GAFM Expert Opinion

Year-to-date 2009: Where the money was Made & Lost

By Michael Preiss

Tuesday, July 7, 2009 00:08:05 AM

[b]For information only:[/b]


[b]July 1st 2009: [/b] Year-to-date Best & Worst performing Global Equity Markets


In financial markets there is an adage: “The trend is your friend” until it turns. With this in mind, please find enclosed an update on the trends in global equity markets.

Year-to-date, long Tech and Nasdaq was the trade so far as the Nasdaq is up +16.4% compared with +1.8% for the S&P500 and -3.75% for the Dow Jones Industrial. In Europe, Turkey is one the best performing equity market with +37.6%, the UK market is up+9.5%, Germany +2% and France flat with -0.2%.

Worldwide, China is the bright spot, the Shanghai market is up+64.9% in the 1st half of the year making it the 2nd best market globally, followed by Indonesia +64.9% and Brazil +63.6%

Taiwan is the 9th best performing market in the world with +43.5% due to improved cross-border relations and Taiwan’s decision to open 100 categories of industries and services to Chinese mainland investment.

In the frontier markets, Sri Lanka due to peace in the island country is the clear winner +58.4%. In the case of Sri Lanka it seems the trend is indeed your friend and since hardly any institutional nor retail money is looking at Colombo market yet, there seem more upside going forward.

On the SHORT side of the market so far this year, SHORT Nigeria would have been the best trade as the Lagos market is the world’s worst performing stock market. Please note that Qatar’s DSM20 is with -7% the worst performing Middle East Stock market. Dubai is up+10.6% and Oman +4.2% all outpaced by Saudi Arabia which rose +16.3% year-to-date.

Two simple philosophies tend to work in the markets: “The Trend is your friend” and “Reversion to Mean”. The real skill is to decide which is which and when are the rules of the game changing.

The next 6 month and your portfolio valuations and NET worth at the end of 2009 will tell.

The Rules of Trading and Investing

By Michael Preiss

Monday, July 6, 2009 09:59:22 AM

Among economists and on Wall Street there is now an active debate whether the massive stock market rally we saw globally since the mid March lows is the beginning of a new bull market or whether it is simply a bear market rally that is now running out of steam. In Mid march I published in this column an article: What the stock market crash means: Time to Buy

Since then some stock markets around the world have risen from +60 percent to +100 percent while there was an increasing talk about "green shoots" and the real economy recovering or at least getting less worse.
Now as we are entering the 2nd half of 2009 and most investors would do well to do a "reality check" and reconsider their risk exposures and portfolio contents. Whatever your view is on the state of the global economy it pays to consider some truths and rules about trading and investing.

Never, under any circumstance add to a losing position.... ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin! Remember Citibank shares at 55 U.S. dollars less than two years ago, it fell to $30, when our friends in Abu Dhabi tried to save them with a $7.8 billion life line investment. Many thought Citi was cheap and "averagedـin" only to see the once largest bank in the world slump to less than $1.

Trade with an open mind. Still too many people only buy stocks and hope they will rise. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand. The same applies to emerging markets. While fundamentally a lot of the emerging markets offer great longـterm potential, shortـterm several countries look overbought. So in Emerging markets it seems, "Shortـterm SHORT, Longerـterm LONG" might be the best advise.

Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital, not to mention stress.

The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is "low." Please all remember Citibank. Nor can we know what price is "high." Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed "cheap" many times along the way.

In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem selfـevident; it is not, and it is a lesson learned too late by far too many.

"Markets can remain illogical longer than you or I can remain solvent," according renowned British Economist Lord Maynard Keynes.

Illogic often reigns and markets are enormously inefficient despite what the academics believe.
Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds... they shall carry us higher than shall lesser ones.

Try to trade the first day of a gap, for gaps usually indicate violent new action. I have come to respect "gaps" in my nearly 25 years of watching markets; when they happen (especially in stocks) they are usually very important.
Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In "good times," even errors are profitable; in "bad times" even the most well researched trades go awry. This is the nature of trading; accept it.

To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we, or should we, trade.

Respect "outside reversals" after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more "weekly" and "monthly," reversals.

Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.
Respect and embrace the very normal 50ـ62 percent retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen... just as we are about to give up hope that they shall not.

Bear markets are more violent than are bull markets and so also are their retracements.

An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making superـhuman insights. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are "right" only 30 percent of the time, as long as our losses are small and our profits are large. The market is the sum total of the wisdom ... and the ignorance...of all of those who deal in it; and we dare not argue with the market’s wisdom. If we learn nothing more than this we’ve learned much indeed.

Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.

The hard trade is the right trade: If it is easy to sell, don’t; and if it is easy to buy, don’t. Do the trade that is hard to do and that which the crowd finds objectionable. In Mid march that trade was major BULL now after the second half and a massive rally common sense would indicate "book profits" across the board and move into cash if not outـright short.