Market ends lower with less trading days and shortened hours on last day. Institutional investors should have completed portfolio trimming. But some hedge funds are still speculating on further market retrenchment. Their selling was followed by some day traders and individual investors. As mentioned in the article "The One Number That Spells Market Upside or Downside in 2011", in this kind of market, it's wise to take profits when you can on any short-term moves while sitting tight on your long-term core holdings.
Although buying demand from individual investors appears to vanish in this week, investors are holding tight on existing portfolio. When the market declines, trading volume remains low whether the magnitude is large or small. This indicates that trading activities are mainly from day traders whether institutional or individual. As mentioned in earlier post, current market level should have support from individual investors. However, the confidence is still low because of stagnant economic growth despite soaring corporate earnings which boost investors' interest on stock. Since hedge fund can make profit on either market movement direction, there is probability that hedge fund can use herd behaviour to manipulate down the market for profit and to accumulate position for future appreciation. There may or may not be better entry point later for value investment. But long-term investors can still profit from cost averaging under current environment.
"Good for GM, Bad for Stocks?" Investors' stock-buying appetite is still hearty. After all, money has started to flow into stock funds again, and this year's U.S. debutantes are up an eye-catching 15%. Of course, whether investors will keep purchasing stocks depends ultimately on the state of the economy, and the surprises it holds. If it's any consolation, today's bulls are a fickle, faithless bunch, their optimism cloaked in layers of qualifiers and caveats, and they change their minds quicker than teenagers do.
The wealth effect has started to surface. From Yahoo! article, "Signs of Swagger, Wallets Out, Wall St. Dares to Indulge", exuberance made a comeback this year at Josh Koplewicz's annual Halloween party. More than 1,000 people packed into a 6,000-square-foot space at the Good Units night club in Manhattan, a substantially larger crowd than in the last several years. The scene was more extravagant in September, at a 50th birthday party in Hong Kong for Brian Brille, the head of Bank of America Asia Pacific.
Two years after the onset of the financial crisis, the stock market is recovering and Wall Street's moneyed elite are breathing easier again. And this means in some cases they are spending again - at times cautiously, but sometimes with a familiar swagger. Expensive restaurants report a pickup in bookings. Real estate agents say Wall Street executives have already begun lining up rentals in the Hamptons for next summer. Christie's auction house says investors from the financial world who fell out of the bidding market during the 2008 credit crisis are "pouring" back in. Most expenditures, however, are for more mainstream indulgences. Marc B. Porter, a senior executive at Christie's, says Wall Street workers for whom the auction market was recently seen as "out of range" are pouring back in. This resurgence of activity, he says, has followed the recovery of different economies, be it Hong Kong or the United States.
Lack of interest from the majority of household investors is the major bottleneck of market uptrend. "Probe leads investors to wonder: Is game rigged?" "A large part of trading has to do with trust, and I don't have it," says Mark Swenson, a 43-year-old plumber from New Hampshire who refuses to buy individual stocks. Even before news broke that federal investigators were looking into whether hedge funds traded on inside information, small-time investors were pulling their money out of stocks -- despite a remarkable run for the market since the spring of 2009.
Some pros on Wall Street say hesitation by small investors is good news. It means that there's plenty of "dry powder" to propel the market higher in the next few months when and if the little guy finally relents and joins in the rally. The insider-trading probe could test that theory.
It's not the first time small investors have been scared out of stocks. Charles Geisst, a finance professor at Manhattan College who has written 18 books on the history of markets, says investors balked at buying for years after the Crash of 1929 and Black Monday in 1987. The view both times: The odds are stacked against the little guy.
The market needs them back. Most of the stock in U.S. companies, both public and private, is held by individuals, not institutions, according to Federal Reserve data. Small investors may be comforted to know that professional investors don't always fare better, even with the edge they have over the masses. "The edge is hugely exaggerated," says Richard Ferri, founder of the investment advisory firm Portfolio Solutions and an advocate of low-cost index funds. "If the small investor does the right thing, he can do better than 99 percent of anyone else."
Friday, November 26, 2010
Friday, November 19, 2010
Market Ends Flat From Last Week With Oscillation
Market participants fight for short term equilibrium. Institutional investors continue with selling while individual investors buy on the dip. Since selling from institutional investors is relatively light and not followed by day traders, market seems to find support at current level. The selling from institutional investors should be approaching the end as they cannot drive the market further down without heavy selling. The majority of existing equity stock holders are not willing to dump the shares which are expected to appreciate in the long run. On the other hand, the demand for equity stock is still weak because household, being the largest buyer, is staying away from stock. Nevertheless, it is anticipated that market will drift upward slowly by liquidity as well as wealth effect. There may be oscillation as market participants manipulate for short term profit.
More analysts speak of an optimistic outlook on economy. As mentioned in the Yahoo! article "'The Next American Economy': Govt.-Sponsored Innovation Is Our Best Hope, Holstein Says", they key is innovation. The U.S. needs to make a “deep structural adjustment” he tells Aaron in this clip. No longer can we rely on credit cards and rising home values to finance our growing consumption. If done right, government involvement in research and development can spark new industries and create millions of jobs. Innovation in communications, the Internet, biotechnologies all have their roots in government funding, Holstein notes. “Look at so many of these thing that have come out of the right kind of federal funding that goes into the right kind of institutions and then allowing those ideas to blossom commercially.”
Sonders: Building Blocks for Recovery "Starting to Stack Up," But Don't Expect a Boom. While Wall Street and big business post record profits, the popular perception is the 'real economy' is still struggling to gain ground. With the unemployment rate near 10% and housing still bouncing along the bottom (at best), the divergence of opinion between Wall Street and Main Street is probably no surprise. Her pessimism on jobs is due in large part to “structural impediments” that have prevented people looking for work from moving to areas where there are actually jobs.
An undesirable outcome of 2008 financial crisis and 2009 stock market rally is the concentration of wealth. Although wealth of the nation, measured by asset valuation, recovers significantly, it is only redistributed to the already rich people. This explains that the majority of population is not benefited from the recovery. The Rich Get Richer, and They Have You to Thank, Says David Cay Johnston. The wealth gap in America is outpacing much of the world. "Income inequality in the United States has soared ... with 1 percent controlling 24 percent of American income in 2007," New York Times columnist Nicholas Kristof recently wrote. Kristof notes that's worse than "historically unstable countries like Nicaragua, Venezuela and Guyana." What's even more striking is that many of these unfair advantages are given to the biggest political contributors. The Wall Street bailouts are a perfect example. "There's been a massive turnover of money to people who didn't have to face the consequences of the market," Johnston says. "Goldman Sachs got its bad bets paid off at 100 cents on the dollar. I’ve never seen the government do that for me."
More analysts speak of an optimistic outlook on economy. As mentioned in the Yahoo! article "'The Next American Economy': Govt.-Sponsored Innovation Is Our Best Hope, Holstein Says", they key is innovation. The U.S. needs to make a “deep structural adjustment” he tells Aaron in this clip. No longer can we rely on credit cards and rising home values to finance our growing consumption. If done right, government involvement in research and development can spark new industries and create millions of jobs. Innovation in communications, the Internet, biotechnologies all have their roots in government funding, Holstein notes. “Look at so many of these thing that have come out of the right kind of federal funding that goes into the right kind of institutions and then allowing those ideas to blossom commercially.”
Sonders: Building Blocks for Recovery "Starting to Stack Up," But Don't Expect a Boom. While Wall Street and big business post record profits, the popular perception is the 'real economy' is still struggling to gain ground. With the unemployment rate near 10% and housing still bouncing along the bottom (at best), the divergence of opinion between Wall Street and Main Street is probably no surprise. Her pessimism on jobs is due in large part to “structural impediments” that have prevented people looking for work from moving to areas where there are actually jobs.
An undesirable outcome of 2008 financial crisis and 2009 stock market rally is the concentration of wealth. Although wealth of the nation, measured by asset valuation, recovers significantly, it is only redistributed to the already rich people. This explains that the majority of population is not benefited from the recovery. The Rich Get Richer, and They Have You to Thank, Says David Cay Johnston. The wealth gap in America is outpacing much of the world. "Income inequality in the United States has soared ... with 1 percent controlling 24 percent of American income in 2007," New York Times columnist Nicholas Kristof recently wrote. Kristof notes that's worse than "historically unstable countries like Nicaragua, Venezuela and Guyana." What's even more striking is that many of these unfair advantages are given to the biggest political contributors. The Wall Street bailouts are a perfect example. "There's been a massive turnover of money to people who didn't have to face the consequences of the market," Johnston says. "Goldman Sachs got its bad bets paid off at 100 cents on the dollar. I’ve never seen the government do that for me."
Thursday, November 18, 2010
Apple 1 And Paperwork Being Auctioned By Christie’s On November 23rd, 2010
Christie’s Auction House will be auctioning off an Apple 1 computer — the first computer model designed by Steve Wozniak and hand built by The Woz and Steve Jobs in Mr. Jobs’s parent’s garage. The auction is for a fully assembled motherboard with some extra components such as a 6502 microprocessor and more RAM that were added later, and the auction takes place on November 23, 2010. Christie’s expects it to fetch between £100,000 and £150,000 (roughly US$161,600 - $242,400).
The circuit board is numbered 82, and that’s out of the 200 that were made before the newly born company moved on to the Apple II computer. That does, in theory, mean that it’s not one of the first 50 that were sold to The Byte Shop, an early computer and electronics supply store that bought the first 50 units made.
SALE 7882 (Valuable Printed Books and Manuscripts)
23 November 2010 London, King Street
LOT 65
Lot Description
APPLE-1 -- Personal Computer. An Apple-1 motherboard, number 82, printed label to reverse, with a few slightly later additions including a 6502 microprocessor, labeled R6502P R6502-11 8145, printed circuit board with 4 rows A-D and columns 1-18, three capacitors, heatsink, cassette board connector, 8K bytes of RAM, keyboard interface, firmware in PROMS, low-profile sockets on all integrated circuits, video terminal, breadboard area with slightly later connector, with later soldering, wires and electrical tape to reverse, printed to obverse Apple Computer 1 Palo Alto. Ca. Copyright 1976.
[With:] Apple cassette interface card, numbered 2 in black ink manuscript to obverse and lettered G within triangle in black ink manuscript to reverse; Scotch C-60 cassette with typed printed label 'BASIC'; Apple-1 Cassette Interface. Palo Alto: Apple Computer Company, (n.d., but 1976). 2 bifolia to form oblong 8° (140 x 216mm). [8pp.] Original company logo of Sir Isaac Newton under the apple tree to upper cover, 2 diagrams, 1 full-page -- Apple-1 Operation Manual. Palo Alto: Apple Computer Company, (n.d., but 1976). 4° (280 x 215mm) 12pp. 8 circuit diagrams, 2 on one folding sheet printed recto and verso, one full-page. (Light vertical crease to folding sheet, marginal light pink ink marks to full-page diagram.) Original printed wrappers, stapled, with original company logo to upper wrapper and warranty within decorative border to inside rear wrapper (short split at foot of spine) -- double-sided illustrated advertisement sheet with prices -- original typed invoice for Apple-1 and Apple cassette interface totaling $741.66 dated 12/7/76, with salesman named as Steven -- undated TYPED LETTER SIGNED 'STEVEN JOBS' to original owner, on ruled paper, one page folio -- typed letter signed by Apple Technical Support Specialist John Fenwick dated 19 January 1982, one page folio.
ALL CONTAINED IN THE ORIGINAL SHIPPING BOX, typed label to upper cover, 'fragile' stamps in red ink, various shipping marks in ink and manuscript (extremities rubbed, parcel tape fraying, lightly soiled, but in remarkably fresh condition). 455 x 290 x 70mm. Provenance: Electric City Radio Supply, Great Falls, Montana (shipping label to box, invoice address) -- Frank Anderson (of Great Falls, Montana, possibly the original owner of ECRS, letter addressed to him from Apple Technical Support) -- Keith Purdy (of Scotts Valley, CA, business card) -- unknown owner (photograph of owner with Steve Wozniak, Wozniak's business card included).
THE FIRST APPLE COMPUTER, AND THE FIRST PERSONAL COMPUTER WITH A FULLY ASSEMBLED MOTHERBOARD, HERALDING THE HOME COMPUTER REVOLUTION. Introduced in July 1976, the Apple-1 was sold without a casing, power supply, keyboard or monitor. However, because the motherboard was completely pre-assembled, it represented a major step forward in comparison with the competing self-assembly kits of the day. Priced at $666.66, the first Apple-1s were dispatched from the garage of Steve Jobs' parents' house - the return address on the original packaging present here. It is not clear how many Apple-1s were sold, but by April 1977 the price was dropped to $475, and it continued to be sold through August 1977, despite the introduction of the Apple II in April 1977 (a major advance with integrated keyboard, sound, a plastic case, and eight internal expansion slots). It was officially discontinued by October 1977. A SUPERB EXAMPLE with the original packaging, manuals, cassette interface and basic tape, early documentation and provenance, and a COMMERCIALLY RARE LETTER FROM STEVE JOBS.
Christie’s information on the particulars of this auction on the company’s site.
eBay auction 320585219846 ended on September 10th 2010. The merchandise is an Apple I computer similar to the Christie's auction, with manuals and accessories. The high bidder fetches a ten-fold appreciation in less than three months on market valuation.
For additional details on above eBay auction, visit the posting on Atico Electronics Storefront.
The circuit board is numbered 82, and that’s out of the 200 that were made before the newly born company moved on to the Apple II computer. That does, in theory, mean that it’s not one of the first 50 that were sold to The Byte Shop, an early computer and electronics supply store that bought the first 50 units made.
SALE 7882 (Valuable Printed Books and Manuscripts)
23 November 2010 London, King Street
LOT 65
Lot Description
APPLE-1 -- Personal Computer. An Apple-1 motherboard, number 82, printed label to reverse, with a few slightly later additions including a 6502 microprocessor, labeled R6502P R6502-11 8145, printed circuit board with 4 rows A-D and columns 1-18, three capacitors, heatsink, cassette board connector, 8K bytes of RAM, keyboard interface, firmware in PROMS, low-profile sockets on all integrated circuits, video terminal, breadboard area with slightly later connector, with later soldering, wires and electrical tape to reverse, printed to obverse Apple Computer 1 Palo Alto. Ca. Copyright 1976.
[With:] Apple cassette interface card, numbered 2 in black ink manuscript to obverse and lettered G within triangle in black ink manuscript to reverse; Scotch C-60 cassette with typed printed label 'BASIC'; Apple-1 Cassette Interface. Palo Alto: Apple Computer Company, (n.d., but 1976). 2 bifolia to form oblong 8° (140 x 216mm). [8pp.] Original company logo of Sir Isaac Newton under the apple tree to upper cover, 2 diagrams, 1 full-page -- Apple-1 Operation Manual. Palo Alto: Apple Computer Company, (n.d., but 1976). 4° (280 x 215mm) 12pp. 8 circuit diagrams, 2 on one folding sheet printed recto and verso, one full-page. (Light vertical crease to folding sheet, marginal light pink ink marks to full-page diagram.) Original printed wrappers, stapled, with original company logo to upper wrapper and warranty within decorative border to inside rear wrapper (short split at foot of spine) -- double-sided illustrated advertisement sheet with prices -- original typed invoice for Apple-1 and Apple cassette interface totaling $741.66 dated 12/7/76, with salesman named as Steven -- undated TYPED LETTER SIGNED 'STEVEN JOBS' to original owner, on ruled paper, one page folio -- typed letter signed by Apple Technical Support Specialist John Fenwick dated 19 January 1982, one page folio.
ALL CONTAINED IN THE ORIGINAL SHIPPING BOX, typed label to upper cover, 'fragile' stamps in red ink, various shipping marks in ink and manuscript (extremities rubbed, parcel tape fraying, lightly soiled, but in remarkably fresh condition). 455 x 290 x 70mm. Provenance: Electric City Radio Supply, Great Falls, Montana (shipping label to box, invoice address) -- Frank Anderson (of Great Falls, Montana, possibly the original owner of ECRS, letter addressed to him from Apple Technical Support) -- Keith Purdy (of Scotts Valley, CA, business card) -- unknown owner (photograph of owner with Steve Wozniak, Wozniak's business card included).
THE FIRST APPLE COMPUTER, AND THE FIRST PERSONAL COMPUTER WITH A FULLY ASSEMBLED MOTHERBOARD, HERALDING THE HOME COMPUTER REVOLUTION. Introduced in July 1976, the Apple-1 was sold without a casing, power supply, keyboard or monitor. However, because the motherboard was completely pre-assembled, it represented a major step forward in comparison with the competing self-assembly kits of the day. Priced at $666.66, the first Apple-1s were dispatched from the garage of Steve Jobs' parents' house - the return address on the original packaging present here. It is not clear how many Apple-1s were sold, but by April 1977 the price was dropped to $475, and it continued to be sold through August 1977, despite the introduction of the Apple II in April 1977 (a major advance with integrated keyboard, sound, a plastic case, and eight internal expansion slots). It was officially discontinued by October 1977. A SUPERB EXAMPLE with the original packaging, manuals, cassette interface and basic tape, early documentation and provenance, and a COMMERCIALLY RARE LETTER FROM STEVE JOBS.
Christie’s information on the particulars of this auction on the company’s site.
eBay auction 320585219846 ended on September 10th 2010. The merchandise is an Apple I computer similar to the Christie's auction, with manuals and accessories. The high bidder fetches a ten-fold appreciation in less than three months on market valuation.
For additional details on above eBay auction, visit the posting on Atico Electronics Storefront.
Friday, November 12, 2010
Speculative Stock Trading Strategy
This week ends in a continuous correction movement while trading volume is not heavy. The forecast from last week's outlook predicts a light volume institutional selling for profit taking or to continue heavy buying from individual investors. The former scenario happens. As previously mentioned, individual investors does not have enough confidence to significantly increase the equity stock proportion of the portfolio. Therefore buying frenzy lasts only for just a few days. Institutional investors then use the opportunity to sell at the market top when the buying demand fades out. Selling is in an orderly manner and limited quantity. The amount can be used in other investments such as IPO or emerging markets, or to wait for a lower entry point again.
Although the guess on market movement is somewhat correct, the speculative trading portfolio incurs a loss this week due to inappropriate timing. Long holdings are liquidated and short holdings are initiated too early before the peak. Loss mainly comes from emotional short covering near the peak, thus a very bad timing. For profitable trading activity, such mistake should be avoided. One cause of panic in volatile market condition is over-leveraging. As mentioned in a previous post on the destructive power of leveraging, an over-leveraged portfolio can be easily shrunk or even annihilated by unfavorable market movement. An example is the investment portfolio that is reduced by an order after the financial crisis. The remnant is a major component of current speculative trading portfolio.
There should be a profit if the portfolio remains intact for the last two weeks before the recent rally after Federal Reserve announcement of "Quantitative Easing" plan. This indicates that the trading activities destroy value of the portfolio, hence incorrect investment decision. Objective of the speculative trading portfolio is to recover the investment (gambling?) loss during the financial crisis. Thus the experience will be used to avoid similar mistakes in future. It is expected that a portfolio with quality equity stocks can grow appreciably in the coming years. However, the growth rate is not large enough to recover all the loss within reasonable amount of time. i.e. a few years because the portfolio destroyed during the financial crisis was over-leveraged with damage for extended period of time.
There are two mistakes in the trading activities this week, namely over-leveraging and inappropriate timing. The portfolio is in a margin trading account. It allows margin borrowing while the broker can earn interest from lending to traders. However it seems that some brokers may be very sensitive to volatile market turbulence. It will cause panic if the account is stretched to maximum borrowing and market moves sharply in unfavorable condition. Therefore there should be enough buffer in borrowing to accommodate temporary portfolio loss. Previously it is mentioned that the trading strategy is to allocate 60% of portfolio value for equity stock (30% small cap and 30% mid/large cap) and 100% of portfolio value for leveraged ETF. Assuming 35% and 75% for margin borrowing rate respectively, it is already very close to the limit. If hedging tools are included it can easily exceed maximum borrowing limit. The maximum allocation limit of equity stock and leveraged ETF is still considered within reasonable risk. But in a volatile market condition, it should be avoided to have both reaching the limit at the same time. At current market level, there is no definite direction in short term market movement. Buy and hold strategy for equity stock may not be profitable since many strong stocks have reached or close to historical high. Only weak stocks remain at low but the prospect may not be attractive. There may be oscillation with the increase in interest from returning market participants who have been waiting on the sideline since the rally from bottom in 2009. Therefore leveraged ETF would be the more appropriate trading tools in such environment. Therefore the speculative trading portfolio will reduce holding in equity stocks to provide more buffer for trading activities.
Secondly, the trading activities in this week are made in wrong timing although in correct sequence. Nevertheless it results in overall loss. It is correctly estimated for a rise in market and an aftermath correction. There is existing long holding before the surge. Soon after the surge, there is long holding liquidation and then short initiation later. However it is too early and the surge continues further. Emotional fear on additional loss while waiting results in the decision of short covering. Curiously the expected correction occurs at the same time. Seeing the surge created by frenzy investor buying and the loss from short covering at the peak, it is decided to initiate long position again soon after correction starts. However the correction extends much longer than the surge although the rate is smaller. At the end of the week, it nearly returns back to the level before the surge, only slightly higher. If the long liquidation, short initiation, short covering, long initiation activities are delayed to matched with the best timing, it would maximize the profit instead of the overall loss in current portfolio. Obviously the wrong timing is caused by emotional fear for further loss and then desire to recover loss. This may be common behaviour of many traders. During the 2009 rally, traders are initially selling along the dip on emotional fear. Then suddenly the direction changes. When correction just starts, some late entry traders do not believe in the correction and some even still insist on a double dip today. There may be symptoms for a cycle from observation of the behaviour of market participants. However it is very difficult to predict the peak or trough of a cycle. Unfortunately even if the cycle is predicted correctly, a wrong timing can still incur significant loss. There are plenty of scenario similar to this in prior trading activities. In conclusion, this experience indicates that an appropriate strategy would be helpful to time the waiting in trading execution. It is also important that there is enough buffer in the portfolio to absorb temporary loss during the waiting period. The assumption is that market cycle can be predicted correctly. From past experience, market cycle is predictable because market participants and their behaviour are observable events. However market timing is unpredictable because there is no measure for the tipping point of a market cycle. In order to ensure profit in speculative trading, it is important to assess the timing of trading execution. Accumulated trading experience may help to evaluate a systematic approach.
Currently market is struggling to move in either direction in short term movement. Individual investors triggered the start of the surge and did not continue to hold up the market. Nevertheless they are closely watching with cash on the sideline. It appears that the "wealth effect" from asset inflation will sustain and affect the investment strategy regardless of whether it is equity stocks, bonds, treasuries, commodities, currency, etc. Institutional investors have successfully unloaded portion of the portfolio to diversify to other markets. Current correction may extend for some more time. But eventually, institutional investors will align with individual investors to participate in the asset inflation process triggered by "Quantitative Easing".
As mentioned, it is difficult to predict the timing. However, the correction will end some time soon. Then there may be a calm period before another gradual climb or rally. There is always possibility that a sudden dip or extended reversal may occur due to any events or news. However it will not change the long term direction since the equity stock market will reflect the wealth as well as economic growth in a society. The economy of United States is driven by technology while the economy of developing countries is driven by increasing productivity. Japan and Europe exhibits a stable and developed economy with gradual improvement in living standard. At the present moment, equity stock is still a better investment tool than money market for long term investment. Speculative stock trading can generate more profit/loss than buy and hold strategy.
Although the guess on market movement is somewhat correct, the speculative trading portfolio incurs a loss this week due to inappropriate timing. Long holdings are liquidated and short holdings are initiated too early before the peak. Loss mainly comes from emotional short covering near the peak, thus a very bad timing. For profitable trading activity, such mistake should be avoided. One cause of panic in volatile market condition is over-leveraging. As mentioned in a previous post on the destructive power of leveraging, an over-leveraged portfolio can be easily shrunk or even annihilated by unfavorable market movement. An example is the investment portfolio that is reduced by an order after the financial crisis. The remnant is a major component of current speculative trading portfolio.
There should be a profit if the portfolio remains intact for the last two weeks before the recent rally after Federal Reserve announcement of "Quantitative Easing" plan. This indicates that the trading activities destroy value of the portfolio, hence incorrect investment decision. Objective of the speculative trading portfolio is to recover the investment (gambling?) loss during the financial crisis. Thus the experience will be used to avoid similar mistakes in future. It is expected that a portfolio with quality equity stocks can grow appreciably in the coming years. However, the growth rate is not large enough to recover all the loss within reasonable amount of time. i.e. a few years because the portfolio destroyed during the financial crisis was over-leveraged with damage for extended period of time.
There are two mistakes in the trading activities this week, namely over-leveraging and inappropriate timing. The portfolio is in a margin trading account. It allows margin borrowing while the broker can earn interest from lending to traders. However it seems that some brokers may be very sensitive to volatile market turbulence. It will cause panic if the account is stretched to maximum borrowing and market moves sharply in unfavorable condition. Therefore there should be enough buffer in borrowing to accommodate temporary portfolio loss. Previously it is mentioned that the trading strategy is to allocate 60% of portfolio value for equity stock (30% small cap and 30% mid/large cap) and 100% of portfolio value for leveraged ETF. Assuming 35% and 75% for margin borrowing rate respectively, it is already very close to the limit. If hedging tools are included it can easily exceed maximum borrowing limit. The maximum allocation limit of equity stock and leveraged ETF is still considered within reasonable risk. But in a volatile market condition, it should be avoided to have both reaching the limit at the same time. At current market level, there is no definite direction in short term market movement. Buy and hold strategy for equity stock may not be profitable since many strong stocks have reached or close to historical high. Only weak stocks remain at low but the prospect may not be attractive. There may be oscillation with the increase in interest from returning market participants who have been waiting on the sideline since the rally from bottom in 2009. Therefore leveraged ETF would be the more appropriate trading tools in such environment. Therefore the speculative trading portfolio will reduce holding in equity stocks to provide more buffer for trading activities.
Secondly, the trading activities in this week are made in wrong timing although in correct sequence. Nevertheless it results in overall loss. It is correctly estimated for a rise in market and an aftermath correction. There is existing long holding before the surge. Soon after the surge, there is long holding liquidation and then short initiation later. However it is too early and the surge continues further. Emotional fear on additional loss while waiting results in the decision of short covering. Curiously the expected correction occurs at the same time. Seeing the surge created by frenzy investor buying and the loss from short covering at the peak, it is decided to initiate long position again soon after correction starts. However the correction extends much longer than the surge although the rate is smaller. At the end of the week, it nearly returns back to the level before the surge, only slightly higher. If the long liquidation, short initiation, short covering, long initiation activities are delayed to matched with the best timing, it would maximize the profit instead of the overall loss in current portfolio. Obviously the wrong timing is caused by emotional fear for further loss and then desire to recover loss. This may be common behaviour of many traders. During the 2009 rally, traders are initially selling along the dip on emotional fear. Then suddenly the direction changes. When correction just starts, some late entry traders do not believe in the correction and some even still insist on a double dip today. There may be symptoms for a cycle from observation of the behaviour of market participants. However it is very difficult to predict the peak or trough of a cycle. Unfortunately even if the cycle is predicted correctly, a wrong timing can still incur significant loss. There are plenty of scenario similar to this in prior trading activities. In conclusion, this experience indicates that an appropriate strategy would be helpful to time the waiting in trading execution. It is also important that there is enough buffer in the portfolio to absorb temporary loss during the waiting period. The assumption is that market cycle can be predicted correctly. From past experience, market cycle is predictable because market participants and their behaviour are observable events. However market timing is unpredictable because there is no measure for the tipping point of a market cycle. In order to ensure profit in speculative trading, it is important to assess the timing of trading execution. Accumulated trading experience may help to evaluate a systematic approach.
Currently market is struggling to move in either direction in short term movement. Individual investors triggered the start of the surge and did not continue to hold up the market. Nevertheless they are closely watching with cash on the sideline. It appears that the "wealth effect" from asset inflation will sustain and affect the investment strategy regardless of whether it is equity stocks, bonds, treasuries, commodities, currency, etc. Institutional investors have successfully unloaded portion of the portfolio to diversify to other markets. Current correction may extend for some more time. But eventually, institutional investors will align with individual investors to participate in the asset inflation process triggered by "Quantitative Easing".
As mentioned, it is difficult to predict the timing. However, the correction will end some time soon. Then there may be a calm period before another gradual climb or rally. There is always possibility that a sudden dip or extended reversal may occur due to any events or news. However it will not change the long term direction since the equity stock market will reflect the wealth as well as economic growth in a society. The economy of United States is driven by technology while the economy of developing countries is driven by increasing productivity. Japan and Europe exhibits a stable and developed economy with gradual improvement in living standard. At the present moment, equity stock is still a better investment tool than money market for long term investment. Speculative stock trading can generate more profit/loss than buy and hold strategy.
Friday, November 5, 2010
Equity Stock Climbs On Liquidity And "Wealth Effect"
Equity stock climbs to year high on liquidity inflow to stock market. As mentioned earlier, individual investors are watching closely on the sideline while there is a change in market dynamics. With the wealth creation effect of stock equity in existing portfolio, individual investors feel more comfortable with stock market and become more aggressive. Since there is only few willing sellers on the market, the newly created demand from investors turning bullish can easily push the market higher. The significantly increased trading volume indicates the appetite of investors with cash on the sideline waiting in the past months.
The return of interest in the equity of stock market by individual investors has just started. However, it is uncertain how long the buying interest will last. Individual investors have memory of the wealth destruction effect of equity stock. Although they will maintain original holdings for long term investment, they are very cautious on the new holdings which are acquired based on speculative trading. The strong buying demand on stock equity from individual investors originates from the Federal Reserve "quantitative easing" effort. As stated in the Yahoo! article "The Fed's big gamble: Here's what could go wrong". But it also motivates investors to move out of safe investments into riskier ones in search of better returns. The stock market, for instance, rises in value and everyone with savings in stocks feels wealthier. Ideally, it produces what economists call a "wealth effect": People who feel better off spend more. Many investors argue that it may create bubbles as hedge funds and other speculators borrow cheaply and make even bigger bets on stocks, commodities and markets in developing countries like Brazil.
On the other hand, some institutional investors have already accumulated significant profit from the rally and attempt to realize portion of profit at current level. There is possibility that market maker may use the opportunity and the lack of enough confidence from individual investors to drive down the market as a correction.
If the buying demand from individual investors sustain, market may advance further since there is little selling pressure. If buying demand drains up, market may move on a correction with profit taking selling from market participants.
Although short term outlook on market movement is uncertain, long term is optimistic as explained in earlier posts. There will be oscillations in the market but on the whole, market participants move in the the direction to reflect an improving economy.
"Is The Economy Actually Better Than We All Think?" Dan concedes that the economy is not growing as fast as it might be, especially at this stage of the recovery. (Normally, after a sharp recession, the growth during the first few quarters of the recovery is very fast, not the ~2% rate we've seen for the last couple of quarters.) But he thinks the economy will continue to grow, despite ongoing doom-saying and warnings about an impending double-dip. And below the wreckage of the housing market, he thinks the economy is fundamentally sound. We'll work our way through the remaining problems, Dan thinks, and, when we do, the economy will be stronger than ever.
The return of interest in the equity of stock market by individual investors has just started. However, it is uncertain how long the buying interest will last. Individual investors have memory of the wealth destruction effect of equity stock. Although they will maintain original holdings for long term investment, they are very cautious on the new holdings which are acquired based on speculative trading. The strong buying demand on stock equity from individual investors originates from the Federal Reserve "quantitative easing" effort. As stated in the Yahoo! article "The Fed's big gamble: Here's what could go wrong". But it also motivates investors to move out of safe investments into riskier ones in search of better returns. The stock market, for instance, rises in value and everyone with savings in stocks feels wealthier. Ideally, it produces what economists call a "wealth effect": People who feel better off spend more. Many investors argue that it may create bubbles as hedge funds and other speculators borrow cheaply and make even bigger bets on stocks, commodities and markets in developing countries like Brazil.
On the other hand, some institutional investors have already accumulated significant profit from the rally and attempt to realize portion of profit at current level. There is possibility that market maker may use the opportunity and the lack of enough confidence from individual investors to drive down the market as a correction.
If the buying demand from individual investors sustain, market may advance further since there is little selling pressure. If buying demand drains up, market may move on a correction with profit taking selling from market participants.
Although short term outlook on market movement is uncertain, long term is optimistic as explained in earlier posts. There will be oscillations in the market but on the whole, market participants move in the the direction to reflect an improving economy.
"Is The Economy Actually Better Than We All Think?" Dan concedes that the economy is not growing as fast as it might be, especially at this stage of the recovery. (Normally, after a sharp recession, the growth during the first few quarters of the recovery is very fast, not the ~2% rate we've seen for the last couple of quarters.) But he thinks the economy will continue to grow, despite ongoing doom-saying and warnings about an impending double-dip. And below the wreckage of the housing market, he thinks the economy is fundamentally sound. We'll work our way through the remaining problems, Dan thinks, and, when we do, the economy will be stronger than ever.
Friday, October 29, 2010
Calm Week Of Stock Equity Market At Inflexion Point
Both daily trading range and volume shrink in this week. Market participants are hesitating to trade in a market without direction. Some institutional investors attempt to sell down the market but there are not many followers. Investors with holdings and unrealized profit are afraid that stocks sold at current price cannot be bought back at a lower price. Investors with cash on the sideline are waiting for the ideal entry point. But it appears that the majority of market participants anticipate an immediate correction at current peak level. The majority of sellers are traders and individual investors liquidating only a small portion of their portfolio.
On the other hand, there is ample supply of capital in the financial market. Concentration of wealth and the wealth creation effect of stock equity appreciation make investors hungry for yield. The majority of individual investors continue to flee the stock equity market and go into the bond market. As mentioned in the Yahoo! article "First-Ever TIPS Auction at Negative Yield: What It Means", the offering of $10 billion in Treasury Inflation Protected Securities (known as TIPS) was priced to yield an interest rate of -.55 percent. In another Yahoo! article "Cotton, coffee and sugar all rally to end week", commodities are back to recent high level.
Although market sentiment on economic growth is bleak, especially on unemployment rate, assets price are driven by wealth allocation which is mostly held by household. Therefore stock equity and real estate become unpopular after the financial crisis. However, institutional investors are benefited from the rally of stock equity.
From Yahoo! article "For Many Market Strategists, Equities Are Top Dog Again", asset allocation strategists haven't had an easy time in recent years. They've grappled with deflation, recession, plummeting U.S. stock markets and surging foreign economies. And for awhile they dished out bigger weightings to defensive plays-bonds, cash and commodities.
But in 2011, strategists expect the stock market to notch double-digit gains and recommend investors boost allocations to ride the wave, whether its lower-risk consumer staples stocks or global companies tapping into emerging market supply needs.
"The S&P 500 is growing its earnings," says Joe Zidle, head of global wealth management investment strategy at Bank of America Merrill Lynch. "And we think that stocks are undervalued relative to historic price-to-earnings ratios."
Market is waiting for trigger signal for the next move. Probability of an imminent market correction exists. Short term speculative traders can use swing trade strategy to make profit from market movement. In the long run, stock equity will catch up with other wealth assets.
On the other hand, there is ample supply of capital in the financial market. Concentration of wealth and the wealth creation effect of stock equity appreciation make investors hungry for yield. The majority of individual investors continue to flee the stock equity market and go into the bond market. As mentioned in the Yahoo! article "First-Ever TIPS Auction at Negative Yield: What It Means", the offering of $10 billion in Treasury Inflation Protected Securities (known as TIPS) was priced to yield an interest rate of -.55 percent. In another Yahoo! article "Cotton, coffee and sugar all rally to end week", commodities are back to recent high level.
Although market sentiment on economic growth is bleak, especially on unemployment rate, assets price are driven by wealth allocation which is mostly held by household. Therefore stock equity and real estate become unpopular after the financial crisis. However, institutional investors are benefited from the rally of stock equity.
From Yahoo! article "For Many Market Strategists, Equities Are Top Dog Again", asset allocation strategists haven't had an easy time in recent years. They've grappled with deflation, recession, plummeting U.S. stock markets and surging foreign economies. And for awhile they dished out bigger weightings to defensive plays-bonds, cash and commodities.
But in 2011, strategists expect the stock market to notch double-digit gains and recommend investors boost allocations to ride the wave, whether its lower-risk consumer staples stocks or global companies tapping into emerging market supply needs.
"The S&P 500 is growing its earnings," says Joe Zidle, head of global wealth management investment strategy at Bank of America Merrill Lynch. "And we think that stocks are undervalued relative to historic price-to-earnings ratios."
Market is waiting for trigger signal for the next move. Probability of an imminent market correction exists. Short term speculative traders can use swing trade strategy to make profit from market movement. In the long run, stock equity will catch up with other wealth assets.
Sunday, October 24, 2010
Wealth Creation Effect Of Equity Stock Shifts Market Dynamics
Broad market index is buoyed at recent high level with relatively higher trading volume. Market is oscillating and seems to look for a breakout. Dynamics is changing from slow rally to a competition among market participants. Some institutional investors see the significant profit since the bottom in last year and attempt to take profit for part of the investment portfolio. On the contrary, some individual investors who sold part of the investment portfolio during the bottom sees the recovery in the remaining portfolio and dividends in the last quarters. The low return of money market and the possible peaking of treasuries and bond lures them to take more risk in the equity stock market. Opportunistic traders are pushing the movement of market to make profit from the volatility.
Although the long term outlook is optimistic, there is uncertainty in short term market movement. It is not a good time for long term investment. There may be lower entry point which a lot of investors are waiting. There is possibility that market may dip due to profit taking. However, there is a lot of liquidity looking for financial return on the global scale. Any dip would attract support from various investors.
The speculative trading portfolio has new position in stock holding and maintains a bullish holding on leveraged ETFs. However, the trading strategy is more inclined to day trading rather than buy and hold.
The Yahoo! article "Small investors shun stock funds -- and miss the big rally" describes current market.
Individual investors are boycotting the stock market, while hedge funds have regained their swagger after wandering in the wilderness.
"We're at an inflection point where investors are beginning to become more tolerant of risk," Heinz said. "We had been at historically low levels for a long time. Only now are we starting to see investors start to take advantage of opportunities in the marketplace."
Despite the renewed flow of capital into hedge funds, which invest in an array of assets, including stocks, commodities and currencies; the average investor continues to boycott the U.S. stock market.
"Individual investors are willing to take some risk, but not in large cap U.S. stocks," he said.
Although the long term outlook is optimistic, there is uncertainty in short term market movement. It is not a good time for long term investment. There may be lower entry point which a lot of investors are waiting. There is possibility that market may dip due to profit taking. However, there is a lot of liquidity looking for financial return on the global scale. Any dip would attract support from various investors.
The speculative trading portfolio has new position in stock holding and maintains a bullish holding on leveraged ETFs. However, the trading strategy is more inclined to day trading rather than buy and hold.
The Yahoo! article "Small investors shun stock funds -- and miss the big rally" describes current market.
Individual investors are boycotting the stock market, while hedge funds have regained their swagger after wandering in the wilderness.
"We're at an inflection point where investors are beginning to become more tolerant of risk," Heinz said. "We had been at historically low levels for a long time. Only now are we starting to see investors start to take advantage of opportunities in the marketplace."
Despite the renewed flow of capital into hedge funds, which invest in an array of assets, including stocks, commodities and currencies; the average investor continues to boycott the U.S. stock market.
"Individual investors are willing to take some risk, but not in large cap U.S. stocks," he said.
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