Trading in the current environment!

hmm.... I am really starting to believe that trading is again becomming somewhat less riskier. With most governments now having had reacted to the immediate crisis events. Secondly volatility is calming somewhat since October.

1st - Markets have been too volatile for most risk limiting strategies. Even with the correct anticipation of price moves, it was very easy to end up on wrong side of the trade. Stop-loss orders have recently been very prone to execution due to outrageous volatility.
2nd - Rescue and other aid packages by governments cannot by any practicall means be predicted. This just ment more volatility and scope for unanticipated price action.

I'm starting to get convinced again that going short or long rather than staying out, is the way to go forward. Rescue package approval has strongly slowed down, and volatility seems to be a little more behaved. Anyway, I know what way I'm going to trade ;-).... selling short, except anticipated market corrections on the long side, but search for proper growth is just a little to soon.

Market update, 2 weeks after Obama election

It's been exactly 2 weeks since the election of Barack Obama, who is sheduled to be sworn in as the 44th President of the USA on January 20, 2009.

On the day of election the Dow Jones was up 1.5% from previous close, in fact 4th November was the highest price for past month. Since Obama's election, markets haven't been doing too greatly, but also there is some talk about an easing situation in media. Compared to month of October this clearly seems to be the case, however the bottom of markets is ony beeing tested at 8K (Dow Jones), 4K (FTSE-100), 7K (Nikkei 225), 4.2K (DAX), 3K (CAC 40) and another drastic drop might be around the corner. For the next 2 days or so, we might however see some positive consolidation, as the 8K (Dow Jones) bottom is beeing tested.

More rescue packages have been approved by the likes of emerging economies such as China (over $500bl) and today a drop in inflation was reported to 4.5% from 5.2% (United Kingdom). Yet the crisis may be still worse than it appears. There are huge manufacturing decreases, redundancies and problems (at least unexpected changes) with implementing rescue packages are starting to creep out with the USA $700bl plan.

Cornered into an illiquid market

Short selling is a simple technique that enables traders to make profit on down trends. The underlying process involves borrowing shares, selling them instantly, rebuying the same number of shares at a later point and returning them to the lender. The lender makes their profit from a small interest paid for the privilege of borrowing shares and of course in their best interest hopes for share prices to go up.

I came across the VW/Porshe - Hedge Funds story on BBC today, see http://news.bbc.co.uk/1/hi/business/7697082.stm. Share prices VW have soared by over 300% in the past 3 business days. Many Hedge Funds found themselves in lossy short positions after Porshe anounced that it owns over 70% of VW. These short positions got cornered, not enough shares on the free market as most are owned by Porshe.

"'Each and any short-seller in the world is trying to close up their position and there is no way they can do it, except for trying to buy like mad,' said Heino Ruland, an analyst at FrankfurtFinanz. What is upsetting the hedge funds is that if between 10% and 15% of VW shares were on loan to be shorted and only just over 5% were available in the market, it is likely that many of the funds that shorted VW had borrowed the shares from Porsche." [source: BBC article]

VW is now clearly overvalued, so what does this mean?!! I wonder at what point the shares start falling? "VW's shares peaked on Tuesday at 1,005 euros, valuing the company at 296bn euros ($370bn; £237bn), which is well over the $343bn value of Exxon Mobil - previously the world's most valuable company. Last Friday, VW's shares closed below 200 euros. As an indication of how extreme the market valuation is, last year Exxon made profits of $41bn on sales of $390bn while Volkswagen managed profits of about $8bn on sales of $136bn." [source: BBC article]

This is a stock to watch, maybe once the lossy short positions are accounted for the stock will plummet down?!!

Big price rises!!

Hehe, no chance... what we are seing in the market for past 2 days (28th-29th October) is overvalued madness. Apparently the 10% up on the US markets was beeing credited to planned US interest rate cuts expected later today, however financial commentators lacked enough factual explanation to justify current market behaviour. Recession is underway with a lot of bad quarterly reports and it is pretty clear that whatever interest rate cuts will be, tomorrow (very latest by friday) we will see more strong drops on markets!

As anticipated...

Just check out last paragraph of my previous post, go on, check it! You will notice that the expected fall has occured today, what's more it was a very volatile trading session again. The British Markets closed down with -4.46% loss of its value. The company that I've been tracking as an example (ANTO.L in the top UK 100 by capitalisation) experienced volatility of up to 10% today...
Wait, let me re-iterate that, the blue chip metal-mining company saw 10% volatility. Only reaction that comes to mind is, wow, because this is not a single case of such volatility, in blue chips these days.

To explain, the Asian markets started daily trading with a horrible nearly 7% drop on NIKKEI 225. Followed by other eastern markets doing rather badly and when western europe opened up the fall continued with now 6:30pm (Greenwich Time) the DowJones is craweling at 8600, meaning -3.65% loss.

A lot of these drops are attributed to some sort of realisation by the investors that eventhought credit markets are improving, everybody else is now going into recession.

See the following articles that will help summarise "events":
http://biz.yahoo.com/ap/081022/world_markets.html
http://biz.yahoo.com/ap/081022/wall_street.html
http://news.bbc.co.uk/1/hi/business/7684216.stm
http://biz.yahoo.com/ap/081022/oil_prices.html
http://ekonomika.sme.sk/c/4135938/svetova-ekonomika-smeruje-do-recesie-euro-pada.html

I think we are now in vain looking for explanations, it is clear markets will be volatile and generally on the down side for big part of near time to come. Traders will still however try to make profits in short term, so we will see upswings and drops as investors take profits (or losses while they are still alive :-).

Volatility can be great & gloomy

As I wrote on October 14, 2008 it is becoming clear we are close to the bottom of largest market falls, but a recession is what we are just enterying. However as this is happening the worse falls are behind us and markets are now looking to find their bottoms. This means large volatility, and brings plenty of opportunity to make money, but also to loose some.

Caution is hence advised. I recently started day trading, and it was not uncommon to see in stocks that I traded, such as ANTO.L (a large in the top 100 by capitalisation in UK) moves that ranged over 10% during a trading session.

Anyway, a lot, really a lot, of chaotic trading seems to be going on at the moment. These are dangerous times and predicting market direction is hard, lets look at tomorrow. The previous 2 days have seen some growth of market prices again, and today there was slight drop, most of it starting on the Dow Jones after British markets closed at 4:30pm (Greenwich Time), hmm... I'm
thinking now tomorrow might be a negative roller coster as traders sell some of the growth they accumulated over the past up days. Let's just see what will happen tomorrow ;-) !

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Close to the bottom??!

As I wrote on Friday 17th October the "Black Friday of 2008" has reached shores of global markets. Looking at past crises what follows after such days is a lot of extremely volatile sideways action and a possibility of market bottom beeing reached. Every individual crisis is handled differently with varying macro variables involved. Hence it is difficult to say whether a natural market bottom is close.

Given the current environment and efforts my bet is that there will be further drops but some sense of stability returning into markets. Maybe the worst panic has been shielded but an economic downturn is not over yet!! At least not for some market regions, let us remind ourselves that recent years have initiated some economies becoming more potent now than ever.

Yesterday (13th October) markets saw their White Monday of 2008. Over the weekend European leaders have finally agreed on coordinated rescue action, over $2 trillion were put on the line as off Monday in guarantees and emergency measures to save banks in Europe.

The current crisis prevention efforts have prevented the worst for now. Monday and today have seen good bullish price bursts. However rescue efforts create a number of deep problems. To name a couple,

• huge budget deficits, this will put a lot of strain on population and take time to heal.
• due to the current scare it is also clear markets will become over-regulated, this will criple free trade mechanics and it is difficult to say to what extent will negatively affect markets.
• even thought we are in a recession inflation risks are still very real, in the UK today reached 5.2% as opposed to government's target of 2%.

In the end of day, specifically risks of Securitised Mortgage Backed Assets are just beeing shifted from private sector onto thegovernment, it does not dissapear. There is no magic tric to this, we will have to deal with this pickle!

10th October 2008 - the Black Friday of 2008

We have see large losses on world markets for the past two weeks. You may wonder why then did I pick today.

Well it's pretty simple actually, and has to do more with psychology than with real economy. This week served to confirm that feelings are now taking the larger part of healthy judgement.

Last week 29th Sept - 3rd Sept, was full of expectations. Monday the House of Representatives voted against the $700b bail out plan, hopes were still high thought after wednesday senate voted in favour of a slightly tweaked $700b rescue plan and finally friday the rescue bill did pass the House. It was thought that this should ease the crisis, some even hoped for a miracle. To most traders thought it was always clear the question is not UP or DOWN but the severety of the market DOWN.

The $700b rescue bill didn't do the trick ;-)! Monday 6th Sept was a complete let down, as we saw FTSE go down by nearly 8% and other world markets following this trend. In fact this was a clear sign that the $700b came too late. Whats more, on wednesday 8th Sept UK government anounced its rescue plan worth dozen billion pounds the markets still fell. Thursday saw coordinated efforts of 7 central banks lowering interest rates, to no avail. Well and today came the cherry of the week, Nikkei dropped nearly 10% eventhought the government anounced that they'll pump several billion dollars into its markets.

I could carry on mentioning a plethoria of rescue efforts by governments and regulators, let me just say that the UK markets have lost nearly 20% of its value this week, so have the US and Nikkei has lost twice as much as during the 1987 crisi. We are way past the fundamentals now, this is a full on crisis, comparable to 1987, 1970s, 1929.

We have reached a point where economics stops making sense and investor psychology takes over. Let me rephrase, economical incentives in form of regulation and rescue efforts should logically help, however panic has spread and nobody wants to own anything in the markets anymore, investor trust is gone!! This is just panic.....

Rebuilding trust takes time, which is the only thing we never have enough off.

another 100 year move, woohooo!

so here we go again a 9.4% drop on Nikkei this wednesday 8th Oct 2008, triggered by previous days drop of Dow by more than 5.1%, and now the European markets responded with multiple percent drops in the first trading hours :-)

I think it's obvious that we are now in a panic more than in just an economic crisis. All the drops on world markets propagate like a chain reaction with moves that are theoretically extremely unlikely (given standard capital market theory), and all this is still happening even with the various government rescue plans beeing anounced.

Today UK government unveiled their rescue plan, which compared to the US is tiny but clearly better. Even then the FTSE-100 fell with more than 90 constituents showing a drop in price!!