Finance and Stuff

Thoughts on finance and other stuff by Johan Lindén

Category: Trading (Page 2 of 3)

stock market manipulation

Manipulation Lowering Stock Prices

stock market manipulationI never understood all the fuss about so-called downward manipulation of a company’s stock price. I so often hear or read about people complaining about that their stock is manipulated to be artificially lower than it should be. Even if it was true, that would be a good thing!

As all other things in life, the lower you buy, the better you are off. The advantages of buying a stock lower means, you get more of the company for the same money, a bigger share of future earnings, a higher dividend each year, and a better risk-reward ratio in distance for an up versus down swing.

A low stock price is only bad in one of the two scenarios. If a company needs to issue new stocks. Then they will have to sell out more of the company diluting the current ownership base. And it is obviously bad if current shareholders need to sell stocks at the time of the manipulation.

So please tell me if you know any stocks that are manipulated to be cheaper so I can buy them. I suggest you do the same next time you hear about manipulated stocks.

Click here for a general paper on Stock Market Manipulation.

Gold Sentiment among Portfolio Analysts

In this short article I will follow up on the ways to look at gold sentiment to judge whether it is a good time to buy or sell gold (or sit on your hands). This time we see how portfolio analysts look at gold to see if they are too enthusiastic or too negative.

According to Hulbert at MarketWatch, “that huge two-day drop in late August did scare a lot of erstwhile bulls into becoming almost stubbornly bearish — which, from a contrarian point of view, is bullish. As a result, even though gold bullion is now back within shouting distance of its August highs, gold market sentiment remains remarkable subdued.”

They write that the average recommended gold market exposure among a subset of the shortest-term gold market timers currently stands at 40.3%. While it stood at a much higher 67% in late July.

So even though gold has climbed $300 and 18% since July portfolio managers are more negative (or less positive) now. Since the typical pattern is for gold timers to become more bullish as the market rises, and vice versa, this development is bullish from a contrarian point of view.

gold sentiment bullish chart

 

Ceiling on Swiss Franc

Today the Swiss National Bank announced that they will no longer tolerate a Euro under 1.20, thus putting a ceiling on the franc.

The bank said that: “The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development [and] the SNB is therefore aiming for a substantial and sustained weakening of the Swiss franc”.

The bank also said that to prevail this goal they may buy Euro in “in unlimited quantities” to suppress the Swiss Franc.

The trade we recommended last week is better shown in a chart:

us dollar swiss franc trade chart

Gold Sentiment

There are many ways to measure market sentiment for gold. One way to do it is by checking Google Trends to see how many have searched for the term “buy gold”. That way you get a very broad definition of the positive sentiment in gold

From the chart below we see that we just have had a top in sentiment in gold in the beginning of August. Last time before that was in October 2008. The price of gold took a deep three-week dive right after the October top before the strong trend continued.

What seems to be a bit stretched in the picture though, is that the news references just made a huge spike in august. More notable than the spike in October 2008. This spike, however, totally died out for the last days which could make gold bulls relax a bit.

I am not very found of doing quantitative research with so few observations (the peeks), but this is one of many tools about how to look at quantitative-, technical-, or sentiment analysis.

Enjoy!

gold positive sentiment trend

Related Articles:
Should I Buy Gold?
Platinum and Silver vs. Gold

Negative Interest Rate in Swiss Franc… Again

Switzerland is now charging interest (or call it a tax if you want) if you want to lend the country your money! That is right, for every franc you want to lend them they will give you less back.

No matter how crazy this might sound, this is actually for the second time period in history that Switzerland charge investors to give them money. The first period where Switzerland had negative interest rate was in the 1970’s and that initially lead to a decline of 27% before the appreciation continued. Switzerland sure seem like a country who knows how to take care of its currency. Maybe something other countries could learn from.

Today you have to pay 0,82 Swiss Franc for a U.S. Dollar. The facts above indicates that the market sentiment is a bit stretched to say the least, and if the pattern from the 1970’s repeats, then there seem to be a good risk/reward to buy U.S Dollar with Swiss Franc. 0,7765 is where I put the stop loss for this idea, which is 5,3% below current value.

US Dollar Swiss Franc USD CHF

Beware! Be sure to understand money management and the risk of trading before attempting any trades. For instance, in the example above, if you only want to risk 1% of your trading capital you need to invest a fifth of your capital. There will be a risk and money management article coming up in later posts.

Bernanke Speaking at Jackson Hole

FED director Mr Bernanke is now starting his speech in the Jackson Hole FED-bank conference.

bernanke jackson hole stock market

The market participants are now waiting for news about the economy. Last year a big rally started in the stock market that lasted until this summer.

This time people do not seem that optimistic about the things Bernanke has left to offer. A Quantitative Easing number 3 is what many hopes for to help inject money into the markets. But even if that comes that is no guarantee for a raising stock market.

The positive side, I think, is that so many are negative now and not many believe in a strong stock market. That is the only, but very important, tell that we might enjoy some strength in the market.

But beware of volatility. Always take smaller trade sizes during times of high volatility. More about trade sizing in later posts.

S&P 500 is at this time down 1,3% to 1144.

POST-MEETING UPDATE 16:48 CET

No specific information about quantitative easing was given as most had expected.  But Bernanke said that the U.S. Federal Reserve will do what is necessary to support the economic recovery. — Suprise suprise!

The recovery in the U.S. economy remains modest. The recovery is slower than the Fed had hoped for, but the Fed continues to expect better growth in the second half of 2011. — I think you should change the world “expect” for “hope for”. What they or any expert expect is rarely what happens.

While noted a significant growth in the global economy and America’s banking sector is generally in much better shape now, says Bernanke, and I believe him, but it is not now I am worried about. It is tomorrow or next year. Warren Buffet also seems to believe in the American banking system. Google Buffet + BAC for more info about his latest investment.

The Federal Reserve has a number of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. — They might have the holy grail but they have not used it yet and do not want to tell us about it.

Their next meeting is in one month.

S&P 500 is at this time down 0,7% to 1152.

The Rise of the Machines

computer guided tradingLast week we could read from the supposed to be knowledgeable people that short-selling (see article) is to be blamed for falling stock market. Yesterday it was the computers turn to be blamed.

According to some financial “professionals” it was the computer guided trading that is to be blamed for many of the big declines in the market, such as the one we saw yesterday when stocks fell 5-6% across markets. I wonder how the authorities think that their ban of short-selling turned out?

From time to time you will hear other equally ridiculous claims such as it is the fault of the:

  • Institutions
  • Daytraders
  • Short-sellers
  • Scared Investors
  • Analysts
  • Investors taking wrong decisions

I guess markets still have a long way to fall when we hear these ridiculous claims trying to explain why the stock market declines.

Regulating Short-Selling is Ridiculous

As always when the stock market is running bad there is this discussion among authorities to forbid short-selling* of stocks. This time is no different as I could read yesterday that several authorities are talking about banning short-selling of stocks.

So, it must be good for the market if we forbid short-selling right? No, wrong.

  1. There is no evidence whatsoever that it will be better for the financial markets. Show me proof and I will surrender!
  2. Why keep up prices if market participants want them lower? Prices will always end up where they belong sooner or later. The sooner a stock shows its real value, the better for an effective stock market.
  3. Restricting the market makes the market less liquid and effective, which leads to lower prices. Not really what the authorities had in mind I guess.
  4. There are ways to get around this ban by using futures and options. So as usual, the ones that lose are the average Joes who do not have access to those instruments while the sharks prosper as usual. Or maybe we should forbid those instruments too? Why not forbid the whole stock market to avoid turbulence?

The most important point though, is why there is only talk about trying to lower the downward swings. If the market have not gone so high to begin with it would not have gone so deep now. Why ban short-selling? If we instead had ban people from over-investing and buying on the margin we might not have gotten these swings.

Check out the chart below for how the market did the last time we did when banning short-selling in 2008.

short-selling ban 2008

Edit: 28th of September. Adding a video from Bloomberg below.

*For those who do not know what short-selling is, it is when you are speculating in a falling price and sell something you do not have. So instead of owning 100 shares of XYZ, you are owing 100 of XYZ, meaning you have a total of minus 100 shares of that stock in your account and thus prosper when the stock is going down and you later buy it back cheaper.

 

Trading vs. Poker

Having been a full-time poker player for a few years before I started my recent venture in finance, I have found many similarities between the two occupations.

trading poker

When I read the book Poker Wizards, a book interviewing some of the best poker players of all time, I found it very interesting to see how the poker professionals reasoned and how it was related to the financial markets.

Let us look at what Daniel Negreanu, one of the most acclaimed and well-known poker players of all time, has to say about the traits of successful poker player:

  1. The one quality that I think is definitely the most important in being a successful player is having good people skills.
  2. The second most important quality is an aggressive personality.
  3. Third is discipline.
  4. The last quality is having a fundamental knowledge of the game, which is the easiest part.

I could not have agreed more about this list of qualities that makes a successful player. The interesting part though, is that the same thing goes for the players in the stock market or other financial markets. So let us look at these four qualities one by one when it comes to being a successful trader.

People Skills

Most definitely one of the most important qualities! A good poker player knows that when the table is tight and people hold onto their money he should be more involved and putting his money in the pot more often. But if many players are involved most of the time, then he plays fewer hands.

The same thing goes for the stock market. When everyone talks about how good it is to invest in stocks and you hear stock tips just by visiting your local coffee shop, you better stay out. But when people loathe the thought of owning stocks, that is a good time to own stocks.
stock market psychology behavioral economic

Another way of seeing why you need good people skill is to understand what drives the stock prices. In the long-run it is the earnings of a company that leads the way for stock prices, but in the long-run we might have gotten broke already.

In the short-run it is the hope and fear of people who decides where the stock prices moves. This is what we call market psychology or behavioral economics. Instead of fundamental analysis of the company itself, many successful traders try to measure and use people’s behaviour when analysing the outcome of a trade.

An Aggressive Personality

I prefer to call it an unafraid personality. If you assessed the risk of your strategy you must be willing to follow through your plan and not change it just because you are currently losing. When people panic they often take the wrong decision.

Discipline

Even if you have the best trading plan in the world and make money 95% av the time, you might lose all those winnings in the last 5% of your trades if you trade inconsistently. You must also have discipline and routines to look over your trading on a regular basis to optimize results, but also take care of your well-being to not lose focus due to stress and other factors.

Another very important aspect that many people fail to follow is the discipline of game selection. Both poker players and traders alike love their game so much so they often join a game where they do not have an edge instead of waiting for the right opportunity. To sit out and not take a position is many times the right decision. Or to put it another way, to not get involved in losing games makes you a winner in the long-run.

Fundamental Knowledge of the Game

It is easy to get a fundamental knowledge of poker. Anyone can get it by reading a few good poker books. In the stock market this is much harder since there is not much scientific evidence about doing the right investment. Are value companies better than growth companies? Is it better to buy a stock with a low P/E? Many people have an opinion but if you ask them for some statistical evidence they think you are a donkey not taking their word for granted.

It is a big leak for a trader or investor who is using his common sense to take decisions instead of finding a scientific measurable edge. But just as in poker, those bad traders might win in the short-run and complain about being unlucky in the long-run. Do not become one of those people!

Differences between Trading  and Poker

Finally I would like to point out two differences between trading and poker. In poker, many go with their gut-feeling when taking hard decisions. They might see something in their opponent, a tell, that looks suspicious, and take actions according to that. That is fine! People have had millions of years to evolve skills in reading other people’s subtle expressions. But traders usually do best in avoiding that gut-feeling that usually comes from fear or greed instead of the body language of their opponent.

The similarity, however, is that you should try switching of your emotional senses in both poker and trading to avoid taking emotionally driven decisions. So much money has been lost in both poker tables and in the stock market for those emotionally driven decision. But your own emotions are one of the toughest challenges to master no matter if you are a trader or poker player.

My last point regarding the dissimilarities between poker and trading is that trading and the financial markets is much tougher to master than poker. It is much harder to find an edge in trading than in poker. If you have two aces and get your money in before the flop, you are making a good investment. That is a fact. In trading you rarely find those facts.

I want to finish of with a quote:

“Poker is like sex. Everyone thinks they are the best, but most people don’t know what they are doing.” -Dutch Boyd

I hope you enjoyed this article. Feel free to comment!

Related posts:
Ten Characteristics of Successful Traders
Quotes of Market Wizards

Shortage of Physical Gold

How to handle the shortage of physical gold? 

I got my first reader questions yesterday.

gold shortage

I would like to own 25% gold in the next months, since I believe that a real market crash will occur that will ruin most of our financial markets. But first I think there will be a rebound so I only want to own 10% gold now. But as I already can see today, there are bottlenecks in how to get physical gold where I live. Do you have any suggestions?

A very good question! In fact there is a way to get around this problem, so the answer is yes!

With all the financial turbulence and buy recommendations we now get on gold from everywhere, the Swedish gold retailer, Tavex, as of yesterday, announced that they, were out of gold.

However, these alarming signs usually means that we are coming to a temporary plateau for the gold price, and that you will most likely have plenty of days to buy your physical gold. But I want to stress the word usually. But do not panic and see what I would have done in the example below:For example let us say:

  • You want 1000 oz. of physical gold as a maximum.
  • Today you think that the gold market has overreacted, but just to be sure you want to own 500 oz.
  • So you buy that 500 oz. today electronically.
  • When you get hold of your 1000 oz. of physical gold you will have a total of 1500 oz. of gold, which is 1000 oz. more than you want today so you go short/sell 1000 oz. of gold electronically.
  • Now you are 1000 oz. invested in physical and minus 500 oz. in electronic gold for a net of +500 oz.
  • Finally when you think that you want to be fully invested you buy back those 500 oz. that you shorted in the market.
  • Then you own 1000 oz. of physical gold, but zero oz. of electronic gold. You are safe!

 

If there is to be a real panic. Let say the stock market crashes 10% three days in a row. At that time there may be a real shortage of physical gold for some time and you may even have to buy it significantly above market price to get it.

The only downside to this strategy is that this will add a slight transaction cost, but it guarantees me that I will own the right amount when the time comes without having to think about where and how to get it. And at the same time it will let me have some room to ease my position when I think that the market has overreacted.

 

By hedging my physical gold with electronic gold I will:

  1. Easily always have the amount of gold that I want at any time by regulating it in my trading account. 
  2. Be fully secure in case of that my bank or brokerage firm goes down.
  3. Have instant access to my gold at all times.

Keep those questions coming.

See my previous article about investing in gold in general

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