The Party Is Over For Stocks, Bonds and Real Estate

 

This is a copy of the Article I wrote for the National Business Review that appeared on 11 October 2013.

The Party is Over

Take a step back and ask yourself this simple question: “Why are so many investment asset classes at or near all time highs?”

US stocks, the NZX50, Australian stocks, UK stocks, government bonds, corporate bonds, residential real estate, commercial real estate etc, heck even the Iran Stock Exchange – are at all time highs. This is spectacularly unusual when you consider some other all time highs: US indebtedness, US poverty, and European unemployment.

But the reason is simple: coordinated international market manipulation. Let me explain.

After the GFC in 2007-2008, the US Federal Reserve (“the Fed”) made a momentous decision. After years of excess credit and excess consumer spending, we had the inevitable collapse in asset prices, and the freezing of credit markets. The Fed could have, and should have, allowed the age-old economic boom and bust cycle to clear out the dead wood, and punish those who overspent and took excess risks. Instead the Fed decided to bail out the over-spenders and excess risk takers by savagely cutting interest rates. By necessity, every other country in the western world followed suit.

Since 2008 the world has enjoyed the lowest interest rates since the 19th century. The only single exception was a brief period during the Second World War. Right now you can fix your mortgage at 4.94%. That is a rate not even dreamed of by anyone alive right now in New Zealand – or their parents.

The US effectively cut interest rates to zero. New Zealand didn’t go quite so low but the RBNZ cut rates from 8.25% to 2.5% in just eight months in 2008-2009.

When you have ultralow interest rates, there are a number of economic impacts:
•    businesses can borrow at very low rates to make capital expenditures, and operating expenditures which stimulates all areas of the economy;
•    businesses with large levels of debt can refinance at much lower rates;
•    households with excess consumer debt and large mortgage debt can refinance at hugely more affordable levels;
•    individuals, companies and investment funds can borrow cheaply to invest in appreciating and income producing assets.
This is exactly what we have seen around the world since 2009 – easy credit, more risk, overspending, and massive rises in investment asset prices.

Here is the key to understanding international money flows and asset allocation:

Money flows around the world seeking the highest possible return for the lowest possible risk.

So when you see price changes in oil, gold, commodities, stocks, bonds, real estate or anything else, it reflects precisely the market participants’ views on obtaining the greatest return for the least risk. The problem is, higher asset prices become a magnet and a self fulfilling prophecy, long after the economic value of an asset has been fully priced. To be clear, the views of market participants are frequently wrong, which is why after a boom, there is a bust.

So here we are just five short years from the fear and the staggering losses of the 2008 credit crisis, enjoying stock market and bond and real estate prices at record levels.

But here is the kicker, market participants think these asset prices are the “new normal”. They aren’t. The asset price gains are simply the result of a massive and manipulated reduction in interest rates. And it’s coming to an end.

Very few people accept that, because almost all of us suffer from two psychological biases – recency bias and anchoring. These biases cause us to anchor our price expectations to recent prices, rather than viewing them accurately in a historical context. Let’s see if you are a sufferer. The NZD USD exchange rate is currently around 0.8300. Before you read on, guess what it was four and a half years ago.

In March 2009 the rate was below 0.4880. The NZ dollar is currently 70% higher than it was just four and a half years ago. Very low interest rates in the US have made the NZ dollar much more attractive because our 2.50% is a lot more than the 0 to 0.25% rate in the US. And in an ultralow interest rate environment, everyone is rewarded for taking on risk assets, including commodity currencies like the NZ dollar.

We have had a manipulated asset price boom for the last four and a half years. It’s almost over. Change is already in the wind.

In June this year the Fed merely mentioned that their interest rate manipulation (called quantitative easing) would be diminished, if economic indicators continue to improve. They called the start of this gradual process “tapering”. Simply the whisper of the beginning of removing the stimulus caused the markets to wobble. Bond prices tanked, stocks fell, as interest rates ticked up. That was just a small taste of what is to come.

The latest market expectation is that the Fed will start tapering in December this year, and remove all stimulus by the end of next year.

Asset prices are artificially and unjustifiably high – stocks, bonds and real estate especially so. Now is not the time to load up on assets at prices that have been artificially inflated. In fact, now is the time to sell.

Yes, if you sell now you will probably be early. The interest rate cycle is more like a battleship than an America’s Cup boat – it takes a while to turn around. But once it starts turning, it’s not coming back. And if you wait, you will be caught like everyone else, running for the exit at the same time.

I have been a property investor since 1990. I have also been trading the financial markets seriously since January 2007. My average annual trading return for 2007 to 2012 was 47.17%, so here is some practical advice:
•    don’t buy real estate investments, and sell any that are negatively geared;
•    fix your mortgage while interest rates are still low;
•    underweight stocks and stockpile cash;
•    sell out of bonds. When interest rates go up, as they are about to do, the price of bonds go down;
•    companies requiring finance should issue bonds and/or obtain long term fixed loans as soon as possible;
•    don’t borrow to buy any non-productive assets, or to fund your lifestyle;
•    depending on the timing of the RBNZ increasing interest rates and the US tapering, the NZ dollar is likely to fall heavily in 2014. Other “risk on” currencies like the Australian dollar and Asian currencies are likely to do the same. Reduce your exposure;
•    emerging market stocks and currencies that have catapulted higher since 2009 because billions of dollars have flowed there in the last four years, will come down with a crash when those flows are reversed. Reduce your exposure.

 

Get ready for higher interest rates and put away your decorations. The party is over.

 

Oli Hille

www.TradingBook.net

 

Natural Gas Futures

Important – Disclaimer By reading this Blog you agree that this Blog and any trading or investing ideas described are for informational and educational purposes only and do not constitute any advice or recommendation. The information contained in this communication is based on generally available information and, although obtained from sources believed by Oli Hille to be reliable, its accuracy and completeness is not guaranteed. This communication is not intended to forecast or predict future events. Past performance is not a guarantee or indication of future results. No liability is accepted by Oli Hille for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained herein or derived here from. Oli Hille and representatives are not stockbrokers, financial or investment advisors and do not recommend any stocks, bonds, options, CFD’s, currencies or any securities of any kind. Any financial securities that are mentioned throughout the course of this document are cited only for illustrative and educational purposes. Investing in financial markets is risky and it is possible to lose money. It is recommended that you seek a professional licensed financial advisor prior to implementing any investment program or financial plan. You acknowledge that Oli Hille and representatives have not promised you in any manner whatsoever that you will earn a profit from your personal investments. If you do not agree to be bound by these terms then please discontinue reading. These terms can be modified at any time without notice.

 

I have a score to settle with Natural Gas. In one of my most successful trading periods in the first half of 2008 I made a lot of money long commodiites like Cocoa, Soybeans, Soybean Oil, Coffee etc.

But I was so busy with those commodities that I failed to notice Natural Gas breaking upwards as well, and missing that trade cost me around $100,000.

So here we are four and a half years later and it is time to even the score! Of course as a trader I don’t actually think like that because the market can and will do whatever it wants to, and it never owes me anything. Still, no-one could accuse me of not being patient, and I am planning how I can take $100,000 or more from Natural Gas if it races upwards.

First some recent background. Natural Gas futures have just recently been at their lowest level for 12 years. See this monthly chart (click to enlarge):

Notice how low we are compared to the average price over the last decade. A return to the average is know as “mean revision” or “reverting to the mean”. You can also see the 2008 run up in price that I missed.

Here is the daily chart for the November 2012 contract showiing the lovely new 20 day high breakout that I have been waiting patiently for (click to enlarge):

Although I am strictly a technical trend trader, I do like it when there are catalysts that I can point to that have triggered the trade. And this from Nasdaq.com today re Monday’s rally:

Futures rallied as weather forecasters called for a cold spell through much of the central U.S. in the coming weeks. Traders say the expected drop in temperatures is likely to prompt the first meaningful demand for natural gas used for heating, one of the most widespread applications for the fuel.”

Will prices race up quickly into double digits like they did in 2003, 2005, and 2008? I have no idea, I am a simple trend trader. But if they do, you will be able to hear the cash register ring from wherever you are!

Happy trading.

 

Oli

Author

“Trading for Profit”

http://www.amazon.com/dp/B006TBPY6Y

PS Please “Like”, “Tweet”, Comment, and share with your friends.

Why I Took My Silver Profits

Important – Disclaimer By reading this Blog you agree that this Blog and any trading or investing ideas described are for informational and educational purposes only and do not constitute any advice or recommendation. The information contained in this communication is based on generally available information and, although obtained from sources believed by Oli Hille to be reliable, its accuracy and completeness is not guaranteed. This communication is not intended to forecast or predict future events. Past performance is not a guarantee or indication of future results. No liability is accepted by Oli Hille for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained herein or derived here from. Oli Hille and representatives are not stockbrokers, financial or investment advisors and do not recommend any stocks, bonds, options, CFD’s, currencies or any securities of any kind. Any financial securities that are mentioned throughout the course of this document are cited only for illustrative and educational purposes. Investing in financial markets is risky and it is possible to lose money. It is recommended that you seek a professional licensed financial advisor prior to implementing any investment program or financial plan. You acknowledge that Oli Hille and representatives have not promised you in any manner whatsoever that you will earn a profit from your personal investments. If you do not agree to be bound by these terms then please discontinue reading. These terms can be modified at any time without notice.

 

Why I Took My Silver Profits

I sent an email to my mentoring clients on 20 August 2012 saying that the silver breakout I had been waiting patiently for, had occurred.

I took a long silver trade on the breakout, and I added to the position on 5 September. Here is the chart showing the beautiful breakout on the daily chart. Notice the long period of consolidation which is often a good sign that the breakout will be successful:

[Click on the chart to enlarge it.]

You can see I have drawn in the Support/Resistance line at 26.4964 which price broke through.

At the close of trade, just as the Dow closed on Friday 7 September, I took profit on both positions at 33.61. Here is the chart:

If you know my trading style you will know this is unusual for me. I am a trend trader and I generally let my trades run until the market turns around, then I get stopped out.

But this time I took my profits. Here is why:

1. You can see in the chart above that we are right at this level of 33.61 we are at long term support/resistance with multiple touches going back to January 2011.

2. You can also see that we are a long way extended from the Moving Average lines, which is rarely sustainable.

3. Closing out a profitable position on a Friday afternoon eliminates weekend event risk.

4. I ask myself “If I did not already have a position, would I be buying here?” The answer is clearly no, because I would have missed the profitable part of the trade, and I would be buying when the moving averages suggest a pullback is far more likely than a further price extension.

5. Don’t be greedy! Trying to squeeze the last few dollars out of a profitable trade is usually a mistake. This has been my second most profitable trade of the year so far (second only to my short Live Cattle trade earlier in the year).

6. If I look at the chart, and if I was going to take a bet (and in a sense I have) I would happily bet that I will be able to buy silver at a lower price than 33.61 in the next two weeks.

 

Can Silver go higher? Absolutely!

Can it go higher on Monday and keep going up? Yes of course.

But as traders we are not dealing with “unlikely possibilities” we are dealing with “probabilities”.

Looking at the chart, the probability is that price is over extended, has reached a major resistance point and will fall back early next week. Therefore I need to get out and wait for a new set-up on silver before going long again.

Breakouts 2012

As I said I am a trend trader. 2012 has been the best year for breakouts, especially my favourite 20 day high/20 day low breakout, since 2008.

I could give you lots of examples but if you look at the charts for the year you will see a lot of successful break out trades.

So I am looking for more breakouts now – because they are working so well!

Happy trading.

 

Oli

Euro USD – What the Living Heck are we Doing Up Here?

Important – Disclaimer By reading this Blog you agree that this Blog and any trading or investing ideas described are for informational and educational purposes only and do not constitute any advice or recommendation. The information contained in this communication is based on generally available information and, although obtained from sources believed by Oli Hille to be reliable, its accuracy and completeness is not guaranteed. This communication is not intended to forecast or predict future events. Past performance is not a guarantee or indication of future results. No liability is accepted by Oli Hille for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained herein or derived here from. Oli Hille and representatives are not stockbrokers, financial or investment advisors and do not recommend any stocks, bonds, options, CFD’s, currencies or any securities of any kind. Any financial securities that are mentioned throughout the course of this document are cited only for illustrative and educational purposes. Investing in financial markets is risky and it is possible to lose money. It is recommended that you seek a professional licensed financial advisor prior to implementing any investment program or financial plan. You acknowledge that Oli Hille and representatives have not promised you in any manner whatsoever that you will earn a profit from your personal investments. If you do not agree to be bound by these terms then please discontinue reading. These terms can be modified at any time without notice.

Euro USD – What the Heck are we doing UP Here?

You think Euro is down right? Wrong!

You are suffering from a common trading syndrome – recency bias.

You only think Euro is down because you think the most recent prices are the ones you should be looking at – wrong!

Where were you in October 2000? I don’t know but I can tell you where Euro USD was:

0.8225

That is 34% lower than where we are now!

And guess what, there was no Euro crisis, no Greek debt problem, no Global Financial Crisis, no issue with the PIGS (Portugal, Ireland, Greece and Spain).

May 2011

ONE YEAR AGO Euro USD was 1.4938.

We have fallen 2,400 points since then. Another 2,500 points or so and the rate will be at parity!

Technical Trader

If you follow my blog or my website or you have read my book, you will know that I am a technical trader. Only about once every two years do I have the wonderful combination of a technical view going hand in hand with both a fundamental catalyst and a psychological trait that blinds traders and fund managers – like recency bias.

This is one of those times.

Europe Double Talk

IMF head  Christine Lagarde said the impact Greek exit from the Euro would be “messy”.

Former Greek prime minister Lucas Papademos (also former European Central Bank deputy chief) said a “Greek euro exit will be disastrous”.

In the past few months ECB policymakers have warned a Greek exit could have disastrous consequences well beyond Greece’s borders.

This month Bank of England governor Mervyn King stated that the Euro zone is “tearing itself apart”.

But in the last week ECB policymakers have turned around and are now saying that a Greek exit from the Euro is “manageable”.

Let’s think about that…

46 Hours

I love what Bloomberg reported this week:

“Greece may have only a 46-hour window of opportunity should it  need to plot a route out of the euro. That’s how much time the country’s leaders would probably have  to enact any departure from the single currency while global markets are largely  closed, from the end of trading in New York on a Friday to Monday’s market  opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios  from 21 economists, analysts and academics.

Over the two days, leaders would have to calm civil unrest while managing a  potential sovereign default, planning a new currency, recapitalizing the banks,  stemming the outflow of capital and seeking a way to pay bills once the bailout  lifeline is cut. The risk is that the task would overwhelm any new government in  a country that has had to be rescued twice since 2010 because it couldn’t manage  its public finances.”

Hmm, my money is on the exit being messy.

And I like what my friend Nigel Babbage said:

“Can you expect a group of countries that have been at war on and off for centuries, to share a common economic policy for long?”

Predictions

I don’t like predictions, and as a technical trader I don’t predict the market, I trade what I see in the charts.

But I do like the thought of making $100,000 shorting Euro.

So I worked out that if I am short $250,000 EUR USD and EUR USD gets to parity ie. 1.000 this year (remember we have fallen 2,400 point in a year, the next 2,500 points can go a lot more quickly if Greece exits), I will make around $100,000.

WARNING: This is not a trade recommendation. Do not take a large short Euro USD position unless you know what you are doing. This currency pair is NOT going to go straight down, and I might even be WRONG! If I am I can stand the loss!

Read the disclaimer above. If you are looking for a silver bullet, you will most likely get one – in the head.

Happy Trading.

Oli Hille

Author and Trader

The Truth About Annual Returns – Is the Fool at the Table YOU?

I want you to stop and think about something VERY important for YOUR trading.

If you earned a return on your trading account of half a percent per week (and compounded it) what would your annual return be?

Put another way, if your trading account size was $100,000 and you made half a percent per week which is $500 per week, what would your annual gain be?

Stop and think about it before reading on.

Okay, your annual return would be 29.61%.

In dollar terms on a $100,000 account this would be $29,610 trading profit for the year.

Disappointing?

Does this annual return seem disappointing to you? If so, you are what is know in trading circles as “the fool at the table”. This term is taken from gambling theory.

Why are you the fool at the table? Because you expect to do better than the best traders and investors the world has ever known.

And because this return is disappointing to you, you will chase higher returns by taking excess risk. Traders who take excess risk sooner or later give their money to the other players in the game.

The Best Ever

Okay who are the best ever and what are their returns?

Warren Buffett (Billionaire) - a 20.3% return since he purchased Berkshire Hathaway in 1965.

Louis Bacon (Billionaire) - a 31% return since 1990.

Paul Tudor Jones (Billionaire) - 24% return since 1980.

 

$100,000 in 30 years

So let’s say you start with $100,000 today and only return an average of half of one percent per week for the next 30 years.

At the end of 30 years, your net worth will be:  $239,362,626 ($239 MILION).

So what should you do?

Simply aim to earn 0.5% return per week.

If you only have a $10,000 account that is $50 per week.

If you have a $20,000 account that is $100 per week.

Most likely you are trying to make $500 per week on a $10,000 account. That is the best way to BLOW UP your trading account.

 

Position Size

Let me tell you my position size – $30,000 positions for every $100,000 in my trading account.

So if you have allocated $50,000 to you trading account your initial position size should be $15,000.

It is most likely you are taking $50,000 or $100,000 positions. Result? You are taking too much risk!

Remember you need only make half a percent per week to become rich beyond your wildest dreams!

Also your trading account is going to last a LONG, LONG time and you will be able to learn and grow, if you trade small.

If you take excess risk and blow up your account within three months, you are out of the game and you never have the chance to make real money.

 

It is simple: Trade SMALL and grow rich.

 

Oli Hille

Trader

www.TradingBook.net

PS Please Tweet, Share and Comment on this blog.

 

 

 

 

 

Stock Market CRASH of August 2011 (?)

 

Important – Disclaimer By reading this Blog you agree that this Blog and any trading or investing ideas described are for informational and educational purposes only and do not constitute any advice or recommendation. The information contained in this communication is based on generally available information and, although obtained from sources believed by Oli Hille to be reliable, its accuracy and completeness is not guaranteed. This communication is not intended to forecast or predict future events. Past performance is not a guarantee or indication of future results. No liability is accepted by Oli Hille for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained herein or derived here from. Oli Hille and representatives are not stockbrokers, financial or investment advisors and do not recommend any stocks, bonds, options, CFD’s, currencies or any securities of any kind. Any financial securities that are mentioned throughout the course of this document are cited only for illustrative and educational purposes. Investing in financial markets is risky and it is possible to lose money. It is recommended that you seek a professional licensed financial advisor prior to implementing any investment program or financial plan. You acknowledge that Oli Hille and representatives have not promised you in any manner whatsoever that you will earn a profit from your personal investments. If you do not agree to be bound by these terms then please discontinue reading. These terms can be modified at any time without notice.

There is a SIGNIFICANT POSSIBILITY of a Massive Market Crash in the next few days.

Here is why:

On Friday, October 16 1987, when all the markets in London were unexpectedly closed due to the Great Storm of 1987, the DJIA closed down 108.35 points (4.58%) to close at 2246.74 on record volume.

Monday October 19 1987 (the next trading day) was black Monday when the Dow fell 22.6% in ONE DAY.

Today this would equate to a fall in the Dow of 2,572 points – in ONE DAY.

Imagine it!

So What About Yesterday?

Yesterday the NYSE composite index fell 5.41%.

Guess what?

Yesterday the NYSE recorded its highest volume day EVER!

Here it is in black and white:

NYSE Top 10 Record Trading Days of all time (before yesterday)

http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=3007&category=3

NYSE Volume Yesterday

http://online.wsj.com/mdc/public/page/2_3021-tradingdiary2-20110804.html?mod=mdc_pastcalendar

You will see on this page that Total Volume for 4 August 2011 (yesterday) was 7,504,992,235.
Is there a risk that the equity indexes will have a Colossal fall in the next few days?

You bet!

Happy Trading

Oli Hille

Author

“Creating the Perfect Trade”

www.TradingBook.net

PS Forward this post, Tweet and Re-Tweet it, and Facebook it etc – just in case…

And add a comment below.

Equities and NZ Dollar – Flip Flop!

 

Important – Disclaimer By reading this Blog you agree that this Blog and any trading or investing ideas described are for informational and educational purposes only and do not constitute any advice or recommendation. The information contained in this communication is based on generally available information and, although obtained from sources believed by Oli Hille to be reliable, its accuracy and completeness is not guaranteed. This communication is not intended to forecast or predict future events. Past performance is not a guarantee or indication of future results. No liability is accepted by Oli Hille for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained herein or derived here from. Oli Hille and representatives are not stockbrokers, financial or investment advisors and do not recommend any stocks, bonds, options, CFD’s, currencies or any securities of any kind. Any financial securities that are mentioned throughout the course of this document are cited only for illustrative and educational purposes. Investing in financial markets is risky and it is possible to lose money. It is recommended that you seek a professional licensed financial advisor prior to implementing any investment program or financial plan. You acknowledge that Oli Hille and representatives have not promised you in any manner whatsoever that you will earn a profit from your personal investments. If you do not agree to be bound by these terms then please discontinue reading. These terms can be modified at any time without notice.

 

 

Part of being a good trader is quickly recognizing when you are wrong, and moving on.

My last blog noted that a lot of the techical data pointed to falling equities and therefore falling risk currencies such as the New Zealand dollar.

However the indicators have changed again.

Martin Zweig’s 4% model went to +5.29% last Friday 1 July 2011, signalling to go long equities.

Also the Zweig NYSE Volume Ratio showed an extremely bullish reading on Friday 1 July, and the 10 day moving average is a hugely bullish 3.71.

I am now cautiously bullish. Cautious because the sentiment indicators are still at an all time high.

The Almanac MACD indicator has swung around to bullish again too.

Because I have disclosed my losses in previous blogs, I will say that I was profitable on the short NZD USD trade. I sold at 0.8206 and bought it back at 0.8070.

I also went long Dow Futures on Thursday 30 June 2011, and took my profits at the close of trade on 1 July 2011.

Combined profits were around a 3% gain on total equity.

Happy Trading

Oli Hille

Author

“Creating the Perfect Trade”

www.TradingBook.net

 

New Zealand Dollar – It’s Time To Sell

Important – Disclaimer By reading this Blog you agree that this Blog and any trading or investing ideas described are for informational and educational purposes only and do not constitute any advice or recommendation. The information contained in this communication is based on generally available information and, although obtained from sources believed by Oli Hille to be reliable, its accuracy and completeness is not guaranteed. This communication is not intended to forecast or predict future events. Past performance is not a guarantee or indication of future results. No liability is accepted by Oli Hille for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained herein or derived here from. Oli Hille and representatives are not stockbrokers, financial or investment advisors and do not recommend any stocks, bonds, options, CFD’s, currencies or any securities of any kind. Any financial securities that are mentioned throughout the course of this document are cited only for illustrative and educational purposes. Investing in financial markets is risky and it is possible to lose money. It is recommended that you seek a professional licensed financial advisor prior to implementing any investment program or financial plan. You acknowledge that Oli Hille and representatives have not promised you in any manner whatsoever that you will earn a profit from your personal investments. If you do not agree to be bound by these terms then please discontinue reading. These terms can be modified at any time without notice.

 

 

I live in New Zealand, and so I watch the NZ dollar (Kiwi) more closely than most world traders.

 

The current level is 0.8210.

 

The NZ Dollar is currently insanely overvalued against the USD and it is time for a MAJOR fall.

 

Here are the reasons:

 

1. NZD USD is at an all time high but stalling.

 

2. Right now NZD USD is at a multi-year resistance point going back to the high in 2008 of 0.8213.

 

3. Looking at the daily chart, there is clear bearish divergence on both the RSI and MACD. So note on this chart that at the price made recent higher highs, the RSI and the MACD made lower highs.

 

Click the chart to enlarge:

 

Looking at the weekly RSI chart you can clearly see two levels of bearish divergence. As the price goes higher in November 2010 and then again in May 2011, the RSI shows progressively lower highs.

 

Click the chart to enlarge:

 

 

4. Elliot Wave International reminded me this week that:

 

“When the major stock indexes stand at or near a long-term high, mutual fund cash levels are low. By way of example, the long-term peaks in 1937, 1966, 2000 and 2007 have an average cash-to-assets ratio of 4.18%. Right now the ratio stands in a place it has never been before — at 3.4%. That’s an all-time record low.”

 

5. The NZD USD rate is historically very highly correlated with the main stock indexes (over 90% correlated). So when they fall, NZD USD usually accompanies them.

 

6. The Dow has fallen for the last six weeks in a row. It is time for Kiwi to follow.

 

7. I follow Martin Zweig’s fantastic 4% model. It signals to sell equities when it triggers -4%. This week it triggered -4% for the first time in some months. NB I calculate this daily, not weekly.

 

8. The Traders’ Almanac has a terrific MACD Timing system for going long equities for part of the year and flat/short the other part of the year. That system has now signalled flat/short.

 

9. We have recently had new 20 day lows on Dow Futures, S&P500 Futures and NASDAQ futures. A new 20 day low is a signal I have found to be an indicator of further falls.

 

10. Other instruments are starting to show weakness against the USD, for example Euro, AUD, GBP.

 

11. Jim Rogers, the trading legend who started the Quantum Fund with George Soros is on record as hating the USD and expecting it to be worthless one day soon. However this week Rogers publicly stated that he is buying the USD because the selling looks
overdone.

 

12. The NZ Reserve Bank interest rate is 2.5% and is expected to stay there until the end of the year. There is very little carry benefit for being long NZD. The last time NZD USD was at these levels in March 2008, interest rates were at 8.25%.

 

This makes me think that the only reason people are long NZD USD is the “Greater Fool Theory”. The theory that there will be someone else willing to buy at an even higher level – no other reason than that.

 

Sure, New Zealand is riding the commodity boom and our milk exports are in demand at very high prices, but it strikes me that all of this good news is already priced in to the market.

 

13. There is a psychological phenomenon known as “anchoring”. People tend to “anchor” to recent prices. Traders have lost perspective that only two and a half years ago NZ USD was trading at 0.4860 (59% below the current level). The average exchange rate in the last ten years has been around 0.6000. If you look at a ten year chart, you tend to get a better perspective.

 

14. Looking further at psychology, we all know that a very small percentage of traders/fund managers make a huge percentage of the money trading. By definition therefore you cannot make money trading if you follow the herd. If you could make money trading following the herd, then most people by definition would make money trading. So right now the herd are long NZD USD. We know this to be certain because the level is at a record high.

 

Selling it now does two things. First it puts you in the minority, second when the herd changes direction as it eventually must, you are ahead of the herd and make the easiest money.

 

I like what Paul Tudor Jones said:

 

“I believe the very best money is to be made at the market turns. Everyone says you get killed trying to pick tops and bottoms, and you make all the money by catching the trends in the middle. Well, for twelve years, I have often been missing the meat in the middle, but I have caught a lot of tops and bottoms.”

 

15. Also, when every trader and fund manager and their mother is long, and there is a stampede for the exits, you can make money faster than just about any other time. Look at these examples of NZD USD falls:
  • In early 2003 NZD USD fell over 1,100 points in under three months.
  • In early 2005 NZD USD fell 950 point in two and a half months.
  • In mid 2007 NZD USD fell over 1,450 points in less than one month.
  • From March 2008 to November 2008 NZD USD fell from the current level of 0.8210 to 0.5340 – all fall of 2,870 points.
  • In early 2009 NZD USD fell over 1,150 points in less than two months.

 

This means that there is a colossal reward to risk ratio going short NZD USD.  So to put up some numbers, if you took a $100,000 short NZD USD position today with a stop above the existing high, say at 0.8307, and with a target of 0.5000, the risk reward looks like this:

 

Risk: NZ$1,180
Reward: $64,180
Ratio: 54.39 to 1

 

So to be clear I am not necessarily calling NZD USD to 0.5000. I am simply pointing out that the potential reward to risk ratio is really exciting.

 

Question: Have I ever taken a similar trade?

 

 

Answer: Yes. On 24 July 2007 when the rate was 0.8086 I bought a $1m put option with a strike of 0.7950 and an exercise date of 17 August. The option cost me NZ$5,458. I sold the option three days later on 27 July for a profit of $13,595. This might look good, but 18 hours later the option was worth $33,000. Also if you look at the chart, had I held my option to expiry I would have made around $150,000.

 

This reminds me of two things. One, selling at or near a high can be very profitable if your timing is right. Two, do not take your profits too early. There is a TON of downside potential on this move.

 

Practical Matters

 

Today is Sunday and I have just finished this analysis. Currently I am not short NZD USD. I plan to take a short position in the next two days. I will most likely take a margin position and not an option.

 

My stop will be at 0.8307 unless we break higher in the next two days.

 

NB There is nothing definitive to suggest that we have seen the high. The rate could go above 0.83, above 0.84 or above 0.85. I do not have a crystal ball and I cannot make a prediction on how high it will go before it falls. However in my opinion the risk reward is currently in my favour to go short here. If I am stopped out I will try again, and again.

 

Let me quote Paul Tudor Jones again:

 

“I consider myself a premier market opportunist. That means I develop an idea on the market and pursue it from a very-low-risk standpoint until I have been repeatedly been proven wrong, or until I change my viewpoint.”

 

Happy Trading

 

Oli Hille
Author
“Creating the Perfect Trade”

Head and Shoulders Chart Pattern

Head and Shoulders

It is VERY rare to see an almost perfect Head and Shoulders Chart pattern, but I saw one today on Euro USD. Here it is shown on a 4 hour chart.

Click the chart to enlarge it:

 

 

 

 

 

 

 

 

So this is a common technical analysis chart pattern showing the head in the middle and the two shoulders on either side. Ideally as in this case the top of the right should needs to be slightly lower than the top of the left shoulder.

I have put a line where the head and shoulders “neck line” is.

Notice that the break of the neckline is the trigger to go short. I have not taken this trade as I am now too late to take it at the trigger point, but it is interesting to see a technical signal so clearly stated.

Happy Trading

Oli Hille

Author

“Creating the Perfect Trade”

www.TradingBook.net

Bearish Again

On March 15th 2011 I put up a blog post on my bearish views.

And on April 7th 2011, in my blog “Trading Failure“, I said I was wrong and I lost just under 1% of my trading capital on my bearish trades.

Now however I am bearish again, with a lot more conviction than before. Here are my reasons:

1. Martin Zweig’s fantastic 4% model has again signalled -4% which is a sell signal on stocks (note that I calculate his model daily not weekly).

2. We have recently had new 20 day lows on Dow Futures, S&P500 Futures and NASDAQ futures. A new 20 day low is a signal I have found to be significant.

3. Elliot Wave International today reminded me today that:

“When the major stock indexes stand at or near a long-term high, mutual fund cash levels are low.
By way of example, the long-term [equity market] peaks in 1937, 1966, 2000 and 2007 have an average cash-to-assets ratio of 4.18%.”

The CURRENT ratio is 3.4% which is the lowest reading EVER!

4. The Traders’ Almanac has a terrific MACD Timing system for going long equities for part of the year and flat/short the other part of the year. That system has now signalled flat/short.

So I am now bearish and looking for opportunities and places to take short trades.

The S&P500 and the Dow are especially weak.

A break of 12,000 in the Dow Futures will get me looking seriously at a short trade on Dow Futures.

In the meantime I have found a trade I like. CAD Yen is a good proxy for the equity indexes (i.e. highly correlated) and I like the fact that it has broken the key support/resistance level of 82.28.

I have gone short CAD Yen today with my stop at 82.67, but I am looking for opportunities to get short the indexes as well.

 

Happy Trading

Oli Hille

Author

“Creating the Perfect Trade”

www.TradingBook.net