The article lists the rules in equity stock trading. The idea matches well with the speculative trading strategy under development. Trading is a serious game and involves strict rules and honest dedication. "Do You Know Basic Stock Investing Rules That Can Help You Get Successful?"
1. Buying low and selling high- it is the most basic thing that every investor must know.
2. Trend or flow of the market- trend in the share market and stock price are the only reality of trading and rest are myths.
3. Trend is the king- share markets are volatile and trading works with momentum.
4. Don’t try to find market’s movement reasons- a lot of investors and traders try out finding reasons for movement of the market. Trading is done in accordance with perception of market and not reality.
5. Work on your profits and minimize loses- every investor must try to run his profits and eliminate all loses quickly. Discipline is a necessary condition to trade successfully.
6. Experience and knowledge- there is no age bar for gaining knowledge. So, keep practicing and become successful trader.
Wednesday, September 29, 2010
Monday, September 27, 2010
"Myth of the Missing Market Volume"
There is an article titled ""Myth of the Missing Market Volume". The author states that "many question the legitimacy of any rally that comes with less volume than a preceding decline". But he takes a slightly different approach. "I think the decline in volume in equity markets is predominantly a good thing that portends more upside for the stock market". This is in agreement with previous post in which it is estimated that the market would drift upward gradually if the trading volume remains low. The author expresses another point that he "think different volume metrics provide a much clearer and more important snapshot of the state of our economy than equity market volume."
"There are several reasons for this relationship. On the way down, many with long equity exposure use market instruments to conduct their selling. It’s impossible to sell multi-billion baskets of stock easily, so these sellers turn to futures markets to hedge their long exposure with shorts. Next is the fact that when fear generates selling, selling is done for selling’s sake and people panic out. When the panic is done, those very same sellers don’t panic back into markets. They slowly and steadily accumulate individual positions which they like most. In that regard, it’s far more helpful to look for volume spikes in individual stocks than it is in the market at large, and those are plentiful in this September rally."
"Well there is one volume indicator making significant highs: in both July and August, global M&A volume registered new monthly highs unseen since tracking began in 1995. That trend will continue as companies look to deploy the cash hoarded during the crisis in a strategic manner. The IPO market has looked particularly good lately, with innovative new companies looking to tap into public capital markets and venture capital firms looking to lighten up on positions bought in the time leading up to the financial crisis. This fall boasts an impressive lineup of IPOs that should awaken investors animal spirits."
It is interesting to note that the comments are mostly negative on equity stock market outlook. It has been mentioned in earlier posts that many individual investors stay on the sideline during the rally from bottom last year. Since both the decline and bounce are fast, many stocks sold near the bottom are not purchased back to preserve the portfolio value. As a result, many individual investors and amateur traders lose significant portion of their wealth.
The equity stock market is a wealth creation/destruction as well as transfer tool. The majority of individual investors who become panic during the financial crisis suffer from loss of wealth. However, a minority would benefit from transfer of wealth.
A small portion of individual investors remain holding cash or equivalent. Some are buying treasuries and bonds. However, the majority of individuals still have a portion of their wealth in the form of equity stock holding either in their account or through mutual fund. And the net worth is accumulating.
As a result, many individual investors switch to the passive investment strategy. The swing in market is only a paper loss or profit. They are not panicked by decline nor excited by rally. They are wise enough not to sell their holdings less than the worth. Also, they are afraid of market wild oscillation and not greedy to chase for profit. They feel comfortable to see slow recovery (for holdings prior to financial crisis) or appreciation (for holdings after financial crisis) in their portfolio. Therefore the trading volume is relatively low compared to the figure during financial crisis or before.
However, technology is driving the living standard of human beings. The accumulation of wealth is in the form of physical property such as gold, real estate, equity stock, etc. In the current market environment, from the perspective of a speculative trader, a low trading volume would be beneficial to the stock price. An opportunistic trader can be benefited with adequate mitigation of risk.
The speculative investment portfolio maintains the holding on stock equity and changes to a neutral position in leveraged ETFs holding. It is prepared for quick profit making if the market exhibits volatility. Market dynamics may change significantly in relatively short time. The strategy for speculative stock trading would take into consideration of market environment, participants sentiment, capital flow, etc.
"There are several reasons for this relationship. On the way down, many with long equity exposure use market instruments to conduct their selling. It’s impossible to sell multi-billion baskets of stock easily, so these sellers turn to futures markets to hedge their long exposure with shorts. Next is the fact that when fear generates selling, selling is done for selling’s sake and people panic out. When the panic is done, those very same sellers don’t panic back into markets. They slowly and steadily accumulate individual positions which they like most. In that regard, it’s far more helpful to look for volume spikes in individual stocks than it is in the market at large, and those are plentiful in this September rally."
"Well there is one volume indicator making significant highs: in both July and August, global M&A volume registered new monthly highs unseen since tracking began in 1995. That trend will continue as companies look to deploy the cash hoarded during the crisis in a strategic manner. The IPO market has looked particularly good lately, with innovative new companies looking to tap into public capital markets and venture capital firms looking to lighten up on positions bought in the time leading up to the financial crisis. This fall boasts an impressive lineup of IPOs that should awaken investors animal spirits."
It is interesting to note that the comments are mostly negative on equity stock market outlook. It has been mentioned in earlier posts that many individual investors stay on the sideline during the rally from bottom last year. Since both the decline and bounce are fast, many stocks sold near the bottom are not purchased back to preserve the portfolio value. As a result, many individual investors and amateur traders lose significant portion of their wealth.
The equity stock market is a wealth creation/destruction as well as transfer tool. The majority of individual investors who become panic during the financial crisis suffer from loss of wealth. However, a minority would benefit from transfer of wealth.
A small portion of individual investors remain holding cash or equivalent. Some are buying treasuries and bonds. However, the majority of individuals still have a portion of their wealth in the form of equity stock holding either in their account or through mutual fund. And the net worth is accumulating.
As a result, many individual investors switch to the passive investment strategy. The swing in market is only a paper loss or profit. They are not panicked by decline nor excited by rally. They are wise enough not to sell their holdings less than the worth. Also, they are afraid of market wild oscillation and not greedy to chase for profit. They feel comfortable to see slow recovery (for holdings prior to financial crisis) or appreciation (for holdings after financial crisis) in their portfolio. Therefore the trading volume is relatively low compared to the figure during financial crisis or before.
However, technology is driving the living standard of human beings. The accumulation of wealth is in the form of physical property such as gold, real estate, equity stock, etc. In the current market environment, from the perspective of a speculative trader, a low trading volume would be beneficial to the stock price. An opportunistic trader can be benefited with adequate mitigation of risk.
The speculative investment portfolio maintains the holding on stock equity and changes to a neutral position in leveraged ETFs holding. It is prepared for quick profit making if the market exhibits volatility. Market dynamics may change significantly in relatively short time. The strategy for speculative stock trading would take into consideration of market environment, participants sentiment, capital flow, etc.
Friday, September 24, 2010
Wild Oscillation In Stock Market
As predicted in the post in last week, the stock market oscillates wildly in this week. And also as predicted in the post in the beginning of this month, the stock equity market shows a gradual uptrend, with some fluctuation. The movement of stock equity market in relatively short term depends on market participants' herd behaviour. In the longer term, equity stock market is correlated to economic growth. Therefore it should be optimistic with the advancement of technology. However, there is a threat of overuse of natural resources by human being and thus damaging the environment. Many people are aware of the threat. But from the perspective of an investor in financial market, the threat will not have significant effect on the economy, at least in the coming decade.
The speculative investment portfolio has small gain in this week. Some of the profit in equity stock holding is offset by the leveraged ETFs which is bearish to protect the portfolio against sudden market drop. However, it is seen that a more active trading strategy can improve the profit if managed properly to mitigate risk. The portfolio can take advantage of fluctuation in market to increase overall return. However, instantaneous market movement is highly unpredictable and day trading strategy is not to be end up as pure random gambling with the portfolio. One of the objective of developing a speculative trading strategy is to avoid the mistakes during the financial crisis in order to increase the probability of positive return in the portfolio.
So far, the allocation of stock equity and leveraged ETFs in the portfolio seems to be adequate. However, it appears that the holding period may be long for an aggressive trading portfolio. The oscillation in yesterday's and today's market provides chance to make profit for opportunistic traders. Therefore trading activity can be increased if there is volatility in the market. This would require close tracking of market movement and analysis of market environment.
Investors on the sideline are impatient of waiting with cash earning low return. This drives the price of gold, junk bond, as well as stock recently. Although it is believed that equity stock should go up in the log run, there are many uncertainties in short term. And it can be manipulated quite easily under current environment. For a speculative trading portfolio, holding an investment for extended time may not be the most efficient strategy. Therefore portion of the stock and ETFs in the portfolio would be used for day trading if there is the opportunity.
If trading volume remains low, the market may drift upward to extend the rally. Herd behaviour is critical to this market environment. There is probability that market can swing violently. And this will be golden chance for opportunistic traders.
The speculative investment portfolio has small gain in this week. Some of the profit in equity stock holding is offset by the leveraged ETFs which is bearish to protect the portfolio against sudden market drop. However, it is seen that a more active trading strategy can improve the profit if managed properly to mitigate risk. The portfolio can take advantage of fluctuation in market to increase overall return. However, instantaneous market movement is highly unpredictable and day trading strategy is not to be end up as pure random gambling with the portfolio. One of the objective of developing a speculative trading strategy is to avoid the mistakes during the financial crisis in order to increase the probability of positive return in the portfolio.
So far, the allocation of stock equity and leveraged ETFs in the portfolio seems to be adequate. However, it appears that the holding period may be long for an aggressive trading portfolio. The oscillation in yesterday's and today's market provides chance to make profit for opportunistic traders. Therefore trading activity can be increased if there is volatility in the market. This would require close tracking of market movement and analysis of market environment.
Investors on the sideline are impatient of waiting with cash earning low return. This drives the price of gold, junk bond, as well as stock recently. Although it is believed that equity stock should go up in the log run, there are many uncertainties in short term. And it can be manipulated quite easily under current environment. For a speculative trading portfolio, holding an investment for extended time may not be the most efficient strategy. Therefore portion of the stock and ETFs in the portfolio would be used for day trading if there is the opportunity.
If trading volume remains low, the market may drift upward to extend the rally. Herd behaviour is critical to this market environment. There is probability that market can swing violently. And this will be golden chance for opportunistic traders.
Friday, September 17, 2010
Investors Start to Move Into Stock Equity Market, Seeing Support
The stock equity market moves up gradually and finishes higher than last week. The trading volume is also higher as some investors move some capital from bond to stock equity. The inflow of capital is still relatively small and does not push the market significantly higher. Unlike the last rally from February to March, individual investors turn optimistic since recent bottom. Therefore it is suspected that this rally can continue for several months whereas individual investors mostly stay on the sideline during February to March.
It is still optimistic on stock equity market. However, short term volatility presents risk to the investment portfolio which is based on speculative stock trading. The portfolio is still fully invested in the stock portion, but with leveraged ETFs holding slightly bearish. The latter serves as hedging to the stock holding in case the market may swing against the holding stocks.
Market makers may not be patient to see the market flat for extended time. On the other hand, retail investors do not have strong confidence in stock equity and may flee from stock market if they perceive unfavorable sign of economy again. There is much uncertainty of market direction under current condition of participants.
It is still optimistic on stock equity market. However, short term volatility presents risk to the investment portfolio which is based on speculative stock trading. The portfolio is still fully invested in the stock portion, but with leveraged ETFs holding slightly bearish. The latter serves as hedging to the stock holding in case the market may swing against the holding stocks.
Market makers may not be patient to see the market flat for extended time. On the other hand, retail investors do not have strong confidence in stock equity and may flee from stock market if they perceive unfavorable sign of economy again. There is much uncertainty of market direction under current condition of participants.
Saturday, September 11, 2010
Capital Flow Reversing From Bond To Stock Equity Market
The stock equity market maintains an uptrend for two weeks since recent bottom. There is no exceptional good news behind the rally. However, it is observed that the bond market is inversely correlated to stock equity market recently. And it appears that the bond yield may have reached the bottom. Investors seeking safety in bond market may be hesitating at this point. Risk appetite of liquidity has increased.
It is interesting to note that the wealth effect of bond and stock equity appreciation are different. Bond value appreciation does not generate wealth among the participants since the underlying collateral remains unchanged in value. On the contrary, stock equity market is not a zero sum game because wealth is created or destroyed with appreciation or depreciation of the collateral.
Greenspan, on Meet the Press on August 1st, said, "As I've always believed, we underestimate the impact of stock prices on economic activity. Asset prices are having a profoundly important effect. What created the extent of the contraction globally was the loss of $37 trillion in market value. It collapsed the value of collateral in the system and it disabled finance. We've come back a little more than halfway, and it's had a very positive effect. I don't know where the stock market is going, but I will say this, that if it continues higher, this will do more to stimulate the economy than anything we've been talking about today or anything anybody else was talking about."
Short term stock trading is very speculative and it is inappropriate to approach from the perspective of financial investment. It is cautiously optimistic on stock equity market movement with long term optimistic outlook. Currently the speculative trading portfolio is neutral on leveraged ETF holdings and bullish on stock holdings. Given the market volatility in recent months, priority is to preserve capital and less aggressive in holding positions for potential gains.
It is interesting to note that the wealth effect of bond and stock equity appreciation are different. Bond value appreciation does not generate wealth among the participants since the underlying collateral remains unchanged in value. On the contrary, stock equity market is not a zero sum game because wealth is created or destroyed with appreciation or depreciation of the collateral.
Greenspan, on Meet the Press on August 1st, said, "As I've always believed, we underestimate the impact of stock prices on economic activity. Asset prices are having a profoundly important effect. What created the extent of the contraction globally was the loss of $37 trillion in market value. It collapsed the value of collateral in the system and it disabled finance. We've come back a little more than halfway, and it's had a very positive effect. I don't know where the stock market is going, but I will say this, that if it continues higher, this will do more to stimulate the economy than anything we've been talking about today or anything anybody else was talking about."
Short term stock trading is very speculative and it is inappropriate to approach from the perspective of financial investment. It is cautiously optimistic on stock equity market movement with long term optimistic outlook. Currently the speculative trading portfolio is neutral on leveraged ETF holdings and bullish on stock holdings. Given the market volatility in recent months, priority is to preserve capital and less aggressive in holding positions for potential gains.
Saturday, September 4, 2010
Is Alpha Market Research, Inc. A Legitimate Business?
Two posts referring Alpha Market Research, Inc. have been published. Readers are recommended to do their own due diligence on the company. On the bottom line, before promoting the company to readers, it has already registered as website tester. It is believed that registrants are not joining a pyramid scheme and the development of the startup business will be monitored.
The business model of Alpha Market Research, Inc. may be debatable. In a website, the author is doubtful about the company since its first appearance in June and is tracking the development. It remains cautious about the legitimacy of the business. Nevertheless, it has not claimed the company as fraud or scam yet.
PatrickPretty.com Covering Ponzi Schemes And Internet Crime.
It may promote our on-line storefront here occasionally. But it is not intended to promote scam. It is found in a discussion forum that the poster appears to have found a company that offers make money from home program. A message is posted to promote the program to other readers. Later after a month, it is found that the program does not work as expected and a message is posted to warn other readers.
Project PayDay Very Good Home-based Business
There are business models that may appear not working at the first glance. During dot-com's heyday, there was an Internet advertising company called AllAdvantage.com. The company paid members to view advertisement on their computers. Registration was free. The company's practice of compensating existing members for referring new members led it to become one of the most heavily promoted websites of its time. The company was a real business although it survived for only about two years. There is evidence to support this claim because a reward check from AllAdvantage.com was not cashed and recently found among other letters. Although the company had paid out over 160 millions to its members, it is suspected that very few reward checks were not cashed. The financial burden prohibited the company to reward members with cash bonus which was replaced with prize drawing before the company was finally shut down. For additional information about the company and its business, see AllAdvantage.com.
There are other business models that reward members and referrals. PayPal is a successful example. Unfortunately, the 5-dollar signup bonus was already cancelled when registering for membership.
In conclusion, paid website testing may be a viable business concept. Alpha Market Research, Inc. appears to be following this path. However, its financial strength and thus sustainability is unclear.
The business model of Alpha Market Research, Inc. may be debatable. In a website, the author is doubtful about the company since its first appearance in June and is tracking the development. It remains cautious about the legitimacy of the business. Nevertheless, it has not claimed the company as fraud or scam yet.
PatrickPretty.com Covering Ponzi Schemes And Internet Crime.
It may promote our on-line storefront here occasionally. But it is not intended to promote scam. It is found in a discussion forum that the poster appears to have found a company that offers make money from home program. A message is posted to promote the program to other readers. Later after a month, it is found that the program does not work as expected and a message is posted to warn other readers.
Project PayDay Very Good Home-based Business
There are business models that may appear not working at the first glance. During dot-com's heyday, there was an Internet advertising company called AllAdvantage.com. The company paid members to view advertisement on their computers. Registration was free. The company's practice of compensating existing members for referring new members led it to become one of the most heavily promoted websites of its time. The company was a real business although it survived for only about two years. There is evidence to support this claim because a reward check from AllAdvantage.com was not cashed and recently found among other letters. Although the company had paid out over 160 millions to its members, it is suspected that very few reward checks were not cashed. The financial burden prohibited the company to reward members with cash bonus which was replaced with prize drawing before the company was finally shut down. For additional information about the company and its business, see AllAdvantage.com.
There are other business models that reward members and referrals. PayPal is a successful example. Unfortunately, the 5-dollar signup bonus was already cancelled when registering for membership.
In conclusion, paid website testing may be a viable business concept. Alpha Market Research, Inc. appears to be following this path. However, its financial strength and thus sustainability is unclear.
Alpha Market Research, Inc. Update
Couple of months ago, an opportunity for paid website tester is posted. Now the program is launched and additional promoting materials are available from the company. Interested reader can click the following link to register as paid website tester, free.
Alpha Market Research, Inc. Paid Website Tester
For companies interested to know more about the program, there is a YouTube Video to explain the program.
Alpha Market Research, Inc. AMR Success Strategy
For individuals interested to know more about the program, there are some video clips from the company.
Speech of CEO Michael Anthony DeBias
The video "AMR Success Strategy" is available in different languages:
AMR Success Strategy (English)
AMR Success Strategy (Deutsch)
AMR Success Strategy (中文-國語)
Join Alpha Market Research, Inc. as paid website tester.
Alpha Market Research, Inc. Paid Website Tester
For companies interested to know more about the program, there is a YouTube Video to explain the program.
Alpha Market Research, Inc. AMR Success Strategy
For individuals interested to know more about the program, there are some video clips from the company.
Speech of CEO Michael Anthony DeBias
The video "AMR Success Strategy" is available in different languages:
AMR Success Strategy (English)
AMR Success Strategy (Deutsch)
AMR Success Strategy (中文-國語)
Join Alpha Market Research, Inc. as paid website tester.
"Far Too Many Bears for Stock Market to Crash?"
A search on the Internet reveals many articles with similar thinking on sideline investors on equity stock market. One of the article that deserves reading (especially on some comments) is
http://www.rickackerman.com/2010/08/far-too-many-bears-for-stocks-to-crash/.
Although there are a few points that is not totally agreed, the overall perception on current market scenario matches with previous discussions here. The article is published at the time (August 24th) when the market reached recent bottom. Following are some reasoning quoted from the article and comments that further dramatic decline in equity stock market would not happen.
"There is just so much talk of a crash that it has almost become anti-climactic. The thing is that with so many mutual fund redemptions having taken place and so many more 401-Ks being shifted out of equities, it does seem surprising that markets keep floating, range-bound."
"Incidentally, we hear daily about this or that person of note who has sold “all” their equity positions to avoid collateral damage, and we all know about all the people who are bailing on the markets for the shelter of bonds, T-bills, Gold or old-fashioned cash. But I am not convinced this is the exact course that should be taken."
"How anyone can think we’re in a moment which resembles a moment containing the prerequisite market sentiment and technical factors which precede a crash is beyond me. We have no blowoff top, we have no giddy wooohaa, we have no extreme bullishness, we have loads of cash on the sidelines, we have fear, THE WALL OF WORRY is as much there right now as it has ever been. I could go on…the pieces of the puzzle are just not there plus the rules of the system are not the same."
"Point is, one of the few times we saw a major collapse was in the early 30’s and that was under a gold standard which, makes it a completely different situation than what we have today."
"One should read the congressional record of 1929. The concern was that the People had too much money, and were not using that money the way the government wanted it used."
"All anyone is concerned about is the double dip, and catching the next bull. There are no perma-bears out there, except the radical few who have been made fun of."
Despite above arguments, the possibility of significant decline in equity stock market still exists. There are not many buyers to prevent a fast dip if bad news comes out and the market moves downwards. A "Black Swan Event" will drive the herd for sell-offs. And there is always a driving force causing fluctuations to correlate the equity stock market performance and real world economy fundamentals.
http://www.rickackerman.com/2010/08/far-too-many-bears-for-stocks-to-crash/.
Although there are a few points that is not totally agreed, the overall perception on current market scenario matches with previous discussions here. The article is published at the time (August 24th) when the market reached recent bottom. Following are some reasoning quoted from the article and comments that further dramatic decline in equity stock market would not happen.
"There is just so much talk of a crash that it has almost become anti-climactic. The thing is that with so many mutual fund redemptions having taken place and so many more 401-Ks being shifted out of equities, it does seem surprising that markets keep floating, range-bound."
"Incidentally, we hear daily about this or that person of note who has sold “all” their equity positions to avoid collateral damage, and we all know about all the people who are bailing on the markets for the shelter of bonds, T-bills, Gold or old-fashioned cash. But I am not convinced this is the exact course that should be taken."
"How anyone can think we’re in a moment which resembles a moment containing the prerequisite market sentiment and technical factors which precede a crash is beyond me. We have no blowoff top, we have no giddy wooohaa, we have no extreme bullishness, we have loads of cash on the sidelines, we have fear, THE WALL OF WORRY is as much there right now as it has ever been. I could go on…the pieces of the puzzle are just not there plus the rules of the system are not the same."
"Point is, one of the few times we saw a major collapse was in the early 30’s and that was under a gold standard which, makes it a completely different situation than what we have today."
"One should read the congressional record of 1929. The concern was that the People had too much money, and were not using that money the way the government wanted it used."
"All anyone is concerned about is the double dip, and catching the next bull. There are no perma-bears out there, except the radical few who have been made fun of."
Despite above arguments, the possibility of significant decline in equity stock market still exists. There are not many buyers to prevent a fast dip if bad news comes out and the market moves downwards. A "Black Swan Event" will drive the herd for sell-offs. And there is always a driving force causing fluctuations to correlate the equity stock market performance and real world economy fundamentals.
Friday, September 3, 2010
Speculative Herding, Bubble and the Trading Strategies: Behavioral Finance
While browsing the Internet, an article appears with the title "Speculative Herding, Bubble and the Trading Strategies: What can we learn from Behavioral Finance?" It seems interesting and may contain useful information on trading strategy. There are two parts on the topic. The links are as following.
Speculative Herding, Bubble and the Trading Strategies: What can we learn from Behavioral Finance? Part I
Speculative Herding, Bubble and the Trading Strategies: What can we learn from Behavioral Finance? Part II
There are some interesting points mentioned in the article.
"The heterogeneity of these speculative trading provides the liquidity to the market. In a normal-functioned market, speculative trading fosters price discovery and ensures market efficiency.
However, when one-sided opinions drown out the opposite opinions and the heterogeneity beliefs arise from the overconfidence agents, it induces a herding behavior and the market ceases functioning rationally."
"Investing is a social activity. Herding occurs when the market participants seek signals from others in matters of knowledge and behavior and therefore align their convictions with the leading voices within the group."
“(Herding is) dependence upon the behavior of others most easily substitutes for rigorous reasoning when knowledge is lacking or logic irrelevant. In a realm such as investing, where so few are knowledgeable, or in a realm such as fads and fashion, where logic is inappropriate and the whole point is to impress other people, the tendency toward dependence is pervasive. Trends in such activities are steered not by the rational decisions of individual minds but by the peculiar collective sensibilities of the herd. … To forecast on the basis of the current sentiments of the herd is to “forecast” the present mood, not future events. Success is simply a matter of whether the present mood maintains, which it usually does not.”
"Sentiment indicators, net order flow and autocorrelation in daily trading volume can be easily integrated into daily decision making process. For more sophisticated traders, many models, such as game theory, complexity theory and other social sciences, are available to construct a tradable strategy and mitigate risk."
"The stock market and various asset classes rebounded after the financial meltdown. It is arguable whether or not we are in a liquidity-fueled mini bubble. There are certainly distinct fads in the recent post-crisis market. Many market participants flock into certain areas like Gold, certain commodities and the emerging markets."
In another article from a different author, “Where are We in the Bubble Process”, the author predicts a sustained and difficult road ahead.
"In my opinion, I think the panic phase of the credit bubble is past us. Unfortunately, what is consistent in each of the major bubbles in the history of the world is that they always suffer extended periods of sideways to down action (though generally not dramatically down)."
Contrary to the author's opinion, it is believed that current equity stock market is at the "Return to the mean" stage in the pricing model. There have been different bubbles in the past, Nikkei, Gold, Great Depression, Nasdaq, etc. Current housing bubble results in a credit crunch that leads to economic recession. The equity stock market is priced at a valuation that can be decomposed into its fundamental component, and, the speculative component from the demands by the investors who overreact to news or are vulnerable to fads. Since economic indicators does not indicate a fast recovery, the majority of investors stay away from equity stock and park the funds into treasuries and bonds which may become a bubble.
However, the wealth generated by technology and global liquidity will fuel the asset class targeted by the herd, which is currently treasuries and bonds. In a world of human complexity, short term speculative trading strategy is to predict market movement as we enter into an anemic economic growth period and assets are increasingly prone to speculative attacks. Investors need to keep constant vigilant to the underlying fundamentals and market ecosystem.
Speculative Herding, Bubble and the Trading Strategies: What can we learn from Behavioral Finance? Part I
Speculative Herding, Bubble and the Trading Strategies: What can we learn from Behavioral Finance? Part II
There are some interesting points mentioned in the article.
"The heterogeneity of these speculative trading provides the liquidity to the market. In a normal-functioned market, speculative trading fosters price discovery and ensures market efficiency.
However, when one-sided opinions drown out the opposite opinions and the heterogeneity beliefs arise from the overconfidence agents, it induces a herding behavior and the market ceases functioning rationally."
"Investing is a social activity. Herding occurs when the market participants seek signals from others in matters of knowledge and behavior and therefore align their convictions with the leading voices within the group."
“(Herding is) dependence upon the behavior of others most easily substitutes for rigorous reasoning when knowledge is lacking or logic irrelevant. In a realm such as investing, where so few are knowledgeable, or in a realm such as fads and fashion, where logic is inappropriate and the whole point is to impress other people, the tendency toward dependence is pervasive. Trends in such activities are steered not by the rational decisions of individual minds but by the peculiar collective sensibilities of the herd. … To forecast on the basis of the current sentiments of the herd is to “forecast” the present mood, not future events. Success is simply a matter of whether the present mood maintains, which it usually does not.”
"Sentiment indicators, net order flow and autocorrelation in daily trading volume can be easily integrated into daily decision making process. For more sophisticated traders, many models, such as game theory, complexity theory and other social sciences, are available to construct a tradable strategy and mitigate risk."
"The stock market and various asset classes rebounded after the financial meltdown. It is arguable whether or not we are in a liquidity-fueled mini bubble. There are certainly distinct fads in the recent post-crisis market. Many market participants flock into certain areas like Gold, certain commodities and the emerging markets."
In another article from a different author, “Where are We in the Bubble Process”, the author predicts a sustained and difficult road ahead.
"In my opinion, I think the panic phase of the credit bubble is past us. Unfortunately, what is consistent in each of the major bubbles in the history of the world is that they always suffer extended periods of sideways to down action (though generally not dramatically down)."
Contrary to the author's opinion, it is believed that current equity stock market is at the "Return to the mean" stage in the pricing model. There have been different bubbles in the past, Nikkei, Gold, Great Depression, Nasdaq, etc. Current housing bubble results in a credit crunch that leads to economic recession. The equity stock market is priced at a valuation that can be decomposed into its fundamental component, and, the speculative component from the demands by the investors who overreact to news or are vulnerable to fads. Since economic indicators does not indicate a fast recovery, the majority of investors stay away from equity stock and park the funds into treasuries and bonds which may become a bubble.
However, the wealth generated by technology and global liquidity will fuel the asset class targeted by the herd, which is currently treasuries and bonds. In a world of human complexity, short term speculative trading strategy is to predict market movement as we enter into an anemic economic growth period and assets are increasingly prone to speculative attacks. Investors need to keep constant vigilant to the underlying fundamentals and market ecosystem.
Thursday, September 2, 2010
Support Level From Traders Looking for Value
Equity stock market rallied for three continuous days after reaching recent bottom. As previously mentioned, some investors/traders find equity stock market attractive at current level. Some good news will spur the stock market to rally.
Since the stock market declined for an extended long time before the rally, the investment portfolio suffered quite an amount of loss. Therefore part of the portfolio holding was liquidated to reduce loss. The decision was made too early and thus reducing the capability to recover loss. Current portfolio still retains some long position holding. The gain would be higher if more risk were taken.
Recent transactions on the portfolio shows that the risk/gain scenario is not evaluated properly. During the market decline, the risk is underestimated and there is not enough hedging to offset the potential loss. During the rally, the confidence is hampered and therefore not realising most of the profit. To guess the equity stock market movement is not a easy task. However, the trading strategy should emphasize more on risk/gain evaluation than emotional behaviour.
It is cautiously optimistic on the market which is expected to gradually move up due to absence of selling pressure. The low trading volume in equity stock market indicates bullish and bearish day traders are competing while individual and institutional investors are waiting on the sideline. Most individual investors are waiting patiently for the ideal low entry point which may not happen. But some institutional investors are impatient and fuel the recent rally.
The driving force to advance the equity stock market further is still limited at this moment. And it is possible that it may be manipulated down by traders and market makers. The priority is to preserve the portfolio value and to take controlled risk as opportunity cost to make profit from market speculation.
Since the stock market declined for an extended long time before the rally, the investment portfolio suffered quite an amount of loss. Therefore part of the portfolio holding was liquidated to reduce loss. The decision was made too early and thus reducing the capability to recover loss. Current portfolio still retains some long position holding. The gain would be higher if more risk were taken.
Recent transactions on the portfolio shows that the risk/gain scenario is not evaluated properly. During the market decline, the risk is underestimated and there is not enough hedging to offset the potential loss. During the rally, the confidence is hampered and therefore not realising most of the profit. To guess the equity stock market movement is not a easy task. However, the trading strategy should emphasize more on risk/gain evaluation than emotional behaviour.
It is cautiously optimistic on the market which is expected to gradually move up due to absence of selling pressure. The low trading volume in equity stock market indicates bullish and bearish day traders are competing while individual and institutional investors are waiting on the sideline. Most individual investors are waiting patiently for the ideal low entry point which may not happen. But some institutional investors are impatient and fuel the recent rally.
The driving force to advance the equity stock market further is still limited at this moment. And it is possible that it may be manipulated down by traders and market makers. The priority is to preserve the portfolio value and to take controlled risk as opportunity cost to make profit from market speculation.
Subscribe to:
Posts (Atom)