SEC’s curbs on short selling a waste of time

 

The rule puts in a so-called circuit breaker for stock prices, restricting short-selling of a stock that has dropped 10 percent or more for the rest of a trading session and the next one. The new curbs take effect in about 60 days but stock exchanges have six months after that to implement them. Full story=

The above rule will only serve to delay the inevitable and could actually worsen the situation. For example let’s say a former high flyer disappoints the street with its earnings report. Normally the stock is bid up in anticipation of blow out earnings, but now the earnings come in lower than expected, so the stock drops 20% in one day, but short sellers are now cut out of the game. Like a dam the pressure will build up and a day later when the short sellers can jump in, it might cause the stock to drop more than 10% and so forth. This effect could go for a longer period of time then if normal market forces were allowed to play out. When one is forbidden from doing something the desire to the opposite increases twice fold; the more one is prevented from doing something the more one wants to do it. Thus this rule is just a silly piece of legislation that will not really achieve much in the long run. In the short run it might provide the illusion that it has the effect of stabilizing the markets.

 

 

 

www.tacticalinvestor.com

How to become a better Investor

by Sol Palha

The main focus of any good trader should be to spend time trying to identify new and upcoming trends; this is not an easy task. It’s a difficult task because one has to go against the herd; one has to on many occasions even go against one’s own way of thinking because one is embracing a concept that one’s own nature will naturally try to rebel against. The reason for this struggle is due to the fact that we are wired to seek the company of others; we feel safety in numbers. This may be true when it comes to real life dangers but when it comes to investing it’s a fatal error.

In fact, if one just focused on the main issues we have discussed over the years, the end result would have been quite profitable. For example, we focused quite a bit on Palladium from the end of 2008 to early 2009. In the bullion portfolio, we had the label screaming buy up several times when Palladium was trading in our suggested entry ranges. Subscribers know that we do not often use the phrase screaming buy, so when we do it usually means that we think we have a unique situation at hand that won’t last long.

Towards the end of 2008 we also spoke of the potential for bonds to mount a very strong correction and warned individuals against opening new long positions. Bonds mounted one of their strongest corrections ever and by June of 2009, they were down over 20%; a massive move for the bond market.

From roughly the end of 2008 towards the beginning of 2009 we spoke of the fact that the market was going to mount a strong rally as the plunge was overdone, and that it was trading in the extreme zones. Again patience and discipline were needed, for the markets did not turn around immediately. We issued our final targets of 10,500 plus for the Dow in February; at that time, everyone thought the world was going to end.

Towards the end of the 2009 we started to focus heavily on the markets pulling back. This is the reason we started to actively close out many of our positions and it’s also the reason we tightened many of our stops. So far, we have had a brief taste of what lies in store, but the main move has not begun yet. Most will wait until it’s too late to react, very few have the patience to take profits and wait for a better opportunity.

We also spent a lot of time talking about the Dollar mounting a strong rally and gold pulling back. Again individual could have jumped out of other currencies into the dollar, closed out some of their long positions in gold and so on. We could list many such stories; however, that’s not our goal here.

Why are we bringing this up? Well, it’s not to talk about our timing skills. Our goal here is to illustrate that most individuals are lacking when it comes to patience and discipline; most individuals want to chase every single opportunity or at least what they deem to be an opportunity. To most opportunity means following the herd. They feel that if they pay for something they should get maximum usage out of it regardless of whether they win or loss.

To illustrate this point, try this simple exercise. Choose a day and try to do nothing for 1-2 hours and by nothing we mean absolutely nothing. Very few will be able to achieve this. In fact, most will find that it’s really hard to do absolutely nothing. (Doing nothing does not mean watching TV, reading book, playing games, etc., it means doing nothing). However, many can run around the whole day trying to do something but achieving nothing. So in reality the truth comes down to this. As long as one can fool oneself that one is doing something (even if one is achieving nothing in the process) its fine, but to actually sit down and do nothing, now that is a terrible and undoable deed. Now apply the above concept to investing and see how true it is. Many feel that they should try to do something all the time, even if they achieve nothing or even loss money in the process, its fine because they are doing something; sitting down, doing nothing and waiting for an opportunity to present itself, now that is simply unimaginable.

Patience and discipline are the most important traits any trader can hope to master. Would it not be much easier to focus on your real needs and not your fantasies? Why not sit down and look for 1-3 great opportunities and wait for the trades to come to you instead of chasing them

We are almost certain that if a subscription service stated that after they produced 6 or more plays that produced wins in excess of 30%, they would issue no more plays, that the majority would throw a fit and cancel their subscriptions. This clearly illustrates the principle of wanting to get something even though nothing might be achieved by forcing a move. The wise man is happy if he can find 1-2 good opportunities a year. There is no need to chase them, just wait for them to come to you. Sometimes you have to wait a few weeks for them and sometimes months and this is what we focus on. We do not like chasing for it usually leads to trouble. All one really needs is one great opportunity a year and one will achieve spectacular results over the long term.

Is it not funny that most find it difficult to sit down and do nothing for 1-2 hours, but as long as they can pretend they are doing something while achieving nothing they are happy? There is a huge difference between the two, in one you are dealing with reality, in the other reality is eluding you; you are just living in an illusory phase.

Thus going forward, try to find out what you really want, who you really are, what are your needs, what are your goals really are? When you know what you really want, achieving it becomes a lot easier than simply aiming for some arbitrary pie in the sky dream.

Tactical Investor

SEC’s curbs on short selling a waste of time

 

The rule puts in a so-called circuit breaker for stock prices, restricting short-selling of a stock that has dropped 10 percent or more for the rest of a trading session and the next one. The new curbs take effect in about 60 days but stock exchanges have six months after that to implement them. Full story=

The above rule will only serve to delay the inevitable and could actually worsen the situation. For example let’s say a former high flyer disappoints the street with its earnings report. Normally the stock is bid up in anticipation of blow out earnings, but now the earnings come in lower than expected, so the stock drops 20% in one day, but short sellers are now cut out of the game. Like a dam the pressure will build up and a day later when the short sellers can jump in, it might cause the stock to drop more than 10% and so forth. This effect could go for a longer period of time then if normally market forces were allowed to play out. When one is forbidden from doing something the desire to the opposite increases twice fold; the more one is prevented from doing something the more one wants to do it. Thus this rule is just a silly piece of legislation that will not really achieve much in the long run. In the short run it might provide the illusion that it has the effect of stabilizing the markets.

 

 

Tactical Investor

Dollar and Euro Review

Feb 18, 2010

A quick glance at the Euro reveals that it’s putting in broad based top formation; it has been unable to trade past 150 for any decent period of time. It is also putting in a bearish rising wedge formation. A break below 148 for 3-5 days in a row should take it down to the 144 ranges. The next step would be to trade below 144 for 3 days in a row or close below it on a weekly basis. If it achieves this, the next target becomes 141, and it could potentially spike all the way down to the 138 ranges before stabilising. Global Pulse Nov 2009.

The dollar has broken out very strongly from this falling wedge formation. A strong break out is usually a very good sign that the trend is going to last a few months. Conversely, in the picture below we see that the Euro has broken down very rapidly after putting in a rising wedge formation. Global Pulse Dec 22, 2009

The Euro exhibited further weakness by its inability to rally to 146 after testing 142. After trading as high as 145 it rapidly broke down and dropped all the way down to 140 before stabilising. This violent action indicates further weakness in the Euro and is also a signal that it could now potentially trade below 130.

The dollar, on the other hand just achieved a critical mile stone by closing above 78.50 on a weekly basis. This is the first strong signal that the dollar could potentially mount such a strong rally that it could/might catch both the bulls and the bears off guard. The dollar has generated a buy on the weekly, daily and hourly time frames; if by some miracle it generates a monthly buy signal (this based on 9 years worth of data and each bar represents one month worth of data), it could change the upside targets dramatically. However, we do not want to get ahead of ourselves as new monthly signals are usually a rare development. The euro, on the other hand has generated a sell signal on the weekly, daily and hourly charts.

The final development would be a monthly close above 81 for the dollar index; if this comes to pass it should lead to a test of the old highs with the possibility of spiking as high as 91 before a top in is place..

A monthly close below 140 for the euro would be negative development and signal that the Euro could now potentially trade all the way down to 125.

.

The Euro is facing a host of problems and rather than repeating them all we have attached an extract from the Jan 5th market update titled “Euro woes” that was sent out to our subscribers that covers this topic in detail.

In terms of the dollar we can make the following assertions

Technical picture

Multiple indicators have generated a buy signal and up until very recently the dollar was extremely oversold. We also have the dollar carry over trade, if this starts to unwind in the same way the Yen did, it could lead to huge spike upwards as was the case with the Yen. In the Yen carryover trade, the New Zealand dollar was the beneficiary as individuals borrowed in Yen and jumped into New Zealand dollars. Right now most of the competing currencies are the beneficiaries of the US carryover trade, but the main one is the Euro. Thus if the unwinding process starts to gather steam the Euro, Franc, Australian Dollar, Canadian dollar, etc., could experience severe pull backs.

Mass psychology perspective

The dollar is still universally despised and so when an investment is despised to such an extent, mass psychology indicates that a strong reversal is usually close at hand. From hating the dollar the majority will slowly start to embrace the dollar and this will be what drives it even higher. Unlike contrarian investing mass psychology does not advocate taking a counter position to the masses the moment they become bullish on an investment. When they change and embrace an investment, there are 3 stages, the Luke warm embrace, the full embrace and then the euphoric embrace. We will soon approach the Luke warm stage so potentially there is still quite sometime before we hit the euphoric stage. It’s only at the euphoric stage that we will start to look for an exit.

Now normally the above two developments are sufficient for us to jump into an investment. However, this time the fundamentals are also against the Euro and instead of repeating them all over again. We are just going to post an excerpt from the Jan 5 market update below.

Euro Woes

The European Union established the growth and stability pact which imposed the following two conditions on all members

1) Deficit spending cannot exceed 3% of the GDP

2) Total Government debt should not exceed 60% of GDP

The table below clearly illustrates that many of the members are blatantly ignoring these rules.

Country	Budget Deficit as % of GDP	Debt as % of GDP
Greece	-12.7%	113%
Portugal	-9.6%	53%
Italy	-5.0%	115%
Ireland	-12.2%	65%

Spain’s budget deficit could reach 90% of GDP by 2011, currently it is roughly at 60% and rising, so we have yet another contender to join the list of troubled nations. S&P has already downgraded Spain’s sovereign AAA credit rating. In fact, at this point Germany is the only country in the EU that deserves the AAA rating, the rest all face varying degrees of trouble.

Germany the head honcho is in no mood to lend money or help its fellow members as they have their own problems. Now a strong currency makes it hard for struggling countries to make their exports attractive by devaluing their currency. Under the one currency umbrella, they no longer have this option. For example, Italy had a history of systematically devaluing the lira when faced with tough economic conditions; they no longer have this option now that they are part of the Euro. Thus the next step is to simply openly flaunt the rules. If no punishment is forthcoming for breaking these rules, then there is nothing to stop other members from doing the same.

Thus there is a very good chance that something could crack here and that the Euro might not end up being as safe as so many make it to be. While the US has problems, the problems facing the EU are starting to look even more daunting. Look at the table above all 4 nations are openly flaunting the rules laid by the growth and stability pact, actually when we add Spain to the list it the count rises to 5.

This situation is going to create rifts in the EU as weaker nations now have to adhere to a fixed standard, and as a result they are going to continue to blatantly ignore these rules. This in turn is going to seriously start to aggravate the larger stronger players such as Germany and France, which could possibly lead to the one of the following outcomes.

Some members could be kicked out

Members could start to openly revolt against these rules and make demands to ease them or ask for lengthy time extensions before coming into compliance with these rules.

Either of the developments could have a very strong negative impact on the Euro. So when we look out the window it appears what we stated many times in the past might become a reality. “Every currency is rotten” and the rats are jumping from one sinking ship to another. We are also very close to entering competitive devaluation stage (better known as the devalue or die era) where every nation in order to gain an exporting edge starts to devalue its currency.

Thus individuals should not smugly gloat over the dollar’s demise, for they might be missing the real trouble that is taking place in their own backyard. This problem facing the EU is another reason why the dollar could potentially mount a stronger rally than most expect and why it might even potentially surpass all our posted targets. When the ship is sinking panic takes over and people jump before they look. Thus if anything out there makes investors feel skittish about the Euro, it could potentially trigger a mad rush for the exits. Are we saying this is definitely going to occur? No we are not but given the large deficits 5 members in the EU are running; it’s safe to say that all is not well and that the situation could take a turn for the worse very rapidly. Greece could turn out to be another Iceland, if they do not get their act together very very fast.

The US dollar for all its current woes is at least backed by the full faith of the US government; the Euro in contrast is backed by nothing. No one nation backs it, it's backed by a group of nations whose economic conditions could/might force them to eventually abandon the Euro (strong examples right now are Greece and Italy, Spain and Portugal are not far behind). Going forward the currency markets are going to become increasingly complex and entangled.

The only real competition to the dollar is the Euro and the following two articles make a fragile situation appear even more fragile.

The only real competitor right now to the dollar is the Euro and the Euro could be in trouble. Moody’s recently made the following comments on two key members.

The Portuguese and Greek economies may face a “slow death” as they dedicate a higher proportion of wealth to paying off debt and investors demand a premium to hold their bonds, Moody’s Investors Service said. While the two countries can still avoid such a scenario, their window of opportunity ’’will not be open indefinitely,’’ Moody’s said in a report today from London. Portugal, with a negative outlook on its Aa2 rating, has more time “to reverse this trend” while Greece “has significantly less time.” Moody’s cut Greece’s rating to A2 from A1 on Dec. 22. Full Story

In our opinion they should be adding Spain, Italy and Ireland to the equation and we are sure several more members are going to be running into trouble soon.

Saving the euro from a Greek tragedy

EU finance ministers are pressing their indebted and riot-prone Balkan member to embrace a massive austerity plan and plug its debilitating deficit. But with markets skeptical and the appetite for more bailouts at a low, there are deepening concerns that a Greek meltdown could deal a severe blow to the very European idea of a common currency, and set off a domino effect through Italy, Spain, and Portugal. The EU's economy commissioner Joaquin Almunia warned of a domino effect, saying Greece's debt crisis is already hurting other indebted countries that use the euro as nervous bond markets hike borrowing costs on fears that Greece could default or demand an unprecedented bailout from reluctant EU states.

"The fate of one is the fate of all," he said. "This situation in Greece is having effects in other countries." Eurozone nations are trying desperately to patch up the cracks, promising Monday to do more to run their economies in a uniform way and accepting possible warnings when they go astray -- a major shift for sovereign nations that are not keen to see more EU oversight.

But Greece is the real litmus test.

If Greece can't deliver the cuts it is promising and risks not being able to repay its debt, it will likely seek a bailout from EU members to rescue it from a crisis of its own making, where failure to curb a bloated public sector and endemic corruption have dragged down economic growth. Finland's Finance Minister Jyrki Katainen bluntly said that would be asking too much. The Greeks couldn't expect "any outside help" and "it's purely up to them how well they will treat this crisis," he told reporters. Full story

Conclusion

When we take all these factors into consideration, there is a real possibility that something could go potentially wrong in the Euro zone. Greece is a ticking time bomb and not only is the government plagued with corruption, but unless they implement very severe and painful cuts, the problem is only going to get worse. A default here could trigger defaults in other weak members such as Ireland, Italy, Spain and Portugal.

The current pattern is projecting that the dollar will mount at least a 3 month rally if not longer that could lead to a new 52 week and possibly 2 year high. A strong rally in the dollar could have far reaching effects. It will certainly lead to a pretty severe correction in the commodities markets and most competing currencies will in turn experience strong pull backs, with the potential for some to completely break down.

If you have no position in the dollar wait for a pullback before opening positions in UUP and short positions in the EURO via EUO.

 

Disclaimer: we have positions in EUO and UUP.

Becoming a better Investor

When you recognize and understand your weaknesses that is when you can truly begin to focus on your strengths.

Sol Palha

Feb 17, 2010

One of thee main functions of the market update is to identify new trends and not only is this a time consuming task, but it’s also a difficult task. It’s a difficult task because one has to go against the herd; one has to on many occasions even go against one’s own way of thinking because one is embracing a concept that one’s own nature will naturally try to rebel against. The reason for this struggle is due to the fact that we are wired to seek the company of others; we feel safety in numbers. This may be true when it comes to real life dangers but when it comes to investing it’s a fatal error.

Once the trend has been identified, we offer suggestions on what to do and in most cases put out trades that help traders capitalize on our observations. In fact, if one just focused on the main issues we have discussed over the years, the end result would have been quite profitable. For example, we focused quite a bit on Palladium from the end of 2008 to early 2009. In the bullion portfolio, we had the label screaming buy up several times when Palladium was trading in our suggested entry ranges. Subscribers know that we do not often use the phrase screaming buy, so when we do it usually means that we think we have a unique situation at hand that won’t last long.

Towards the end of 2008 we also spoke of the potential for bonds to mount a very strong correction and warned individuals against opening new long positions. Bonds mounted one of their strongest corrections ever and by June of 2009, they were down over 20%; a massive move for the bond market.

From roughly the end of 2008 towards the beginning of 2009 we spoke of the fact that the market was going to mount a strong rally as the plunge was overdone, and that it was trading in the extreme zones. Again patience and discipline were needed, for the markets did not turn around immediately. We issued our final targets of 10,500 plus for the Dow in February; at that time, everyone thought the world was going to end.

We also spent a lot of time talking about the Dollar mounting a strong rally and gold pulling back. Again individual could have jumped out of other currencies into the dollar, closed out some of their long positions in gold and so on. We could list many such stories; however, that’s not our goal here.

Towards the end of the 2009 we started to focus heavily on the markets pulling back. This is the reason we started to actively close out many of our positions and its also the reason we tightened many of our stops. So far, we have had a brief taste of what lies in store, but the main move has not begun yet. Most will wait until it’s too late to react, very few have the patience to take profits and wait for a better opportunity.

Why are we bringing this up? Well, it’s not to talk about our timing skills. Our goal here is to illustrate that most individuals are lacking when it comes to patience and discipline; most individuals want to chase every single opportunity or at least what they deem to be an opportunity. To most opportunity means following the herd. They feel that if they pay for something they should get maximum usage out of it regardless of whether they win or loss.

To illustrate this point, try this simple exercise. Choose a day and try to do nothing for 1-2 hours and by nothing we mean absolutely nothing. Very few will be able to achieve this. In fact, most will find that it’s really hard to do absolutely nothing. (Doing nothing does not mean watching TV, reading book, playing games, etc., it means doing nothing). However, many can run around the whole day trying to do something but achieving nothing. So in reality the truth comes down to this. As long as one can fool oneself that one is doing something (even if one is achieving nothing in the process) its fine, but to actually sit down and do nothing, now that is a terrible and undoable deed. Now apply the above concept to investing and see how true it is. Many feel that they should try to do something all the time, even if they achieve nothing or even loss money in the process, its fine because they are doing something; sitting down, doing nothing and waiting for an opportunity to present itself, now that is simply unimaginable.

Patience and discipline are the most important traits any trader can hope to master. Would it not be much easier to focus on your real needs and not your fantasies? Why not sit down and look for 1-3 great opportunities (luckily we have managed to do this every year) and wait for the trades to come to you instead of chasing them

We are almost positive that if we stated that after finding 6 plays that produced 30% or more in gains, we would not issue any more updates for the year, most of the subscribers would throw a fit and want to cancel their subscriptions. This clearly illustrates the principle of wanting to get something even though nothing might be achieved by forcing a move. The wise man is happy if he can find 1-2 good opportunities a year. There is no need to chase them, just wait for them to come to you. Sometimes you have to wait a few weeks for them and sometimes months and this is what we focus on. We do not like chasing for it usually leads to trouble. All one really needs is one great opportunity a year and one will achieve spectacular results over the long term.

Is it not funny that most find it difficult to sit down and do nothing for 1-2 hours, but as long as they can pretend they are doing something while achieving nothing they are happy? There is a huge difference between the two, in one you are dealing with reality, in the other reality is eluding you; you are just living in an illusory phase.

Thus going forward, try to find out what you really want, who you really are, what are your needs, what are your goals and so on? Take the time also to read all the rules we have posted in the pass coded section of our website and most of all focus on trying to become a better trader by having more patience and more discipline.

 

www.tacticalinvestor.com

Random Musings

Feb 13, 2010

India

We are just going to briefly touch this topic today and if time permits spend more time on it in future updates. The Indian Government announced that the economy expanded roughly at 7.2% for this fiscal year; like china this is an astounding growth rate and on the surface would justify the bullishness surrounding its stock market. However, as always there is more to the story than meets the eye.

First of all, the Indian government always has a problem in managing its budget; even in good times they manage to run a budget deficit. Another problem is that you have budget deficits on two fronts one from the central government and one from the provincial governments and their total budget deficit could run well over 12% of GDP. Such a high budget deficit puts them in the league with the PIIGS (Portugal, Ireland, Italy, Greece and Spain).

India like most nations decided to stimulate their economy, but they decided to embark on monetary and fiscal stimulation at the same time. They lowered repo rates to 4.75%, but inflation is running at roughly 11% so what you have is a negative rate of interest here.

It held its lending rate, or the repo rate , unchanged at 4.75 percent and its reverse repo rate , at which it absorbs surplus cash from banks, unchanged at 3.25 percent.

Despite increasing inflationary pressures, the central bank has been under pressure from senior government officials to hold off from raising its policy rates, which they argue would undermine the economic recovery. Full story

When India's deficits get too high it relies on foreign financing unlike China and so while the growth rate is high, investors might not mind financing these deficits, but a slowdown could cause them to flee and produce a similar crisis as the one that is currently plaguing Greece.

India is also suffering from a drought and food prices are rising at roughly 15-18% a year. The best thing to do now would be for the governments to cut back seriously on public spending but the congress party in command has a history of spending heavily on public projects, and so we cannot expect any change here.

A look at some of the top stocks indicates that they are pulling back or building up patterns that suggest all is not well. Our advice if you are heavily invested in the Indian and or Chinese markets is to lighten up or completely get out until the situation mellows out. The current trend is very dangerous and inflationary forces are already manifesting themselves strongly India; a slowdown in economic growth could lead to rapid breakdown in the stock markets. The BSE SENSEX Index has already put in a rolling top formation (this is what took place in the Dow); a break below 15,500 for 5-7 days in a row, could lead to a test of the 12k-13k ranges. There are many good long term plays in India, some of which are IBN, INFY, RDY, etc., but right now they are all still trading at lofty levels and so a strong pull back will provide for much better entry points. It's time to be cautious; as they say it's better to be safe than sorry.

"There's no security on this earth, only opportunity." - Douglas Macarthur, 1880-1964, American Army General in WW II

 

www.tacticalinvestor.com

Oil

Feb 13, 2010

 

"Security is the chief enemy of mortals." - William Shakespeare, 1564-1616, British Poet, Playwright, Actor

Oil recently mounted a strong short term rally and traded as high as 77 but pulled back just as fast. This inability to hold above 74 suggests that it is still in a consolidative/corrective phase; unless it trades above 74 on a weekly basis the odds favour a pull back to the 63-66 ranges.

The intermediate pattern is still bullish and suggests that by summer oil could be trading significantly higher. The first sign of much higher prices to come will be for oil to trade past 78 for 3 days in a row or close above 84 on a weekly basis. Thus going into the summer season we could be looking at higher prices and a depressed stock market.

As long as oil remains below 74, the trend will remain negative. Currently, we have weekly and daily sell signals in effect. The daily signal is moving closer to the buy zone and a new buy signal should lead to a rapid upward move in a relatively short period of time; if this occurs we will definitely issue a long trade in our VIP futures service. However, as of yet we have no buy, so do not jump into this market, unless you are opening up long term positions. A weekly buy signal would be a very good early indication that oil is getting ready to trade well past the 93-95 ranges and possibly past 100.00

Finally oil has been trading in a channel formation that ranges from 66 to 84 for almost 8 months; the longer the channel the more explosive the move. The only problem is that channel formations do not give clues as to which direction the move is going to occur. For that we need to use other tools and that's where multi time frame analysis, daily and weekly signals, etc., come into play. Preliminary indications suggest that the next big move is going to occur towards the upside. A daily buy signal would give an early warning of this break out, while weekly buy would indicate that the breakout is gathering steam and that oil is getting ready to challenge the 90 plus ranges.

From a long term perspective any price below 65 is great play to open up new positions in oil related stocks.