Know the Market Environment: Risk Management Series

I was asked a question the other day that I feel almost any trader or investor has asked themselves at sometime or another, but I rarely find anyone writing about it... including myself. I feel ashamed about it too. Sure, I've discussed risk management through setting stops, understanding trend lines, support, resistance, patterns, breakouts, breakdowns, etc. But this particular question is much more simple than that, and it's the staple that can ultimately hold a portfolio together through a bull market, bear market, or even sideways market.

Here's the discussion/question I encountered from an individual who recently began working on controlling his own investments: "Analysts and books that discuss trading strategies always say know your risk before making a trade. They always say trail your stops or sell into strength depending on your unique trading principles. What I am having a difficult time understanding is how do I decide which of these styles works best for my "unique" principles? If I place a trailing stop, I can be whipsawed out of the trade and watch it resume it's uptrend. If I sell into strength, it can run along without me, essentially losing potential profits. What do I do?"

Bonds Quietly Breaking Out

Always check bond prices.  It's nothing less than a necessity. For active traders and investors who closely follow the equity markets, keeping tabs on other asset classes is something many talk about, but often forget to incorporate into their daily/weekly routine.

Of all asset classes, bonds are arguably the most important and rightfully so. The bond market is enormous. Bond traders look at equity markets as the poor man's game. Yet, us peons should maintain our composure and have no fear. Bonds have a history of turning before equities, and those who do not heed the warning signs always pay the price. There are multiple ways to check in on bonds, mainly by analyzing the basic price charts. However checking in on the ratio of Equities/Bonds allows us to see quickly which asset class is underperforming, and adjust our positions accordingly.

Purging Toxic Media

I have been doing a pretty good job of ignoring the hoopla in the financial media, and overall, basic news coverage for over a year now. I've always told myself and given advice to others interested in markets that the more noise you subject yourself to, fear is instilled, causing many traders or investors to be paralyzed when it's time to act. It wasn't until early 2012 that I began to truly take my own advice and rid myself of the hysteria of a zombie Apocalypse caused by the incompetent politicians and Central Bankers.

*Though I am an ardent "Walking Dead" watcher and can tell you exactly what happened to Rick in the season finale, I, unlike many, do not take the show so literally as to go out and purchase multiple guns and samurai swords. By the way, for all you zombie loving gold bugs out there who believe runaway inflation is inevitable, why don't we see Rick, the Governor, and other survivors in a desperate search to find and hoard all that gold left behind? Chew on that for a while. Now back to reality...

What's Your Trading Style?

A while back I posted the article "Routine Becomes Habit". The premise of that post was to affirm the need for any individual who has an active stake in the markets to develop and maintain a successful investing strategy. Just as in life, each of us has a different style that suits our investing needs - the difficult part for many is finding that style.

I'll be breaking this topic into a few different columns, but the first is to lay the framework for how to determine which style may be best for you. All the nuances and unique details can be worked out at another time. What needs to happen first is an honest, well structured conversation with yourself. So, let's go ahead - start talking.

Trend Changes are a Process

At the end of yesterday's stock market close, the final minutes of trading signaled a quick turn around from relatively bullish to bearish action. Granted, breadth was quite poor during the day which called the strength of the indexes into question, but nonetheless, price action was in the green most of the day. In the final ten minutes, selling kicked in, likely exacerbated by the HFT machines, taking the indexes back to the morning lows, and in some cases exceeded them. Selling like that, when viewed on a 5 or 10 minute candlestick chart, sets up a down open the next day almost every time. Think of it as the "smart money" jumping ship before the potential storm overnight.

Gain a Few Pounds with British Stocks

I've been anticipating the devaluation of the British Pound for some time now, however now that we have what appears to be confirmation, let's take a look at how we can profit.

For a quick reference, when a Central Bank of any country who issues it's own currency (such as the US) decides to provide a seemingly endless supply of liquidity to markets during a deflationary economic environment, what happens to the stock market of said country?

January 2013 Barometer Says Overweight These Sectors

I understand that statistics don't much matter when you land on the fat tails, however it would be short sighted to completely ignore what the numbers are attempting to tell you. For example, let's run through the stats of a lesser known version of the January Barometer and use it's guidance for positioning our portfolio over the next 6-12 months.

Obviously, January posted an exceptional gain for 2013, seeing the S&P rise slightly over 5%, and small caps rising about 5.5%. Since 1950, when January finishes in the green, 88.7% of the time the year ends with a gain equal to or greater than the gains made in January. However, this doesn't actually help anyone position their portfolio unless the plan is to throw some money in the index ETF's and ignore them the rest of the year. So, how do we determine where to position ourselves over the coming months? Let's dig into the January performance metrics of the major sectors and follow their lead.

Check that Ratio: Stocks to Bond Yields

The trend is your friend. That is the main argument I've heard on the airwaves as to why a pullback has not yet ensued. I don't much care for arguments either way... arguments are fun to debate, but talking about "why" the market has held up so strong doesn't provide any actionable strategy for profiting from it. Momentum traders have done very well to start the year if they followed their trading rules without letting the bearish emotions get the better of them. That can hard these days, but the best way is to simply turn off the noise and focus on your own methods.

Crowd Surfing Carefully

I don't particularly enjoy crowds. The idea of large groups huddled together doing some combination of pushing, shoving, spitting, groping, coughing, sneezing, sweating, and yelling is, for the most part, unappealing. I'll rough it for certain concerts or sporting events, but I can only handle it about 2 or 3 times in any given year. Same concept goes for waiting rooms, lines, traffic, etc (though, these are simply unavoidable).

Black Friday is right around the corner, and you guessed it, you won't see me anywhere near a retail store. I prefer to enjoy the holiday's, not be trampled by them. Having said that, there is a time and place for joining the crowd that is the stock market, as long as you take the necessary precautions to protect yourself from the rabid speculators among you.