Financial Training Seminar December 7, 2009
Posted by smarttradepro in Current Issues, Events.Tags: financial training class, stock market seminars, training
comments closed
Stop Playing by Someone Else’s Rules
And Learn How Insiders Invest and Trade
It’s Time to Take Control;
Time to Take Your Next Step!
Next Step Ultra Financial Training Seminar
Learn to Invest and Trade Like the Pros
January 16-18, 2010
Las Vegas, NV
Call: 877-715-0660 for More Information
Learn the strategies and state of mind that set insiders apart
Find the tools that work and how to use them, day-in and day-out to make outsized profits
Learn how to use the powerful new Ultra Leveraged Exchange Traded Funds (ETFs) to supercharge your account.
A Tale of Two Markets, Part Two November 24, 2009
Posted by smarttradepro in Current Issues.Tags: Retail investors have yet to vote with their cash on the soundness and safety of the equities markets.
comments closed
“Let them eat cake.” — Misattributed to Marie Antoinette
Such an interesting quote for today. Meant to show the total disconnect between the royalty and their subjects, this quote takes us back to a time and place where the working class French literally spent 50% of their household income on bread. The common attribution is that Marie Antoinette, on hearing that the peasants had no bread, spoke the words, “Let them eat brioche.” Brioche was a huge step up from common bread, since it was enriched with butter and eggs. Over the years, the quote has become a more anglicized by changing the “luxury” food item to cake.
To keep this from being a lesson in quote derivation, suffice it to say that Marie Antoinette almost certainly did not utter the words. She was a champion of the rights of the poor and was a well-reasoned thinker who would not have said something so callous. Most likely, an earlier French princess did say something similar and did so out of ignorance and/or lack of compassion for the plight of those struck by famine.
I don’t think our “tale of two markets” is about class warfare. But it is certainly about two different mindsets and two different standards, depending on whether you sit on the retail or the institutional side of the fence.
Last week, we talked about the reactions of the retail public and the institutions during this impressively strong bull market. We talked about cash on the sidelines and how retail investors have yet to vote with their cash on the soundness and safety of the equities markets.
More and more data floods in to support this point. A number of analysts very closely watch the flow of money into and out of mutual funds. Surprisingly, since the March lows, only about 10% of the multi-trillion dollar cash hoard stored up by retail investors has flowed back into the markets via mutual funds (hence, lots of cash is still on the sidelines). Even more surprisingly, there continues to be an outflow of cash from equity mutual funds into fixed income (or bond) funds. Very interesting, indeed.
This means that either 1) there is much more upside potential because of the money on the sidelines, or 2) another (much milder) pain and gain cycle will be needed for the markets to win the trust of retail investors. I tend to favor the second view. If a 65% market rally hasn’t drawn retail investors into equities, what will it take? Most likely, many think that they’ve missed the boat on this bull run and will look to re-invest when equities go on sale. Others probably remain simply shell-shocked by the 50% drop in equity markets in a matter of a few short years.
There really is so much to look at with these fascinating market conditions! Next week we’ll take a good look at the huge differences in the credit markets for institutions versus individuals. We’ll draw some conclusions about where that particular two-market model might be taking us.
In the U.S., this is a week where we take some time out to give thanks. In addition to my thanks for a God who loves me, and family that is a blessing to me every day, I’d like to say a special thanks to the readers and other associates of the Van Tharp Institute “family” for your kind e-mails, commentary and support (be it constructive criticism or good old fashion praise). I always welcome your comments at drbarton “at” iitm.com. Thanks to all of you!
Until next week…
Great Trading!
D. R.
A Tale of Two Markets November 24, 2009
Posted by smarttradepro in Current Issues.Tags: Indeed our current financial markets reflect the Dickensonian superlative and polar opposites.
comments closed
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”—Charles Dickens, A Tale of Two Cities
Today we’re living in “A Tale of Two Markets.” I was just telling a friend and long time trader about this article and using Dickens’ quote. Has there ever been a better opening paragraph? Most strikingly, I did not remember the end of the quote: “…in short, the period was so far like the present period…”
And indeed our current financial markets reflect the Dickensonian superlative and polar opposites. The financial markets are seeing one level of participation from institutions and another from retail investors. And credit markets are bending over backwards to issue corporate debt while continuing to shun retail borrowers and make credit tough to find for small businesses.
Let’s look a little closer at these two separate responses from the retail and institutional worlds.
With the market making an amazing recovery from the March lows, some amazing statistics accompany the 65%+ run that the market has seen. First and perhaps most interestingly, money market funds (where retail investors traditionally park cash) continue to be at a very high level, despite the markets’ strong bull run. Traditionally, when the stock market heats up, retail investors jump in with both feet. Analysts claim that this high level of money market assets reflects the fact that retail investors are still avoiding the equity market after being burned last year.
To be fair, this money on the sidelines could also serve as fuel for a further push up in the markets, if and when the retail investors decide it’s safe to jump back in with both feet.
But it seems, from consumer sentiment numbers, that Joe and Jane Six-pack are still playing their cards very close to the chest. University of Michigan preliminary consumer sentiment dropped significantly from October to November and was well below analysts’ estimates. This is ominous heading into the holidays. This is especially true given that the paper increase in wealth from the surging stock market typically loosens, rather than tightens, the purse strings.
Next week we’ll take a look a look at the huge differences that exist in the credit markets for institutions versus individuals, and we’ll draw some conclusions about where this two-market model might be taking us.
Until then…
Great Trading!
D. R.
They’re Already Talking about Bubbles November 6, 2009
Posted by smarttradepro in Current Issues.Tags: cash, credit/real estate bubble, fear of a new bubble, financial bubble, global markets, inflation, interest rates
comments closed
It’s been just a year since the credit / real estate bubble burst, and there is already serious discussion about another one.
In the current political and economic climate, the global response to the crisis was infusion of trillions of dollars of capital to attempt to reduce the impact of the bursting bubble. With that much extra liquidity chasing the same amount of goods and services (or really a lesser amount, given the global economic contraction), the price of something eventually has to go up.
The game is already afoot.
In places where the economies are a tad more nimble than in the U.S., Europe and Japan, the capital infusion has made a quicker and bigger impact. The manufacturing industries in Asia have recovered much faster than their western counterparts (you didn’t think Americans were going to stop buying big screen TVs, now did you?). Add that to the extra liquidity in the global markets and extremely low worldwide interest rates and you have cash chasing assets again, especially in Asia including Australia. As a case in point, Australia’s central bank has already begun raising interest rates to try to cool off inflationary pressures there.
A cover story in the Wall Street Journal trumpets “fear of a new bubble,” citing some compelling statistics. Included are run-away real estate prices in Hong Kong, Singapore, South Korea and Australia. And perhaps most telling is the fact that risk premium spread—the difference between junk bonds and highly rated bonds—is at its lowest level since February 2008 (before the investment banks Lehman Brothers and Bear Stearns collapsed).
So What?
Financial bubbles at their most basic occur when asset price levels far exceed any reasonable fundamental valuation. And the story always ends the same way. If Asian assets suffered through a bubble-collapse cycle, the ramifications would be felt (and felt strongly) in the rest of the world.
As with all bubbles, the support of the tangential financial markets is necessary. And the equities markets are certainly lending their support. Let’s take a look at an insightful chart from the folks over at Chart of the Day.
The fact there were 6 distinct rallies of greater than 15% during the bear market of the Depression is well known among market followers. This chart shows where the current rally from the March lows fits in with those of the past era.
Bulls could make a reasonable case that this might show that the current action isn’t a bear market rally, but has now escalated to full-fledged recovery. A more cautious view would be that the markets haven’t had time to digest the credit contraction from last fall and that the huge cash injection has merely given the market a “sugar high” and will delay meaningful recovery as it works through the system.
In either case, make sure your profit-taking and stop-loss exit plans are in place. And do take into account the fact that volatility is starting to creep back into the market.
Great Trading!
D. R.
Why the Crystal Ball Is Still a Bit Fuzzy October 30, 2009
Posted by smarttradepro in Current Issues.Tags: anyone looking to forecast market movement has not one, but two big factors to hamper their analysis. Five TRILLION dollars has been pumped into the economy in some way, shape or form. The second 600 pound gorilla is the artificially low interest rate., Today
comments closed
Forecasting is one of the most maligned practices in the world. And, more often than not, it’s maligned for good reason.
When I worked at DuPont, the one job everyone avoided was coming up with business forecasts for the next year. These were either hopelessly low (to make them easier to achieve) or ridiculously high (for businesses that were looking for additional product development funding or a bigger marketing budget). A sane middle-of-the-road case was rarely made.
We can find the difficulty of forecasting and our cultural disdain for that tough job in our feelings about weather forecasters. They have been the butt of jokes since the profession began. Here is a quip I read 30+ years ago in Readers’ Digest:
Letter to the local TV station weather forecast: “Hello. I’m just writing to inform you that I have six inches of ‘partly cloudy’ on my front lawn.”
Stock market forecasters don’t usually fare much better. The old advice to help forecasters remain “safe” was, “Never give date and price together” or better still, “Forecast often.”
Two Big Gorillas
Today, anyone looking to forecast market movement has not one, but two big factors to hamper their analysis.
The first 600 pound gorilla in the forecasting room is all that stinkin’ stimulus money. How do you try to take into account the fact that five TRILLION dollars has been pumped into the economy in some way, shape or form? This is an unprecedented amount of liquidity creation, and most fundamental models don’t have ways to process that level of outside intervention. Is it any surprise that a large portion of that money made it in to the stock market? Interestingly, for the size of the cash infusion, very little actually went toward producing products and services; it was mostly a paper infusion.
The second 600 pound gorilla is the artificially low interest rate. With essentially zero return on cash, Bill Gross (Pimco’s bond maven) writes, “…the continuation of punitive 0% short-term rates force investors to buy something, anything, with their cash…” (emphasis is his). And as it turns out, that “anything” has been mostly stocks with some gold and oil thrown in the mix.
Forecasting, Bulls, and Bears
So pity the poor stock market forecaster today; there are so many more competing factors and external influences that he/she has to take into account compared to the past. What might happen? The five billion dollar party that the stock market is throwing could end with the bears inducing a sharp pullback any day now. Or the bulls, drunk with cash, could keep this thing moving higher for months. A very likely scenario is that we have a blow off extension like we did in the last months of 1999. That would have the partying like it’s 1999 for sure, but…
Listen to What the Technicals Are Saying
As we look at the recent market action, there are a few key technical items to keep in mind.
This is a multiyear price chart for the SPY—the ETF equivalent of the S&P 500. A clean break above the 50% Fibonacci peak-to-trough retracement would be a clear sign for a bullish continuation. Alternatively, several closes below the 50 day moving average could warn of a more serious short term drop. I believe the probabilities point to the 50 day MA holding and continued bullish price action into year end. But in general, all that stimulus cash flying around makes the image in my crystal ball a bit more fuzzy than usual…
Great Trading! D. R.
The Importance of Your Trading Road Map October 28, 2009
Posted by smarttradepro in Current Issues.Tags: A Destination and a Map of the Territory.Our Intraday Road Map – The Key Number Ladder-The unique road map used by all top day traders, stock market trading, trading road map
comments closed
“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where–” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“–so long as I get SOMEWHERE,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”
(Alice’s Adventures in Wonderland, Chapter 6)
–Lewis Carroll
Last week, I attended a very interesting “round table” type of event where folks gathered to discuss issues they were having and how to solve them. In this case, the discussion was on broader business issues, but I was struck by how much it related to trading.
The first three people were all at very different places in their journeys. I suspect the probabilities were extremely high that just about anybody listening in could make an excellent predication about where each person would end up.
The first lady was full of passion about helping student athletes prepare for life after competitive sports. However, she lacked any plan for turning that idea into a useful program that student athletes would want and then monetizing that program. I would guess that if she finds the right resources and develops a solid plan to get to her destination, she’ll do well. If not, she’ll most likely flounder (though passionately).
The second person up at the round table was a bit of a mystery. Obviously, he was an intelligent guy, full of life experience. He had so many areas of interest and so many skills that he had no idea what he wanted to do, let alone how to go about doing it. We could have very well substituted his name for Alice’s in the quote above. Until he gets a destination in mind, there’s no way he can put a plan together to get there!
The last person at the meeting had a vision for helping lots of folks. He had a plan — a road map — that would direct his actions and navigate the bumpy spots in the road. He still needed some resources and some infrastructure but this person had intention, a destination and a plan. If I had to back one horse, this guy was the one.
The lack of a destination and, equally as important, a map to get you there keeps many travelers from getting where they need to be. And so it is the same with traders and investors. The lack of a plan or a road map leads to days, months or even years of frustration.
A Destination and a Map of the Territory
Lewis Carroll was so insightful with his books on Alice. This exchange between Alice and the Cheshire Cat has been drilled into our collective mind so deeply that it has spawned its own saying: “If you don’t know where you’re going, any road will take you there.” Lewis Carroll (Charles Dodgson) actually never wrote that phrase; it appears to be another of those sayings that grew out of the “collective wisdom” of people through the years remembering the sage advice Alice received from the smiling cat.
In Van’s groundbreaking book Trade Your Way…, he does a great job of showing us the value of objectives. (That section with fellow Market Wizard Tom Basso is so good that it’s worth a re-read if you haven’t looked at it lately. Pages 50 -59 in the second edition).
Arguably, after we have our objectives, the rest of trading is about creating the plan—the road map—and then executing the plan.
As with most areas of trading, weaknesses in the trading plan are magnified for intraday traders. This is because the opportunities for mistakes are multiplied in the intraday time frame and the leverage available makes mistakes more pronounced.
That’s why a daily road map is so important for intraday traders. And every day trader I’ve worked with uses some form of a very unique road map to get them headed in the right direction every day.
Our Intraday Road Map – The Key Number Ladder
The unique road map used by all top day traders I’ve worked with is a “key number ladder.” This is the tool that tells them what price levels require action, and when to sit quietly and wait.
The markets change. Today’s markets have very different characteristics than the markets of just a few months ago. And a year ago, during the market meltdown, the markets were very different, as well.
The map that professionals use to navigate on a daily basis the ever changing markets is the key number ladder.
One of these top traders is my great friend and business partner Christopher Castroviejo. I’ve included a little about him at the end of this article so you can get to know him better. One snippet: He has 37 years of Wall Street experience and among other things, ran a hedge fund desk that achieved 34% compounded returns for eight years. Pretty darn impressive.
Christopher helped me bring the “key number ladder” concept to a sharp focus even though I had studied the idea with many folks before. The utility of the key number ladder never made great complete to me—until Christopher showed me his personal notes compiled over many years.
In short, key number ladders tell us the points that require action during the trading day. These are the few price levels where the market is most likely to have a major launch, or a significant pullback.
To understand how we use the Key Number Ladder, here’s an example we gave in a webinar last week for our E-Mini course graduates. The night before the webinar, we identified an area of the number ladder that would be an action area for us on the following trading day. Here’s an excerpt from that Key Number Ladder:
We had three numbers that were grouped within less than three quarters of point of each other, giving us a key level to act. If the market gapped up and traded down to this area, it would have been a place to buy. As it happened, price gapped below this level and traded up to +/- one tick of the key number zone three times during the day. Here’s what that looked like on the chart.
As you can see, this really was a KEY zone that day! The trading signals aren’t always that clear-cut, but most days, the Key Number Ladder gives us the road map we need to make clear trading decisions and isolate the few low-risk, high-probability entry points for the day.
In your trading, identifying these key areas will ease stress and can help get you in when the market is ready to move. To get you started, look at areas like floor trader pivots, recent daily highs and lows and key moving averages. You’ll be amazed at how the market has a memory for key points from the recent, and not so recent, past!
Christopher and I will be teaching the key number ladder core concepts along with proven mechanical systems at our highly rated, cutting edge workshop on e-mini index trading in Cary, North Carolina on November 7 – 9. We hope you can join us. This is a course we only teach once or twice a year, so take advantage now!
Great trading,
D. R.
E-Mini Futures Tactics Workshop October 10, 2009
Posted by smarttradepro in Current Issues.comments closed
These Markets Are Confusing…UNLESS You’re an E-Mini Index Trader!
Regardless if the market continues upwards, gently rolls over, or is about to take a dive, you can reap big profits every day – if you have the right tools to capture them!
This market is a perfect match for the multiple trading systems that veteran E-mini traders D.R. Barton, Jr. and Christopher Castroviejo teach in this course. They will cover the tools, strategies, and the proper mental approach at the upcoming E-Mini Futures Tactics Workshop that will help you exploit the current market conditions.
D.R. and Christopher bring the full weight of their experience to you in this fast- paced course designed to take your trading to the next level. These two instructors have worlds of experience – more than 60 years of trading between them. Also, Christopher actually traded THE FIRST S&P Futures contract back in 1982!
They not only teach “the manual” but they also share their broad, rich — and sometimes expensive experiences with the attendees (some lessons do not come cheap!).
D.R. and Christopher not only teach outstanding strategies and tools, they then trade D.R.’s money live at the workshop on Monday morning to demonstrate those tools in action! After learning the systems and seeing the live trading, you leave the course with the technical detail and hands-on practical knowledge to start trading E-minis with confidence.
A number of the systems that D.R. and Christopher teach depend on intraday or short term volatility. Even though the current market volatility is nowhere near the record levels of last fall and winter, there’s still plenty of it for E-mini traders to earn healthy rewards. In a recent article, D.R. explained: “Today’s markets continue to give us very nice levels of volatility which translates into outstanding opportunities for short term traders. Combine short term volatility with the leverage for E-minis and we have prime conditions where traders can find multiple high profit opportunities every single day — whether the market is hitting new intermediate highs or pulling back and threatening a precipitous drop.”
Why Are E-minis Especially Attractive in Today’s Markets?
Leverage. One of the biggest advantages for E-mini trading is the high amount of leverage they offer. For day traders, brokers increase this leverage even further. Look at the actual leverage available: the S&P E-mini trade unit is $50 times the S&P 500 Stock Index. Currently, that calculation looks like this: $50 x 1050 = $52.500. The margin to control $53Kworth of stock is around $8K giving you leverage of about 7:1 on your money. However, the day trading margins drop significantly with $1,000 margins still available, and some reputable firms offer $500 margins. At these rates, you can increase your intraday leverage to greater than 80:1! This means you can control $80 worth of stock with each dollar in your account.
Savvy traders know that leverage is a double-edged sword that definitely cuts both ways. While such leverage allows for large returns on very little money, it also means that if used improperly, you can lose big chunks as well. DR and Christopher help you learn specific strategies how to let your profits run while limiting your risk with E-Minis.
Liquidity. When the market is moving, you need to be able to get in or out fast to take advantage of that leverage! Because so many traders have moved to E-mini trading over the last few years, the liquidity on these exchanges is exceptional and orders get filled immediately with little or no slippage at all. This liquidity makes it easier to enter and exit E-Mini positions exactly where you want to – so you can pay attention to the market rather than watching out for tight spreads.
Round-the-clock Market. The S&P E-mini market is “open” 23.5 hours a day, which gives E-mini traders another advantage – it reduces greatly the effect of opening gaps. Your E-mini stop can execute overnight while stops on your stocks are still sleeping – and long before any opening gap kicks out of bed those stops on your stocks!
Favorable Tax Treatment. E-mini traders get to keep more of what they make compared to stock traders. Because E-minis are a futures vehicle, they are treated as section 1256 contracts. 60% of any short term 1256 gains are taxed at long term capital gains rates and the remaining 40% is taxed at the short term rate. This puts the effective max tax rate at 23% for E-mini gains. This max rate is lower than the short term gains tax rate on stocks for any individual with taxable income of more than $32,550 a year. Additionally, E-mini losses can be carried back 3 years against any E-mini profits. With stocks, you are limited to $3,000 loss limit a year that can only be carried forward, not back.
Join D.R. and Christopher from Saturday, November 7 to Monday, November 9, and learn why so many past students loved and profited from this workshop.
We’re having this workshop at our new VTI on-site facility where seating is limited. You are assured to be in a small group environment where personalized attention works best.
Come learn with the best and register now for a $500 discount.$3,995
Early Enrollment Price: $3,495
U.S. Dollar: Technical Tools for Timing October 3, 2009
Posted by smarttradepro in Events.Tags: or wait for a breakout above the 50 day SMA., There are two ways to play potential dollar strength: get in early in anticipation that last week’s low will hold
comments closed
Every once in a while, a simple solution comes along that absolutely makes my day.
Earlier this year, we were getting ready to have some friends over for a nice dinner. The wines were chosen. The food was bought and ready for preparation. Of course, Murphy’s Law was about to rear its ugly head. This time it came in the form of the garbage disposal.
The thing was stuck. When I’d flip the wall switch, I’d hear the hum of the electric motor trying to turn and then the circuit breaker would trip. After making sure there was no power coming to the motor, I reached my hand down into the jaws of the thing (it barely fit) and found nothing, other than the scraps of food that were starting to get a wee bit aromatic.
I reset the circuit breaker and tried again—same result. Of course, by then it was late Saturday afternoon and my normal “fix it” guy was out doing his own weekend thing. The plumbers that I called promised me huge bills due to the weekend hours and doubted they could get there before the guests arrived.
Cooking dinner for guests with a partially plugged kitchen sink raises the difficulty and stress level of the situation by a factor of ten.
So I quickly went to the internet and Googled “stuck garbage disposal”. Scores of useful sites turned up. The top results all said the same thing: Find the big honkin’ Allen wrench that came with the garbage disposal, and turn the thing by hand.
Just great. Who knows where the Allen wrench is? Apparently the garbage disposal manufacturer does. In a rare fit of anticipating my tool-related angst the manufacturer conveniently located a little pouch attached to the side of the garbage disposal containing the needed tool.
I popped the Allen wrench into the proper hole, turned the thing by hand, and low and behold the disposal was free and spinning! A hard little piece of something had gotten wedged in the gears. And now it was dislodged. Moments later, that ugly crunch-grind-whirr of the garbage disposal in action was sweet music to my ears.
I have to admit, I was elated. Not only had I brought down the dinner party prep stress back to an enjoyable level, I had also saved a couple of hundred bucks on a weekend house call. Most importantly, I had found a simple solution that worked. I love it when that happens.
Simple Technical Tools—Still Useful, and Dollar Friendly
Last week we looked at some great macro fundamental analysis from hedge fund manager Marshall Auerback. He has a short-to-intermediate term bullish take on the dollar, and I relayed some of his recent thoughts in last week’s Trading Tip. I find Marshall’s research to be well reasoned and spot-on. And when his fundamental dollar analysis meshed with my technical take, the time was right to let you know about it.
Below are some timing tools that might help us play a probable swing up in the greenback.
First, let’s look at some basic daily momentum indicators.
The U.S. Dollar index got oversold on the RSI and then a week later, made a new divergent low. And we see a similar story in the weekly time frame.
With the dollar hitting divergent lows in multiple timeframes, we’ve seen a little bounce up. Is it time to start buying the dollar with reckless abandon? Let’s use another simple tool to see when this up move might begin to attract some widespread attention.
For the dollar to register any sort of bullish case on many institutional fronts, it has to get above this 50 day simple moving average (SMA).
So there are two ways to play potential dollar strength: get in early in anticipation that last week’s low will hold, or wait for a breakout above the 50 day SMA.
Great Trading!
D. R.
U.S. Dollar: Global Punching Bag No More September 27, 2009
Posted by smarttradepro in Current Issues.Tags: The declining dollar is making headlines everywhere.Right timing to invest in exactly the opposite direction—dollar strength.
comments closed
“When everyone gets on the same side of the boat, the result is inevitable.”– D. R. Barton, Jr. “Private Thoughts Collection”
There have been many anecdotally famous instances of popular and widespread opinion moving so far to one side that a reversal of an extreme trend was bound to follow.
I still remember watching CNBC in the fall of 2002 when Maria Bartiromo made her famous comment from the floor of the NYSE along the lines that she was hearing indications that there was a lot of short selling going on. While Bartiromo’s comments weren’t the catalyst of the market turn, they were indicative of the common wisdom that once an idea hits the mainstream media, the trend is near its end.
The same thing happens in the general public. I wrote an article last year in June talking about seven different and unrelated people that had spoken to me about the price of oil or gas. These were not financial people; these were folks at grocery stores and schools. The market topped in a matter of weeks.
Lately, in the financial press, the declining dollar is making headlines everywhere, though the buzz is not so high among the population in general. Nobody has approached me recently with concerns about this because most Americans don’t feel directly the decline of the dollar in their day to day lives—unless they travel abroad.
To find out if the falling dollar headlines of late are a measure of popular sentiment and a possible trend reversal indicator, I needed to get input from a group of people who might know and care about the dollar’s relative value.
O Canada, How Concerned You Are About Investing in the U.S.
Every year, we have a large number of Canadians that attend our workshops. (As a quick aside, is there a friendlier group of people on the planet? I think not. Conde Nast magazine agrees: they ranked Canada at the top of the list of friendliest countries to visit in the world. Yet I digress.)
In the recent months, I have had no fewer than half a dozen personal requests from Canadians asking about hedging their investments in U.S. instruments. And it’s little wonder; since the March highs, the dollar has gone from $1.30 for every Canadian dollar down to just $1.07.
And when that many people start to ask about the dollar’s movement, it’s time to gear up for a move back in the other direction.
While it’s no secret that the U.S. dollar is at the whipping post of almost every media pundit, some of the smartest folks I know are now actively looking for the right timing to invest in exactly the opposite direction—dollar strength.
This is probably not a multi-year reversal. Rather it reflects research that shows many of the factors that have weakened the dollar over the past six months are now diminishing. Along with that, the natural rhythm of ups and downs will take the dollar back up.
Smart Guys, Great Analysis, Useful Conclusions
In March of this year, my best friend and business partner Christopher Castroviejo introduced me to a friend of 25 years, Marshall Auerback. Marshall is one of the owners of the RAB Capital hedge fund group.
Over a dinner of spectacular food and wine, I immediately knew that the depth of intellect as well as the breadth of knowledge at the table was something that few people get to experience in their whole life.
Christopher, Marshall and I traversed subjects from bonds to gold to crude to domestic and global markets. And then we were into U.S. and global governmental policy and stability. We diverted to wine and fine foods. And we topped it off with some talk of football, baseball, basketball and golf. All of these diverse subjects were taken to a level of depth and detail that is hard to believe. These guys are wicked smart and extremely well read.
So when Marshall or Christopher has to something to say, I always listen closely. And when they’re both on the same side of a financial issue, one would be ill advised to be on the other side for very long.
This brings me back to the dollar. Marshall wrote such a well-reasoned and concise piece on the dollar this week that I wanted to share the highlights with you. The bottom line is that he’s looking for a dollar rally soon.
- For the current recession, the decline in the U.S. Gross Domestic Product (GDP) has been much smaller than in the European or Japanese GDP.
- Some members of the Federal Open Market Committee (FOMC) are expected to launch a campaign in favor of ending the Fed’s highly accommodating emergency policy stance. This would mean marginally or significantly higher interest rates in U.S. over time, which would lead to a stronger dollar. Just the anticipation of this being made widely known would be a strong net positive for the dollar.
- Speculation that the dollar is being used as a funding source for an interest “carry trade” is absurd. (The carry trade means borrowing a low interest currency to invest in currencies paying higher interest and pocketing the difference). If this trade were happening, it does not describe what is happening with dollar relative to lower yielding currencies (e.g., the Yen or the Euro, which has slightly higher short-term rates and slightly lower long-term rates).
Marshall concludes with this a great summary that I’ve paraphrased here: My experience is that when extreme sentiment reverses and there is a new simple story at hand, trending bandwagon markets can reverse in a quite violent way.
Marshall is the first to agree that the timing on this trend reversal is a touchy matter; it could be today, it could take weeks or more to develop. But when extremely smart and successful money managers give us such well-reasoned thoughts, it usually pays to listen.
Next week I’ll look at some technical issues that can help us with the timing on the dollar. Until then…
Great Trading!
D. R.
