The stock market does not respond positively to the corporation earnings of last quarter the majority of which show improvement in profits despite some decline in revenue. Normally the increase in profitability should drive the stock price higher to maintain the same P/E ratio. However actual equity market movement is the opposite. This indicates that short term market trend is manipulative and may not be directly correlated to corporation operating conditions.
The excuse for the stock market to decline is the disappointed revenue growth in many business sectors. In addition, the tone of Federal Reserve Chairman immediately sent stocks tumbling. Traders with pessimistic sentiment successfully push down the index. This indicates the unpredictable nature of stock movement and thus the consideration for an investment decision on speculative stock trading is less dependent on corporation performance but rather on the action of market participants.
However, in the long run stock valuation would reflect the earning capability of the company. Short term fluctuation in stock price is due to trading activities of diverse market participants. As discussed earlier, technology improves significantly the living standard of human being. And innovations in science and engineering has never stopped. This results in the increase in productivity of agriculture and manufacturing and thus corporate earnings.
The economy is expanding with the increased productivity and thus the accumulation of wealth in the human society. This is a regenerative process. However, the shock wave of financial crisis reverts the wealth accumulation process. Consequently the economy shrinks due to decrease in consumer spending as a result of wealth destruction. Governments are attempting to restore economic growth by encouraging consumer spending but not very successful. Consumers are spending less due to wealth destruction as well as job loss.
Traders take the opportunity to make profit from equity market by driving the market down. The high volatility and volume in the equity market during the financial crisis indicates the participation of corporate and retail investors.
Although economic growth suffers temporarily during the financial crisis, the trend of technology driving living standard has not been changed. Corporations see a decline in revenue growth and thus earnings. However, companies attempt to maintain profitability by means of improving efficiency, in other words, company downsizing. This creates a social problem.
It is unknown when the shock wave of financial crisis will fade away. Traders keep on using various excuse to manipulate the stock market despite the fact that eventually economy will resume growth which is driven by technology. Structural change in the economy may cause social problems. The private and national debt may also be concern of the society. Although these factors have little impact on actual economic growth, they are excuses for short term market movement.
There is a financial blog site, http://maseportfolio.blogspot.com/search?updated-max=2010-06-23T07%3A42%3A00-07%3A00&max-results=7. In the post dated Tuesday, June 15, 2010, titled Bubble, Bubble...Where's the Bubble?, it mentions current companies financial status and the enormous wealth of investors to manipulate the equity market.
“The Federal Reserve reported Thursday that non-financial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963.”
Just one other point on this: I believe that what is happening in European financial markets is a part of this “bubble” activity. International investors are not acting like they are scared and strapped for funds. Their aggressiveness, to me, indicates that they are flush with money and hence have the confidence to be aggressive in attacking the financial condition of euro-zone countries on the sell-side. Investors “in dire straits” do not take on sovereign nations. This indicates, to me, that there are plenty of “well off” investors in the world that can move money around and “make things happen.” The European situation is a result of the U. S. “quantitative easing”. Further “quantitative easing” just exacerbates the problem!
Wednesday, July 21, 2010
Friday, July 16, 2010
Strategic Rules On Portfolio Management
After establishing the objective for speculative trading strategy, following will be to specify the conditions for profitable speculation in the equity market with stocks and derivatives. It derives the unique strategic rules from the initial two-choice situations in a given environment with complex structure involving arbitrage in iterative plays for speculative profits.
Since the initiative for the development of trading strategy is inspired from the collapse of investment portfolio during the financial crisis, the creation of rules will be more emphasized on actual experience than theoretical approach. The former is exploited mostly to minimize risk to the portfolio when the market movement is unfavorable to the investment objective. The latter, as well as speculative intuition, is used to analyze the market movement trend and to arrive at an investment decision.
This approach will render the actual transaction a highly subjective process which in turn means that the result is highly unpredictable if the underlying event is more or less random in nature. The market environment and sentiment can infer an investment mistake from emotion. Therefore it is important that before an investment decision is made, the market condition has to be thoroughly analyzed for short term movement trend estimate. After an investment decision is made, if the market movement is favorable then the next decision is when to liquidate the investment to take profit. If the market movement is unfavorable, the impact on the next decision is more complicated due to leverage and hedging consideration.
There may exist theories to analyze market and construct a portfolio for speculative profit. But for the average retail investor, there is neither the knowledge nor the financial resources to execute those plans. However, an individual with correct estimate of market movement for over half of the transactions and adequate risk control should be able to make appreciable profit.
Rules in managing the portfolio is to control the risk and avoid emotional mistake. Therefore it is important that they are strictly followed. The investment portfolio for development and experiment of speculative trading strategy is remnant of the investment portfolio after the financial crisis. Although it is much smaller than initial value, it is real asset and the transactions will incur monetary gain or loss.
Since the speculative trading strategy is under development, the initial draft is mainly based on past experience and is subjected to modification upon review of actual performance. Nevertheless it is guideline for managing the portfolio and risk control in adverse market condition. As previously mentioned, the objective is highly speculative. The major component in the investment portfolio is leveraged ETFs. Other components include small, medium, and large capitalization stocks and derivatives.
As an initial guidance, the proportion in the portfolio value is 30% for small-cap stocks and 30% for mid-cap and large-cap stocks and 100% for leveraged ETFs. Derivatives such as stock options are for hedging purpose and constitute only a small portion of the portfolio. The leverage multiple will be about 1.6x which may not be achievable in realistic account because of FINRA restrictions in trading account margin requirement. Since higher leverage is desired, the major equity for speculative trading is leveraged ETFs and thus have a maximum portfolio value of 100%. The total percentage for equity stocks in the portfolio will be limited by account margin requirement.
Hedging has an important role in risk control. The meltdown of the investment portfolio during the financial crisis is mainly due to over leveraging without adequate hedging. Although similar strategy works well in the aftermath rally in favor of the investment, the seriously damaged portfolio cannot recover much of the previous loss. Therefore the process of asset allocation and portfolio hedging is critical in the investment decision.
Since the initiative for the development of trading strategy is inspired from the collapse of investment portfolio during the financial crisis, the creation of rules will be more emphasized on actual experience than theoretical approach. The former is exploited mostly to minimize risk to the portfolio when the market movement is unfavorable to the investment objective. The latter, as well as speculative intuition, is used to analyze the market movement trend and to arrive at an investment decision.
This approach will render the actual transaction a highly subjective process which in turn means that the result is highly unpredictable if the underlying event is more or less random in nature. The market environment and sentiment can infer an investment mistake from emotion. Therefore it is important that before an investment decision is made, the market condition has to be thoroughly analyzed for short term movement trend estimate. After an investment decision is made, if the market movement is favorable then the next decision is when to liquidate the investment to take profit. If the market movement is unfavorable, the impact on the next decision is more complicated due to leverage and hedging consideration.
There may exist theories to analyze market and construct a portfolio for speculative profit. But for the average retail investor, there is neither the knowledge nor the financial resources to execute those plans. However, an individual with correct estimate of market movement for over half of the transactions and adequate risk control should be able to make appreciable profit.
Rules in managing the portfolio is to control the risk and avoid emotional mistake. Therefore it is important that they are strictly followed. The investment portfolio for development and experiment of speculative trading strategy is remnant of the investment portfolio after the financial crisis. Although it is much smaller than initial value, it is real asset and the transactions will incur monetary gain or loss.
Since the speculative trading strategy is under development, the initial draft is mainly based on past experience and is subjected to modification upon review of actual performance. Nevertheless it is guideline for managing the portfolio and risk control in adverse market condition. As previously mentioned, the objective is highly speculative. The major component in the investment portfolio is leveraged ETFs. Other components include small, medium, and large capitalization stocks and derivatives.
As an initial guidance, the proportion in the portfolio value is 30% for small-cap stocks and 30% for mid-cap and large-cap stocks and 100% for leveraged ETFs. Derivatives such as stock options are for hedging purpose and constitute only a small portion of the portfolio. The leverage multiple will be about 1.6x which may not be achievable in realistic account because of FINRA restrictions in trading account margin requirement. Since higher leverage is desired, the major equity for speculative trading is leveraged ETFs and thus have a maximum portfolio value of 100%. The total percentage for equity stocks in the portfolio will be limited by account margin requirement.
Hedging has an important role in risk control. The meltdown of the investment portfolio during the financial crisis is mainly due to over leveraging without adequate hedging. Although similar strategy works well in the aftermath rally in favor of the investment, the seriously damaged portfolio cannot recover much of the previous loss. Therefore the process of asset allocation and portfolio hedging is critical in the investment decision.
Friday, July 9, 2010
Portfolio Composition, Leverage Multiple, and Hedging
Although small-cap stocks fit into the philosophy of small and aggressive portfolio, it is observed that many small-cap stocks have peaked recently and stayed below for extended period of time. Therefore small-cap, mid-cap and large-cap stocks will make up portion of the portfolio. Options trading and short selling will be used as hedging for the stocks.
Leveraged ETFs are gaining popularity among individual investors and traders in recent years. The liquidity and leveraging power makes them suitable for speculative trading. Therefore the portfolio will comprise mainly of leveraged ETFs which be traded for short term profits.
Since there are stringent rules for portfolio liquidation in the case of wrong investment decision, the risk control allows maximum use of leverage for magnified gain/loss. Nevertheless, the risk of leverage will be reviewed periodically in order to avoid repeating the mistake that leads to the nearly wiped out of the portfolio during the financial crisis.
Since leveraged ETFs consists of regular as well as inverse indexed fund, hedging is not limited to option trading. Selection of ETFs and hedging strategy will be discussed in more details.
Above are based on stock trading experience in the past. It is believed to be optimal for a small portfolio with maximum growth potential. Since the stock market is very dynamic and financial products are evolving quickly, the trading strategy will adjust accordingly to match with market environment.
Leveraged ETFs are gaining popularity among individual investors and traders in recent years. The liquidity and leveraging power makes them suitable for speculative trading. Therefore the portfolio will comprise mainly of leveraged ETFs which be traded for short term profits.
Since there are stringent rules for portfolio liquidation in the case of wrong investment decision, the risk control allows maximum use of leverage for magnified gain/loss. Nevertheless, the risk of leverage will be reviewed periodically in order to avoid repeating the mistake that leads to the nearly wiped out of the portfolio during the financial crisis.
Since leveraged ETFs consists of regular as well as inverse indexed fund, hedging is not limited to option trading. Selection of ETFs and hedging strategy will be discussed in more details.
Above are based on stock trading experience in the past. It is believed to be optimal for a small portfolio with maximum growth potential. Since the stock market is very dynamic and financial products are evolving quickly, the trading strategy will adjust accordingly to match with market environment.
Adhere to Strategy Regardless of Market Condition
During the financial crisis, the portfolio value drops dramatically within short time. The use of leverage increases the rate of drop and thus shrinks the portfolio components. As a result, the recovery capability of portfolio is reduced if the market changes to favorable condition. Even worse, if the market condition is against the portfolio for extended period of time, the fulfilment for margin requirement with portfolio liquidation will quickly diminish the portfolio due to leverage.
If the market moves against an investment decision, some people may not admit the mistake and even bet more against the market. This scenario is commonly seen in casino gaming where the outcome of an event is random. In stock trading, such attitude coupled with the destructive power of leverage can easily wipe out the entire portfolio. Therefore it is most important that in a properly managed portfolio, the rules should be strictly followed to avoid this from happening.
For a small and aggressive portfolio, use of leverage is inevitable. Otherwise the commission fees will be significant drag on profitability. To reduce the risk of forced portfolio liquidation before recovery, reduce the use of leverage or use hedging to protect against unfavorable market movement. Since use of leverage is inevitable for a small portfolio, hedging would be the preferred means of risk control although it would reduce overall profitability.
Since it is speculative stock trading, the round-trip trade is typically accomplished within hours or days, at most weeks or months. The trading strategy is to make an investment decision and hedge at the same time. There are three possible outcomes for the trade.
1. Market goes into a stall.
2. Market moves in favorable direction.
3. Market moves in unfavorable direction.
If the market goes into a stall or drifts only a little amount, wait for new sign of movement trend. If market moves in favorable direction, wait for the momentum to exhaust or sign of reversal and then liquidate the investment. The portfolio will increase in value. If the market moves in unfavorable direction, the scenario is more complicated because of margin requirement and hedging operation.
If the investment is fully hedged, there is usually a premium for the hedge. Therefore, the maximum loss is confined. On the other hand, the expense of premium means that investment transactions have to be made with higher percentage of right decision in order to make profit. Random decisions with 50/50 chance of profit will result in overall loss to certain extent.
If the investment is only partially or indirectly hedged, the premium may be less or even none. There is still the overhead of commission fees but it is relatively small amount in comparison. In this case, the portfolio value will decline as the market moves further away resulting in larger loss. The portfolio can wait for market reversal or the bad investment can be liquidated if there is no sign of recovery. If the unfavorable market movement extends and the portfolio drops below margin maintenance requirement, There are possibilities of liquidating the investment, hedging, or both in partially or completely.
The objective of setting the rules for a trade with loss is to limit the impact on the portfolio value when a wrong investment decision is made. Above is general guidelines. Specific details depend on the leverage multiple and hedging tools.
The investment decision is critical to the portfolio growth. Each correct decision and timing will boost the portfolio value while each wrong decision and timing will shrink the portfolio value. The more accurate the stock movement estimate and investment decision, the more profitability and hence portfolio growth.
If the market moves against an investment decision, some people may not admit the mistake and even bet more against the market. This scenario is commonly seen in casino gaming where the outcome of an event is random. In stock trading, such attitude coupled with the destructive power of leverage can easily wipe out the entire portfolio. Therefore it is most important that in a properly managed portfolio, the rules should be strictly followed to avoid this from happening.
For a small and aggressive portfolio, use of leverage is inevitable. Otherwise the commission fees will be significant drag on profitability. To reduce the risk of forced portfolio liquidation before recovery, reduce the use of leverage or use hedging to protect against unfavorable market movement. Since use of leverage is inevitable for a small portfolio, hedging would be the preferred means of risk control although it would reduce overall profitability.
Since it is speculative stock trading, the round-trip trade is typically accomplished within hours or days, at most weeks or months. The trading strategy is to make an investment decision and hedge at the same time. There are three possible outcomes for the trade.
1. Market goes into a stall.
2. Market moves in favorable direction.
3. Market moves in unfavorable direction.
If the market goes into a stall or drifts only a little amount, wait for new sign of movement trend. If market moves in favorable direction, wait for the momentum to exhaust or sign of reversal and then liquidate the investment. The portfolio will increase in value. If the market moves in unfavorable direction, the scenario is more complicated because of margin requirement and hedging operation.
If the investment is fully hedged, there is usually a premium for the hedge. Therefore, the maximum loss is confined. On the other hand, the expense of premium means that investment transactions have to be made with higher percentage of right decision in order to make profit. Random decisions with 50/50 chance of profit will result in overall loss to certain extent.
If the investment is only partially or indirectly hedged, the premium may be less or even none. There is still the overhead of commission fees but it is relatively small amount in comparison. In this case, the portfolio value will decline as the market moves further away resulting in larger loss. The portfolio can wait for market reversal or the bad investment can be liquidated if there is no sign of recovery. If the unfavorable market movement extends and the portfolio drops below margin maintenance requirement, There are possibilities of liquidating the investment, hedging, or both in partially or completely.
The objective of setting the rules for a trade with loss is to limit the impact on the portfolio value when a wrong investment decision is made. Above is general guidelines. Specific details depend on the leverage multiple and hedging tools.
The investment decision is critical to the portfolio growth. Each correct decision and timing will boost the portfolio value while each wrong decision and timing will shrink the portfolio value. The more accurate the stock movement estimate and investment decision, the more profitability and hence portfolio growth.
Speculative Stock Trading
The investment portfolio will be solely on stock market because of the liquidity for speculative trading. For long term investment, stock market shows a characteristic of secular growth in value. In short term period, the movement as well as volatility is highly unpredictable. Therefore the scenario of short-term speculative stock trading is like a zero-sum game with the possibility of wealth transfer among the participants. In the very long term, stock investment can create wealth from the appreciation of equity.
Since the investment objective is aggressive in order to recoup the significant loss in prior trading activities, the growth potential in portfolio value by long term equity appreciation is not an important factor to be considered. However, it is believed that the fall in stock market has overshot in early 2009. The stock market has since then recovered some of the drop from the peak in 2007. There is still potential for stock value appreciation in medium term.
The long term growth in stock market is driven by innovations in technology. The living standard of human beings is advancing over the years and in history. The growth in stock market is a symptom of wealth accumulation through the process of improved productivity. Based on this argument, the longer term trading strategy is a positive outlook on stock movement direction.
Since the trading strategy is aggressive and the use of leverage amplifies the gain/loss, each investment decision is risky and has significant impact on the result. The market condition and participants sentiment has to be thoroughly analyzed in order to increase the probability of correct decision and timing. Some means of hedging is used to reduce the negative impact of a wrong decision. Therefore if the ratio of correct versus wrong investment decision is larger than unity as in random event and evenly distributed, the overall result will be growth in the portfolio. Appropriate hedging will help to minimize the impact of overly aggregate wrong decisions on portfolio performance.
In speculative stock trading, the strategy is to consider two factors. The first is the short term movement trend of a stock on which an investment decision is made. The second is the longer term in movement trend. This property is exploited in the hedging process against an immediate wrong investment decision.
In summary, the trading strategy is to make an investment decision based on a stock immediate movement trend. Hedge against wrong decision is made based on a longer term perspective of relevant stock movement.
The quality of investment decision is critical to the success of strategy. Market information and participants competition have to be assimilated in the decision thinking. The selection of appropriate hedging tools is important to the defensive protection against wrong decision.
Since the investment objective is aggressive in order to recoup the significant loss in prior trading activities, the growth potential in portfolio value by long term equity appreciation is not an important factor to be considered. However, it is believed that the fall in stock market has overshot in early 2009. The stock market has since then recovered some of the drop from the peak in 2007. There is still potential for stock value appreciation in medium term.
The long term growth in stock market is driven by innovations in technology. The living standard of human beings is advancing over the years and in history. The growth in stock market is a symptom of wealth accumulation through the process of improved productivity. Based on this argument, the longer term trading strategy is a positive outlook on stock movement direction.
Since the trading strategy is aggressive and the use of leverage amplifies the gain/loss, each investment decision is risky and has significant impact on the result. The market condition and participants sentiment has to be thoroughly analyzed in order to increase the probability of correct decision and timing. Some means of hedging is used to reduce the negative impact of a wrong decision. Therefore if the ratio of correct versus wrong investment decision is larger than unity as in random event and evenly distributed, the overall result will be growth in the portfolio. Appropriate hedging will help to minimize the impact of overly aggregate wrong decisions on portfolio performance.
In speculative stock trading, the strategy is to consider two factors. The first is the short term movement trend of a stock on which an investment decision is made. The second is the longer term in movement trend. This property is exploited in the hedging process against an immediate wrong investment decision.
In summary, the trading strategy is to make an investment decision based on a stock immediate movement trend. Hedge against wrong decision is made based on a longer term perspective of relevant stock movement.
The quality of investment decision is critical to the success of strategy. Market information and participants competition have to be assimilated in the decision thinking. The selection of appropriate hedging tools is important to the defensive protection against wrong decision.
Objective On Stock Trading Strategy
The objective of developing a stock trading strategy is to recoup the loss during the financial crisis in the period 2007/2008/2009. The total loss amounts to over 90% of total investment. Use of leverage contributes to the dramatic decline in portfolio value when the market moves in opposite direction against investment objective.
The experiences learned in the financial crisis would be beneficial to investment, or more appropriately stocking trading, strategy development. It will be emphasized on not to make the same mistakes again.
It may appear that an increase in an order of multiple in portfolio value is unachievable in short time. But real experience exists that a portfolio can drop to less than 10% of value within a time frame of less than two years . Hypothetically, if the investment were made in the reverse direction, it would result in a gain of over 1000%. Therefore, the most important factor is the right choice in investment decision.
The equity market was very volatile during the financial crisis and economic recession. Currently, the stock market is less volatile and investors are very cautious on their investment portfolio. Since the available investment fund is significantly reduced, a more aggressive investment strategy is needed in order to grow the portfolio value significantly. Also leverage will be used to magnify the trading result. However, the destructive impact of leverage to the portfolio value is observed during the financial crisis. Therefore cautions on the use of leverage should be emphasized.
The experiences learned in the financial crisis would be beneficial to investment, or more appropriately stocking trading, strategy development. It will be emphasized on not to make the same mistakes again.
It may appear that an increase in an order of multiple in portfolio value is unachievable in short time. But real experience exists that a portfolio can drop to less than 10% of value within a time frame of less than two years . Hypothetically, if the investment were made in the reverse direction, it would result in a gain of over 1000%. Therefore, the most important factor is the right choice in investment decision.
The equity market was very volatile during the financial crisis and economic recession. Currently, the stock market is less volatile and investors are very cautious on their investment portfolio. Since the available investment fund is significantly reduced, a more aggressive investment strategy is needed in order to grow the portfolio value significantly. Also leverage will be used to magnify the trading result. However, the destructive impact of leverage to the portfolio value is observed during the financial crisis. Therefore cautions on the use of leverage should be emphasized.
Saturday, July 3, 2010
Paid Website Tester - Free Registration (Alpha Market Research, Inc.)
FINALLY... This is the business you have waited for so long:
It is completely free, you earn through EVERYBODY who registers after you, even if you do not sponsor people; you must not sell or buy anything. Guaranteed!
The faster you register, the more can be your potential income, even if you do nothing else than register for free...
How does it work? - It's simple!
A market research company from the USA is searching for internet users all over the world, who get paid for testing websites and giving a short opinion. You also can earn up to 1,000 US$ per month working 1 to 10 hours weekly.
Even if the job as a website tester is not for you, you can earn two passive incomes month after month:
1. Team Provision for all the members that you have sponsored directly or indirectly.
2. Group Provision for all members which have registered in the system after your own registration!
So be fast, this is crucial, while you read these lines, new members register all over the world. There is absolutely no commitment involved with your registration and your data will NEVER be exposed to third parties!
By the way, did we mention that participation will ALWAYS be free of charge?
For additional information, free registration, and get paid, click the link below.
Alpha Market Research, Inc.
It is completely free, you earn through EVERYBODY who registers after you, even if you do not sponsor people; you must not sell or buy anything. Guaranteed!
The faster you register, the more can be your potential income, even if you do nothing else than register for free...
How does it work? - It's simple!
A market research company from the USA is searching for internet users all over the world, who get paid for testing websites and giving a short opinion. You also can earn up to 1,000 US$ per month working 1 to 10 hours weekly.
Even if the job as a website tester is not for you, you can earn two passive incomes month after month:
1. Team Provision for all the members that you have sponsored directly or indirectly.
2. Group Provision for all members which have registered in the system after your own registration!
So be fast, this is crucial, while you read these lines, new members register all over the world. There is absolutely no commitment involved with your registration and your data will NEVER be exposed to third parties!
By the way, did we mention that participation will ALWAYS be free of charge?
For additional information, free registration, and get paid, click the link below.
Alpha Market Research, Inc.
Subscribe to:
Posts (Atom)