Quotable

“Run for your life from any man who tells you that money is evil. That sentence is the leper’s bell of an approaching looter.” – Ayn Rand

FX Trading – Divergence confusionism…

A very astute member of Black Swan services pointed out the latest growing divergence between the bond price action the last couple of days, and the dollar…The question: What does it mean?

The short answer may be that global markets are now normalized and the tight correlations we’ve been witnessing the last several years, during both the boom and the bust, are changing.

The chart above compares the US$ index with the 10-year Note futures.  The reason this is a divergence, compared to the recent past, is because higher 10-year Note prices have usually defined risk aversion, and risk aversion is usually met by a rising dollar.  We know that’s not happening. 

But this divergence, or differing environments i.e. risk aversion versus risk appetite, can best be viewed comparing the 10-yr Note futures to the S&P 500 futures index.  Since mid-August, this pair has started to move together—higher stocks and higher bond prices.

If this represents some outside portfolio flow into the US, why is the US dollar getting creamed? 

And if the US dollar is getting creamed, why are people buying paper denominated in US dollars—10-yr Treasuries?  

This isn’t the only major change in correlation we are witnessing, we see a major “divergence” (divergence based on past price action, doesn’t necessarily make it a divergence now; we need Mr. Hindsight’s visionary powers to prove that) between the Japanese stock market and USD-Japanese yen pair.  Good news for Japan is finally also being reflected in the Japanese yen.  In the past, any good news—reflected by the stock market—was usually met with a weaker yen as it juiced local risk appetite to go offshore for yield.  Maybe this can be more easily explained by the weight of portfolio flow into Japan on optimism the new regime will make some real changes.

Back to the buck vs. 10-year Note “divergence”….

Does a weak currency have to be met by weak bond prices i.e. does selling the currency automatically mean selling the bonds?  Not necessarily if the government is issuing and buying at the same time (or maybe domestic consumer savings is growing rapidly and going there).  

Buying bonds domestically and using the currency internationally as rocket fuel to boost other asset markets in the hopes of reviving demand based on asset wealth effect i.e. implicit weak dollar policy, could be the game Uncle Sam and his advisory staff are playing. 

There has been much talk, and obviously much price action, to support the idea the US dollar is now the world carry trade currency i.e. with short-term yields being so low— grabbing the mantle from Japan.  Maybe!  

But if we consider real yields (nominal minus inflation) on the 10-year Notes, the US is still among the highest of the major currency countries.  We are not sure if this indicates there may be a floor on the dollar, as global investors can buy relative safe yield cheaply. Or whether it means nothing at all and the US dollar has become the carry trade currency of choice. 

Or of course a third options, the bond guys see troubles ahead and are positioning before the double-dip hits the fan.  Place your bets. 

Black Swan Capital LLC
www.blackswantrading.com

Trading Track Record
Stockscores.com Perspectives for the week ending August 22, 2009

This may be a short commentary for the newsletter but I think it will have a lot of value for all traders. Print it out and read it often.

1. Buying a weak stock is like betting on a slow horse. It is retarded.
2. Stocks are only cheap if they are going higher after you buy them.
3. Never trust a person more than the market. People lie, the market does not.
4. Controlling losers is a must; let your winners run out of control.
5. Simplicity in trading demonstrates wisdom. Complexity is the sign of inexperience.

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6. Have loyalty to your family, your dog, your team. Have no loyalty to your stocks.
7. Emotional traders want to give the disciplined their money.
8. Trends have counter trends to shake the weak hands out of the market.
9. The market is usually efficient and can not be beat. Exploit inefficiencies.
10. To beat the market, you must have an edge.
11. Being wrong is a necessary part of trading profitably. Admit when you are wrong.
12. If you do what everyone is doing you will be average, so goes the definition.
13. Information is only valuable if no one knows about it.
14. Lower your risk till you sleep like a baby.
15. There is always a reason why stocks go up or down, we usually only learn the reason when it is too late.
16. Trades that make a lot of intellectual sense are likely to be losers.
17. You do not have to be right more than you are wrong to make money in the market.
18. Don’t worry about the trades that you miss, there will always be another.
19. Fear is more powerful than greed and so down trends are sharper than up trends.
20. Analyze the people, not the stock.
21. Trading is a dictators game; you can not trade by committee.
22. The best traders are the ones who do not care about the money.
23. Do not think you are smarter than the market, you are not.
24. For most traders, profits are short term loans from the market.
25. The stock market can not be predicted, we can only play the probabilities.
26. The farther price is from a linear trend, the more likely it is to correct.
27. Learn from your losses, you paid for them.
28. The market is cruel, it gives the test first and the lesson afterward.
29. Trading is simple but it is not easy.
30. The easiest time to make money is when there is a trend.

I made a typo in the symbol of one of the featured stocks last week, it should have been FSII and not FSSI. Sorry.

I ran the same sort of Market Scan this week as last, looking for stocks trading abnormal volume and breaking through resistance. I check the charts for good chart patterns and if the risk reward relationship looks good, I consider it a good trading opportunity.

Here are this week’s findings:

1. CVGI

CVGI has not been in a narrow trading pattern for very long but is making a good break from low price volatility after beginning its upward trend about 6 weeks ago. It looks like it wants to continue higher in the weeks to come. Support at $4.60.

2. NURO

NURO is a stock that I featured in the Daily newsletter a few months ago and since then it has not done much. Today it made a big break out on big volume and looks like it is ready to move in to an upward trend. Support at $1.77

3. WRES

WRES is my favorite chart this week, a very clean breakout from an ascending triangle pattern. Volume support is very strong, this is a near perfect set up. Support at $2.26.

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.