Waterworld

Have been on the sidelines this week. No positions in anything, anywhere. Exited my positions in Gold (Aug) last week and Gold (Spot) this week with small profits.

I'm trying to make sense of the massive increase in liquidity around the world. This article tells me that, if History is anything to go by, it won't end well for the developed world.

I would like to compare the properties of economic power with that of water. In my school days, I learned of the propensity of water to find its own level. A container of water has 2 compartments with a tap connecting the two at the bottom. The tap is closed. Water is poured into one compartment till it reaches a level near the top (say, level L1). The only way for more water to be held in the container is for the tap connecting the 2 compartments to be opened.

When the tap opens, 2 things happen: the first is that water rushes in to fill the second compartment. In my economic power/water analogy, opening the tap is akin to the concept of globalisation - and economic power started flowing from the container that has water (the 'haves', like the US, UK, etc.) to the compartment that doesn't (the 'have-nots', like India and China).

The second consequence of the tap being opened is that the level of water in the first compartment falls! In my analogy, this means that the 'haves' become worse off - in the real world, this translates into a loss of jobs, technology, etc. To keep the level of water (economic standards) at its previous high (level L1) in the first compartment, the flow of water into it must increase at an equal, or higher, rate as the transfer of water from the first compartment to the second. In the real world this could be taken to translate into credit expansion. However, since the propensity of water is to find its own level, more and more water finds itself into the second compartment. The relative distance between L1 and the level of water in the 2nd compartment keeps on narrowing - in fact all the increase in water in the first compartment goes into filling the second compartment.

In other words, the worldwide expansion in credit is the only way for the West to maintain its standard of living and economic power. At this moment, judging by the way asset prices in the developed world have jumped from their historical rate of growth, I'd say that the addition of water into the first compartment is faster than the transfer of water into the second compartment.

The consequence, in this theory, is that either the credit expansion will slow down in a hurry (or else the first compartment will overflow, and no one likes to clean up a mess), or this increase in credit will increase its speed of transfer to the developing world - or both. In any case, I need to get my act together on investing in developing markets right away.

As money in the developing markets increases, their demand for energy, metals and food will go up exponentially. Hence, my strategy needs to be focussed around these areas.

Double Tops Galore!?

The scenario of synchronised double tops all over the place.....??




So ..... is this the beginning of a correction? A couple of reasons:
1. Subprime mess + slowing growth in the US; and its knock-on effect on the rest of the world
2. Inflationary fears fueled by higher oil and food prices

Lets see what happens when the index meets the 50 day MA.

Time to buy Gold?

Stock markets are rebounding - despite that fact that bond yields are at 5.2%+/-. I suppose this is all very encouraging. However, the XJO bounced back off 6150 - and my guesstimate from the weekly chart was that it would drop to at least 6050. So I'm not sure this 'correction' is quite done yet.

What I have done, however, is buy 1 Spot Gold contract. Had figured a bottom of $644 at the trendline - it went down to $643.25. Of course, I didn't have an order in then. Went long finally at $648.25 (actually $646.75 + $1.5 IGM spread). Looking to go long Spot Silver @ $12.97.

My reasoning is thus: if there is a cartel selling Gold to suppress the price (as some suggest), they'd better have a lot of it to sell since India will come back to buy soon - Dussehra is just 3.5 months away - and that means weddings - lots and lots of them. With the economy booming that means a demand for lots and lots of jewelry.

Again: higher oil prices + higher food prices = inflation = higher gold prices.

Sitting it out

Financial markets have been falling this week - the XJO is down almost 200 points since Monday; however, I'm sitting this out. Part of it has to do with the whip-saw action on Monday that knocked me about; a lot has to do with the fact that these are volatile times and I'd rather watch and learn (for free), than participate and learn (possibly at a cost). Got stopped out of my TTS position along the way. My AGK position is still holding on .... just.

Gold, meanwhile, went from $651 to $671, and back down to $657 (as I write). So is Gold the safe-haven its touted to be, or is it just another asset class? You would expect Gold to go through $700 on this recent manoeuvre by the world markets.

Still trying to make sense of what the future holds - not just next week, but for the rest of the year. The Daily Reckoning, as always, has something sensible to say.

Nymex Oil is a beast

When the June contract hit $66 last night, I was tempted to sell. However, I thought she might break through to $67 today - what with a storm in the Persian Gulf, Bush criticizing Putin etc. So, I bought 2 more contracts @ 6595 (actually 6283 - thanx IGM - that 12 point spread is a real beauty...not).

Anyhoo, got stopped out of both of them, as gasoline went south. So - went short @ 6529 (actually 6541 - again, thanx IGM... love your spreads) - got stopped out on that as well, as gasoline went north! In the meantime, I wanted to close my longs @ 6550 - but my computer got all slow on me. Finally, managed to get out of all 3 @ 6540.

All in all, got clobbered out of close to $1000 in all this mayhem - actual losses plus opportunity loss.

I think if this has taught me one thing, its not to trade frequently. Bide my time, pick my trades - and when I'm convinced - go in strong. At one point, I was up over $6000 - and in the end, came out $4500 ahead.

Well, I'll take my profits - hopefully, I'll remember this lesson.

WTF?

This evening's ASR report sums it up:

The most interesting feature of today was this region's complete indifference to what happened in China.

For those who have not yet heard, the Chinese market fell 8.3% today, closing almost at the lows for the day. This is it’s biggest one day fall since the 28 February correction that shook world markets. On that occasion it fell 10% in a day.

It seems however, that we have successfully climbed this wall of worry.

No longer do such one-day drops in the benchmark Shanghai Composite Index send shockwaves though Asian stock markets and get European markets rattled (it seems the Dow stopped caring some time ago!).

Looking across the continent today, obviously we were up, but so where Hong Kong (+1.03%), Japan (+0.08%) and Singapore (+0.92%). Smaller markets like Jakarta (+1.29%), Malaysia (+0.98%), South Korea (+1.24%), and Taiwan (+0.54%) also fared well.

In fact, it seems the Chinese market was the only one to fall.

Looks like every fund manager in Asia read my post from earlier today.....

Dizzying heights.... are share markets primed for a fall?

The SMH carried an article yesterday, making comparisons between the stock market (crash) of 1987 and the current stock market. Such predictions are not new - one of the more interesting theories is from Mclaren, who says that markets will top out on June 12. Virtually every commentator believes a fall will be due to a meltdown in the Chinese stock market. The Chinese stock market has its fair share of detractors - from Alan Greenspan down to the novice hack believe that if the events of Feb 27 and last week are anything to go by, a dramatic fall in Shanghai will, well ... shanghai the world markets. Came across a differing opinion here.

I think a fall in Shanghai now will have little impact on world markets - that's because everyone expects it, and so it's probably "priced in". In any case, China is not known for the consumption power of its individuals - its known for being the factory of the cheap import. The underlying China story is, therefore, going to continue whether or not the stock market goes into freefall. I think a fall, if it happens, will come from an unexpected area - my favourite at the moment is a dramatic increase in the price of Oil.

So, where do I stand on this debate? The facts:

1. XJO has hit a wall at 6400. Failure to breach 6400 is a bad sign. Its not just the XJO that looks like its in trouble - the DJIA and the DAX look like they're about to be exhausted as well.
2. Bond yields are up - indicating interest rates should rise. That's bad news for stocks.
3. Oil prices are on the move - upwards. We've entered the Hurricane season in the US, and this year is tipped to be one of 'above average' activity. High oil prices = bad news for the economy.

On balance, I think the risk for downside is more than it is for the upside - but not for the reason (China) most (well, all the reports I've read) analysts would like to believe. As a result, I plan to trade more from the short-side on the indices - selling the rallies.

Still here

Its been a while (again!) since my last post. A lot has happened since then - my grand design of getting back even on my positions got hit pretty hard in May. At one point, I was down to $3000 in capital, and with a MTM loss of another $1000.

But now, things are way different.

On May 8, I sent the following email to a friend in India:

interesting set-up in crude. if it holds $61 on the weekly chart, that would confirm the ascending wedge. following the chart pattern forward, we could be looking at $80 crude in jan 08...!! if the pattern is confirmed, now would probably be a great time to go long - we wont see this level for a very long time ......

My call on $61 being the bottom was right! And this was after crude had fallen for 8 straight days. I took positions @ $62 and $62.15, before I realised that crude is indeed a very volatile beast. 2 days later, I was fighting to save both positions, as a sell off in stocks spilled over into commodities, and sent oil tumbling back to $61.

I then realised something interesting about oil - it has an inherent tendency to seek a double bottom before moving on. Also, at the beginning of the trading period, the price would drop about 30-40 cents, find support and move back up till it found the next support.

So, I thought, this means - theoretically, I can sell at the closing price, buy back when it double-bottoms and get more bang for my buck! Great theory - in practice, the double-bottom never happened that day, after I'd sold my positions - because Gasoline prices rallied to all-time highs, taking crude along with it. Of course, that was a link I wasn't aware off - and so I missed out on the ride to $66.

However, this week gasoline prices came down again, due to refineries in the US firing up production. Crude followed - and this time I was ready. Oil was trading @ $63 (having bounced off $62.50 the previous day) before the the oil inventory numbers on Thursday; a decline in crude stocks sent to price up to $64 initially, however since there was a build up in gasoline stocks, i expected the market to fall. And it did - all the way down to $62.50 - which confirmed both my double-bottom expectation and my chart. I piled in with 3 mini contracts, and plan to hold on to them for a while. Last traded @ $64.85 - and they are the reason why my account has completely turned around.

Just 2 weeks ago, I was in despair - all my positions were going down the tubes (in fact, I'm MTM -$1000 on my share CFDs). Since then, I've had a couple of profitable trades on the XJO and some pretty amazing ones in crude futures. I feel like I've crossed a major step in my learning.