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Following J. Paulson: Some Mortgage Securities & Banks

March 13, 2009 Equity Trading No Comments

From the latest print edition of The Economist:

Just as markets used to hang on Mr Soros’s every move, they are now keen followers of Mr Paulson. He does not see the economy reaching bottom this year and is still a net short-seller of financial firms. More encouragingly, he has started buying up bombed-out mortgage securities. The number-crunching that told him subprime-linked paper was overvalued now suggests that some previously AAA-rated tranches are a bargain. He talks of distressed debt—mortgages, leveraged loans and the debt of bankrupt firms—as a $10 trillion opportunity.

At some point, his “number-one focus” will be to provide equity to recapitalise sick but viable banks. He is already dipping his toe in: his latest vehicle, the Recovery Fund, recently took a 25% stake in IndyMac, a Californian bank that the government seized last July. But the timing of any bigger push is uncertain. Mr Paulson is acutely aware of the costs of moving too early: those who have bought into financial firms since the start of the crisis have lost, on average, 80% of their investment. Still, in these dire times it is comforting to know that such a smart investor believes there will be something worth saving.

Link:  The Long and the Short, The Economist, 3/12/09

Trading Order Flow (Trend) vs. Momentum

March 10, 2009 Equity Trading No Comments

Being able to distinguish between order flow/trend and momentum is important!

Why? …. because it determines the profitability of a trade. Generally, trading on order flow (longer term) will yield much better gains than trading on momentum (shorter term).

What? … order flow is what the “big money” is doing. Individual traders are best served by piggy backing on insitutional moves.

 

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Know what is going on in the Futures market!!!

March 8, 2009 Equity Trading 2 Comments

Excerpt from John Murphy’s (1997? ) seminar, Applying Technical Method to Today’s Trading.

 

For those of you that trade the futures markets, there are a lot of other things outside the future markets that you should be following. But, I guess my bigger message is… for those of you that aren’t in the futures markets, whether you trade them or not, the futures markets have a tremendous impact on what happens in the other markets.

 

I keep pointing out to the Wall Street crowd for example, that if you’re going to trade stocks, you have to know what’s happening in the futures markets, because they affect inflation, they affect interest rates, they affect stock groups, and they play a tremendously important part in the whole financial spectrum.”

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Obama is kidding himself.

March 1, 2009 Economy No Comments

Reminded of the quote:

Politicians don’t make economic decisions, they make political decisions that have economic consequences.

Link: The Economist

Warren Buffett also lost a shitload of money in 2008

February 28, 2009 Economy, Equity Trading No Comments

Warren Buffett just released his letter to Berkshire Hathaway Shareholders. Worth the read.

You can read/download it here:

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Interesting….

February 19, 2009 Equity Trading No Comments

Excerpt from Wall Street Journal Blog…

The activity in the nation’s banks suggests that investors believe they are circling the drain, zombies needing only a blow to the head once and for all, or facing an imminent restructuring at the hands of the government. Once again, the market ended lower, and once again, the financial sector bore the brunt of the losses…

It should be noted, however, that some of the trading reflects upcoming options expiry Friday. “Today into tomorrow is a different scenario for banks because of expiration tomorrow. When they are down the whole month going into expiration, you have the continued leap down into expiration,” said Dave Rovelli, managing director of U.S. equity trading for Canaccord Adams. Options activity puts pressure on the underlying stocks as traders attempt to push an option to its strike price, possibly even by shorting the security — it’s not an accident, Mr. Rovelli noted, that these stocks hit a bottom on Nov. 20 and Nov. 21 of last year, just before expiration.

Link:
Four at Four: Banks Get Blasted — Again , David Gaffen, Wall Street Journal, 2/19/09

Leveraged ETFs – a gambler’s dream.

February 19, 2009 Equity Trading No Comments

Here is an excerpt from Gregory Davis’ Article…

Triple The Upside/Downside On Financials
The Direxion Financial Bull 3X Shares ETF (NYSE:FAS) is designed to return three times the performance of the Russell 1000 Financial Services Index (“Financial Index”). The underlying financial services index is a capital weighted index of financial service providers ranging from large capitalization banks, like Wells Fargo (NYSE:WFC) and Goldman Sachs (NYSE:GS), to insurance providers, like Aflac (NYSE:AFL) and Allstate (NYSE:ALL). True to form, the FAS ETF carried out its mission and posted a negative return in slight excess of 64% for year-to-date ended February 11, while the Russell 1000 Financial Services Index declined approximately 22% over the same period. (These funds seem simple, but more goes on behind the scenes. Read Dissecting Leveraged ETF Returns to learn more.)

How Does It Work?
The FAS ETF will invest a minimum of 80% of its net assets in long positions of the individual securities that make up the Financial Index. The fund also invests in financial instruments that provide leveraged and unleveraged exposure to the Financial Index, thus, creating the ability for returns of the underlying index to be tripled. The balance of the net assets are held in money market instruments.

Link: The Joys And Pains Of 3X Returns (FAS, FAZ, TYH), Gregory Davis, 2/17/09

Understanding Market Price Movement.

February 15, 2009 Equity Trading 1 Comment

The IRREFUTABLE LAWS of the MARKET

SIX STEPS that every trader needs to know to succeed in the markets.

Step 1: A move begins with the sponsors (smart traders) who have insider knowledge as it relates to a particular stock or market. This information will move a market up or down depending on the insiders’ information. These buyers are smart, very smart, and recognize trading/investment opportunities very early in the markup cycle.

Step 2: Days, weeks, or sometimes months after a move has started, there is a brief mention in the electronic media (radio, cable, TV) or on one of the internet chat boards that a market has moved. The public hears for the first time and begins to get interested, but does not buy.

Step 3: A blurb of information appears in print media. The move also begins getting more exposure on blogs and internet message boards. The public starts paying a little more attention, and will buy a little bit.

Step 4: Wall Street and LaSalle Street brokers go into full hype mode and hawk the market to their customers. The public begins buying in greater volume.

Step 5: A full-blown front-page article appears about the particular stock or market in one of the major financial newspapers, magazines, or financial websites. This is often six months after the fact and after a market has shown its greatest appreciation. There is often heavy public buying, even a possible frenzy, as all media, brokers, and so-called “gurus” start to tout the market.

Step 6: As step 5 gets underway, the sponsors or smart traders begin to move out of the market and take their profits off the table.

The Final Step: The move ends, the market falls, and investors lose money.

Link: Six Insider Steps that every trader needs to know, Adam Hewison.

The 5 Rules I follow to Successfully Trade Stocks

February 14, 2009 Equity Trading No Comments

Everyone has their own set of rules. The ones outlined here just happen to apply to me and my penchant for swing trading.

1) Must have a Game Plan. There is a business saying, If you fail to plan, you plan to fail. I will not go into all of the planning theories here, but understand that planning is important. Before entering a single trade, I have to come up with and write down five important numbers for the ticker symbol: 

The first number is my i) Targeted Return On Investment (ROI). At minimum, I seek 10% and at most, 30%. Though it depends on the market condition, it is necessary to have a clear goal to drive towards. To get my return, I digest news headlines, study charts, and stare at technical indicators (<add link to post>) to identify suitable ii) Entry Prices and iii) Exit Price Ranges.

Not all trades will be successful. No one wins them all. If they say they do, they’re lying to you, and you should tell them they’re a dumbass. As such, it is important to not only prepare yourself to take some losses but to expect them. What iv) Percentage Loss on Investment can you endure and still sleep at night? Myself, I am comfortable with spending between 5 to 10% for the thrill of the game. To control my losses, I enter Stop Loss orders right after my intial (limit) Buy order. The v) Stop Loss Price is an ugly number, but it is necessary to calculate it when determining your entry price.

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