Saturday, May 7, 2011

+ 6.23 % Also In April! + 29.59 % In 2011 With Our Galaxy Portfolio Systems! Free Demo Available

Nella sottostante tabella sono raffigurate le equity line mensili dei trading systems che compongono il nostro portfolio systems Galaxy ed il riassunto MTM dell’operativit√† dal Novembre 2009. Galaxy chiude con un ottimo risultato anche il mese di Aprile, dopo un equivalente risultato nel mese di Gennaio e Febbraio, portando a 29.59 % la performance del 2011. Quello appena chiuso √® il settimo risultato utile consecutivo a livello mensile dopo la breve pausa alla fine dell’estate dello scorso anno. L’equity continua a svilupparsi in maniera armonica mantenendo un’inclinazione positiva e costante grazie all’elevata diversificazione all’interno del portfolio. I risultati storici di Galaxy Portfolio System sono disponibili ai seguenti link: http://www.box.net/shared/static/nz7u0ztnbp.xls, http://box.net/shared/b9cg6kfa6s. I risultati dei singoli trading systems sono a disposizione al seguente link: http://www.box.net/shared/5vajnzc4cp.

Richiedi la demo gratuita di 30 giorni di Galaxy Combined Portfolio Systems 

In the table below you can see the monthly equity line of the trading systems that make our Galaxy portfolio systems and the MTM performance summary since November 2009. Galaxy ends with a good result also the month of April, after a similar result in the month of January and February, bringing the performance to 29.59 % in 2011. One just closed is the seventh consecutive positive months after the brief pause at the end of the summer last year. The equity continues to grow in harmony while maintaining an upward slope and steady thanks to high diversification within the portfolio. Historical results of Galaxy Combined Portfolio System are available at the following links: http://www.box.net/shared/static/nz7u0ztnbp.xls, http://box.net/shared/b9cg6kfa6s. Historical results of single trading systems are available at the following link: http://www.box.net/shared/5vajnzc4cp.

Request a free demo of 30 days of Galaxy Combined Porolio Systems
 

Galaxy Risultati Aprile


Equity Line Trades, Giornaliera e Mensile di Galaxy / Trades, Daily and Monthly Galaxy Equity Line                                 Free Demo Available
Galaxy Trades Galaxy Time Galaxy Mensile Galaxy Demo2


Performance MTM Mensile di Galaxy Portfolio System con un capitale iniziale di $ 200.000
Monthly MTM Performance of Galaxy Combined Portfolio System with $ 200K initial capital


  Jan
  Feb
Mar
Apr 
May
Jun 
Jul  
Aug
Sep
Oct 
Nov 
Dec 
2009










1.19 %
2.90 %
2010
(4.28 %)
24.49 %
2.99 %
1.76 %
15.62 %
4.35 %
10.60 %
(0.41 %)
(4.73 %)
1.75 %
12.80 %
1.50 %
2011
7.54 %
7.75 %
8.06 %
6.23 %









Galaxy Risultati Mensili image

Your diversification strategy is working correctly?
The diversification is a management technique that mixes a wide variety of investments within a portfolio. The main benefit of adding managed futures to a balanced portfolio is the potential to decrease portfolio volatility. Risk reduction is possible because managed futures can trade across a wide range of global markets that have virtually no long-term correlation to most traditional asset classes. Moreover, managed futures funds generally perform well during adverse economic or market conditions for stocks and bonds, thereby providing excellent downside protection in most portfolios.

The diversification between assets
The diversification between assets that have low correlation between them improves the overall performance of our investments for the same risk, thus reducing our exposure to risk decreases as the so-called "specified risk" linked to a single class of financial products. Basically, if you only held the shares, the result of your trading / investment is overly tied to the fortunes of a particular financial instrument for which you are running too high a risk. A well-diversified portfolio asset class is one of the major components that create the optimal portfolio. Read "The Art Of Asset Allocation" and "Top 10 Rules Of Portfolio Diversification".

The diversification within an asset
Concentrating investments in individual products or securities, you are exposed to a type of risk that can not be controlled, and the risk becomes uncertainty, which is something that is incalculable. is possible, even in this case, reduce the specific risks by trading or investing, for example, not a single product but a basket of products that represents a very large share of the market. Read "The Art Of Asset Allocation" and "Top 10 Rules Of Portfolio Diversification".

The diversification of trading methods
It combines the use of different methods of trading not correlated to improve the relationship between profit and maximum loss. The low correlation between different methods tends to reduce overall losses due to the combined performance of two or more trading systems. It is therefore one of the most effective ways to improve the performance of our investments while reducing risk. Read "The Art Of Asset Allocation" and "Top 10 Rules Of Portfolio Diversification".

The diversification of the trading system parameters
Is to use, within the same trading system, of different sets of parameters. Assuming that a trading account manage an adequate capital for diversification, it is better to diversify sets of parameters rather than making multiple contracts with the same set of parameters. The diversification of the set of parameters helps to minimize risk and strengthen our ability to remain disciplined and consistent psychological application of the trading system. Read "The Art Of Asset Allocation" and "Top 10 Rules Of Portfolio Diversification"

TOGETHER TO WIN: GALAXY PORTFOLIO SYSTEMS
Our goal is to generates significant medium term capital growth independent of stock and bond markets with simple and strict risk trading rules with maximum possible diversification. All our Portfolio Systems are designed assembled and managed with this philosophy. Due to the high diversification that characterizes them, our Portfolio Systems enhance the positive synergies of individual Trading Systems which are composed and dramatically reduce the overall risk. Diversification remains the cornerstone of modern portfolio theory.  Yet, during the financial crisis many "diversifying” investments readily followed the direction of the equity markets as they collapsed in 2008 and 2009. By contrast, our Portfolio Systems have just obtained their best resultsin 2008 thanks to the volatility of the period, the high diversification and the construction model that makes them independent of market equity and bond.



Material in this post does not constitute investment advice or a recommendation and do not constitute solicitation to public savings. Operate with any financial instrument is safe, even higher if working on derivatives. Be sure to operate only with capital that you can lose. Past performance of the methods described on this blog do not constitute any guarantee for future earnings. The reader should be held responsible for the risks of their investments and for making use of the information contained in the pages of this blog. Trading Weeks should not be considered in any way responsible for any financial losses suffered by the user of the information contained on this blog.

What’s Next for the S&P 500, Gold, & Oil

by J.W. Jones

The price action in precious metals and oil this past week has been breathtaking. The last time we have seen this much volatility in commodity prices was amidst the financial crisis in 2008 and the early part of 2009. Does this mean we are at the brink and risk assets are going to decline precipitously? Obviously that question cannot be answered with any certainty, but the underlying price action in the S&P 500 has been relatively strong compared to gold, silver, and oil.

Talking heads everywhere are predicting the commodity bubble has burst and pointing fingers at excessive speculation in silver and oil. Margin requirement changes in silver futures have been fingered as the primary catalyst for the nasty sell off. Silver had gotten way ahead of itself in terms of price and parabolic moves higher are usually followed by parabolic moves lower. For silver buyers on Friday, April 29 a painful lesson has been learned as their investment has declined more than 30% in 5 days.

It doesn’t take a genius to realize that we are going to bounce higher at some point. With a sell off of this magnitude it would not be shocking to see at least a 50% retracement of the entire move in coming weeks. It is also possible that this is a buying opportunity for precious metals and oil. It is too early to be certain, but a bounce next week is likely as silver went from being severely overbought to severely oversold on the daily chart in one week. The chart below illustrates the 50% retracement and the RSI reading for silver futures:
silverart options
In the month of April OptionsTradingSignals members were able to capitalize on rising silver prices to close a trade that produced an 18% return in less than 5 days using a double calendar spread in order to produce outsized profits based on maximum risk. Members regularly receive trade alerts focusing on gold and silver using ETF’s GLD & SLV which have extremely liquid options.

While silver prices have been absolutely crushed, gold prices have held up a bit better. In fact, in this selloff gold has been less volatile in terms of intraday percentage price movement and has not suffered from near the losses that we have witnessed in silver. The gold futures chart below illustrates key price levels:
goldart options
Members of the OTS service received a trade alert on April 6th for a calendar spread that was converted to a vertical spread. When the vertical spread was closed on April 26th the members realized a gain close to 56% based on the maximum risk of the trade.

Recently we have received some poor economic data which has put a drag on equities the past few weeks. This morning we are seeing a strong bounce in the S&P 500 futures and if we have another light volume Friday prices tend to drift higher throughout the trading day. The S&P 500 futures spiked to around 1,370 on the news of Osama Bin Laden’s death and then sold off from that point. The chart below illustrates the S&P 500 futures rally and subsequent sell off highlighting current key price levels:
spxart1 options
Members of OptionsTradingSignals received a trade alert on April 12th to put on a call vertical spread to capitalize on rising prices. On April 21st partial profits were taken and eventually stop orders closed out the position on May 4th locking in a total gain of around 32% for the trade based on maximum risk.

Oil prices have sold off sharply, albeit not as sharp as the downside move in silver recently from a percentage standpoint, but a significant amount of the risk premium has come out of oil prices. I continue to believe that oil prices over the long term have only one direction to go based on tightening supply / demand going forward and lower production levels in the future. Similar to silver, a .500 retracement of the entire recent move is rather likely in coming weeks. The daily chart below illustrates key price levels in oil futures:
oilart options
I continue to believe that oil prices are going to work higher over the longer term for a variety of reasons, but a drop in gasoline prices would not hurt U.S. Consumers and the domestic economy. Higher oil and gasoline prices weigh on the U.S. Economy heavily so this sudden decline in price is beneficial to most Americans which could juice consumption if prices stay lower for a longer period of time.

Overall, price action in the commodity space has been extremely volatile the past week with silver and oil really getting hammered lower. Gold and the S&P 500 held up a bit better and it would not be shocking to see the S&P 500 put on a rally from here if oil prices stabilize. However, if the U.S. Dollar continues its recent rally it will force the commodity space as well as equities lower. The daily chart of the U.S. Dollar Index futures is shown below:
dxyart options
In closing, I am expecting a bounce in coming days and a .382 or .500 retracement of the entire move in gold, silver, and oil would make sense so I would not be too aggressive shorting. However, I would not necessarily be an aggressive buyer either. It is going to take time for market participants to digest the recent moves. In weeks ahead it will be more apparent what price action is likely to do and I would be shocked if we did not see a few low risk, high probability trades setting up.

Speaking of low risk, high probability trades, the month of April was the best performance for the OptionsTradingSignals service so far year to date. Seven total trades were opened and six trades have been closed with sizable profits. Recent returns included an 18% return in SLV, a 56% return on a GLD trade, 32% return on an SPY call vertical spread, a 12% return on a RUT Calendar spread, and a 37% return on an AMZN calendar spread. The total cumulative return in April was 155%.

Assuming a trader had a $10,000 account and risked a maximum of $1,000 per trade, the gross gains would have been well over $1,400 in April alone. The overall service is up over 15% year to date handily beating the S&P 500 return while assuming less risk. Take advantage of the special offer going on now where new members get 3 months for the price of one!
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Commodities Plunge Calls for Stock Market Contingency Plans


While we still believe the S&P 500 can hit 1,400 to 1,440 sometime in 2011, the next few trading sessions are very important for intermediate-term outlook for stocks and commodities. If you own stocks you should be concerned about the May 5 plunge in the commodity markets. Why? Commodities, especially silver and copper, have been the leaders of the current bull market in risk assets. When the leaders of a bull market become weak, it is prudent to become concerned about the entire market.

While there are some significant bullish differences, the similarities between commodities before the May 5 plunge (see green box below) and the S&P 500 as of the May 5 close are concerning enough to continue to err on the side of playing defense and raising more cash in the event of further weakness. It is possible that falling commodity prices give stocks a lift, but it cannot hurt to be prepared and alert for general market weakness in the coming weeks. If stocks can move higher, we are happy to put defensive contingency plans on the back burner. 


If the breakdowns in silver and commodities in general continue, it brings into question the viability of the current economic recovery and bull market in global stocks. Notice the last sentence began with if. As we will illustrate below using charts for a basket of commodities, there are reasons for concern and reasons to believe commodities may find their footing relatively soon, which in turn would be a positive for all risk and inflation-protection assets, including stocks.

We have been concerned about weakness in the energy sector and commodity markets in recent weeks. Copper (JJC) has been the weakest of the big four – oil, gold, silver and copper. Last week, we drew a line in the commodity sands by placing two stop loss orders on our remaining positions in copper (we have been net sellers of copper in 2011). Our strategy was to use copper as a possible warning sign of a general breakdown in the commodities complex. 

Entering this week, we had a very small position in TBT (inverse Treasury bonds). We placed a stop-loss order last week on TBT as another shift-in-risk-tolerance alarm for both the stock and commodity markets. Weakness in TBT means market participants are buying defensive-oriented Treasuries. When bonds are going up in price, interest rates are going down – both indicate a defensive-minded bias in the markets (at least in the short-term).

Our first stop on copper/JJC was at 53.84 and the second at 53.02. JJC closed on May 4 at 54.39. The first trade on April 5 was 52.94, which triggered both our stops at the open. We got a price of 52.88 on both JJC sell orders, which highlights one of the limitations of using stops exclusively to protect your portfolio (something we do not do). Our execution price on both stops was well below the stop levels we entered with the orders. When the copper stops executed, it was a warning to pay attention to all our commodity positions, a warning we did not ignore.

Our second defensive-oriented warning came at 2:54 p.m. ET on May 5 when the line in the sand we drew for TBT was violated triggering our stop. The stops in copper and TBT factored into our decision to sell portions of our holdings in energy and commodity -related positions before the close on May 5.
A fair question is as follows:
If you were concerned enough to place stops on copper and TBT, why did you not cut back on your commodity and energy holdings before May 5?
First, as mentioned above we have been net sellers of copper in 2011 – so we have been cutting back. We have also been net sellers of energy stocks since early April. Second, commodities, especially silver and energy-related positions, are historically volatile. A 20% correction in silver is not all that uncommon within the context of a bull market. The way we have accounted for the volatility in silver is to have a small exposure to silver (SLV) relative to the size of our portfolios. Third, and maybe most importantly, as of the May 4 close, the commodities complex still remained well within the bounds of leave-it-alone territory.

The chart below shows a basket of commodities (DBC) as it looked when the markets closed on Wednesday, May 4. As one of many risk management tools, we have charts like the one below for all our major positions. While the chart looks complex, the basic concepts are easy to understand from a risk management standpoint. The thin horizontal colored lines represent areas of possible support based on the study of monthly, weekly, and daily charts dating back several years. The rationale for knowing where possible support lies is to avoid selling a position just before buyers step in and a market reverses (it happens if you do not do your homework). Notice as of the May 4 close, commodities had a significant band of support very close by – a support area that held in April 2011 (see point A). Point C shows that the basic uptrend off the November 2010 lows remained intact – another reason to remain patient with our positions.


The outlook for commodities took a hit on Thursday, May 5. The close on May 4 is shown via the green arrow. The close on May 5 is shown via the blue arrow. The two major concerning developments were (1) the green trendline (see C) from the November 2010 lows was violated, and (2) the upper band of potential support was broken (see A). These developments, along with numerous other factors (slowing economic growth, the end of QE2, threat of rising interest rates, stops triggered for JJC and TBT, etc), prompted us to use the incremental approach to reduce our exposure to copper (JJC), silver (SLV), energy stocks (XLE), emerging markets (EEM), and commodities (DBC). We still own most of these positions - just not as much.


Now we will shift gears and move to some reasons to (a) have some hope commodities may stabilize soon and (b) maintain some exposure heading into the May 6 trading session. Referencing the chart above, the second band of horizontal support (see point B) is still in play – commodities found their footing there in February and March 2011. The more difficult reason for hope relative to managing risk relates to what we call the base trend from the summer 2010 lows (see blue lines near point D). Notice the early part of the trend off the summer lows is below the blue base trendlines and the more recent part of the trend is above the base trendlines. Using the concept of mean reversion, trends also tend to gravitate back toward their average or base trend. Even if the lower band of support breaks at point B, it would not be surprising for commodities to find support from buyers near one of the blue base trendlines (between $27 and $28 for DBC).
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Understanding The Yuan, U.S. Dollar Relationship To Gold, Silver And Commodities


In early January of 2011, a top secret candlelight dinner was held at the White House. There was no fanfare and meager publicity. Present were the industrial, military and governmental heads of both China and the United States. Our government had just digested the failures of Lehman Brothers, AIG and other corporate icons by creating massive bailouts and running up trillion dollar budgetary deficits. 

China was also concerned about inflation and soaring prices due to the intentional debasement of the U.S. currency (UUP) by the Federal Reserve. Both sides reached a modus vivendi, so they could mutually profit from these agreements. Please see my article on the "Chinamese Twins" back from January 2011 to understand these past few weeks.


Since my January article highlighting the deal, the yuan has steadily risen versus the greenback. China had long wanted to enter the American financial markets. It had abundant U.S. dollars (UUP) to make acquisitions and at the same time needs to diversify out of its enormous U.S. Debt(TLT) position. The solution was simple the U.S. would deliberately weaken the U.S. Dollar in order to hope to fortify the proposed elevation of the Yuan. Consider the cleverness of these stratagems. A bolstered Yuan could allow the growing Chinese Middle Class to improve their lifestyle. In addition, China would now be able to go on a buying spree for foreign companies particularly in the area of commodities and natural resources.

With the improved Yuan (CYB) they would now be able to acquire foreign companies at more attractive prices then heretofore. An elevated Yuan would allow them entree into American Institutions and Banks. It would also allow U.S. citizens to transfer their cheap U.S. dollars into the Yuan at bank windows right here in the United States.

Remember that noises have been made establishing the Yuan as the World's Reserve Currency. The agreement to facilitate Chinese acquisitions and financial entry into the U.S. markets and thus establish a pro quid pro with the United States. Conversely America also benefits by being able to sell products at advantageous prices and to pay off our colossal trillion dollar debts with cheap dollars. Basically, this was the scheme achieved by China and the United States at that candlelight dinner.

The game-plan was conceived in Washington in early January of 2011 and delivered by Bernanke in Washington at the end of April with his grand debut in front of the media. The head of the Fed could regale his audience with phrases like interest rates, transitory inflation and other tropes.

One question remained that no one would dare to ask. If there is no concern of rising silver prices and the falling dollar then why are precious metals especially silver (SLV) soaring into new highs? Obviously the plan to devalue the dollar had seen silver, poor man's gold and a highly speculative market made up of mostly retail investors reache record heights. To combat this "bad inflation" would come not in the form of interest rate hikes to slow down the acceleration of the dollar decline but through a series of margin rate increases which would cause a temporary shakeout of speculators. Raising the costs of owning silver began a quick de leveraging of risky traders taking on too much risk at frothy level. This has sent fear throughout the commodity sector. This correction should be short lived as strong hands will come in and silver will regain its footing and find support after the washout has concluded.

I have researched natural resource assets that might prove to be attractive to the Chinese. On our list are companies some of which already have Chinese participation. Just this year alone Minmetals was outbid by Barrick (ABX) to takeover copper miner Equinox. Jinchuan is making a bid for base metal producer Lundin (LUN.TO) Mining. General Moly (GMO) has received major assistance to build North America's largest molybdenum mine in Nevada. General Moly is currently writing its feasibility study in Chinese to secure the necessary financing.

The Chinese are very willing to partake in these world class assets and are not hiding that fact. This aggressive search for strategic metals may transfer into the rare earth sector (REMX) as well. Prices are continuing to soar and hybrid car manufacturers are looking for supply over the next 3-5 years as demand is rapidly advancing for the crucial heavy rare earths used in the fuel efficient engines. Manufacturers are trying to get all the ore they can and after this runs out I expect some off take deals to occur in late 2011 with some of these key rare earth assets in North America and Europe. Let us not forget that China made an unsuccessful bid for Lynas (LYSCF) not too long ago.

We expect China to now aggressively pursue these strategic metal mining companies (REMX) as part of this little publicized arrangement between these two powerful nations which I have called the "Chinamese Twins" who are now conjoined intimately.

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Earnings Not Quite Living Up to Expectations

by Bespoke Investment Group

Earnings season took somewhat of a backseat to external market events and the big drop in commodities this week, but if the market had been paying more attention to earnings, maybe it would have fallen even farther. As shown below, just 60% of US companies have beaten earnings per share estimates this earnings season. In the early stages of the reporting period, the "beat rate" was much higher, but it has drifted lower and lower to its current level as earnings season has progressed. More than 1,800 companies have already reported their quarterly numbers this season, and with so few companies left to report, it's going to be hard to bring the overall "beat rate" reading up. If earnings season were to end today, it would have the lowest "beat rate" of any quarter during the current bull market.



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Growers miss out on full fruits of coffee boom

by Agrimoney.com

Coffee producers have, thanks to the depreciation of the dollar, not reaped as much as might be expected from a boom in coffee markets, raising questions over how signicantly soaring prices will stimulate extra production.
The International Coffee Organization said that coffee prices, as measured by its own indicator, rose again in April to an average of 231.24 cents a pound, a 34-year high.
The high prices, coupled with "continued dynamism of consumption", had encouraged coffee exporters to lift shipments, which hit a record 10.4m bags in March, up 19.5% year on year.
Coffee exports during the first six months of the 2010-11 crop year, which began in October, rose 15.4% to 52.9m bags, led shipments of arabica beans, the type traded in New York.
'Limiting factor'
However, the gains to producers had, in their own currencies, been eroded by a decline in the dollar which on Wednesday set a three-year low against a basket of currencies, taking losses over the past year to 13%.
"Despite this firmness in prices, the depreciation of the US dollar reduced export earnings of many exporting countries, in particular Brazil, Colombia, Guatemala, India, Indonesia and Mexico," the ICO said.
Furthermore, farmers faced growing costs.
"Prices of oil products have continued to rise, further increasing costs of the important production factors in the coffee supply chain, such as transport and fertilizers."
Indeed, the raised expenses "might be a limiting factor" to investment in plantations needed to stimulate production, which last year fell behind consumption for a fourth successive season.
Inventories drained
Indeed, coffee stocks in producing countries had fallen to 13.0m tonnes, the lowest for at least 20 years, as of the start of 2010-11, sapped by the strong pace of export and, in many countries, growing domestic consumption too.
And these inventories looked set to remain weak.
"The strong export performance is unlikely to favour the immediate reconstitution of stocks in exporting countries," the ICO said.

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THE TIPPING POINT HAS ARRIVED


As we pointed out from the get-go Bernanke’s QE2 policy was a gamble from its inception, and its consequences are now coming to the fore with the collapse of the commodities bubble. Throughout financial history parabolic market moves have inevitably collapsed, and there is no reason to think that this one will be an exception. Although there will undoubtedly be some attempts to buy the dips, once bubbles burst they don’t come back for a very long time. The chances are therefore high that this is a real tipping point for both stocks and commodities with a major downturn more likely than a mere correction.

The initiation of QE2 was a desperate move to begin with. QE1 most likely saved the world from a financial collapse and induced the start of a sub-par recovery along with a strong rally in equities. However, when QE1 ended in the spring of 2010, economic growth began to lag once again and the stock market dropped about 17%. With further stimulation from fiscal policy politically off the table, it was left to the Fed to do the heavy lifting even though the fed funds rate was already near zero, and obviously could not be reduced any further. The intention to start QE2 was announced late in August 2010, and implemented in November.

The original intention of QE2 was for the Fed to buy $600 billion of Treasuries by June 30, 2011 in order to lower medium to long-term rates, help increase home buying, weaken the dollar to aid exports and jump-start stock prices. The hope was that the resulting increase in assets including stocks and houses would spread to the real economy. Since this type of monetary easing had never been tried before on such a grand scale, it was an experiment fraught with danger and the potential of serious side effects that we pointed out at the time.

Although QE2 has helped some segments of the economy and jump-started the stock market, it has had important negative consequences as well. Since that time commodity prices have soared while long-term interest rates have climbed and the dollar has weakened. The rise in food and energy prices has caused top-line inflation to increase faster than wages, resulting in declining real income. In addition it has resulted in higher inflation in emerging nation as well as the EU, causing them to raise interest rates at the risk of slowing down global growth. Some nations have also initiated capital controls to prevent too many dollars from flooding their financial system.

Now the bubble (the third in 11 years) is finally in the process of bursting and reversing the market trends that have persisted for the past eight months when the dollar was down and everything else was up. Consumers in the U.S. are being squeezed by stagnant wages, higher commodity prices, continued weakness in housing, and high unemployment that is more than offsetting whatever benefits accrue from a weaker dollar. At the same time emerging nations and the EU are all tightening monetary policy and reducing fiscal stimulus.

Today the markets came as close as they ever do to ringing the proverbial bell that signifies things have changed. Suddenly commodities are collapsing, equities are declining, the dollar is rising and high quality long rates are dropping. In our view this constitutes a new trend that will persist for some time to come.

LESSONS FROM THE FLASH CRASH

By Charles Rotblut

Yesterday marked the first anniversary of the flash crash. During the afternoon of May 6, 2010, U.S. stock prices plunged in a matter of minutes. The sudden downward move caused stop orders for many stocks to be executed, leaving some shareholders with unanticipated losses or realized capital gains. The events of that afternoon brought to the surface a few important points for individual investors. 

The first is the involvement of high-frequency trading firms. Though their existence was known to professional traders and money managers, these firms were not in the public spotlight. Their ability to trade quickly has increased the speed at which breaking news is priced into the market. This arguably makes the market more efficient, especially for securities with higher levels of trading volume. It also makes day trading even more risky for individual investors than it previously was. 

A second point is that how you place an order matters greatly. Investors who had standing orders to sell a stock or exchange-traded fund (ETF) if it fell below a certain price learned the risks of such orders on May 6, 2010. As Chris Nagy of TD Ameritrade explains in the new issue of the AAII Journal, a stop order turns into a market order once triggered if more specific instructions are not given. During the flash crash, prices fell rapidly and many orders were executed at what turned out to be artificially low prices. (Some of the trades were later cancelled.) 

An alternative to a plain stop order is a stop-limit order, which includes a minimum price at which you want to sell the stock. This is not without risk either, as a stock could fall below the minimum price you want to sell at without your order being executed. Put options (a contract to sell the stock at a future date) lock in a sell price, but increase costs, especially since they expire worthless if not executed. 

As you can see, even actions intended to provide downside protection to your portfolio are not without risk. Therefore, you need to weigh your desire to sell a stock or ETF as soon as the price drops to a certain point versus your willingness to wait until you are able access your account and asses the price action and news. (Investors who did not place stop orders saw their portfolios mostly unaffected by the flash crash.) If you do use stop orders, consider that events like the flash crash are rare. 

The third point is that technology is a double-edged sword. Electronic trading has shortened settlement times, lowered bid-ask prices for frequently traded stocks, reduced brokerage costs and improved the flow of information. On the other hand, the stock and futures markets are now more interconnected, which means fluctuations in one market can influence the other market. Furthermore, when something does go haywire, the speed at which traders react is vastly accelerated. It is difficult for regulators to keep up with technological and market changes, especially since problems can be unforeseen, as was the case with the flash crash. 

Regulators have been taking steps to prevent another flash crash from occurring. The latest idea is a proposal to institute a “limit up-limit down” system that would pause trading in stocks that move beyond a band based on transaction prices for the previous five-minute period. As I said last month, I think this should help, though any new regulation always has the potential for unintended consequences. 

It is important to note that the markets do function normally the overwhelming majority of the time. There will always be systematic risks (the chance of losing money by simply participating in the financial markets), whether due to market gyrations or other, very infrequent events such as the flash crash. However, there is also a risk to not investing at all.

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Oil crash pits floor veterans versus computer algorithms

By David Sheppard

A day after oil prices plunged an unprecedented $12 a barrel, a New York trader sat on the steps of the dormant oil futures pit, playing a word game on his tablet computer.
Back to business as usual for floor traders, a vanishing breed in a market now dominated by machines and algorithms, a fact that some of them say worsened one of the most shocking -- and baffling -- trading sessions ever.

On the waterfront of Manhattan's southern tip, veterans of the New York Mercantile Exchange's (NYMEX) pits recounted how the crash reminded them of the heyday of the trading floor.

"Yesterday was organized chaos down on the floor, it was right back to the old days," said Chris Kenny, crude oil options trader at Lloyd Group. "The size of the move was almost unprecedented and you could see it all there. Greed and fear, that's what this job is all about."

Action in the options pit was still lively, they said, reminding them of the jostling and jousting of days gone by.

Miles away from the emotional rollercoaster that marked Thursday's puzzling rout, the new breed of computer traders counted their profits in anonymous offices across the country.

High-frequency and algorithmic traders, comprising half the oil market, seem to have weathered Thursday's mayhem without breaking a sweat, unlike many of the new breed who took a beating in the stock market "flash crash" exactly a year ago.

"We continued to trade normally and be involved in the market the whole time, no differently than the day before. We didn't change our risk parameters or our model parameters," an oil futures trader at an proprietary algorithmic trading firm told Reuters.

Unlike with the stock market's "flash crash," few old-school traders blamed the algos for the fall, although some did blame them for the end of a way of life that aided both transparency and liquidity in an often opaque market.

"When you get massive electronic long-liquidation like that the price just moves rapidly. It wouldn't have been the same on the floor," said Bob Penny, an individual trader of crude oil and sugar who has been in the business for 31 years. "You didn't get price vacuums there. Funds don't try and finesse it -- when they decide to sell they just hit it."

While conventional wisdom would have suggested buying on the dips in such a seemingly illogical and abrupt decline, computer programs said otherwise as the fall continued.

"If you'd followed conventional wisdom... you would have got killed," said Jeffrey Grossman, President of BRG Brokerage.

Analysts at investment bank Credit Suisse said automated trading probably did play a role in the fall.

"We believe the magnitude of the correction appears in large part to have been exacerbated by algorithmic traders unwinding positioning."

NOSTALGIA

Many oil trading veterans returning to the NYMEX building on Friday swapped war stories of the previous day. Many still work out of booths and offices at the NYMEX, where open-outcry trading has withered due to the rise of electronic trading over the past decade.

The open pit still exists, but only a few thousand lots ever trade there, a fraction of the million-plus that trade almost round-the-clock.

Veteran traders at NYMEX, a unit of CME Group Inc (CME.O), recalled price swings linked to some of the biggest moments in recent U.S. history, including the 9/11 attack and Hurricane Katrina. The difference this time? Even a day later, most are unable to pinpoint exactly what set off the frenzy.

The bout of panic selling jump-started trading in the oil options pit, which has resisted the migration of volumes to electronic screens. Traders and brokers still stand shoulder to shoulder, communicating complex deals through a series of shouts and hand gestures incomprehensible to outsiders.

Brokers described near chaos in the pit as traders loaded up on $95 and $100 a barrel option contracts to protect against further price falls.

"People were getting their faces ripped off yesterday, everyone was yelling and screaming all day," one crude oil options broker said, who asked not to be named.

NEW GUARD

The way prices move has changed with trading practices. Lightening-fast, algorithmic traders, known as "black box" players, have multiplied in recent years. Many used to trade open-outcry, yet they are viewed as the antithesis of the old-fashioned pit trader.

Manoj Narang, CEO and chief investment strategist of Tradeworx, a hedge fund that also runs a high-frequency unit, called Thursday a "great day" for his fund, which trades commodity-linked Exchange Traded Funds (ETFs) and stocks.

Narang said that unlike Wall Street's "flash crash" last May, automated trading was not behind oil's plunge.

Instead, he cited traders who had gone long-commodities and short the dollar, but were caught out when the U.S. currency bounced up.

"It was a very crowded trade," Narang added.

Even as prices plummeted, oil brokers also stood to gain from the huge jump in trading volumes.

On the sun-drenched plaza outside the exchange overlooking the Hudson River, long-term broker Dominick Caglioti was in good spirits.

"It was great for business because there was a lot of action," he said, extinguishing a cigarette before heading back into the exchange.

"It was still quieter than it used to be, but I guess screens don't yell."

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The Commodity Bull Market Isn’t Over


Commodities have taken a hit recently, but the overall trend remains positive. Consider this multi-week correction your opportunity to build positions in select commodity funds.

The news about global food shortages and stockpiling of scarce commodities by emerging economies like China has been the focus for many over the past year, and the Reuters CRB Index had risen 55% from the May 2010 lows at 450 to last week’s high at 691.

The selling across many of the commodity markets has now turned into a stampede for the exits this week, as the Reuters CRB Index, as well as the commodity ETFs and ETNs are now clearly in a correction phase. 

The dollar is also trying to turn higher, and a further rally will add additional downward pressure on commodity prices. The major technical trend for the majority of the commodity markets is still positive, as is the global demand outlook for commodities. Of course, this demand flattens out at various periods when the emerging market economies cool, but this does not alter the major trend.

Therefore, it is my view that a deeper correction and a significant retracement of the recent gains should be an opportunity to establish either 1) long positions in a broad-based commodity vehicle, or 2) targeted positions in a specific commodity market. In fact, one of the markets I am focusing on appears to be in the process of completing a significant bottom formation. Let’s first look at the Reuters CRB Index.

Figure 1

Click to Enlarge

This weekly chart of the Reuters CRB Index goes back to the peak in 2008, when the weekly relative strength index (RSI) formed a 16-week bearish divergence (line c) in July 2008 as crude oil was peaking.

During this plunge, the CRB lost over 47% of its value. In late 2008, the RSI formed a short-term positive divergence (line d), which was confirmed by the move through its downtrend in March 2009 (line 1). This completed the bottom formation in the CRB.

During early 2010, the CRB Index corrected for five months, losing 10% before bottoming in May. This week’s drop in the index will signal at least a test of the March lows at 635, and a decline to test the upper boundary of the trading channel (line a), currently at 620, would not be surprising. The 38.2% support from last summer’s low is at 600 with the 50% level just under 570.

The weekly RSI failed to confirm the CRB’s recent highs (point 3), as it was not able to move back above its weighted moving average (WMA) while the CRB was making a new weekly closing high. The break of the short-term uptrend, line e, warned that a divergence may be forming. Typically, this length of divergence is consistent with a correction, and not a major top. The most likely downside target is at 600-615, which would amount to a 12% correction from the highs.

Figure 2

Click to Enlarge

The Elements Rogers Total Return ETN (RJI) was designed to track the global consumption of a basket of 36 commodities. It has 35% in agricultural commodities, 21% in both precious and base metals, and the remaining 44% in energy.

RJI peaked in early April at $10.51 and formed a lower secondary peak last week. The weak close on May 4 violated short-term support (line a) with the daily uptrend, line b, at $9.70.

The correction may be able to hold the March lows at $9.33, but if not, there is stronger support in the $9.00-$9.10 area. This corresponds to the 38.2% support level as well as the November 2010 highs.

How to Profit: Go 50% long RJI at $9.24 and 50% long at $9.08 with a stop at $8.57 (risk of approx. 6.4%).

Figure 3

Click to Enlarge

The PowerShares DB Commodity Index ETF (DBC) is more narrowly focused than RJI, as it includes the commodities like light sweet crude oil (West Texas Intermediate, or WTI), heating oil, RBOB gasoline*, natural gas, Brent crude, gold, silver, aluminum, zinc, copper grade A, corn, wheat, soybeans, and sugar.
*RBOB: Reformulated Blendstock for Oxygenate Blending. This is the benchmark gasoline product traded on the major commodity exchanges. 

DBC has declined steadily from the highs made at the end of April, and next chart support (line a) and the daily uptrend, line b, is in the $29.70 area. The March lows ($28.20) are a key level to watch with the 38.2% support at $27.80. The daily on-balance volume (OBV) has dropped below its weighted moving average (WMA), but is still well above its uptrend from the September 2010 lows, line c.

How to Profit: Go 50% long DBC at $27.88 and 50% long at $27.44 with a stop at $26.77 (risk of approx. 5.4%).

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