Key News

Japan's industrial production jumped at the fastest pace in 56 years in April. (AP)

UK House prices staged a tentative recovery in May as the cost of the average British home unexpectedly rose by 1.2 per cent, in its strongest monthly gain for 19 months, according to figures from the Nationwide Building Society. (TimesOnline)

Key Reports Due (WSJ):

8:30 a.m. 1Q Preliminary GDP: Expected: -5.5%. Previous: -6.1%.

8:30 a.m. 1Q Corporate Profits: Previous: -28.4%.

9:45 a.m. May Chicago PMI: Expected: 42. Previous: 40.1.

10:00 a.m. End-May Reuters/U Mich Sentiment Index: Previous: 65.1.

Quotable

“A fool thinks himself to be wise, but a wise man knows himself to be a fool.”

William Shakespeare

FX Trading – Remaining open…not always easy

I always liked this quote attributed to John Maynard Keynes: “The market can stay irrational longer than you can stay solvent.” We know it's true. The problem is that practical application of this is not always easy unless one has a very long investment time frame—and very deep pockets. In other words, without that elusive gift of hindsight how can we correctly judge whether a market is being irrational?

If you've been reading this morning missive for a while you likely realize that John Ross and I have been very much leaning toward the idea of an irrational move in markets, as we haven't yet been convinced the underlying evidence for such a move is in place. But deep down we know markets discount a lot of stuff we don't see as there are a lot of smart people making bets on better information than is available to others. So despite what we may believe or want to believe, too much belief pushes one deeply into the territory of falling in love with your own story; and for a trader that is a very dangerous place to reside.

Technicians, or chartists, will exclaim they don't fall in love with their story because they don't consider fundamentals; they let the charts play out the script. There is much truth to that, but we've known chartists who not only fall in love with their story, but seem 100% certain they know exactly when and where the story will end; that is even more frightening to us—crystal ball land!

So is there a point to this ramble? If there is, it goes back to what Jesse Livermore is credited saying: “There is nothing new on Wall Street.” That says it all. There are a lot of great sages and adages out there that have told us how to do this, problem is we ignore their wise advice (guilty as charged I am).

Having missed the British pound move entirely…

… having been stuck on my fundamental story on the UK economy, I thought it might be a good time to review some wise advice from some proven brilliant traders as introduced to us in Jack Schwagers great book, “Trading Wizards”:

Bruce Kovner

  • Do not overtrade and use proper position size.
  • The market usually leads because there are people who know more than you do.
  • I assume that the price for a market on any given day is the correct price.
  • Do not personalize the markets.

Michael Marcus

  • Patience…stay with a position until the trend changes…be patient enough to wait for a clearly defined situation
  • Always use stops
  • Always pick a point you will get out before you get in
  • The best trades have three things going for them
    • First – the fundamentals suggest that there is an imbalance of supply and demand
    • Second – the chart must show that the market is moving in the direction that the fundamentals suggest
    • Third – when the news comes out, the market should act in a way that reflects the right psychological tone.

Ed Seykota

  • Longevity is the key to success.
  • In order of importance to me are: 1) the long-term trend, 2) the current chart pattern, and 3) picking a good spot to buy or sell.
  • Common patterns transcend individual market behavior
  • Trading rules:
    • Cut losses
    • Ride winners
    • Keep bets small
    • Follow the rules without question
    • Know when to break the rules
  • Everybody gets what they want out of the market

That is about the best you can do…I think.

A lot of talk about the US bonds and dollar lately:

..and if I remembered what Mr. Marcus had say a while back, my trading account would like me a lot more than it does today:

Three things going for them…

  • Fundamentals suggest supply and demand imbalance : At least for bonds we see the massive supply on the market; and if we think of the initial fear move into bonds, it was part and parcel to an unusual demand imbalance for the dollar i.e. one has to buy dollars in order to own bonds.
  • Chart pattern : Both are moving in the direction of the current fundamental view—global healing and risk taking on a perceived bottom in the recession.
  • News reaction : Both seem to clearly be showing the right tone relative to the news; “green shoots” sparked by Chinese stimulus and zooming emerging stock markets define the risk trade, and the continued fear of monetization of debt by the Fed has led to a surge down in the price of both.

Harry Truman once said: “The only thing new in the world is the history we don't know.”

I think we can apply that to trading: “The only thing new in the world is re-learning the key market adages shared with us by the truly great traders that have gone before us.”

Take care and have a great weekend.