Midday Briefing for August 7th: Shifting Themes

With strong jobs data, we've seen the dollar rally sharply against the euro and stocks rally strongly to new bull highs, led by the financial sector.

Note the inversion of recent themes: here we're seeing strong stock prices on the heels of a strong dollar and weak commodities. Note also the continued relative underperformance of the NASDAQ 100 stocks, as well as commodity-sensitive energy and materials shares. Indeed, the new highs in the S&P 500 Index (ES, above) are not confirmed by several sectors, including XLP, XLV, XLE, XLB, and XLK.

I will be watching closely to see if we can sustain the current strength--and also to see if we're seeing the start of shifting intermarket themes.

Thoughts on Discovering Our Best Trading

Here's a little thought experiment for active traders.

Suppose you could only make two trades per day and you could only trade at a maximum of 2x leverage.

Once you made your two trades, you were done for the day.

What would happen?

You would have to be very selective in your choice of trades. That means you would have to be extremely patient and disciplined.

You would have to concentrate on identifying the largest moves in a day. That means that you would have to be very market focused, emphasizing only the best and most relevant market data.

You would have to ride your winners and frame each trade with very good risk/reward, because you wouldn't have further opportunities to trade during the day.

You would have to trade only when patterns in the market hit you between the eyes, giving you the greatest possible confidence.

It's all supply and demand. If the supply of possible trades is reduced, each trade becomes more valuable to the trader.

Might many of us discover who we are as traders--what we do best--if we strictly limited the number of trades we placed? At that point, we'd have to be the best we could be, because we wouldn't get another shot at markets.

Perhaps it's true of life itself: awareness of our limited time on earth makes us value each day more, prodding us to live it to its fullest.

Without perceived scarcity, any commodity loses value.


Morning Briefing for August 7th: Retreating Into the Range

Please take a look at my post on the narrowing trading range from several days ago. We're seeing that scenario playing out in recent trading, as stocks have retreated from their highs and are back into multiday trading ranges. All of this looks like an extended topping action from my perspective. That doesn't mean we can't get higher prices still, but I suspect any such highs will be accompanied by growing divergences among sectors, indexes, and indicators.

Trading, Entrepreneurship, and Confidence

The recent post emphasized the importance of finding creative trading niches. The great majority of traders I've known who have sustained success have developed their own unique "take" on markets. They either look at unique information, or they assemble existing information in unique ways. This enables them to see patterns that escape the attention of others.

One unusually successful trader patiently explained to me some years ago that he tracked a variety of commodity prices as well as the pricing of commodity options and futures for various expiration months. The relationships among the commodity prices--and the expectations built into the futures and options--told him which sectors of the stock market were most likely to outperform the others. So he bought those sectors and sold the likely underperformers. His trading was always market neutral: the general stock market could go up or down, but he would always make money as long as he was in the sectors that performed best.

He no longer trades that strategy; he felt that the long/short space became too crowded several years ago. Now he tracks completely different economic indicators to accomplish something similar among global stock markets. So, for example, he has been long certain emerging economies and short other, developed ones.

What initially impressed me about this trader was not only his work ethic and ability to view and trade markets in fresh ways, but also his confidence level. He was extremely confident, but not overconfident. His confidence was a direct result of finding his own trading strategies: ones that made sense to him and that he had researched. He could weather drawdowns and add to winning trades, because he knew how his markets performed.

What impressed me most recently about this trader has been his willingness to remake himself as markets changed. He didn't hesitate to replace one strategy with another when he saw opportunity fading.

No business market remains static. Successful businesses always have to remake themselves and adapt to changing economic and demographic conditions. Trading as a business is quite similar. The ability to detect opportunity and see the world through fresh eyes is a virtue of all fine business leaders. They don't come to markets to gamble; they approach markets as entrepreneurs.


Trading Creatively: Finding New Niches as a Trader

A while back I wrote six pieces of advice for new traders. One additional piece of advice that I would offer is to be creative in finding markets and strategies to trade.

If you were starting a new business, you wouldn't necessarily select an area that is loaded with competition. You would find a business niche where demand is not fully met; where there is potential opportunity.

Interestingly, new traders often gravitate to the most common and popular strategies and markets, such as the directional trading of stock indexes. Rarely do traders venture outside their national boundaries (especially in the U.S.), and rarely do they look into strategies at different time frames, non-directional strategies, and strategies across asset classes.

One trader I met recently collected extensive information on world trade and used this (along with other information) to trade calendar spreads in commodities. He has been unusually successful, using reasoning processes that are quite different from the norm.

I encourage traders to never stop exploring markets and strategies. There is always room to grow. Those who develop new opportunities are best positioned for those occasions in which current sources of edge start to go away. It is great to find a niche as a trader; even better is to continually develop fresh niches.

Morning Briefing for August 6th: Probing New Highs

Here we see that we're trading at the upper end of yesterday's range. Note that, once again, corrections have been relatively short and shallow, helping to preserve the uptrend. We have support at the Tuesday and Wednesday lows; failure to sustain new highs would target the midpoint of the range since Tuesday. Continued stimulus in the UK is helping support prices; we're seeing stronger gold prices and higher Treasury rates so far, with 10-year rates nearing 3.8%.