Passing The Bottom Of The Stock Market?
April 20, 2009 by Vagabond Investors · Leave a Comment
Have we finally seen the bottom of the stock market? We will know better by the end of this earning season. If the news continue to get worse, but the stock market refuses to make new lows, we will clearly see the foundation of a solid bottom.
So, if you are investing for the long term and you are not interested in the movement of the following months, by all means by the index and close your eyes for six months or so. Your investment could very well deliver its promise on a long time perspective.
As we look at the charts on a weekly basis, we clearly see how the price has moved from a significantly under-valued zone to the value zone. Note that the MACD histogram, which expresses the power of the uptrend, has reached a 10 year high! This tells how the market has been wildly optimistic and willing to buy. However, the wilder the party becomes, the more likely it is that there will be a hangover. It is very possible to see the index take some breath on the following weeks. It would be a healthy to retreat to around 740 points in order to gather strength to a new marvelous rally.
The daily chart shows how the index bounced from the bottom to tingle the upper level of the channel. In order to create a positive mood for the future, the bounce would have to reach the significant level around 870 and close above it. At present, the index is clearly above the value zone, where it tends to retreat to gather momentum. The rallies of the past days have not reached new short term highs.
Even the MACD histogram, which measures the power of previous power, has failed to make new highs. Instead it has fallen whenever there is a higher new high compared to the previous ones. This simply means the deceleration of the rising power. The struggle of the upcoming weeks shall be seen between 740 and 870. The result of that will show if there is basis for further bounce. Patience in timing purchases is no sign of being a sissy. It is simply sensible thinking.
It strongly seems that the longer trend is changing, but we could experience violent volatility during the upcoming weeks when new earnings are announced and the market gathers strength on slightly lower levels. If you are a short term trader, keep your stops tight and practice very prudent risk management.
The ride will be bumpy and it will offer tickly opportunities both on the short and long side. If you are planning a long term investment, it is desirable to make multiple enters to the market over time as this strategy will calm the mind.
I wish you pleasant investing. As always, let’s plan our moves carefully before we do anything.
Best,
Matias
The Scapegoat Game: Why Speculators Are Not to Blame for Rising Commodity Prices
July 11, 2008 by Vagabond Investors · 14 Comments
I am astonished that many finance ministers and “experts” blame speculators for the rise in commodity prices – especially oil. Italy’s finance minister believes that there is a “magnum of speculative champagne” included in the price of each oil barrel. Some EU members want the union to impose tax and regulation on speculation.
It’s a shame that economic discussion has disintegrated into such disinformation and manipulation of facts. Any attempt to curtail speculation is likely to make oil even more expensive. Speculators do play an important role in setting the price of commodities. However, if they had somehow managed to push prices to unjustified heights, then demand would contract and unsold oil would be left on the market. At the moment, there is little sign of that. All big exporters are pumping as fast as they can.
The reason for the rise in oil price is elsewhere. It’s always easy to blame somebody and speculators have become the most appealing scapegoat. There is little evidence to support such blaming statements.
It should be obvious that speculators do not buy physical oil. Instead, they buy futures and options which they settle with a cash payment when they fall due. The real currency of these contracts is cash and not oil barrels. There’s no limit to the number of bets that can be made. No oil is ever held back from the market. All positions are closed out in a futures market. The impact of speculators is essentially market neutral. These bets do not affect the price of oil any more than bets on a horse race affect the result.
The market for nickel provides a good illustration of this. Speculative investment in the metal has been growing over the past year. Still nickel prices have come down by some 50% of their peak. At the same time, the prices of many other commodities have been rising almost as fast as oil even though they are not traded on any exchanges. Iron and rice are two good examples of this.
It’s not long ago that all asset classes were inflating. As I have pointed out in my other posts, now the credit supply is contracting and lending standards are tightening despite the fact that the Fed has lowered the Fed Fund rate. Over the long term, there has been a close relationship between M3 money supply growth and oil prices.
The public invests in those sectors of the economy that provide superior profit opportunities. If short-term interest rates are set below the rate of consumer price increases, paper money is no longer a store of value. What then is the difference between a hedger and a speculator is not clear to me. Under constant growth of M3, it was acceptable for people to hedge the loss of purchasing power by buying into the Nasdaq until the burst of the tech bubble. There were no complaints when the public bought homes between 2002 and 2007. Some “experts” even believed it created wealth, (although I think this is one of the most stupid statements one can make: rising equity in homes might be a good at first but the inevitable correction is usually too painful!) However, when the public moves into commodities, it’s not considered acceptable. Such are the double standards.
Excessive speculation is a direct result to the easy monetary policies by central banks. They are eroding the purchasing power of their currency and undermining the working classes for the benefit of the elite. The easy monetary conditions have hit the consumers with a commodity price surge. At the same time, it is causing a global flight from dollar assets. Since oil prices follow the growth of M3, who would you say is the biggest speculator of them all if not the Federal Reserve itself?
However, I should like to congratulate the Federal Reserve and especially Mr. Bernanke for an amazing cover story. It seems that there are academics who know a lot more about monetary theory and too little about currency markets and price signals in the real world. They are doing a proper job blaming other people for their mistakes with the easy money experiment. At the same time, I hope more people would pay attention to the real causes of bubbles and changes in the investment environment.
Jaakko
