In this week’s issue of market slice, we will discuss challenges and opportunities for your investment portfolio – highlighting recent market activity and trends, how to spot trends, and a free resource to help you along the way in your investing journey
Is this the “Black Swan” Moment?
As you read this, the fallout from Monday’s all-markets bloodbath is still unfolding. Regardless of where things stand today, however, we can draw some conclusions:
1) This is totally not a surprise. We have been alerting readers to the possibility of this kind of selloff for months. Not only has the stock market been extremely inflated, with valuations that defy reason, but also seasonal patterns provided a strong indication of rough waters ahead.
2) The Evergrande debacle may have been the trigger, but it is not the cause. The massive global debt bubble has been building for years. Not only government debt but – more critically, as it turns out – corporate indebtedness has been inflated to gargantuan proportions by COVIID measures.
3) A knee-jerk government response is practically assured. Partisan wrangling is delaying passage of Biden’s infrastructure bill and, crucially, the debt ceiling negotiations. This is likely to intensify in the weeks ahead; make no mistake, the Republicans smell blood in the water, and will not help the President out of this mess.
This means the likelihood of unilateral action is increased. Chances are the nominally independent Federal Reserve is going to reverse course on “tapering” under pressure from the White House… Fed chair Jerome Powell has already signaled his willingness to back Biden’s agenda. The over-used, economically devastating policy of nonstop money printing will continue. Especially watch for the Fed to step in with massive new purchases of low-grade corporate bonds.
But here’s the main thing to realize.
The Evergrande collapse, while perhaps China’s “Lehman moment,” as the pundits are saying, is not the market-crashing “black swan” event everyone fears.
By Friday’s close, stock prices may be up or down on the week. Bitcoin may move below $40,000, or back up near $50. The metals, which were not beneficiaries of Monday’s dive, may move up slightly, or remain within the trading range we’ve seen for weeks.
The real issue is the long-term fragility of the economy, and the long/short strategy you need to take advantage whether the market resumes its upward climb with new stimulus wind in its sails, or moves into a longer-term correction.
And you definitely want to be prepared for when stuff really hits the fan. Which it will, eventually, but probably not yet.
Do you have a reliable trading coach who can help you sort through the impact of current events on your trading strategy? FFR’s Strategy Team provides unbiased expert guidance on portfolio strategy, market coverage, and the best ways to meet your trading goals. Call 1-800-883-0524 to speak with one of our pros today. Or just click the button below to schedule a call at your convenience.
How to Spot Trend Following Trading Opportunities
Last week we looked at examples from the Crude Oil market, showing how price trends can help us identify breakout trading opportunities. This week, let’s examine the Grains group.
This is the 10-year Corn chart. As you can see, late 2020 and early 2021 witnessed a huge runup in corn prices. Over the past few months, those prices have eased.
Long/short traders could have made highly profitable trades on both sides of this massive move. What is really worth noting, however, is that the price of corn today is 38% below its 10-year high of 843. In other words, compared to previous historic highs, there is a lot of room to the upside.
Compare this to the S&P 500 10-year chart:
Each trader will make their own judgment about whether the likelihood is greater of an upside or downside move in these markets. On technical factors alone, one might go either way.
However, it is prudent to also consider fundamental factors, above all the upward pressure of consumer price inflation and potential supply chain issues for agricultural commodities. While corn appears poised to go either way, which do you consider more likely?
And if it does break to the upside, how far might it go?
Likewise, how do the fundamentals look for stocks? Is the global debt crisis going to get better, or worse? Is the economic foundation strong, or shaky? Is there value in individual stocks, or are traders mostly betting on continued stimulus to fuel further growth?
These are the questions that alert us to breakout trade possibilities.
(Note: Russell Sands explains the difference between fundamentals that drive the markets, and the technical indicators that show those forces, in his e-book, The Turtle Way. See below to grab your copy!)
Here’s one more chart to consider, the 20-year Soybean oil chart:
In this case, we have a commodity that has recently approached historical highs… you have to go all the way back to 2008 to find prices as high as we saw earlier this year in the oil contract.
Again, 2020-21 saw a massive increase in prices. Bullish oil traders scored big time during this run. One thing to remember is that these prices are not inflation-adjusted. Even with the relatively low inflation of the past 14 years, the 2021 highs are short of 2008 in inflation-adjusted terms.
Here, as with corn, traders might be watching for a further break to the downside after the pullback of recent months… or for a new up-leg, for the same reasons mentioned above.
Commodity and Index futures are fascinating and offer a perfect way to hedge against the possibility of a big correction – or even a crash – in the stock market. FFR clients who trade these markets are seeing incredible results. Click the link below to find out more about how commodities can fit into your trading strategy portfolio, and to get a free copy of Russell Sands’ book, The Turtle Way.
What is Trend Following, and Why Does it Work?
An excerpt from The Turtle Way: Breakout Trend Following Secrets by Russell Sands
Okay, let’s just start with the basics. And that is that this whole general trading methodology that we call “trend following” is a very proven method that has been around and working for more than 80 years. There is an extensive library of both technical and fundamental analysis that shows this is not only scientifically valid, it is also just plain common sense.
There are periods when trend following works very well, and periods when it doesn’t. And the truth is, when trend following “doesn’t” work, it can sometimes be pretty ugly for a while. But for anyone that has the patience and discipline to sit through some of the rough times, I just cannot think of any more profitable way to extract money from the markets…
In purely economic terms, the main purpose of a marketplace, any marketplace, is ‘to facilitate trade’. In other words, the buyers and sellers need to have a place to come together and meet and do business. And whether this is going to be a physical meeting floor, or an electronic one, is not really important…
In order to make these trades or exchanges, both buyers and sellers are going to have to compromise a little on the prices at which they are willing to trade. The price of a good or commodity (or share of stock for that matter) will move up and down in a “trading range”, the boundaries of which will be defined by the absolute last resolve of the buyers and sellers. The upper boundary will be the highest price at which buyers are willing to pay, any higher, there are still obviously going to be a lot of eager sellers, but no buyers willing to take them up on those higher prices.
Conversely, the lower boundary of the trading range will be lowest price at which sellers are willing to part with their goods, any lower, there will be plenty of buyers, but no sellers willing to give up what they have at such a cheap price.
And so, prices will continually move in this trading range, with small changes in the upper and lower boundaries, as various different buyers and sellers, with slightly different agendas and price objectives, continue to enter and leave the marketplace. But of course, as I said before, nothing lasts forever. Eventually, the whole trading range picks itself up and shifts to a different level. Sometimes it just keeps on going and going, like the energizer bunny, and that’s what we call a ‘trend’.
To get a free copy of The Turtle Way, just follow the link below. This entertaining 52 page e-book covers technical and fundamental analysis, how to implement trend following theory – with several trade examples – details of the Turtle system, and much more. Or call FFR’s Strategy Team at 800-883-0524 and request a copy… we will email it to you immediately.
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