Tuesday, October 28, 2008
TRADING DURING TROUBLED TIMES
With a recession taking a firm hold on the U.S.economy, and the prospects of a looming Democratic presidency becoming more and more a likely near term scenario, the U.S. financial markets are indeed in a classic "troubled times" market condition.
Market volatility will be ever present and will add up to the confusion of the already confused American investors. We will continue to see short term market rallies prop up by cautious buying binges by bargain hunting long term traders held back by unwinding of still unliquidated positions by leverage traders wanting to simplify portfolios. In bottom searching markets such as what we currently have, we will see frequent roller coaster rides across the board. Seasoned investors will mostly opt to convert most of their investments into cash.
The currency markets will be the logical alternative for short term placements for these 'troubled times'.
Currency markets allow the investors a lot of flexibility during volatile market situations. The investors can easily liquidate positions just as fast as they place them. They can take advantage of short term market rallies and even short sell on plunging markets for short term profits. Where ever the prices turn, up or down, there will be a profit opportunity in the currency markets.
But before we take a plunge into currency trading, let us first get a clearer view of the real market situation.
The current financial crisis the whole world is experiencing now started at the time the U.S. institutionalized sub prime rates in their mortgage industry. It spread globally aided in part and magnified by the globalization of trade and the adoption of a free market economy by most nations which unknowingly was eating up a piece of the pie of the American sub-prime woes. And when the mortgage industry bubble finally burst, the effect is now being felt by everyone in all four corners of the globe.
The U.S. responded, though a bit late, with a financial bailout package. The rest of the industrialized nations reciprocated with their own economic bailout plans. To show their resolve in placing the world economic downturn in check, all the major central banks cut their interest rates in a concerted effort to revive their individual economies as well as the rest of the world. There is no doubt that they are not going to stop at anything to correct the current financial anomaly.
However, despite the resolve of the government authorities and the unprecedented bailout packages installed, the financial markets in the U.S. are still not reacting to the stimulus. Investors are continuing to unwind positions. They are clearing up positions especially in the U.S. equities market and for a good reason.
All these rescue plans are being over-shadowed by the uncertainties being cast by the U.S. presidential elections. The uncertainties of previous presidential elections revolve around the normal questions about the candidates' stand on regular economic and political issues. This year's economic issues are different and have far more profound implications. First, it is a known fact that the sub-prime problems, the root cause of all our financial worries today, were instigated by a legislation ordered by a Democrat president- Bill Clinton in 1995. Second, it is also a known fact now that sub-prime lending was institutionalized by a Democrat dominated Senate and House of Representatives for the past 3 terms. Thirdly, with the Republicans having control of the White House for three successive terms, odds are now in favor of the Democrats wresting control of the same. And finally, the most formidable argument as to why investors are not likely to resume buying in to the U.S. securities market near term is the fact that the electoral polls are showing the Democrat Obama leading in majority of the states.
In short, the million dollar question in the minds of big investors is how will a Democrat President solve a Democrat instituted financial crisis of a global magnitude? Or can he?
To make matters worse, Obama's penchant for declaring his policy of "spreading the wealth" (a socialistic goal) all throughout his campaign sorties is striking fear into the hearts of investors and deepening doubts about his ability to stem the economic downturn.
So, as it is, every dyed-in-the-blood seasoned investor follows one basic rule of investing - "When in doubt, get out!" This is what we see happening in the equities market. This is what we will see for a long while even after elections. Worst, should the Democrats succeed in wresting control of the white house the recession may deepen and even lead to a long drawn ugly depression.
The best strategy under these circumstances is to get out of equities and derivatives. They are likely to be the last to respond to any good changes in the market place and the first to react by liquidating positions when things turn ugly. Unwinding of positions will continue all the way up to the end of the year no matter who wins the elections. And, we should not expect substantial placements in these markets to flow in until after the second quarter next year if depression does not set in.
Your best bet now is to trade the currencies on short term. With market volatility everywhere, the entailing risks are about the same. Trade the day's range and scalp. If you are going long term place your bet on the dollar against Japanese Yen. Anything below 100 yen to the dollar will be a good buy for a 3 to 5 month placement. Place your target at 105 yen and your risk factor at 97.
(As a service for day traders, I shall be running a daily technical commentary using the Japanese Candlestick Chart trading technique which I have used for a long time with a great degree of success starting after the November elections.)