) Which side is led by the largest investors?
(3) Who is trading with the trend?
(4) On which side is discipline most rigorously enforced?
(5) Which side has more money?
(6) Which side has the best understanding of fear and greed, and how the crowd behaves when pressured by either?
(7) Which side lets profits run, and limits losses?
"According as circumstances are favorable, one should modify one's plans.
We should only add to winning positions and never average down on a loser. Profits are carried by momentum, and if you are on the right side of momentum, you can make a lot of money. When losing, stick to the plan and exercise stop losses. When winning, increase position size as new entry signals are confirmed.
"When you engage in actual fighting, if victory is long in coming, then men's weapons will grow dull and their ardor will be damped. If you lay siege to a town, you will exhaust your strength." 
If the expectation of your trade is not working out in a timely fashion, then you have read the market wrong and it is best to exit the position.
"It is only one who is thoroughly acquainted with the evils of war that can thoroughly understand the profitable way of carrying it on." 
If you think the stock market is fair, quit trading immediately.
"Hence the saying: If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb to every battle." 
If you know the market and know yourself, you will consistently profit. If you know the market but not yourself, your success will be random. If you do not know the market or yourself, you will consistently lose money. Success in the stock market is not just about the market, it is also about knowing how you react to fear and greed.
"The onset of troops is like the rush of a torrent which will even roll stones along in its course." 
The trend is your friend.
"The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy." 
Good traders know that they can consistently make money, and that confidence fuels them to consistently make good decisions.
"To lift an autumn hair is no sign of great strength; to see the sun and moon is no sign of sharp sight; to hear the noise of thunder is no sign of a quick ear." 
Great traders see more than the obvious.
"There are not more than five primary colors (blue, yellow, red, white, and black), yet in combination they produce more hues than can ever been seen." 
Keep stock trading simple. You need only understand support, resistance, optimism, pessimism, price volatility and abnormal behavior.

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Now that June is behind us, I expect that trading activity will improve. The last month of the quarter tends to be slow because there is not much to drive share price. Now that we are in July, the announcement of corporate earnings should be a catalyst for trading action. Alcoa is the first of the big companies to announce, their earnings are out tomorrow.
The run higher in stocks over the past week was a bounce back from oversold conditions and not a sign of optimism. The major market indexes are now at the point where they could turn from pessimism to optimism. Whether that happens or not will depend on earnings.
Fear is not a big factor in the market, although there are still big issues in Europe the market does not seem to be too concerned. The focus now will be on corporate earnings and whether the US will do another round of quantitative easing.
Comments out of the Fed on Friday opened the door for more stimulus. After another weak jobs number, the Fed has the incentive to act, it is just a question of whether they believe acting will make any difference. As Ben Bernanke has said, it is a question of cost and benefit.
No features this weekend, I would like to see what happens with the market indexes next week before I make any new commitments to stocks.

Tyler Bolhorn

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Timing & trends

Gold. A safe haven? It depends on your trading time frame

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Posted by Jack Crooks - Black Swan Capital

on Friday, 06 July 2012 08:31

Markets yawned at rate cuts from the European Central Bank, China's "central bank," and more quantitative easing by the Bank of England. Money is draining from emerging markets,as discussed last week. Corporate earnings forecasts are being managed lower. The global macro view we've held for a while seems to be playing out on cue-unfortunately for those of us that live in the real world.  

... During the Dow Jones Industrial Average swoon in the midst of the last credit crunch crisis, gold fell about 27% peak to trough. We expect a similar pattern to emerge. Remain short for now!

Market Vitals for July 6th/2012


“Civilized countries generally adopt gold or silver or both as money.” Alfred Marshall

 Of Interest 

Lagarde Says IMF to Cut Growth Outlook as Global Economy Weakens (Bloomberg) 

 Entire Commentary 

Markets yawned at rate cuts from the European Central Bank, China’s “central bank,” and more quantitative easing by the Bank of England. Money is draining from emerging markets, as discussed last week. Corporate earnings forecasts are being managed lower. The global macro view we’ve held for a while seems to be playing out on cue—unfortunately for those of us that live in the real world. Private deleveraging seems to be overwhelming public sector debt creation (or shall we call it the “bastardized Keynesian scream of panic” from clueless policymakers). For as much as we have criticized the Keynesian policies supporting government deficit spending, it seems very doubtful Keynes would approve of what’s going on now, no matter what Paul Krugman or Larry Summers say. Gold is the one asset targeted again, or shall we say, continuously, by global investors looking for a place to hide during this storm.

Picture 1

And from a longer term time frame, it has been very good. But it has also not played the role of safe haven when most needed (see chart below); and we don’t believe it will this time. We think the private sector liquidity demands i.e. need to sell a good asset to cover the ones gone bad, will push gold sharply lower as it did during the initial stages of the credit crunch. 

Picture 2


During the Dow Jones Industrial Average swoon in the midst of the last credit crunch crisis, gold fell about 27% peak to trough. We expect a similar pattern to emerge. Remain short for now! 

Picture 4


Timing & trends

Jim Chanos on investments, China bubble, and “Short-selling is not as risky as many more stocks go to zero than to infinity"

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Posted by Brazilain Bubble & Opalesque TV

on Thursday, 05 July 2012 11:36

In this interview, famous short-seller Jim Chanos (runs his portfolio of $115M)  talks about his background, first short, Chinese bubble, etc. Among his point of views are:

- China will have whatever GDP growth number the Government wants (even if the numbers do not add up);

- China makes Greece and Spain look like Childs’ play, due to bad credit;

- Many (mostly Chinese) companies on the Hong Kong Exchange do not even have financial statements.

jim-chanos 1


Timing & trends

A Hot Commodity Sells Off

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Posted by Canadian Housing Price Charts

on Thursday, 05 July 2012 09:22

Gold Sells Off Yet Is Still Out Performing All Other Commodities- Especially Real Estate

1638291 orig

The chart above shows the S&P TSX Real Estate, Gold, Energy and Financial Services Indices as well as the Bank of Canada Commodities Index (CRB) all valued in CA$. In May 2012 the energy sector continued to sell off keeping a lid on the CRB despite the strong US$. Gold also continued its correction while real estate was flat and financials slumped. With a subdued CPI the "real" price of gold trend is rising. Gold is out performing all other commodities and especially real estate. Gold is very liquid while Real Estate can be a "slow" asset and become unsellable (See history notes here and here). Check your return on investment with this Evaluator; if buyers suddenly vanish you might have to look for tenants and then your hope for capital gains becomes a job of managing a Return on Investment, if there is one.


Timing & trends

Solidifying a KEY TURN Date - June 30

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Posted by Victor Adair via Union Securities

on Wednesday, 04 July 2012 08:26

By mid-day Thursday June 28 US stock indices were lower following the Supreme Court Obamacare ruling...then they began to rise as rumors swirled that the latest (in a long string of Euro Summits) was actually going to produce some positive results. The markets spiked higher during the Thursday overnight session and by the close Friday the DJI was up 430 points from Thursday's low. On Friday we also saw the largest single day rallies in copper, crude oil and several currencies that we have seen YTD...bond prices and the VIX fell sharply...it was risk on.

The dramatic rallies across several asset classes was a sure sign of a Global-Marco psychology shift...the market perceived the Euro Gordian Knot to be unraveling and re-assessments were made.

The market mood ahead of the Euro-Summit was negative...expectations of more baffle-gab and can-kicking...some markets, like Euro/dollar and Crude had huge short positions and the "positive" vibe from the Euro conference set off a rally that sparked aggressive short covering.

Cynics could be forgiven for saying that this rally will be just another "flash in the pan"...that the markets were craving a "fix" of the Euro debt problem and experienced a moment of euphoria...but the "reality" is that it's only an up-tick in a bear market...disaster is only temporarily averted...asset prices spiked on short covering and in a week we will be back where we were...maybe...

I can easily be seduced by the cynical view...but... in my June 8 blog I wondered if we had seen a Key Turn Date on June 1/4, 2012 like we had seen on May 2, 2011 and Oct 4, 2011....

If we can suspend our thoughts about what we think the market "should" be doing (largely based on our assessment of the "news" flow) and look at what the market "is doing" then we must agree that, despite all the negative news, the stock market is going up...on Friday the DJI closed 850 points above it's June 4 lows...and 2,476 points above its Oct 4 lows!

Bank shares gapped higher Friday, as did resource giants like Teck, BHP, Freeport. Crude was up over $7 BBL after falling $30 BBL since May 1.  (Interestingly Ford and GM made new YTD lows Friday...did I miss something?)...the VIX closed at 2 month lows and US 30 year bonds hit their highest yields in 6 weeks...risk on.

We had weekly Key Reversals higher in the S+P 500, French stock Indices, AUD, NZD...but not in crude or copper despite their big Friday rallies.

Bottom line: Assets took a big hit in May after a strong advance from the October 2011 lows but turned higher the first weekend of June...Friday saw aggressive short covering (and some real buying) on the back of a global-macro psychology shift....the market looks like it wants to go higher...I've been mostly on the sidelines with my short term trading accounts this month...the day to day volatility has been fierce and I've had little confidence in my ability to call the short-term swings.  

Charts: (Charts were added Monday July 2…so there is a little data showing for that date.)

Gold: had been in danger of breaking below the $1525 – 40 support level but got a reprieve on the Euro Summit news…the downtrend from last August still looks strong:


Crude: topped out this Feb around 110…below the highs made on Key Turn Date of May 2, 2011, and fell more than $30 before Friday’s big one day rally which came close to making a weekly key reversal


Euro: has been in a choppy downtrend since the May 2, 2011 Key Turn Date, the Friday rally came close to making a weekly key reversal.


S+P 500: despite the negative news the S+P has been trending up since Oct 4, 2011. The decline in May could be seen as a correction to that uptrend. There are 2 weekly key reversals up in the last 4 weeks.


Bonds: In the Really Big Picture bonds have had a 30 year rally…shorter term the June 4 weekend top around 152 may have been a key turn date for bonds


CAD: declined in May like many other assets…and turned up the June 4 weekend. European Bank Share Index: Also turned higher June 4 weekend


European Bank Share Index: Also turned higher June 4 weekend


Cameco: Japanese demand? Global Marco? Or both…this market also turned higher June 4 weekend.


CAT: A volatile “commodity” stock, but also one of 30 stocks in the DJIA, CAT touched last year's May 2 key turn date in late Feb of this year before turning down hard.


CAT: but on the daily chart left a 4 day Island reversal when it gapped higher


Friday: Corn: another market that turned up on the June 4 weekend…prior to that date the market was expecting a record crop…since then hot weather has sharply reduced expectations


Victor Adair

Senior Vice President and Derivatives Portfolio Manager

Victor Adair is a Senior Vice President and Derivatives Portfolio Manager at Union Securities Ltd. Victor began trading financial markets over 40 years ago and has held a number of senior positions during his long career as a commodity and stockbroker. He provides daily market commentary on CKNW AM 980 radio Vancouver and is nationally syndicated on Mike Campbell's weekly Moneytalks radio show.

Victor's trading focus is primarily on the currency, precious metal, interest rate and stock index markets and his clients are high net worth individuals and corporations.

vadair@union-securities.com">Click here to contact Victor.


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