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Thursday, November 12, 2009

Trading Tips

Greetings fellow heretics

Welcome to the first blog of The Financial Markets Heretic.

Essentially this site will give trading tips that go contrary to the propaganda you hear on Mainstream Financial Media. Some of the things I will mention would be treated as outright heresy on the popular financial news networks but I aim to give you an alternative to the same mundane "buy and hold" mantra they preach. These tips will be across all asset classes and many different global markets, basically wherever I see an opportunity that is being overlooked.

N.B THIS IS NOT FINANCIAL ADVICE!!!

This blog is merely a view of the markets and suggested ways to profit from the herd like behaviour of other market participants. I suggest you run my ideas past your Financial Adviser (who will probably disagree with me!!) before acting on any suggestions I make.

My trading strategy is very simple, do the opposite to what you hear suggested on TV or in the newspapers! Global markets exhibit lemming-like qualities. In March of this year nobody wanted to own stocks, in fact Jake Bernstein's Trader's Sentiment Index for the S&P 500 (find out more as to how this Index works here) got to a historic low of 3%. What this is saying in simplistic terms is that only 3% of traders were positive on the market and a whopping 97% were bearish! This was a classic buying opportunity missed by the large majority of traders.

Well we all know what has happened since then, the S&P 500 is up 63% from its lows. Of course now they will have you believe that the economy is recovering, the worst is behind us. Trading Sentiment on the S&P 500 is now over 90% bullish! So there are very few people traders expecting the market to go down.

US Dollar

Essentially the US dollar has been moving in the opposite direction of global stock markets. All the talk you hear at the moment in mainstream media is how all the money printing of the US Federal Reserve will lead to inflation. Major oil producers are having secret meetings to end the use of the US Dollar for pricing of oil. China and India is buying gold and selling US Treasuries. At the moment it appears according to these views nothing to stop the imminent slide into a currency collapse causing hyperinflation.

Of course, this is not the first time we have heard these calls of dollar death. Take a look at this article, beautifully timed for a turnaround in the USD.

This article was written on March 14 2008. On this day USD$1 would buy you EUR0.6383.

For a while there the writer may have been getting impatient as the USD treaded water for a few months before reaching an ultimate low on July 11 around EUR 0.6290. Alas from there something very odd happened. From July 11 2008 to November 21 2008 the USD rallied 27%, completely contrary to the doomsday views on the dollar at the time.

Fast forward to today and as mentioned above there is once again extreme bearishness on the USD. Trading sentiment is at an extreme level of bearishness around 8% (it did get as low as 3% a week ago). Does this sound similar to my example of the S&P 500 in March of this year?

I think there is a good opportunity for patient investors to make a good return here in USD. For conservative US investors I would just hold my money in a safe bank or short term US Treasury Bills as I feel the equity market will sell off as the USD rallies. Personally I am an Australian based investor so I have invested part of my trading position in a USD currency deposit with my International Shares broker and have also bought some UUP (Powershares DB US Dollar Index Bullish). UUP aims to track the performance of the Deutsche Bank US Dollar Index so if the US Dollar goes up against a basket of the major global currencies UUP's unit price will also go up.

In my opinion the USD will continue to move in the opposite direction to the S&P 500. For those willing to take a bit more risk you may wish to take a look at SH (PROShares Short S&P 500). This security aims to generate a return opposite to that of the S&P 500 eg if the S&P500 is up 1% SH should go down 1%. It doesn't move exactly like that but it is pretty close.

To compare the above historical example of the USD those who bought SH on the same day (March 14 2008) at $69.13 would have made a return of 40% through to November 21 2008.

Given the level of extreme bearishness on the USD and converse bullishness on the S&P500 I think now is a good time to enter into the above suggested trades.

Good luck with your trading!



The Financial Markets Heretic







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