Trade With Control in 2010 – Resolutions for Every Trader

Stockscores.com Perspectives for the week beginning Dec 27th, 2009

Best wishes for 2010!

1. I Will Remember Risk
Every time we make a trade, we must let the risk of the trade determine how many shares we take in the position. If we take more risk than we are comfortable with, we are more likely to make emotional mistakes that will cost us money.

2. I Will Remember Reward
A trade must have enough profit potential to justify the risk of the trade. As a general rule, a trade should have twice as much reward potential for the risk you take.

3. I Must Limit Losses
A big loss in your portfolio can outweigh the gains made on 10 other trades. Limit the size of your losses and stick to the limits. If a trade does not work out, take a small loss and move on.

4. I Must Not Limit Profits
While it feels good to lock in a profit, we should lock in our gains when the market tells us the stock is more likely to go lower than higher. Let profits run until then.

5. I Need to Keep it Simple
In the search for trading success, many traders get very complex in their analysis. Good traders keep it simple, and focus on doing the simple things right.

6. I Will Remember that Public Information is Useless Information
If information is known by the general public, then it is priced in to the stock. The stock market moves on what will happen in the future, not on what has already happened.

7. I Will Focus on Abnormal Behavior
The stock market is efficient most of the time. That means that you can not expect to consistently beat the stock market unless you focus on opportunities where the efficiency of the market is breaking down. That tends to happen when stocks are behaving abnormally.

8. I Will Trade With Confidence
So much of trading success is mental. To make money, you have to believe in what you are doing and execute your trading plan. Start slowly and build up your confidence before you take too much risk.

9. I Will Learn Before I Trade
Most stock traders lose money because most stock traders don’t take the time to learn how to trade. Tools are only useful if you know how to use them.

10. I Will Not Try to be an Overnight Success
If you aspire to make money from the market, realize that the process to learn how to trade will take time. Getting rich quick from the stock market is no more likely than attaining wealth by playing blackjack. Good traders don’t gamble.

The markets are very slow at this time of year and there are few good trading opportunities. Expect activity to pick up after the first week of January.

This year was one of the most unusual I have ever seen. In March, investor psychology could not have been any more negative; there was complete fear among most investors which, of course, means there is great opportunity. The sky did not fall as so many thought it would and the market enjoyed one of the best rallies ever after making its low early in March.

The question we all now face is, will the buyers continue to push stocks higher?

2009 is finishing with some pretty optimistic chart patterns on the major market indexes. This week, I go through each of these charts and provide a short analysis to help you determine what your strategy should be as 2010 begins.

The state of the overall market should determine your strategy. If the market appears likely to move higher, position trading strategies like the Stockscores Simple or the swing trading strategy Pull Back Plays are good choices. If the market is going lower, short selling strategies like the Reversal of Fortune, Pull Up Plays or Long Term Breakdowns will enjoy the best success.

So, as 2009 comes to a close, here is my current analysis on the four major market indexes that I like to follow. This analysis can change quickly, to stay updated on where the markets are likely headed, check out the weekly Market Minutes videos from the link on the Stockscores.com home page.

1. SPY
The S&P 500 is represented by the Exchange Traded Fund, SPY. This ETF is just breaking through resistance after spending a couple of months trending sideways. The buyers are in control and we should continue to favor buying strategies until the trend reverses.

2. QQQQ
The Nasdaq 100 is a showcase for mostly technology companies and is represented by the ETF, QQQQ. This market has been a leader in the past couple of weeks and was the first to make the break through resistance. I expect these stocks will continue to lead the market higher in the very short term before that money rotates out in to other sectors. Stay on the buy side of the market for these stocks.

3. DIA
The Dow represents the largest companies in the world and is a good proxy for the global economy. The DIA is lagging the S&P and Nasdaq as it has not yet broken through resistance but its chart is an optimistic one with the buyers in control.

4. T.XIU
The TSX 60 is the benchmark for the Canadian markets and is represented by the ETF T.XIU. This index is based heavily on commodity stocks, particularly energy and mining. Since the global recovery will require commodities, this is a good index to track. The chart for the T.XIU is in an optimistic sideways pattern but the chart is a bit deceptive. Unlike the US Dollar, the Canadian has been strong over the past few months which means this market has been an outperformer for foreign investors who are seeing gains in their stocks but also in the underlying currency of those stocks. Remain on the buy side of this market until the chart pattern is reversed.

Click HERE for the Speaker Lineup and click  HERE if you want to learn from some of the timeless advice from some of worlds best traders including the very successful Tyler Bollhorn.

Tyler Bollhorn started trading the stock market with $3,000 in capital, some borrowed from his credit card, when he was just 19 years old. As he worked through the Business program at the University of Calgary, he constantly followed the market and traded stocks. Upon graduation, he could not shake his addiction to the market, and so he continued to trade and study the market by day, while working as a DJ at night. From his 600 square foot basement suite that he shared with his brother, Mr. Bollhorn pursued his dream of making his living buying and selling stocks.

Much of Mr Bollhorn’s work was pioneering, so he had to create his own tools to identify opportunities. With a vision of making the research process simpler and more effective, he created the Stockscores Approach to trading, and partnered with Stockgroup in the creation of the Stockscores.com web site. He found that he enjoyed teaching others how the market works almost as much as trading it, and he has since taught hundreds of traders how to apply the Stockscores Approach to the market.

References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.

Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.

BIG PICTURE- “It’s a question of how do you achieve the deleveraging. Do you go through a long period of slow growth, high savings and many legal problems or do you accept higher inflation? It would ameliorate the debt bomb and help us work through the deleveraging process” – Kenneth Rogoff, Professor of Economics at Harvard, Former Chief Economist at the International Monetary Fund

Make no mistake; the developed world is drowning in debt and as outlined above, there are only two viable options – a global economic depression or very high inflation. It is our contention that the policymakers have chosen the latter option and over the following years, we will experience the trauma of severe inflation.

Look. The American government is staring at total obligations of US$115 trillion, America’s debt to GDP ratio is off the charts and the American public is also up to its eyeballs in debt. Under this scenario, you can bet your bottom dollar that the American establishment will try to reduce this debt overhang through a process known as monetary inflation. If you have any doubt whatsoever, take a look at Figure 1 which captures the incredible expansion in America’s monetary base. As you can see, over the past two years, the monetary base in America has expanded from US$827 billion to an astonishing US$1.93 trillion! Up until now, this surge in the monetary base has not permeated through the broad economy but once the money velocity picks up, the money supply will zoom and the end result will be surging price inflation.

Figure 1: Explosion in America’s monetary base

It is notable that America is not alone in pursuing inflationary policies; most nations all over the world are printing money and debasing their currencies. In this era of globalisation, no country wants a strong currency and everyone is engaged in competitive currency devaluations. Given this reality, we firmly believe that this money and debt creation will cause an inflationary holocaust over the coming years.

In fact, those who erroneously believe that deflation is unavoidable should review Figure 2 which highlights the mind-boggling expansion in the balance sheets of various central banks. As you can see, America alone is not the only nation guilty of printing money; the Europeans have also jumped on this train to Inflationville.

Now, we are aware that many prominent commentators are still calling for deflation and their argument is based on the strength in American Treasuries. “After all, how can inflation be a problem when bond yields are so low?” seems to be their reasoning. Well, these deflationists seem to be missing the point because the American Treasury market is no longer a free market and we would argue that the Federal Reserve’s intervention is largely responsible for keeping bond yields artificially low. It is noteworthy that over the past several months, the Federal Reserve has purchased most of the newly issued American Treasuries. It goes without saying that the American central bank is engaged in this desperate act in order to keep interest-rates low. However, it is buying these Treasuries by creating money out of thin air. This is inflationary.

If our assessment is correct, somewhere down the road, the Federal Reserve will lose its battle and long-dated American Treasuries will plummet in value. As more and more bond investors wake up to the looming inflationary menace, they will start demanding a higher rate of return on their capital. When that happens, the dyke will break and the Federal Reserve will become irrelevant.

We have no doubt in our minds that over the next decade, various central banks will intensify their money-printing efforts and Mr. Bernanke will lead by example. After all, America has run out of choices and if the Federal Reserve does not inflate away this mountain of debt, the biggest sovereign default in history is guaranteed. Now, given the ability of the Federal Reserve to create confetti money, we are convinced that it will opt for the inflation tonic. Remember, inflation dilutes the purchasing power of each unit of money and it will make America’s debt more manageable. Of course, this inflationary agenda is not a secret and this is why many creditor nations with huge reserves are beginning to diversify out of the American currency.

It is our observation that throughout history, monetary inflation has caused asset prices to rise and this time should be no different. In the past, when inflationary expectations spiralled out of control, hard assets were the prime beneficiaries and this trend is likely to remain intact in this inflationary episode. If our assessment is correct, over the coming years, stocks, precious metals, commodities and real-estate will appreciate in value versus paper currencies. Furthermore, on a relative basis, we expect precious metals and commodities to outperform all other asset-classes. Conversely, we anticipate that cash and fixed income instruments will probably turn out to be the worst assets to own over the next decade.

Bearing in mind the looming inflationary nightmare, we urge you to protect your purchasing power by allocating capital to precious metals and commodities related businesses. Finally, we suggest that you consider allocating a portion of your capital to the fast growing economies in Asia (China, India and Vietnam).

For our part, we have invested our clients’ capital in world-class businesses in our preferred themes and we expect our holdings to benefit during this low-growth, high-inflation environment.

Puru Saxena
www.purusaxena.com

PuruSaxena Wealth Management offers discretionary wealth management, advisory and research services to private and corporate clients. Our investment strategies are designed for long-term capital appreciation and our prime objective is to produce growth over the entire business cycle.

Puru Saxena Wealth Management is an established money-management firm in Hong Kong. We are regulated by the Securities & Futures Commission of Hong Kong and registered with the Confederation of Insurance Brokers.