Be selective in picking your trades this coming year because these days preservation of capital is critical. Appreciation of capital is the goal, and it’s certainly attainable; however, today’s markets favor aggressive traders opposed to longer-term investors.
Here are some of my observations and thoughts to help us to make money this year.
The value of the dollar will steer countless other market values, and the dollar’s direction generally tips its hat for at least the first six months of a New Year after the second week of January.
Here’s a quick and easy way to determine the dollar’s trend for the first six months of the year: Draw a box around the range of the first two weeks of the year, as I’ve done in the chart below. A breakout above the box will indicate dollar strength, while a breakout below the box will indicate dollar weakness.
My research reveals that this pattern has worked 80 percent of the time and will indicate the direction of the dollar at least through mid-year, many years for the entire year. Here’s what the box looked like as of Jan. 16:
Buy the relatively strong commodities, those with good fundamentals, and sell the relatively weak ones. On Nov. 21, 2008, I gave an interview for MoneyShow.com in which I provided my opinion that the most bullish commodity for 2009 would be soybeans. You can watch that interview here.
On the day I sat for that interview July soybeans were trading at $8.64. Oil was at $50 a barrel. As of this writing oil is trading at $43, or $7a barrel lower. Despite a very bearish crop report last week, July soybeans are trading at $10.20, or more than $1.50 a bushel higher. This indicates very strong relative strength and bodes well for further price appreciation in this market.
Another relatively strong market is wheat, while oil remains a relatively weaker market (no reason to be a buyer of that one just yet).
The trend in the stock market remains down to sideways; in my view, there’s no reason to own stocks right now. We need to keep in mind that the stock market will bottom out when gloom and doom is at its height, and there’s a lot of that going around these days. So be vigilant for a sign of a bottom; it could be close.
But until that sign appears I prefer to own stronger markets. Soybeans once again come to mind, and they’re as legitimate an asset as the stock of General Motors (NYSE: GM)--and could last longer).
Government spending is out of control. The US deficit--as well as that of many other countries--has now reached a new record. The Fed says it will print money to an unlimited extent until the economy starts moving again. The Obama administration will put into place a huge stimulus package that will eventually lead to inflation.
Rising inflation is no doubt around the corner, but it’s not here yet, as weak oil prices indicate. Analysts can make their predictions of when it will come back, but nobody knows the exact timing. Again, wait for the sign, and the sign of this will be a bull gold market.
Right now a move for gold above $900 (see the chart below) would be one indication of this.
It can change very quickly. It’s hard to believe oil was trading at $147 a barrel just months ago and is now trading below $40. The lesson here is to be nimble.
If an investment you have doesn’t feel right, it probably isn’t. You think the Madoff scam was off the charts? These scams, unfortunately, have occurred throughout history, and happen all over. Consider this one from The Harare Times of Zimbabwe:
Reserve Bank Governor, Gideon Gono, has frozen the accounts of eleven companies and nine individuals who have been involved in fraudulent cheque activities totaling Z$60,000,000,000,000,000,000,000 they deployed on the Zimbabwe Stock Exchange to bid for shares.
The number, by the way, is $60 hexillion.
This isn’t another Great Depression. Unemployment could certainly reach the low double-digits, but during the Great Depression unemployment surged to 25 percent, and 5,000 banks disappeared.
Back then there was no China, and this country continues to grow economically, albeit at only 5 percent to 8 percent today versus 17 percent to 20 percent the last few years. But it is still growing.
If you have debt, pare it down as much as you can as early as you can. Odds are you’ll keep your job, and if not you wont’ starve. Eventually you’ll find one if you keep looking.
Don’t worry, stay nimble, and if you have the risk capital to trade with, just watch for the signs.
Here are a few Additional trading rules:
• Be selective in your trading, but if you get a good trade signal (unless you have a good reason to overrule it) take the risk and just do it. Place your stop, and go for your target.
• You must maximize those good ones that are working for you because you’ll get chopped around at times with a series of losers.
• You must cut your losses on your first indication the trade isn’t working out.
• Go short as well as long; markets move in both directions.
• If you can take the risk, take it. If not, then don’t trade until you can.
In the words of Vincent Van Gogh, The fishermen know the sea is dangerous and the storm is terrible, but they have never found these dangers sufficient reason for remaining ashore.
Good luck and good trading in 2009.