September 16, 2014

What a Difference 500 Billion ¥ Makes

frustrateddaytraderThe head scratching continues as traders try to understand and embrace the rip-roaring lift in the US markets after leaving a small but promising dent on Monday. After Tuesday’s start appeared to be continuing to add to the “woes” as news out of China over the weekend revealed a continued decline in the economy the markets appeared headed for their much needed correction. This basically was due to the overall poor performance thus far from Chinese stocks in 2014, which was seen as sign of weakness within the Chinese economy. Adding to the cause for lower prices was the hype and speculation that the much-anticipated Alibaba IPO was just cause for social media stocks as well as many others to sell off as traders and fund managers made room in portfolio’s to hold all that new stock – yes I really read that.

Ultimately, though it was Saturday’s reports that signaled a “dramatic” slowdown in the world’s second largest economy, with factory output in August growing at the lowest pace in nearly six years. How could the world’s major supplier of goods be slowing down – yikes could it be that we are staring at some serious downside straight ahead?

On Monday traders it was US trader chance to exit positions and exit they did with China Petroleum and Chemical dropping more than 6%, Sinopec Shanghai Petrochemical loosing about 4%, SouFun 4.9%, Baidu 3.3%, Youku close to 4%, Sina lost nearly 5% and even Weibo the Chinese equivalent to TWTR slipped 11.6%. Chinese ETF’s didn’t fair much better with PGJ dropping 3% and FXI nearly 1.5%.

renminbiThe US markets began to see a more serious liquidation as traders moved out of positions in equities, treasuries, precious metals and commodities. Then about mid-day on Tuesday came the announcement that China was pumping 500 billion yuan ($81.4 billion) of liquidity into the five largest Chinese banks. One economist was quoted as saying “The immediate impact is similar to an RRR (required reserve ratio) cut of 50 basis points to all banks. Cutting it increases the amount they, (the banks), have available to lend. “ All this in the face of using a broad based stimulus that could in fact exacerbate the country’s mounting debt as China’s target of 7.5% GDP growth was on its way to the chopping block by a continue threat of a massive property slump. Nonetheless, it was enough to bring an abrupt end to the downside slide with the shorts making a mad dash scramble to cover and get long.

Is all that took place really a long-term cure to the economic woes developing in China – no I don’t think so. It was however, enough to bring an abrupt end to the downside slide with the shorts making a mad dash scramble to cover and get long. The DJIA zipped quickly to a new all time high, which brought strong support for the balance of the broader indexes.

technicallyspeakingTechnically, the move while volatile and rapid to the upside came on the heels of the broader indexes reaching extreme oversold levels on the short-term charts. Many of the down trodden stocks within the social media sector immediately saw a run to buy as new and weaker shorts stormed back in to cover and likely reestablish positions. Does it signal all is well and the rally is back in full force? Possibly, but on a short-term basis keep in mind that all good things must come to an end.

The current overbought and exhausted bull continues to find its get and go as it battles an increasingly tired bear. Unfortunately, in the longer term it will be the bear that finds its umpteenth wind to ultimately defeat the exhausted bull. In the near term though new highs continue to get racked up and cannot be ruled out for all of the broader indexes and their component stocks.

moneyspigotAs I have discussed previously it is historic low interest rates and the continuous flow of cheap money swirling around the globe in search of yield that feeds the search for yield. Until the central banks of the world turn off the money spigot the continuous domino effect of interest rate cuts rolling around the world will not end and the overly inflated stock markets will remain seemingly out of touch with reality.

There is a silver lining to all of this though. The sudden jolts delivered to the markets both to the downside and the upside brought a solid return of 2-way trade and increased volumes. The moves themselves have brought with them abundant opportunities to trade producing huge price swings and mega winners along the way.   Not having to defend a position allows a trader to just trade. Not having a bullish or bearish opinion allows a trader to trade the number, after all that is exactly what the majority of algorithmic traders are doing.

The realization of the growing problems in China and the European Union may appear to have been received as ‘good news’ for equities but that would be inaccurate. It may only seem that bad news is good news, when in fact the market is merely reacting to the prospect or realization of an increase in liquidity within the global banking systems. And so long as the money eventually finds its way down the pike to more than the 1%, which is more likely the ½ of 1% the search for yield will continue.

tradersThe Logical Signals Trade Room is open and in full swing. I’m very excited about the progress of the room and the level of traders who have subscribed. The room currently boasts an international crowd of experienced traders. Thus far we’ve received great feedback and awesome input from members to share during while the room is in session. Check for details. Again, it is not your typical trade room and is being restricted to 50 subscribers. A few spaces remain open and available but I can only guarantee the current introductory price for another week.

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keyinsandTrading the number remains key to being able to reduce and separate the “noise” from opportunity. This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

Opportunity continues to knock on our doors. While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.

Steer the course and don’t compare yourself to everyone else. You are not they and they are not you. Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves. Don’t be swallowed up by the chaos and false emotions swirling around. Remember it’s just a number.

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